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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2002
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7427
VERITAS DGC INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0343152
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
10300 TOWN PARK
HOUSTON, TEXAS 77072
(Address of principal executive offices) (Zip Code)
(832) 351-8300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of the Company's common stock, $.01 par value,
outstanding at February 28, 2002 was 32,498,470 (including 1,458,218 Veritas
Energy Services Inc. exchangeable shares which are identical to the Common Stock
in all material respects).
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TABLE OF CONTENTS
FORM 10-Q
INDEX
Page Number
----------------------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income and Comprehensive Income -
For the Three and Six Months Ended January 31, 2002 and 2001 1
Consolidated Balance Sheets - January 31, 2002 and July 31, 2001 2
Consolidated Statements of Cash Flows -
For the Six Months Ended January 31, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 15
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
Revenues ............................................................. $ 119,623 $ 134,415 $ 241,001 $ 245,714
Costs and expenses:
Cost of services ................................................... 74,019 94,428 154,357 170,596
Research and development ........................................... 2,696 2,504 5,535 4,673
Depreciation and amortization ...................................... 16,803 16,225 34,041 33,330
Selling, general and administrative ................................ 6,196 6,846 12,032 12,349
Merger costs ....................................................... 2,758 2,758
Argentina devaluation and shutdown costs ........................... 2,382 2,382
---------- ---------- ---------- ----------
Operating income ..................................................... 14,769 14,412 29,896 24,766
Interest expense ..................................................... 3,544 3,542 7,079 7,058
Other income-net ..................................................... (1,324) (2,637) (2,239) (4,153)
---------- ---------- ---------- ----------
Income before provision for income taxes ............................. 12,549 13,507 25,056 21,861
Provision for income taxes ........................................... 4,872 6,287 9,734 9,633
---------- ---------- ---------- ----------
Net income ........................................................... $ 7,677 $ 7,220 $ 15,322 $ 12,228
Other comprehensive income (loss) (net of tax , $0 in all periods):
Foreign currency translation adjustments ........................... (2,795) 392 (4,299) (1,512)
Unrealized gain (loss) on investments-available for sale ........... (221) 964 (730) 3,301
Unrealized gain (loss) on foreign currency hedge ................... (129) 23
---------- ---------- ---------- ----------
Total other comprehensive income (loss) .............................. (3,145) 1,356 (5,006) 1,789
---------- ---------- ---------- ----------
Comprehensive income ................................................. $ 4,532 $ 8,576 $ 10,316 $ 14,017
========== ========== ========== ==========
PER SHARE:
BASIC:
Net income per common share ........................................ $ .24 $ .24 $ .47 $ .42
========== ========== ========== ==========
Weighted average common shares ..................................... 32,378 30,479 32,349 29,153
========== ========== ========== ==========
DILUTED:
Net income per common share ........................................ $ .24 $ .23 $ .47 $ .41
========== ========== ========== ==========
Weighted average common shares ..................................... 32,581 31,272 32,522 29,961
========== ========== ========== ==========
See Notes to Consolidated Financial Statements
1
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
JANUARY 31, JULY 31,
2002 2001
----------- ---------
Unaudited
ASSETS
Current assets:
Cash and cash equivalents ....................................................................... $ 26,114 $ 69,218
Accounts and notes receivable (net of allowance for doubtful accounts: January $1,139; July $709) 127,328 140,761
Materials and supplies inventory ................................................................ 4,086 10,062
Prepayments and other ........................................................................... 12,218 11,817
Income taxes receivable ......................................................................... 3,196 5,017
Investments -- available for sale ............................................................... 757 1,487
----------- ---------
Total current assets ........................................................................ 173,699 238,362
Property and equipment ............................................................................ 509,780 474,345
Less accumulated depreciation ..................................................................... 319,533 300,410
----------- ---------
Property and equipment -- net ............................................................... 190,247 173,935
Multi-client data library ......................................................................... 351,808 310,610
Investment in and advances to joint ventures ...................................................... 2,299 2,354
Goodwill (net of accumulated amortization: January $6,801; July $6,844) ........................... 34,307 34,514
Deferred tax asset ................................................................................ 16,396 15,031
Long term notes receivable ........................................................................ 4,013 4,017
Other assets ...................................................................................... 16,522 18,129
----------- ---------
Total ....................................................................................... $ 789,291 $ 796,952
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade ....................................................................... $ 38,942 $ 60,631
Accrued interest ................................................................................ 3,839 3,952
Other accrued liabilities ....................................................................... 45,982 45,261
----------- ---------
Total current liabilities ................................................................... 88,763 109,844
Non-current liabilities:
Long-term debt .................................................................................. 135,000 135,000
Deferred tax liability .......................................................................... 6,106 6,144
Other non-current liabilities ................................................................... 4,678 4,501
----------- ---------
Total non-current liabilities ............................................................... 145,784 145,645
Stockholders' equity:
Common stock, $.01 par value; authorized: 40,000,000 shares; issued: 31,055,660 shares at
January and 30,920,550 shares at July (excluding Exchangeable Shares of 1,458,918 at January
and 1,484,948 at July) ......................................................................... 310 309
Additional paid-in capital ...................................................................... 410,298 407,442
Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.) ......................... 158,913 143,591
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustment ............................................. (11,275) (6,976)
Unrealized loss on investments-- available for sale ............................................ (744) (14)
Unrealized loss on foreign currency hedge ...................................................... (398) (421)
Unearned compensation ............................................................................. (1,167) (1,297)
Treasury stock, at cost; 66,739 shares at January and 65,296 at July .............................. (1,193) (1,171)
----------- ---------
Total stockholders' equity .................................................................. 554,744 541,463
----------- ---------
Total ....................................................................................... $ 789,291 $ 796,952
=========== =========
See Notes to Consolidated Financial Statements
2
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JANUARY 31,
--------------------------
2002 2001
---------- ----------
(IN THOUSANDS)
Operating activities:
Net income ............................................................ $ 15,322 $ 12,228
Non-cash items included in net income:
Depreciation and amortization (other than multi-client) ............. 34,041 33,330
Amortization of multi-client library ................................ 59,371 66,876
Gain on disposition of property and equipment ....................... (1,694) (1,053)
Equity in loss of 50% or less-owned companies and joint ventures ... 55 (109)
Deferred taxes ...................................................... 165 2
Amortization of unearned compensation ............................... 360 292
Change in operating assets/liabilities:
Accounts and notes receivable ....................................... 12,208 (24,212)
Materials and supplies inventory .................................... 5,969 501
Prepayments and other ............................................... (420) (7,174)
Income tax receivable ............................................... 1,856
Accounts payable and other accrued liabilities ...................... (20,775) 9,120
Income taxes payable ................................................ 8,786
Other non-current liabilities ....................................... 139 117
Other assets ........................................................ 319 (5,192)
Other ............................................................... (641) (1,688)
---------- ----------
Total cash provided by operating activities ...................... 106,275 91,824
Investing activities:
Increase in restricted cash investments ............................... 206
Investment in multi-client library .................................... (102,040) (95,010)
Purchase of property and equipment .................................... (51,605) (35,889)
Sale of property and equipment ........................................ 3,304 2,409
---------- ----------
Total cash used by investing activities .......................... (150,341) (128,284)
Financing activities:
Payments of long-term debt ............................................ (42)
Net proceeds from sale of common stock ................................ 1,259 89,690
---------- ----------
Total cash provided by financing activities ...................... 1,259 89,648
Currency loss on foreign cash ......................................... (297) 20
---------- ----------
Change in cash and cash equivalents ................................... (43,104) 53,208
Beginning cash and cash equivalents balance ........................... 69,218 43,154
---------- ----------
Ending cash and cash equivalents balance .............................. $ 26,114 $ 96,362
========== ==========
See Notes to Consolidated Financial Statements
3
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include our accounts and the
accounts of majority-owned domestic and foreign subsidiaries. Investment in an
80% owned joint venture is accounted for on the equity method due to provisions
in the joint venture agreement that give minority shareholders the right to
exercise control. All material intercompany balances and transactions have been
eliminated. All material adjustments consisting only of normal recurring
adjustments that, in the opinion of management are necessary for a fair
statement of the results for the interim periods have been reflected. These
interim financial statements should be read in conjunction with our annual
consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain prior year balances have been reclassified for consistent presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
(Business Combinations) and SFAS No. 142 (Goodwill and Other Intangible Assets).
We adopted SFAS No. 141 upon its issuance, and we adopted SFAS No. 142 as of
August 1, 2001. The main effect of SFAS No. 141 is to require purchase
accounting to be used in all future business combinations, disallowing the
pooling-of-interests method allowed under APB Opinion No.16. SFAS No. 142
defines the booking and subsequent treatment of goodwill and other intangible
assets derived from business combinations and supersedes APB Opinion No.17. This
statement requires us to discontinue amortization of goodwill and requires that
we test goodwill and other intangible assets for impairment in a specific manner
on an annual basis or when certain events trigger such a test. We completed our
initial evaluation of goodwill in January 2002 and found no impairment.
In August 2001, the Financial Accounting Standards Board issued SFAS No.143
(Asset Retirement Obligations). This standard requires that obligations
associated with the retirement of a tangible long-lived asset be recorded as a
liability when those obligations are incurred with the liability being initially
measured at fair value. We will adopt the use of this accounting statement in
fiscal 2003. We have not yet completed our evaluation of the effect of this
statement on our accounting practices.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144
(Accounting for the Impairment or Disposal of Long Lived Assets). This standard
develops one accounting model for long-lived assets that are to be disposed of
by sale, requiring such assets to be measured at the lower of book value or fair
value less cost to sell. The standard also provides guidance on the recognition
of liabilities for the obligations arising from disposal activities. We will
adopt the use of this accounting statement in fiscal 2003. We have not yet
completed our evaluation of the effect of this statement on our accounting
practices.
4
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. MERGER COSTS
On November 26, 2001, Petroleum Geo-Services ASA, a Norwegian public limited
liability company ("PGS"), Veritas DGC Inc., a Delaware corporation ("Veritas"),
Venus I, a Cayman Islands exempted company and a direct, wholly owned subsidiary
of Veritas ("Caymanco"), Venus Holdco Inc., a Delaware corporation and an
indirect, wholly owned subsidiary of Caymanco ("Veritas Holdco"), and Venus
Mergerco Inc., a Delaware corporation and a direct, wholly owned subsidiary of
Veritas Holdco ("Veritas Merger Sub"), entered into an Agreement and Plan of
Merger and Exchange Agreement (the "Agreement"), whereby, subject to the
conditions stated therein, (i) Caymanco will make an offer (the "Exchange
Offer") to issue ordinary shares, par value $0.01 per share, of Caymanco
("Caymanco Shares") in exchange for the issued and outstanding ordinary shares,
nominal value NOK 5 per share, of PGS ("PGS Shares") and all issued and
outstanding American Depositary Shares representing such PGS Shares ("PGS
ADSs"), at an exchange ratio of 0.47 Caymanco Shares for each PGS Share and each
PGS ADS; and (ii) immediately following the closing of the Exchange Offer,
Veritas Merger Sub will be merged with and into Veritas (the "Merger" and,
together with the Exchange Offer, the "Combination"), pursuant to which shares
of common stock, par value $0.01 per share, of Veritas ("Veritas Common Stock")
will be converted into Caymanco Shares on a one-for-one basis and certain shares
that are exchangeable for shares of Veritas Common Stock will become
exchangeable for Caymanco Shares. Upon closing of the Combination, which is
expected to occur before the end of fiscal 2002, PGS and Veritas would become
subsidiaries of Caymanco. Under the terms of the agreement, PGS shareholders
would hold approximately 60% of the shares to be issued by Caymanco, and
Veritas shareholders would hold approximately 40% of such shares.
During the current quarter we spent $2.8 million on merger related items,
including investment banking, legal and accounting services. As the acquired
company, for accounting purposes, we are required to expense these fees as
incurred.
3. ARGENTINA DEVALUATION AND SHUTDOWN COSTS
On January 4th, 2002, Argentina devalued its currency, ending a ten-year period
of parity with the U.S. dollar. At the same time, the Argentine government
instituted sweeping law changes, including outlawing pricing linked to outside
currencies and changing significant amounts of dollar-denominated consumer debt
into peso-denominated debt on a 1-to-1-basis.
The law effecting dollar-denominated pricing affected us negatively, as we
previously had very little financial exposure to the peso due to our contracting
methods. This change put all of our accounts receivable in Argentina at risk
during the period of devaluation, resulting in a $1.4 million loss. Our
customers are similarly affected, as their sales of oil on account are being
repaid with dollar equivalent pesos, now worth approximately half that amount.
The Argentine banking law is also affecting us indirectly. Denominating consumer
debt into pesos means that banks will be severely damaged as their loan
portfolios decline precipitously in value. The Argentine government is proposing
a 25% tax on oil production as a means to generate funds with which to repay the
banks for this imposition. In response to this tax, and the general economic
conditions in Argentina, our customers have significantly curtailed operations
in this country. This led to our decision to shutdown our seismic acquisition
business, resulting in the severance of most of our employees and redeployment
of our equipment. The severance and redeployment costs are estimated to be $0.9
million and have also been included in the operating expense section of our
income statement.
4. OTHER INCOME-NET
Other income-net consists of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS)
Interest income .................................... $ (271) $ (1,634) $ (1,120) $ (2,635)
Net gain on disposition of property and equipment .. (53) (320) (1,694) (1,053)
Net gain on sale of Air-Jac subsidiary ............. (658)
Net foreign currency exchange gain ................. (320) (573) (88) (359)
(Gain)/loss from unconsolidated joint venture ...... (6) (119) 54 (108)
Other .............................................. (16) 9 609 2
-------- -------- -------- --------
Total ..................................... $ (1,324) $ (2,637) $ (2,239) $ (4,153)
======== ======== ======== ========
The $1.4 million currency loss in Argentina in 2002 has been excluded from
"Other income" and is included in the "Argentina devaluation and shutdown costs"
line of the income statement. See note 3 of the Notes to Consolidated Financial
Statements.
5
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share are computed as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income ........................................................... $ 7,677 $ 7,220 $ 15,322 $ 12,228
======== ======== ======== ========
Basic:
Weighted average common shares (including exchangeable shares) ..... 32,378 30,479 32,349 29,153
======== ======== ======== ========
Net income per share ............................................... $ .24 $ .24 $ .47 $ .42
======== ======== ======== ========
Diluted:
Weighted average common shares (including exchangeable shares) ..... 32,378 30,479 32,349 29,153
Shares issuable from assumed conversion of options ................. 203 793 173 808
-------- -------- -------- --------
Total ...................................................... 32,581 31,272 32,522 29,961
======== ======== ======== ========
Net income per share ............................................... $ .24 $ .23 $ .47 $ .41
======== ======== ======== ========
The following options to purchase common shares have been excluded from the
computation assuming dilution because the options' exercises prices exceed the
average market price of the underlying common shares.
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
---------------------------------------- ----------------------------------------
2002 2001 2002 2001
------------------- ----------------- ------------------ -------------------
Number of options............... 1,391,050 61,173 1,431,975 104,028
Exercise price range............ $16.3125 - $55.125 $28.75 - $55.125 $15.625 - $55.125 $27.8125 - $55.125
Expiring through................ March 2011 August 2008 March 2011 August 2008
6. UNREALIZED LOSS ON INVESTMENTS -- AVAILABLE FOR SALE
In April 1999, we exchanged a $4.7 million account receivable from Miller
Exploration Company ("Miller"), a publicly traded company, for a long-term note
receivable bearing 18% interest. Effective October 15, 2000, the note bears
interest at 9 3/4%. Interest is paid in Miller common stock warrants, with an
exercise price of $0.01 per share, in advance, at six-month intervals.
JANUARY 31, 2002 JULY 31, 2001
--------------------------------------- ------------------------------------------
COST UNREALIZED FAIR COST UNREALIZED FAIR
BASIS (LOSS)/GAIN VALUE BASIS (LOSS)/GAIN VALUE
-------- ------------ ------------ ------------ -------------- ---------
(IN THOUSANDS)
Miller stock and warrants 1,501 (744) 757 1,501 (14) 1,487
6
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. GOODWILL
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
(Goodwill and Other Intangible Assets). We adopted SFAS No. 142 as of August 1,
2001. SFAS No. 142 defines the accounting treatment of goodwill and other
intangible assets derived from business combinations and supersedes APB Opinion
No. 17. This statement requires us to discontinue amortization of goodwill and
requires that we test goodwill and other intangible assets for impairment in a
specific manner on an annual basis or when certain events trigger such a test.
The following is the proforma effect of implementing SFAS No. 142.
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reported net income .................... $ 7,677 $ 7,220 $ 15,322 $ 12,228
Goodwill amortization (net of tax) ..... 520 869
---------- ---------- ---------- ----------
Adjusted net income .................... $ 7,677 $ 7,740 $ 15,322 $ 13,097
========== ========== ========== ==========
Earnings per share:
Basic:
Reported net income per share ...... $ .24 $ .24 $ .47 $ .42
Goodwill amortization per share .... .02 .03
---------- ---------- ---------- ----------
Adjusted net income per share ...... $ .24 $ .26 $ .47 $ .45
========== ========== ========== ==========
Diluted:
Reported net income per share ...... $ .24 $ .23 $ .47 $ .41
Goodwill amortization per share ... .02 .03
---------- ---------- ---------- ----------
Adjusted net income per share ...... $ .24 $ .25 $ .47 $ .44
========== ========== ========== ==========
8. HEDGE TRANSACTION
In March 2001, we entered into a contract requiring payments in Norwegian kroner
to charter the seismic vessel M/V Seisquest. The contract requires 36 monthly
payments commencing on June 1, 2001. To protect our exposure to exchange rate
risk, we entered into multiple forward contracts as cash flow hedges effectively
locking our exchange rate for Norwegian kroner to the U.S. dollar. The
unrealized loss on the hedge transaction is summarized below:
JANUARY 31, 2002 JULY 31, 2001
---------------------------------- ---------------------------------
FORWARD UNREALIZED FORWARD UNREALIZED
VALUE LOSS FAIR VALUE VALUE LOSS FAIR VALUE
--------- ---------- ---------- ------- ---------- ----------
(IN THOUSANDS)
Forward contracts $ 7,335 $ (398) $ 6,937 $ 9,183 $ (421) $ 8,762
7
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SEGMENT INFORMATION
We have two segments, land and marine operations, both of which provide
geophysical products and services to the petroleum industry. The two segments
have been aggregated as they are similar in their economic characteristics and
the nature of their products, production processes and customers. A
reconciliation of the reportable segments' results to those of the total
enterprise is given below.
THREE MONTHS ENDED THREE MONTHS ENDED
JANUARY 31, 2002 JANUARY 31, 2001
----------------------------- -----------------------------
SEGMENTS CORPORATE TOTAL SEGMENTS CORPORATE TOTAL
-------- --------- -------- -------- --------- --------
(IN THOUSANDS)
Revenues.......................................... $119,623 $119,623 $134,415 $134,415
Operating income.................................. 25,258 $ (10,489) 14,769 23,444 $ (9,032) 14,412
Income (loss) before provision for income taxes... 26,385 (13,836) 12,549 22,165 (8,658) 13,507
SIX MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 2002 JANUARY 31, 2001
----------------------------- -----------------------------
SEGMENTS CORPORATE TOTAL SEGMENTS CORPORATE TOTAL
-------- --------- -------- -------- --------- --------
(IN THOUSANDS)
Revenues......................................... $241,001 $241,001 $245,714 $245,714
Operating income................................. 48,071 $ (18,175) 29,896 41,386 $ (16,620) 24,766
Income (loss) before provision for income taxes.. 49,896 (24,840) 25,056 41,490 (19,629) 21,861
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of certain factors. These factors
are more fully described in other reports filed with the Securities and Exchange
Commission, including our fiscal year 2001 Form 10-K, and include changes in
market conditions in the oil and gas industry as well as declines in prices of
oil and gas.
OUTLOOK
We have enjoyed a strong quarter in an environment of fairly weak commodity
prices and general economic concerns. We expect that exploration spending will
be reduced in 2002 but do not foresee large reductions in seismic spending, as
the levels of spending have been fairly modest over recent quarters. While
multi-client revenue is difficult to forecast, we expect this portion of our
business to remain strong for the remainder of the fiscal year. We are seeing
weakness in the land contract market in the Western Hemisphere, particularly in
the lower 48 United States and in Argentina, where recent economic problems have
disrupted the entire oil industry. However, we enjoy a strong relationship with
land acquisition customers in Canada who are currently remaining active and we
have a large project beginning in Peru in June. We have seen marine contract
pricing stabilize at a profitable level, although we are concerned that
overcapacity still exists in this market. Finally, demand for high-end data
processing is continuing to increase and we are well positioned to meet the
demand with multi-client products already on the shelf and with capacity to
perform contract services. Against this background, we are comfortable with
previous earnings guidance of $1.00 to $1.20 per share for fiscal 2002. This
estimate does not include the effects of any unusual charges; such as the ones
we recorded this quarter related to our proposed merger and the Argentine
situation, both described in more detail below.
On November 26, 2001, we entered into an Agreement and Plan of Merger and
Exchange Agreement with Petroleum Geo-Services ASA (PGS). The proposed merger
has passed all significant regulatory requirements. Upon closing, which is
anticipated to occur before the end of fiscal 2002, Veritas DGC Inc. and
Petroleum Geo-Services ASA would become subsidiaries of a new holding company
incorporated in the Cayman Islands. See Note 2 of the Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2002 COMPARED WITH THREE MONTHS ENDED JANUARY 31,
2001
Revenues. Revenues decreased by 11% overall. Multi-client revenues increased 10%
due to increased licensing of Gulf of Mexico data and continued acquisition by
both Veritas Vikings of the well-funded multi-client Brazil Cluster survey. The
multi-client revenue increase was offset by the contract revenue decrease of 28%
primarily due to declines in the land acquisition business. The decrease was
caused, in part, by warmer than normal weather in Canada and Alaska which
delayed the winter season. The economic and political situation in Argentina
added to the shortfall, as our customers ceased their exploration activity in
that country. As a result, we are suspending our land acquisition business in
Argentina, severing most of our employees there and moving our equipment to
other countries.
Operating Income. Operating income increased by 3%, from $14.4 million to $14.8
million, however, the current quarter income includes unusual charges of $2.8
million for costs related to our proposed merger with PGS and $2.4 million for
Argentine costs including foreign exchange losses, severance and equipment
relocation. The foreign exchange component of the unusual charge occurred due to
a change in Argentine law outlawing the use of dollar denominated contracts,
even if the contracts were executed before the change in law. Before this law
changed, we had little exposure to the Argentine peso devaluation. Excluding
these unusual charges, the operating income was $19.9 million, or a 38%
increase. Cost of services as a percentage of revenue decreased from 70% to 62%
due to slightly improved contract margins and improved revenue mix, with
multi-client revenues representing 56% of total revenue compared with 45% in the
prior year.
Other income-net. Other income-net decreased by $1.3 million, from $2.6 million
to $1.3 million. This decrease is primarily due to the decrease in interest
income by $1.4 million as a result of lower cash balances and lower interest
rates. In addition, currency gains decreased from $0.6 million to $0.3 million.
A $0.7 million gain in the current year from the sale of our transition zone
shot-hole drilling business, Air-Jac Drilling, partially offset the lower
interest income and foreign exchange gains.
9
Provision for income taxes. The effective income tax rate decreased from 47% to
39%. This change is due to fewer unbenefitted losses in non-U.S. entities in the
current year, an addition to the effective tax rate in the prior year as a
result of the inability to utilize foreign taxes as credits against U.S.
profits, and the cessation of goodwill amortization which is generally not tax
deductible.
SIX MONTHS ENDED JANUARY 31, 2002 COMPARED WITH SIX MONTHS ENDED JANUARY 31,
2001
Revenues. Revenues decreased 2% with the drop occurring equally in multi-client
and contract revenue. The strong year over year increase in the contract land
business seen in the first quarter of this year has been offset for the
six-month period by the U.S. and Argentine problems of the current quarter. The
multi-client business has shown the opposite trend; softness in the first
quarter was followed by strong sales and high activity on well-funded surveys in
the current quarter.
Operating Income. Operating income increased 21%, from $24.8 million to $29.9
million. Without the unusual charge of $5.1 million related to the merger and
Argentina, the increase would be 41%. The largest contributor to this increase
were improved contract margins in the current year due to a focus on higher
margin work.
Other income-net. Other income-net decreased by $2.0 million primarily due to a
$1.5 million decrease in interest income as a result of lower cash balances and
lower interest rates. Currency gains decreased from $0.4 million to $0.1
million. In addition, gain on the sale of fixed assets decreased by $0.7
million. A net $0.6 million gain in the current year from the sale of our
transition zone shot-hole drilling business, Air-Jac Drilling, partially offset
the interest income and foreign exchange reductions.
Provision for income taxes. Income taxes increased from $9.6 million to $9.7
million as a result of our higher earnings in the current year. The decrease in
the effective income tax rate from 44% to 39% is due to fewer unbenefitted
losses in non-U.S. entities in the current year, an addition to the effective
tax rate in the prior year as a result of the inability to utilize foreign taxes
as credits against U.S. profits, and the cessation of goodwill amortization
which is generally not tax deductible.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES
Our internal sources of liquidity are cash, cash equivalents and cash flow from
operations. External sources include public financing, equity sales, the
unutilized portion of a revolving credit facility, equipment financing and trade
credit. We believe that these sources of funds are adequate to meet our
liquidity needs for fiscal 2002.
Net cash provided by operating activities increased from $91.8 million in the
first six months of 2001 to $106.3 million in 2002. Major components of this
change were a $3.1 million increase in net income and an $18.4 million favorable
change in operating assets and liabilities. Net cash used by investing
activities increased from $128.3 million in the first six months of 2001 to
$150.4 million in 2002 due to higher capital spending and investments in
multi-client library. We require significant amounts of working capital to
support our operations and fund our research and development program. We are
forecasting capital expenditures for fiscal 2002 of approximately $100 million,
which includes expenditures of approximately $60 million to expand or upgrade
our marine fleet. We are also forecasting approximately $200 million in gross
spending on our multi-client data library.
We will require substantial cash flow to continue our investment in our
multi-client data library, complete our capital expenditure and research and
development programs and meet our principal and interest obligations with
respect to outstanding indebtedness. While we believe that we have adequate
sources of funds to meet our liquidity needs, our ability to meet our
obligations depends on our future performance, which, in turn, is subject to
many factors beyond our control. Key internal factors affecting future results
include utilization levels of acquisition and processing assets and the level of
multi-client data library licensing, all of which are driven by the external
factors of exploration spending and, ultimately, underlying commodity prices.
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Net cash provided by financing activities decreased from $89.6 million in the
first six months of 2001 to $1.3 million in 2002. The prior year includes
proceeds from a common stock offering of $82.4 million. As of January 31, 2002,
we had $135.0 million in senior notes outstanding due in October 2003. These
notes contain a change of control provision allowing the holders to require our
redemption of the notes under certain conditions. We also have a revolving
credit facility due August 2003 from commercial lenders that provides U.S.
advances up to $80.0 million and non-U.S. advances up to $20 million. Advances
bear interest, at our election, at LIBOR plus a margin or prime rate plus a
margin. These margins are based on either certain of our financial ratios or our
credit rating. At January 31, 2002 the LIBOR margin was 1.25% and the prime rate
margin was 0%. As of January 31, 2002, there were no outstanding advances under
the credit facility, but $4.0 million of the credit facility was utilized for
letters of credit, leaving $96.0 million available for borrowings.
OTHER
Since our quasi-reorganization on July 31, 1991 with respect to Digicon Inc.,
the tax benefits of net operating loss carry-forwards existing at the date of
the quasi-reorganization have been recognized through a direct addition to
additional paid-in capital, when realization is more likely than not.
Additionally, the utilization of the net operating loss carry-forwards existing
at the date of the quasi-reorganization is subject to certain limitations. For
the six months ended January 31, 2002, we recognized $1.4 million related to
these benefits.
We receive some account receivable payments in foreign currency. We currently do
not conduct a hedging program for accounts receivable because we do not consider
our current exposure to foreign currency fluctuations to be significant. We have
hedged certain future charter payments to be made in a foreign currency.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
(Business Combinations) and SFAS No. 142 (Goodwill and Other Intangible Assets).
We adopted SFAS No. 141 upon its issuance, and we adopted SFAS No. 142 as of
August 1, 2001. The main effect of SFAS No. 141 is to require purchase
accounting to be used in all future business combinations, disallowing the
pooling-of-interests method allowed under APB Opinion No.16. SFAS No. 142
defines the booking and subsequent treatment of goodwill and other intangible
assets derived from business combinations and supersedes APB Opinion No.17. This
statement requires us to discontinue amortization of goodwill and requires that
we test goodwill and other intangible assets for impairment in a specific manner
on an annual basis or when certain events trigger such a test. We have completed
our initial evaluation of goodwill in January 2002 and found no impairment.
In August 2001, the Financial Accounting Standards Board issued SFAS No.143
(Asset Retirement Obligations). This standard requires that obligations
associated with the retirement of a tangible long-lived asset be recorded as a
liability when those obligations are incurred with the liability being initially
measured at fair value. We will adopt the use of this accounting statement in
fiscal 2003. We have not yet completed our evaluation of the effect of this
statement on our accounting practices.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144
(Accounting for the Impairment or Disposal of Long Lived Assets). This standard
develops one accounting model for long-lived assets that are to be disposed of
by sale, requiring such assets to be measured at the lower of book value or fair
value less cost to sell. The standard also provides guidance on the recognition
of liabilities for the obligations arising from disposal activities. We will
adopt the use of this accounting statement in fiscal 2003. We have not yet
completed our evaluation of the effect of this statement on our accounting
practices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
At January 31, 2002, we had limited market risk related to foreign currencies.
In March 2001, we entered into a contract requiring payments in Norwegian kroner
to charter the seismic vessel M/V Seisquest. The contract requires 36 monthly
payments commencing on June 1, 2001. To protect our exposure to exchange rate
risk, we entered into multiple forward contracts as cash flow hedges fixing our
exchange rates for Norwegian kroner to the U.S. dollar. The total fair value of
the open forward contracts at January 31, 2002 in U.S. dollars is $6.9 million.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 11, 2001 at the Annual Meeting of Stockholders, the stockholders
voted to amend and restate Veritas' 1997 Employee Stock Purchase Plan to
increase the number of shares available for purchase by 500,000, bringing the
total number of shares reserved under the plan to 1,000,000. Votes were cast in
the following numbers: 25,250,018 in favor, 873,467 against and 13,649
abstaining.
The stockholders also voted, as follows, to elect eight directors of Veritas DGC
Inc.
Name Votes For Votes Withheld
---------------------- ------------ --------------
Clayton P. Cormier 26,007,115 130,519
Lawrence C. Fichtner 26,010,103 127,531
James R. Gibbs 26,007,803 129,831
Stephen J. Gilbert 17,939,391 8,198,243
Stephen J. Ludlow 26,007,240 130,394
Brian F. MacNeill 26,009,853 127,781
Jan Rask 26,008,203 129,431
David B. Robson 21,063,296 5,074,338
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS FILES WITH THIS REPORT:
EXHIBIT
NO. DESCRIPTION
------- -----------
2-A -- Agreement and Plan of Merger and Exchange Agreement dated
November 26, 2001, among Petroleum Geo-Services ASA,
Veritas DGC Inc., Venus I, Venus Holdco Inc. and Venus
Mergerco Inc. (Exhibit 2.1 to Veritas DGC Inc.'s Current
Report on Form 8-K filed November 28, 2001 is incorporated
herein by reference.)
3-A -- Restated Certificate of Incorporation with amendments Of
Veritas DGC Inc. dated August 30, 1996. (Exhibit 3.1 to
Veritas DGC Inc.'s Current Report on Form 8-K filed
September 16, 1996 is incorporated herein by reference.)
3-B -- Certificate of Ownership and Merger of New Digicon Inc.
And Digicon Inc. (Exhibit 3-B to Digicon Inc.'s
Registration Statement No. 33-43873 dated November 12,
1991 Is incorporated herein by reference.)
3-C -- Certificate of Amendment to Restated Certificate of
Incorporation of Veritas DGC Inc. dated September 30,
1999. (Exhibit 3-D to Veritas DGC Inc.'s For 10-K for the
year ended July 31, 1999 is incorporated herein by
reference.)
3-D -- By-laws of Veritas DGC Inc. as amended and restated March
7, 2000 (Exhibit 3-E to Veritas DGC Inc.'s Form 10-Q for
the quarter ended January 31, 2000 is incorporated herein
by reference)
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4-A -- Specimen certificate for Senior Notes (Series A).
(Included as part of Section 2.2 of Exhibit 4-B to Veritas
DGC Inc.'s Registration Statement No. 333-12481 dated
September 20, 1996 is incorporated herein by reference.)
4-B -- Form of Trust Indenture relating to the 93/4% Senior Notes
due 2003 of Veritas DGC Inc. between Veritas DGC Inc. and
Fleet National Bank, as trustee. (Exhibit 4-B to Veritas
DGC Inc.'s Registration Statement No. 333-12481 dated
September 20, 1996 is incorporated herein by reference.)
4-C -- Specimen Veritas DGC Inc. Common Stock certificate.
(Exhibit 4-C to Veritas DGC Inc.'s Form 10-K for the year
ended July 31, 1996 is incorporated herein by reference.)
4-D -- Rights Agreement between Veritas DGC Inc. and ChaseMellon
Shareholder Services, L.L.C. dated as of May 15, 1997.
(Exhibit 4.1 to Veritas DGC Inc.'s Report on Form 8-K
filed May 27, 1997 is incorporated herein by reference.)
4-E -- Form of Restricted Stock Grant Agreement. (Exhibit 4.8 to
Veritas DGC Inc.'s Registration Statement No. 333-48953
dated March 31, 1998 is incorporated herein by reference.)
4-F -- Restricted Stock Plan as amended and restated March 7,
2000. (Exhibit 4-F to Veritas DGC Inc.'s Form 10-Q for the
quarter ended April 30, 2000 is incorporated herein by
reference.)
4-G -- Key Contributor Incentive Plan as amended and restated
March 9, 1999. (Exhibit 4.9 to Veritas DGC Inc.'s
Registration Statement No. 333-74305 dated March 12, 1999
is incorporated herein by reference.)
4-H -- Specimen for Senior Notes (Series C). (Exhibit 4-K to
Veritas DGC Inc.'s Form 10-Q for the quarter ended January
31, 1999 is incorporated herein by reference.)
4-I -- Indenture relating to the 9 3/4% Senior Notes due 2003,
Series B and Series C of Veritas DGC Inc. between Veritas
DGC Inc. and State Street Bank and Trust Company dated
October 28, 1998. (Exhibit 4.3 to Veritas DGC Inc.'s
Current Report on Form 8-K dated November 12, 1998 is
incorporated herein by reference.)
4-J -- Employee Stock Purchase Plan (As Amended and Restated
December 11, 2001) (Exhibit 4.1 to Veritas DGC Inc.'s Form
S-8 dated February 26, 2002 is incorporated herein by
reference.)
10-A -- Amended and Restated Employment Agreement between Veritas
DGC Inc. and Matthew D. Fitzgerald. (Exhibit 10-A to
Veritas DGC, Inc.'s Form 10-Q for the quarter ended
October 31, 2001 is incorporated herein by reference.)
10-B -- Amendment No. 1 to Amended and Restated Employment
Agreement between Veritas DGC Inc. and Matthew D.
Fitzgerald. (Exhibit 10-B to Veritas DGC, Inc.'s Form 10-Q
for the quarter ended October 31, 2001 is incorporated
herein by reference.)
10-C -- Amended and Restated Employment Agreement between Veritas
DGC Inc. and Stephen J. Ludlow. (Exhibit 10-C to Veritas
DGC, Inc.'s Form 10-Q for the quarter ended October 31,
2001 is incorporated herein by reference.)
10-D -- Amendment No. 1 to Amended and Restated Employment
Agreement between Veritas DGC Inc. and Stephen J. Ludlow.
(Exhibit 10-D to Veritas DGC, Inc.'s Form 10-Q for the
quarter ended October 31, 2001 is incorporated herein by
reference.)
10-E -- Amended and Restated Employment Agreement between Veritas
DGC Inc. and David B. Robson. (Exhibit 10-E to
13
Veritas DGC, Inc.'s Form 10-Q for the quarter ended
October 31, 2001 is incorporated herein by reference.)
10-F -- Amendment No. 1 to Amended and Restated Employment
Agreement between Veritas DGC Inc. and David B. Robson.
(Exhibit 10-F to Veritas DGC, Inc.'s Form 10-Q for the
quarter ended October 31, 2001 is incorporated herein by
reference.)
10-G -- Amended and Restated Employment Agreement between Veritas
DGC Inc. and Anthony Tripodo. (Exhibit 10-G to Veritas
DGC, Inc.'s Form 10-Q for the quarter ended October 31,
2001 is incorporated herein by reference.)
10-H -- Amendment No. 1 to Amended and Restated Employment
Agreement between Veritas DGC Inc. and Anthony Tripodo.
(Exhibit 10-H to Veritas DGC, Inc.'s Form 10-Q for the
quarter ended October 31, 2001 is incorporated herein by
reference.)
10-I -- Amended and Restated Employment Agreement between Veritas
DGC Inc. and Rene M.J. VandenBrand. (Exhibit 10-I to
Veritas DGC, Inc.'s Form 10-Q for the quarter ended
October 31, 2001 is incorporated herein by reference.)
10-J -- Amendment No. 1 to Amended and Restated Employment
Agreement between Veritas DGC Inc. and Rene M.J.
VandenBrand. (Exhibit 10-J to Veritas DGC, Inc.'s Form
10-Q for the quarter ended October 31, 2001 is
incorporated herein by reference.)
10-K -- Amended and Restated Employment Agreement between Veritas
DGC Inc. and Timothy L. Wells. (Exhibit 10-K to Veritas
DGC, Inc.'s Form 10-Q for the quarter ended October 31,
2001 is incorporated herein by reference.)
10-L -- Amendment No. 1 to Amended and Restated Employment
Agreement between Veritas DGC Inc. and Timothy L. Wells.
(Exhibit 10-L to Veritas DGC, Inc.'s Form 10-Q for the
quarter ended October 31, 2001 is incorporated herein by
reference.)
10-M -- Employment Agreement between Veritas DGC Inc. and Larry L.
Worden. (Exhibit 10-M to Veritas DGC, Inc.'s Form 10-Q for
the quarter ended October 31, 2001 is incorporated herein
by reference.)
10-N -- Amendment No. 1 to Employment Agreement between Veritas
DGC Inc. and Larry L. Worden. (Exhibit 10-N to Veritas
DGC, Inc.'s Form 10-Q for the quarter ended October 31,
2001 is incorporated herein by reference.)
b) REPORTS ON FORM 8-K
On November 28, 2001 we filed a Form 8-K regarding the proposed
combination of Veritas DGC Inc. and Petroleum Geo-Services ASA.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 12th day of March 2002.
VERITAS DGC INC.
By: /s/ David B. Robson
---------------------------------------------------
DAVID B. ROBSON
Chairman of the Board and Chief Executive Officer
/s/ Matthew D. Fitzgerald
---------------------------------------------------
MATTHEW D. FITZGERALD
Executive Vice President, Chief Financial Officer
and Treasurer
15