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SECURITIES AND UNITED STATES EXCHANGE COMMISSION


Washington, D.C. 20549




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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, 2004

OR

|  |  |                                                   | 
|- |  | ------------------------------------------------- | 
|o |  | 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 organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|10300 Town Park                                                |  |                                     
|Houston, Texas                                                 |  | 77072                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(832) 351-8300
(Registrants telephone number, including area code)

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 o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of the Companys common stock, $.01 par value,
outstanding at February 27, 2004 was 34,010,420 (including 1,221,931 Veritas
Energy Services Inc. exchangeable shares which are identical to the Common
Stock in all material respects).

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TABLE OF CONTENTS



|                                             |                                                                                               |                                                                       |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION               
|                                             | Item 1. Financial Statements                                                                 
|                                             |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|                                             |                                                                                               | CONSOLIDATED BALANCE SHEETS                                          
|                                             |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                                
|                                             |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                           
|                                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk                       
|                                             | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                  
|                                             | Item 1. Legal Proceedings                                                                    
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                                  
|EXHIBIT INDEX                               
|Third Amendment to Credit Agreement         
|Employee Agreement - Thierry Pilenko        
|Retirement Agreement - David B. Robson      
|Certification of CEO Pursuant to Section 302
|Certification of PFO Pursuant to Section 302
|Certification of CEO Pursuant to Section 906
|Certification of PFO Pursuant to Section 906



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TABLE OF CONTENTS FORM 10-Q Page NumberPart I. Financial InformationItem 1. Financial Statements (Unaudited)Consolidated
Statements of Operations and Comprehensive Income (Loss) 
For the Three and Six Months Ended January 31, 2004 and 2003
    
    
    1Consolidated Balance Sheets  January 31, 2004 and July 31, 2003
    
    
    2Consolidated Statements of Cash Flows 
For the Six Months Ended January 31, 2004 and 2003
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16Part II. Other InformationItem 1. Legal Proceedings
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 6. Exhibits and Reports on Form 8-K
    
    
    18Signatures
    
    
    19




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PART I. FINANCIAL INFORMATION 
 Item 1.Financial Statements VERITAS DGC INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited) Three Months Ended
    
    Six Months EndedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share amounts)Revenues
    
    $
    147,770
    
    
    $
    125,321
    
    
    $
    252,120
    
    
    $
    262,828Cost of services
    
    
    114,988
    
    
    
    102,013
    
    
    
    232,005
    
    
    
    220,949Research and development
    
    
    3,695
    
    
    
    3,045
    
    
    
    7,140
    
    
    
    6,053General and administrative
    
    
    6,383
    
    
    
    7,810
    
    
    
    12,574
    
    
    
    15,483Operating income
    
    
    22,704
    
    
    
    12,453
    
    
    
    401
    
    
    
    20,343Interest expense
    
    
    4,197
    
    
    
    4,425
    
    
    
    8,475
    
    
    
    8,367Other expense (income), net
    
    
    (370
    )
    
    
    637
    
    
    
    (517
    )
    
    
    1,647Income (loss) before provision for income taxes
    
    
    18,877
    
    
    
    7,391
    
    
    
    (7,557
    )
    
    
    10,329Income taxes
    
    
    4,638
    
    
    
    2,901
    
    
    
    4,551
    
    
    
    4,276Net income (loss)
    
    $
    14,239
    
    
    $
    4,490
    
    
    $
    (12,108
    )
    
    $
    6,053Net income (loss) per share:Basic:Net income (loss) per common share
    
    $
    .42
    
    
    $
    .14
    
    
    $
    (.36
    )
    
    $
    .18Weighted average common shares (including exchangeable shares)
    
    
    33,745
    
    
    
    33,235
    
    
    
    33,668
    
    
    
    33,193Diluted:Net income (loss) per common share
    
    $
    .42
    
    
    $
    .14
    
    
    $
    (.36
    )
    
    $
    .18Weighted average common shares (including exchangeable shares)
    
    
    33,952
    
    
    
    33,249
    
    
    
    33,668
    
    
    
    33,220Comprehensive income (loss):Net income (loss)
    
    $
    14,239
    
    
    $
    4,490
    
    
    $
    (12,108
    )
    
    $
    6,053Other comprehensive income (loss) (net of tax, $0 in all periods):Foreign currency translation adjustments
    
    
    570
    
    
    
    1,374
    
    
    
    5,935
    
    
    
    1,599Other unrealized gain (loss)
    
    
    (691
    )
    
    
    253
    
    
    
    (604
    )
    
    
    365Total other comprehensive income (loss)
    
    
    (121
    )
    
    
    1,627
    
    
    
    5,331
    
    
    
    1,964Comprehensive income (loss)
    
    $
    14,118
    
    
    $
    6,117
    
    
    $
    (6,777
    )
    
    $
    8,017
 See Notes to Consolidated Financial Statements 1




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VERITAS DGC INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)unaudited January 31,
    
    July 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    69,520
    
    
    $
    72,626Restricted cash investments
    
    
    15
    
    
    
    205Accounts and notes receivable (net of allowance: $1,059 and $7,953, respectively)
    
    
    172,243
    
    
    
    131,645Materials and supplies inventory
    
    
    4,056
    
    
    
    5,044Prepayments and other
    
    
    13,303
    
    
    
    13,365Income taxes receivable
    
    
    11,280
    
    
    
    11,335Total current assets
    
    
    270,417
    
    
    
    234,220Property and equipment
    
    
    488,781
    
    
    
    492,639Less accumulated depreciation
    
    
    352,912
    
    
    
    341,430Property and equipment, net
    
    
    135,869
    
    
    
    151,209Multi-client data library
    
    
    350,071
    
    
    
    371,949Investment in and advances to joint ventures
    
    
    3,483
    
    
    
    4,657Deferred tax asset
    
    
    1,967
    
    
    
    2,546Other assets
    
    
    24,678
    
    
    
    23,781Total
    
    $
    786,485
    
    
    $
    788,362LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    1,425
    
    
    $
    13,908Trade accounts payable
    
    
    36,341
    
    
    
    43,423Other accrued liabilities
    
    
    64,606
    
    
    
    41,880Total current liabilities
    
    
    102,372
    
    
    
    99,211Non-current liabilities:Long-term debt
    
    
    179,698
    
    
    
    180,317Other non-current liabilities
    
    
    19,089
    
    
    
    18,701Total non-current liabilities
    
    
    198,787
    
    
    
    199,018Stockholders equity:Common stock, $.01 par value; issued: 32,487,609 shares and 32,156,781 shares,
respectively (excluding common stock equivalent exchangeable shares of subsidiary
of 1,422,711 and 1,443,411, respectively)
    
    
    324
    
    
    
    322Additional paid-in capital
    
    
    430,697
    
    
    
    428,402Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.)
    
    
    48,409
    
    
    
    60,517Accumulated other comprehensive income (loss):Cumulative foreign currency translation adjustment
    
    
    9,453
    
    
    
    3,518Other comprehensive loss
    
    
    (1,382
    )
    
    
    (778
    )Unearned compensation
    
    
    (626
    )
    
    
    (340
    )Treasury stock, at cost; 89,136 shares and 84,143 shares, respectively
    
    
    (1,549
    )
    
    
    (1,508
    )Total stockholders equity
    
    
    485,326
    
    
    
    490,133Total
    
    $
    786,485
    
    
    $
    788,362
 See Notes to Consolidated Financial Statements 2




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VERITAS DGC INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months EndedJanuary 31,2004
    
    2003(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (12,108
    )
    
    $
    6,053Non-cash items included in net income (loss):Depreciation and amortization, net (other than multi-client)
    
    
    19,869
    
    
    
    25,349Amortization of multi-client library
    
    
    105,731
    
    
    
    73,558Impairment of land acquisition equipment
    
    
    
    
    
    
    1,780Loss (gain) on disposition of property and equipment
    
    
    480
    
    
    
    (435
    )Equity in loss of joint venture
    
    
    613
    
    
    
    948Deferred taxes
    
    
    717Amortization of unearned compensation
    
    
    240
    
    
    
    354Change in operating assets/liabilities:Accounts and notes receivable
    
    
    (39,205
    )
    
    
    (12,380
    )Materials and supplies inventory
    
    
    993
    
    
    
    12,744Prepayments and other
    
    
    (462
    )
    
    
    (852
    )Income tax receivable
    
    
    1,360
    
    
    
    3,624Accounts payable and other accrued liabilities
    
    
    14,467
    
    
    
    (17,074
    )Other
    
    
    (3,693
    )
    
    
    (930
    )Net cash provided by operating activities
    
    
    89,002
    
    
    
    92,739Cash flows from investing activities:Decrease in restricted cash
    
    
    190Investment in multi-client data library, net cash
    
    
    (70,315
    )
    
    
    (75,587
    )Purchase of property and equipment
    
    
    (13,557
    )
    
    
    (12,967
    )Sale of property and equipment
    
    
    655
    
    
    
    2,235Sale of (RC)2 software operation
    
    
    2,000Purchase of Hampson-Russell Software Services Ltd.
    
    
    
    
    
    
    (9,250
    )Net cash used by investing activities
    
    
    (81,027
    )
    
    
    (95,569
    )Cash flows from financing activities:Borrowing of long-term debt, net of debt issuance costs
    
    
    
    
    
    
    120,500Payments on long-term debt
    
    
    (13,102
    )
    
    
    (49,950
    )Net proceeds from sale of common stock
    
    
    1,524
    
    
    
    1,186Net cash (used) provided by financing activities
    
    
    (11,578
    )
    
    
    71,736Currency loss on foreign cash
    
    
    497
    
    
    
    50Change in cash and cash equivalents
    
    
    (3,106
    )
    
    
    68,956Beginning cash and cash equivalents balance
    
    

    72,626
    
    
    
    10,586Ending cash and cash equivalents balance
    
    $
    69,520
    
    
    $
    79,542Schedule of non-cash transactions:Capitalization of depreciation and amortization resulting in an increase in
multi-client data library
    
    $
    9,915
    
    
    $
    12,645
 See Notes to Consolidated Financial Statements 3




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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. On April 30, 2004, we will adopt
FIN 46R which will require us to consolidate the 80% owned joint venture. See
Recent accounting pronouncements below for more detail. 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 presented, have been reflected. These interim financial
statements should be read in conjunction with our annual audited 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 December 2003, the Financial Accounting Standards Board issued FIN 46R,
a revision to FIN 46 (Consolidation of Variable Interest Entities). FIN 46R
replaces FIN 46 and provides additional clarification on the application of ARB
No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. We will adopt
FIN 46R on April 30, 2004. Adoption will not have a material effect on our
financial position or results of operations, however, it will require
consolidation of our 80% owned joint venture currently accounted for under the
equity method. The 80% owned joint venture provides processing and acquisition
services and sells licenses to multi-client library. In December 2003, the Financial Accounting Standards Board issued SFAS No.
132 (Revised 2003), Employers Disclosures about Pension and Other
Postretirement Benefits. This statement retains the disclosures required by
SFAS No. 132 and adds additional disclosures. Those disclosures include
information describing the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods. We will adopt SFAS
No. 132 (Revised 2003) in the third quarter of fiscal 2004. 4




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2.
    
    Multi-client library accounting change As of August 1, 2003, we changed our multi-client amortization policy to
include a minimum amortization from the date of survey completion, instead of
only during the last 24 months of survey book life. This change resulted in
a catch-up adjustment of $22.1 million recognized as additional amortization
expense during the current fiscal year and is included in cost of services on
the Consolidated Statements of Operations and Comprehensive Income (Loss).  3.
    
    Other expense (income), net Other expense (income), net consists of the following: Three Months Ended
    
    Six Months EndedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003(In thousands)Interest income
    
    $
    (250
    )
    
    $
    (154
    )
    
    $
    (484
    )
    
    $
    (228
    )Net foreign currency exchange loss (gain)
    
    
    (297
    )
    
    
    414
    
    
    
    (265
    )
    
    
    697Loss from unconsolidated joint venture
    
    
    364
    
    
    
    349
    
    
    
    613
    
    
    
    948Other
    
    
    (187
    )
    
    
    28
    
    
    
    (381
    )
    
    
    230Total
    
    $
    (370
    )
    
    $
    637
    
    
    $
    (517
    )
    
    $
    1,647
  4.
    
    Earnings per common share Basic and diluted earnings per common share are computed as follows: Three Months Ended
    
    Six Months EndedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share amounts)Net income (loss)
    
    $
    14,239
    
    
    $
    4,490
    
    
    $
    (12,108
    )
    
    $
    6,053Basic:Weighted average common shares (including
exchangeable shares)
    
    
    33,745
    
    
    
    33,235
    
    
    
    33,668
    
    
    
    33,193Net income (loss) per share
    
    $
    .42
    
    
    $
    .14
    
    
    $
    (.36
    )
    
    $
    .18Diluted:Weighted average common shares (including
exchangeable shares)
    
    
    33,745
    
    
    
    33,235
    
    
    
    33,668
    
    
    
    33,193Shares issuable from assumed exercise of options
    
    
    207
    
    
    
    14
    
    
    
    
    
    
    
    27Total
    
    
    33,952
    
    
    
    33,249
    
    
    
    33,668
    
    
    
    33,220Net income (loss) per share
    
    $
    .42
    
    
    $
    .14
    
    
    $
    (.36
    )
    
    $
    .18
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The following options to purchase common shares have been excluded from
the computation assuming dilution because the options exercise prices exceed
the average market price of the underlying common shares or the options are
anti-dilutive due to a net loss. Three Months Ended
    
    Six Months EndedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003Number of options
    
    
    3,438,173
    
    
    
    3,338,074
    
    
    
    4,269,195
    
    
    
    3,293,541Exercise price range
    
    $
    10.71-55.125
    
    
    $
    10.71-$55.125
    
    
    $
    5.25-55.125
    
    
    $
    10.71- $55.125Expiring through
    
    March 2012
    
    March 2012
    
    March 2012
    
    March 2012
  5.
    
    Long-term debt Long-term debt is as follows: January 31, 2004
    
    July 31, 2003(In thousands)Term A loan due February 2006
    
    $
    27,314
    
    
    $
    29,850Term B loan due February 2007
    
    
    113,809
    
    
    
    124,375Term C loan due February 2008
    
    
    40,000
    
    
    
    40,000Total debt
    
    
    181,123
    
    
    
    194,225Less: Current portion of long-term debt
    
    
    1,425
    
    
    
    13,908Total long-term debt
    
    $
    179,698
    
    
    $
    180,317
 On February 14, 2003, we entered into a Credit Agreement (the Credit
Agreement) with Deutsche Bank AG, New York Branch, as Administrative Agent,
Deutsche Bank AG, Canada Branch, as Canadian Administrative Agent, and certain
other lending institutions. The Credit Agreement provides term financing of
$195.0 million under term A, term B and term C tranches (the Term Loans), a
revolving loan facility aggregating $55.0 million, including a facility for
swing line loans of up to $10.0 million and the issuance of letters of credit
in an aggregate amount of up to $40.0 million. As of January 31, 2004, there
were $3.1 million in letters of credit outstanding, leaving $51.9 million
available for borrowings. Among other restrictions, the Credit Agreement
prohibits us from paying cash dividends. Proceeds from the Term Loans were
used to satisfy the obligations under our previous credit agreement and our
Senior Notes. The term A loan was in the original principal amount of $30.0 million,
matures in February 2006, and requires quarterly interest payments at a rate,
at our election, of LIBOR plus a margin ranging from 3.5% to 4.0% or a base
rate plus a margin ranging from 2.25% to 2.75%. These margins are based on
certain of our financial ratios. The term B loan was in the original principal
amount of $125.0 million, matures in February 2007, and requires quarterly
interest payments at a rate, at our election, of LIBOR plus 5.0%, subject to a
2% LIBOR floor or a base rate plus 3.75%. The term C loan was in the original
principal amount of $40.0 million, matures in February 2008, and requires
quarterly interest payments at a rate, at our election, of LIBOR plus 7.5%,
subject to a 3% LIBOR floor or a base rate plus 6.25%. The term A and term B loans required quarterly combined principal payments
of $387,500 representing 0.25% of the initial principal balances. Should
there be an event of default or if an unmatured event of default exists, or the
credit rating of any of the debt is below Moodys Ba2 or S&Ps BB, or our
leverage ratio as of the last day of the most recent excess cash flow
calculation period rises above certain levels, the term A and B loans also
require principal payments of 50% of the prior fiscal years cash flow,
calculated as per the loan agreement. This payment is due 100 days after the
end of the fiscal year and results in a ratable reduction of the future
required quarterly principal payments. As our lowest debt rating by Moodys was
below the minimum level, we paid $12.4 million of principal in November 2003
related to the companys cash flow from January 1, 2003 through July 31, 2003.
Based upon this payment, our required quarterly combined principal payments was
reduced to $356,371. Future excess cash flow payments of this type, if any,
will be based on cash flow for full fiscal years. Loans made under the revolving loan facility, including swing-line loans,
bear interest at a variable rate determined on the date of borrowing that is
related to various base rates and margins depending upon our leverage ratio and
the location of the borrowing. The revolving loan facility expires in February
2006. 6




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Borrowings under the Credit Agreement are secured by assets, including
equipment, vehicles, multi-client data library, intellectual property, and
stock of certain material subsidiaries, owned by us and certain of our
subsidiaries. At January 31, 2004, the carrying value of the secured assets,
including intercompany receivables, was $1.1 billion. The Credit Agreement and
related documents contain a number of covenants, including financial covenants
relating to interest coverage, leverage and net worth. At January 31, 2004, we
were in compliance with these covenants. See Note 9, Subsequent Events of Notes to Consolidated Financial
Statements for a description of our recently issued unsecured convertible
senior notes.  6.
    
    Hedge transactions 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 against exposure to
exchange rate risk, we entered into multiple forward contracts as cash flow
hedges effectively fixing our exchange rate for Norwegian kroner to the U.S.
dollar. On February 25, 2003, we entered into interest rate swaps in order to
reduce our exposure to the variable interest rates under our Credit Agreement
described above. These swaps, with notional amounts totaling $80.0 million,
effectively hedge 41% of our exposure to interest rate changes for the two-year
term of the swaps and had no value at inception. Details of the interest rate swaps are summarized in the following table: LIBORTranche Hedged
    
    Amount
    
    Term
    
    Pay %
    
    Receive
    
    Floor(in thousands)Term A
    
    $
    25,000
    
    
    24 months
    
    
    1.86
    
    
    LIBOR
    
    NoneTerm B
    
    $
    55,000
    
    
    24 months
    
    
    2.49
    
    
    LIBOR
    
    
    2
    %
 The values of the forward contracts and the interest rate swaps are as
follows: January 31, 2004
    
    July 31, 2003Forward
    
    Unrealized
    
    
    
    
    
    Forward
    
    UnrealizedValue
    
    Gain/(Loss)
    
    Fair Value
    
    Value
    
    Gain/(Loss)
    
    Fair Value(In thousands)Forward contracts
    
    $
    1,103
    
    
    $
    313
    
    
    $
    1,416
    
    
    $
    2,780
    
    
    $
    632
    
    
    $
    3,412Interest rate swaps
    
    
    
    
    
    
    (384
    )
    
    
    (384
    )
    
    
    
    
    
    
    (777
    )
    
    
    (777
    )
  7.
    
    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: 7




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##### Table of Contents



Three Months EndedJanuary 31,2004
    
    2003Segments
    
    Corporate
    
    Total
    
    Segments
    
    Corporate
    
    Total(In thousands)Revenues
    
    $
    147,770
    
    
    
    
    
    
    $
    147,770
    
    
    $
    125,321
    
    
    
    
    
    
    $
    125,321Operating income (loss)
    
    
    31,107
    
    
    $
    (8,403
    )
    
    
    22,704
    
    
    
    21,224
    
    
    $
    (8,771
    )
    
    
    12,453Income (loss) before provision for income taxes
    
    
    31,352
    
    
    
    (12,475
    )
    
    
    18,877
    
    
    
    20,511
    
    
    
    (13,120
    )
    
    
    7,391
 Six Months EndedJanuary 31,2004
    
    2003Segments
    
    Corporate
    
    Total
    
    Segments
    
    Corporate
    
    Total(In thousands)Revenues
    
    $
    252,120
    
    
    
    
    
    
    $
    252,120
    
    
    $
    262,828
    
    
    
    
    
    
    $
    262,828Operating income (loss)
    
    
    17,202
    
    
    $
    (16,801
    )
    
    
    401
    
    
    
    37,781
    
    
    $
    (17,438
    )
    
    
    20,343Income (loss) before provision for income taxes
    
    
    16,892
    
    
    
    (24,449
    )
    
    
    (7,557
    )
    
    
    36,188
    
    
    
    (25,859
    )
    
    
    10,329
 8. Stock based compensation Compensation expense, net of tax, relating to stock based compensation was
$156,000 and $230,000 for the six months ended January 31, 2004 and 2003,
respectively. We account for stock based employee compensation using the intrinsic
method prescribed in Accounting Principles Board Opinion No. 25 and have
adopted the disclosure only provisions of Statement of Financial Accounting
Standards No. 148. The effect on net income and earnings per share that would
have been recorded using the fair value based method for stock options is as
follows: Three Months Ended
    
    Six Months EndedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003(In thousands)Net income (loss), as reported
    
    $
    14,239
    
    
    $
    4,490
    
    
    $
    (12,108
    )
    
    $
    6,053Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (1,563
    )
    
    
    (1,299
    )
    
    
    (3,196
    )
    
    
    (4,313
    )Pro forma net income (loss)
    
    $
    12,676
    
    
    $
    3,191
    
    
    $
    (15,304
    )
    
    $
    1,740Earnings (loss) per share:Basic  as reported
    
    $
    .42
    
    
    $
    .14
    
    
    $
    (.36
    )
    
    $
    .18Basic  pro forma
    
    
    .38
    
    
    
    .10
    
    
    
    (.45
    )
    
    
    .05Diluted  as reported
    
    
    .42
    
    
    
    .14
    
    
    
    (.36
    )
    
    
    .18Diluted  pro forma
    
    
    .37
    
    
    
    .10
    
    
    
    (.45
    )
    
    
    .05
 8




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##### Table of Contents



9.
    
    Subsequent Event On March 3, 2004, we sold $125 million aggregate principal amount of
Floating Rate Convertible Senior Notes Due 2024 in a private placement. On
March 11, 2004, we sold an additional $30 million of Convertible Senior Notes
due to the initial purchasers option exercise. The convertible notes are our
senior unsecured obligations and are convertible under certain circumstances
into a combination of cash and our common stock at a fixed conversion price of
$24.03 (subject to adjustment in certain circumstances), which is equivalent to
an initial conversion ratio of approximately 41.6 shares of our common stock
per $1,000 principal amount of convertible notes, or a maximum of approximately
6.4 million shares for the $155 million aggregate principal amount. In
general, upon conversion of a convertible note, the holder of such note will
receive cash equal to the principal amount of the note and shares of our common
stock for the notes conversion value in excess of such principal amount. The convertible notes bear interest at a per annum rate which will equal
the three-month LIBOR rate, adjusted quarterly, minus a spread of 0.75%. The
initial interest rate of the notes (through June 15, 2004) will be 0.37%. The
convertible notes will mature on March 15, 2024 and may not be redeemed by us
prior to March 20, 2009. Holders of the convertible notes may require us to
repurchase some, or all, of the convertible notes on March 15, 2009, 2014 and
2019. They could also require repurchase upon a change of control (as defined
in the indenture under which the convertible notes were issued). We used $129 million of the net proceeds from the offering to prepay a
portion of the amounts outstanding under our existing bank credit facility and
used $20 million of the net proceeds to repurchase, in negotiated transactions,
1,222,494 shares of our common stock sold by certain purchasers of the
convertible notes in connection with the offering. The convertible notes were sold only to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933, as amended. The
convertible notes and the underlying common stock issuable upon conversion have
not been registered under the Securities Act or any applicable state securities
laws and may not be offered or sold in the United States absent registration or
an applicable exemption from such registration requirements. We have entered
into a registration rights agreement in which we have agreed to file within 90
days of March 3, 2004 a registration statement with the Securities and Exchange
Commission to register resales of the notes and associated shares of common
stock within 90 days of the closing date. We will be required to pay liquidated
damages in the form of additional interest in the event we fail to file the
registration statement within the required period, it is not effective on or
before the 180th day after March 3, 2004 or under certain other circumstances. 9




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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations This report onForm 10-Qand the documents incorporated by reference
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These statements include statements incorporated by reference from other
documents we file with the SEC. Forward-looking statements include, among other
things, business strategy and expectations concerning industry conditions,
market position, future operations, margins, profitability, liquidity and
capital resources. Forward-looking statements generally can be identified by
the use of terminology such as may, will, expect, intend, estimate,
anticipate or believe or similar expressions or the negatives thereof.
These expectations are based on managements assumptions and current beliefs
based on currently available information. Although we believe that the
expectations reflected in such statements are reasonable, we can give no
assurance that such expectations will be correct. You are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date of this report onForm 10-Q. Our operations are subject to a number
of uncertainties, risks and other influences, many of which are outside our
control, and any one of which, or a combination of which, could cause our
actual results of operations to differ materially from the forward-looking
statements. Important factors that could cause actual results to differ
materially from our expectations are disclosed in Risk Factors and elsewhere
in our Annual Report onForm 10-K. Overview The sluggish customer spending during the first quarter of fiscal 2004,
resulting in an operating loss , gave way to significant year-end spending that
enabled us to generate $0.42 per share for the second quarter of fiscal 2004.
The spending fluctuations were seen most dramatically in multi-client sales,
which amplified the effect on our earnings. The last weeks of 2003 and
beginning of 2004 demonstrated the power of the multi-client business to
generate profits and cash flow. It is too early to know if the increase was simply driven by the year-end
spending of our customers. Notably, some of our customers have highlighted
their reserve replacement in recent earnings releases and appear to be focusing
on that as an important metric going forward. In addition, we are seeing more
tenders for marine contract projects in recent months and our marine
acquisition backlog is higher than we have seen for many quarters. Moreover,
multi-client sales have continued to be strong beyond the calendar year-end. However, we expect our results to continue to be volatile. As we reduce
our investment in new library assets, we should experience a concurrent
decrease in pre-funding revenue and a greater dependence upon less predictable
shelf sales. We are addressing this situation in three ways. First, we are
running our company with a conservative balance sheet so that we can withstand
market variability. Second, we are strongly committed to the library business
and are actively seeking opportunities to invest. However, we are not willing
to take excessive risks and have tempered our spending to the level dictated by
our current portfolio of acceptable surveys. Third, we are seeking contract
work in areas where our particular set of skills and equipment offers us a
measure of differentiation and an opportunity to make a reasonable profit. An
example of this is our participation in the very specialized, high-end
processing market. Here, we work under negotiated contracts with major
customers to process large volumes of data through our proprietary algorithms.
We get paid appropriately for our ability and our customer receives value for
their seismic dollar. In March 2004, we sold $155.0 million of convertible notes with a floating
rate equal to the three-months LIBOR rate less 0.75%, or 0.37% for a beginning
rate. We used $129.0 million of the proceeds to prepay our bank debt, leaving a
balance of $52.1 million. This transaction allowed us to extend the maturity
of our debt while reducing our interest expense. 10




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Results of operations Three months ended January 31, 2004 compared with three months ended January
31, 2003 Revenues.Revenues increased by 18% overall. Multi-client revenue
increased by 27% compared to the prior years second quarter. More
significantly, multi-client revenue increased for the first time after three
consecutive quarters of decline. The second quarter of fiscal 2004 was our
best quarter of library sales ever. While some of the increase in library
sales may be attributed to year-end money, sales continued to be strong
beyond the calendar year-end. Marine multi-client revenue increased by 45%
compared to the prior years second quarter. Marine shelf sales were strong in
the Gulf of Mexico and Nigeria, with sales in Brazil and the North Sea
contributing to the excellent results. Land multi-client revenue decreased by
16% compared to the prior years second quarter due to lower prefunding and
decreased investment. Contract revenue increased by 7% compared to the prior
years second quarter. Marine contract revenue increased by 17% as a result of
additional contract work in West Africa, the Mediterranean and India. Land
contract revenue remained relatively flat. Revenues break down as follows: Three Months EndedJanuary 31,%2004
    
    2003
    
    Increase/(Decrease)(In thousands)Multi-client:Land
    
    $
    15,925
    
    
    $
    18,919
    
    
    
    (16
    %)Marine
    
    
    67,645
    
    
    
    46,644
    
    
    
    45
    %Subtotal
    
    
    83,570
    
    
    
    65,563
    
    
    
    27
    %Contract:Land
    
    
    31,695
    
    
    
    32,020
    
    
    
    (1
    %)Marine
    
    
    32,505
    
    
    
    27,738
    
    
    
    17
    %Subtotal
    
    
    64,200
    
    
    
    59,758
    
    
    
    7
    %Total Revenues
    
    $
    147,770
    
    
    $
    125,321
    
    
    
    18
    %
 Operating income.Operating income as a percentage of revenue increased
from 10% to 15.4% due to the predominance of multi-client shelf sales (sales of
completed surveys) in the current quarter. Some component of revenue from
shelf sales is generally derived from surveys that are fully amortized, thus
yielding almost 100% margin, whereas prefunding revenue usually generates
margins of 20% to 25%. During the current quarter, 81% of multi-client revenue
was generated from shelf sales compared to 47% in the comparable period of
fiscal 2003. Contract margins remained relatively flat. General and administrative expense declined by $1.4 million. Of the
decrease, $0.6 million was due to expense reduction efforts implemented in the
prior fiscal year. Severance expense associated with these efforts was $1.8
million in the prior year, while during this quarter we incurred expense of
$1.4 million related to the retirement of our former Chairman and Chief
Executive Officer, David Robson. The remainder of the reduction was due to
differences in various categories. Other expense (income), net.Other expense (income), net changed from
expense of $0.6 million to income of $0.4 million. A combination of increased
interest income due to a higher cash balance, proceeds from the sale of Miller
Exploration stock, and declining foreign currency exchange losses account for
the largest portion of the change. Income taxes.The effective tax rate decreased from 39% to 25% as
compared to the prior years second quarter. The 25% effective rate is based
upon the annual expected rate (excluding the effect of the multi-client
amortization change) using the expected mix of income by jurisdiction. The
lower rate compared to the prior fiscal year is due to the current use of
previously unbenefited loss carryforwards and other tax credits. 11




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Six months ended January 31, 2004 compared with six months ended January 31,
2003 Revenues.Revenues decreased by 4% overall. Multi-client revenue
remained relatively flat for both land and marine while contract revenue
decreased by 9%. While marine contract revenue was unchanged, land contract
revenue decreased by 15% due to large land acquisition projects in Peru and
Bolivia completed in the prior fiscal year. This was partially offset by
increased projects in Argentina and Alaska in the current fiscal year. Marine
contract revenue remained relatively flat. Revenues break down as follows: Six Months EndedJanuary 31,%2004
    
    2003
    
    Increase/(Decrease)(In thousands)Multi-client:Land
    
    $
    29,827
    
    
    $
    29,940
    
    
    
    (0.3
    %)Marine
    
    
    93,529
    
    
    
    91,902
    
    
    
    2
    %Subtotal
    
    
    123,356
    
    
    
    121,842
    
    
    
    1
    %Contract:Land
    
    
    68,442
    
    
    
    80,383
    
    
    
    15
    %Marine
    
    
    60,322
    
    
    
    60,603
    
    
    
    (0.4
    %)Subtotal
    
    
    128,764
    
    
    
    140,986
    
    
    
    (9
    %)Total Revenues
    
    $
    252,120
    
    
    $
    262,828
    
    
    
    (4
    %)
 Operating income.Operating income as a percentage of revenue decreased
from 7.7% to 0.2%. The decreased results for the current fiscal year were due
mostly to a change in accounting for our multi-client library, which resulted
in a charge of $22.1 million (included in cost of services on the Consolidated
Statements of Operations and Comprehensive Income (Loss)). This charge
represents the adjustment necessary to reduce each of our surveys as of August
1, 2003 to a balance no greater than that which would have been recorded had we
been using the new method. While the sales forecast method remains our primary
means of expensing multi-client surveys, we have now established a minimum
cumulative amortization for each survey based upon straight-line amortization
over five years. The monthly expense recognized for each survey is the greater
of the amount derived by the sales forecast method or the amount of minimum
amortization. This is a change from the prior method that provided for a
minimum amortization only during the last two years of the surveys book lives. Disregarding the charge for the change in accounting method, operating
income as a percentage of revenue increased from 7.7% to 8.9% largely due to
the mix of multi-client surveys and the greater proportion of shelf sales in
the current fiscal year. The benefit of greater shelf sales was largely offset
by increased required multi-client amortization expense of $16.6 million,
compared with $1.0 million in the prior year and the very low multi-client
revenue during the first quarter of the current year. Contract margins were
higher for the six months of fiscal 2004 than in the prior years comparable
period, although the prior fiscal periods margins reflect several operational
disruptions and low margins on a large land acquisition job in Peru. General and administrative expense declined by $2.9 million. The
reduction was due to differences in the cost of various isolated expenses, such
as severance, in each period. Other expense (income), net.Other expense (income), net changed from
expense of $1.6 million to income of $0.5 million. No single item accounts for
a significant portion of the change. A combination of increased interest
income due to a higher cash balance, proceeds from the sale of Miller
Exploration stock, declining losses from our unconsolidated Indonesian joint
venture and declining foreign currency exchange losses account for the largest
portion of the change. Income taxes.Our effective tax rate for the first six months of fiscal 2004
(before the $22.1 million charge for the catch-up entry for the change in
multi-client amortization policy) was 31% compared to 41% for the first six
months of fiscal 2003. The 31% effective rate is based upon the annual
expected rate (excluding the effect of the multi-client amortization change)
using the expected mix of income by jurisdiction. The lower rate compared to
the prior fiscal year is due to the current use of previously unbenefited loss
carryforwards and other tax credits. 12




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Liquidity and capital resources Cash flow and liquidity Our internal sources of liquidity are cash, cash equivalents and cash flow
from operations. External sources include public financing, equity sales,
equipment financing, our revolving loan facility, and trade credit. We believe
that our current cash balance and cash flow from operations will be adequate to
meet our liquidity needs for fiscal 2004. However, key elements of our
forecasted cash flow are shelf sales of multi-client surveys and contract
acquisition work. Should these not occur at forecasted levels we would need to
curtail planned discretionary spending. 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. Net cash provided by operating activities decreased by $3.7 million for
the first six months of 2004 as compared to the first six months of the prior
fiscal year due to increases in working capital in the current fiscal year.
Net cash used by investing activities decreased by $14.5 million primarily due
to the $9.3 million used for the purchase of Hampson-Russell in fiscal 2003 and
a $5.3 million decrease in our multi-client investment in the current year.
Cash flow for the first six months of fiscal 2004 was enhanced by $2.0 million
from the sale of (RC)2. Our capital expenditure estimate for fiscal 2004 is
approximately $43 million and will be spent on replacement and upgrading of
existing equipment, with very little spent on capacity expansion. For fiscal
2004, we are forecasting approximately $130 million to $140 million cash
investment in our data library. We expect to fund these investments from our
current cash balance and from internally generated cash flows. Net cash
provided by financing activities decreased from $71.7 million in the first six
months of fiscal 2003 to a use of cash of $11.6 million in the first six months
of fiscal 2004. In the prior fiscal year, we entered into the Credit Agreement
to satisfy the obligations under the previous credit agreement and the Senior
Notes, while in the current fiscal year we have paid down $13.1 million of this
debt. Free cash flow from operations is an important measure of liquidity for
us. We define free cash flow as cash from operating activities less cash
multi-client spending and capital expenditures. This non-GAAP liquidity measure
is useful as an addition to the most directly comparable GAAP measure of net
cash provided by operating activities because free cash flow includes
investments in operational assets and therefore presents a more complete
picture of net cash flow from ongoing operations. This measure excludes items
such as proceeds from the disposal of assets, cash paid for acquisitions and
all financing activities. Some portion of projected positive free cash flow
is committed to items such as debt repayment obligations and so it is not a
measure of residual cash flow available for discretionary expenditures. Our free cash flow for the first six months of fiscal 2004 was positive
due to decreased investment in multi-client library. We intend to manage our
business to achieve positive free cash flow for fiscal 2004 by maintaining
flexibility in our capital and multi-client investments and generally spending
within the constraints established by our operational cash flow. A reconciliation of free cash flow to net cash provided by operating
activities is presented in the following table: Six Months EndedJanuary 31,2004
    
    2003(In thousands)Net cash provided by operating activities
    
    $
    89,002
    
    
    $
    92,739Multi-client expenditures, net cash
    
    
    (70,315
    )
    
    
    (75,587
    )Capital expenditures
    
    
    (13,557
    )
    
    
    (12,967
    )Free cash flow
    
    $
    5,130
    
    
    $
    4,185
 13




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##### Table of Contents



The following represents our financial contractual obligations and
commitments as of January 31, 2004 for the specified periods: Payments DueGreaterContractual Cash Obligations
    
    Total
    
    Less than 1 year
    
    1  3 years
    
    3  5 years
    
    than 5 years(In thousands)Payments due for operating lease obligations
    
    $
    140,004
    
    
    $
    37,026
    
    
    $
    50,572
    
    
    $
    21,111
    
    
    $
    31,295Scheduled principal payments under debt obligations
    
    
    181,123
    
    
    
    713
    
    
    
    29,475
    
    
    
    150,935Forward exchange contracts
    
    
    1,104
    
    
    
    1,104Potential payments under letters of credit
    
    
    3,142
    
    
    
    2,705
    
    
    
    4371Subsequent to the sale of the new convertible
notes, payment under the credit agreement are as
follows:
    
    $
    181,123
    
    
    $
    129,155
    
    
    $
    11,003
    
    
    $
    40,965
 Debt structure On February 14, 2003, we entered into a Credit Agreement (the Credit
Agreement) with Deutsche Bank AG, New York Branch, as Administrative Agent,
Deutsche Bank AG, Canada Branch, as Canadian Administrative Agent, and certain
other lending institutions. The Credit Agreement provides term financing of
$195.0 million under term A, term B and term C tranches (the Term Loans), a
revolving loan facility aggregating $55.0 million, including a facility for
swing line loans of up to $10.0 million and the issuance of letters of credit
in an aggregate amount of up to $40.0 million. As of January 31, 2004, there
were $3.1 million in letters of credit outstanding, leaving $51.9 million
available for borrowings. Among other restrictions, the Credit Agreement
prohibits us from paying cash dividends. Proceeds from the Term Loans were
used to satisfy the obligations under our previous credit agreement and our
Senior Notes. The term A loan was in the original principal amount of $30.0 million,
matures in February 2006, and requires quarterly interest payments at a rate,
at our election, of LIBOR plus a margin ranging from 3.5% to 4.0% or a base
rate plus a margin ranging from 2.25% to 2.75%. These margins are based on
certain of our financial ratios. The term B loan was in the original principal
amount of $125.0 million, matures in February 2007, and requires quarterly
interest payments at a rate, at our election, of LIBOR plus 5.0%, subject to a
2% LIBOR floor or a base rate plus 3.75%. The term C loan was in the original
principal amount of $40.0 million, matures in February 2008, and requires
quarterly interest payments at a rate, at our election, of LIBOR plus 7.5%,
subject to a 3% LIBOR floor or a base rate plus 6.25%. The term A and term B loans required quarterly combined principal payments
of $387,500 representing 0.25% of the initial principal balances. Should
there be an event of default or if an unmatured event of default exists, or the
credit rating of any of the debt is below Moodys Ba2 or S&Ps BB, or our
leverage ratio as of the last day of the most recent excess cash flow
calculation period rises above certain levels, the term A and B loans also
require principal payments of 50% of the prior fiscal years cash flow,
calculated as per the loan agreement. This payment is due 100 days after the
end of the fiscal year and results in a ratable reduction of the future
required quarterly principal payments. As our lowest debt rating by Moodys is
below the minimum level, we paid $12.4 million of principal in November 2003
related to the companys cash flow from January 1, 2003 through July 31, 2003.
Based upon this payment, our required quarterly combined principal payment was
reduced to $356,371. Future excess cash flow payments of this type, if any,
will be based on cash flow for full fiscal years. In March 2004, we sold
$155.0 million of convertible notes and used approximately $129.0 million of
the proceeds to repay in full the Term C loan and to prepay portions of the
Term A and B loans. After application of these payments, the outstanding
balance on the Term A and B loans was $10.1 million and $42.0 million,
respectively. See Note 9, Subsequent events of Notes to Consolidated
Financial Statements for a description of our recently issued convertible
notes. Loans made under the revolving loan facility, including swing-line loans,
bear interest at a variable rate determined on the date of borrowing that is
related to various base rates and margins depending upon our leverage ratio and
the location of the borrowing. The revolving loan facility expires in February
2006. 14




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Borrowings under the Credit Agreement are secured by assets, including
equipment, vehicles, multi-client data library, intellectual property, and
stock of certain material subsidiaries, owned by us and certain of our
subsidiaries. At January 31, 2004, the carrying value of the secured assets,
including intercompany receivables, was $1.1 billion. The Credit Agreement and
related documents contain a number of covenants, including financial covenants
relating to interest coverage, leverage and net worth. At January 31, 2004 we
were in compliance with these covenants. Off-balance sheet instruments Our limited hedging program consists of off-balance sheet instruments to
fix the U.S. dollar value of foreign currency payments to be made under a
Norwegian vessel charter and interest rate swap contracts that effectively fix
the interest rate on $80.0 million of our variable rate longterm debt. None
of these hedges are critical to our operations but they reduce our exposure to
currency and interest rate fluctuations and allow us to better plan our future
cash flows. These instruments are described in detail in Item 3, Quantitative
and Qualitative Disclosures Regarding Market Risk, as well as in Note 6 of
Notes to Consolidated Financial Statements. Critical accounting policies While all of our accounting policies are important in assuring that we
adhere to current accounting standards, certain policies are particularly
important due to their impact on our financial statements. These are described
in detail in
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations - Significant Accounting Policies included in our Annual Report
on Form 10-K for the fiscal year ended July 31, 2003 which description is
incorporated herein by reference. Since our last annual filing, we have
changed our accounting policy regarding the amortization of our multi-client
data library. This new policy is described below. Multi-client data library In our multi-client data library business, we collect and process
geophysical data for our own account and retain all ownership rights. We
license the data to multiple clients on a non-transferable basis. We capitalize
the costs associated with acquiring and processing the multi-client data on a
survey-by-survey basis (versus a pooled basis). We amortize these costs using
the sales forecast method, but require a minimum amortization expense equal to
that which would have been recorded had the survey been amortized over a
five-year period on a straight line basis. The sales forecast method
amortizes the capitalized cost of multi-client data in the period revenue is
recognized in an amount equal to the period revenue multiplied by the
percentage of total estimated costs to total estimated revenue. Therefore,
multi-client margins recognized in any given period are the product of
estimated costs and estimated sales and may not reflect the ultimate cash
margins recognized from a survey. We periodically review the carrying value of
the multi-client data library to assess whether there has been a permanent
impairment of value and then record losses when it is determined that estimated
sales will not be sufficient to cover the carrying value of the asset. Until August 1, 2003, we required a minimum amortization of surveys only
during the last twenty-four months of book life, versus from the date of survey
completion as we currently require. This change in policy resulted in a charge
of $22.1 million in the current year as a catch-up adjustment to multi-client
amortization and is included in cost of services on the Consolidated
Statements of Operations and Comprehensive Income (Loss). Accounting policies not yet adopted In December 2003, the Financial Accounting Standards Board issued FIN 46R
(A revision to FIN 46 (Consolidation of Variable Interest Entities)). FIN 46R
replaces FIN 46 and provides additional clarification on the application of ARB
No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. We will adopt
FIN 46R on April 30, 2004. Adoption will not have a material effect on our
financial position or results or operations, however, it will require
consolidation of our 80% owned joint venture currently accounted for under the
equity method. The 80% owned joint venture provides processing and acquisition
services and sells licenses to multi-client library. 15




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##### Table of Contents



In December 2003, the Financial Accounting Standards Board issued SFAS No.
132 (Revised 2003), Employers Disclosures about Pension and Other
Postretirement Benefits. This statement retains the disclosures required by
SFAS No. 132 and adds additional disclosures. Those disclosures include
information describing the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods. We will adopt SFAS
No. 132 (Revised 2003) in the third quarter of fiscal 2004. 
 Item 3.Quantitative and Qualitative Disclosures Regarding Market Risk At January 31, 2004, 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 against
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, 2004
in U.S. dollars was $1.4 million. We are exposed to interest rate risk based upon fluctuations in the LIBOR
rate. To partially mitigate this risk, on February 25, 2003, we entered into
interest rate swaps in the notional amount of $80.0 million, effectively
hedging 41% of our exposure to interest rate fluctuations for the two-year term
of the swaps. These swaps had no value at inception. Details of the interest rate swaps are summarized in the following table: LIBORTranche Hedged
    
    Amount
    
    Term
    
    Pay %
    
    Receive
    
    Floor(in thousands)Term A
    
    $
    25,000
    
    
    24 months
    
    
    1.86
    
    
    LIBOR
    
    NoneTerm B
    
    $
    55,000
    
    
    24 months
    
    
    2.49
    
    
    LIBOR
    
    
    2
    %
 The fair value of the swaps on January 31, 2004 was a negative $384,000
and is included in other accrued liabilities on the Consolidated Balance
Sheets. 
 Item 4.Controls and Procedures Our management, including the Chief Executive Officer and the principal
financial officer, has conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report pursuant to Exchange Act Rule 13a-15. Based on that evaluation, our
Chief Executive Officer and the principal financial officer concluded that the
disclosure controls and procedures are effective in ensuring that information
required to be disclosed in the reports we file or submit under the Exchange
Act is recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There have
been no changes in our internal controls over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) identified in connection with the
evaluation described above that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting. 16




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings On occasion, we are named as a defendant in litigation relating to our
normal business operations. Although we are insured against various business
risks to the extent we believe prudent, there is no assurance that the nature
and amount of such insurance will be adequate in every case. 
 Item 4.Submission of Matters to a Vote of Security Holders On December 2, 2003, at the Annual Meeting of Stockholders, the
stockholders voted, as follows, to elect seven directors of Veritas DGC Inc. Name
    
    Votes For
    
    Votes WithheldLoren K. Carroll
    
    
    25,420,048
    
    
    
    2,985,697Clayton P. Cormier
    
    
    25,814,263
    
    
    
    2,591,482James R. Gibbs
    
    
    25,280,477
    
    
    
    3,125,268Stephen J. Ludlow
    
    
    26,204,254
    
    
    
    2,201,491Brian F. MacNeill
    
    
    25,529,611
    
    
    
    2,876,134Jan Rask
    
    
    25,816,413
    
    
    
    2,859,332David B. Robson
    
    
    25,616,284
    
    
    
    2,789,461
 The stockholders voted, as follows, for approval of the amendment of our
Restated Certificate of Incorporation to increase our authorized common stock
to 78.5 million shares. Votes For
Votes Withheld
Abstentions
    
    23,157,685
5,231,253
16,806
 The stockholders voted, as follows, for approval of the amendment and
restatement of our 1997 Employee Stock Purchase Plan to among other things
increase the number of shares authorized under the plan to 2.0 million shares. Votes For
Votes Withheld
Abstentions
    
    23,944,590
1,526,358
253,985
 The stockholders voted, as follows, for consent to a stock option exchange
program under which employee stock options could be exchanged. Votes For
Votes Withheld
Abstentions
    
    19,328,021
6,164,968
231,943
 17




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##### Table of Contents



Item 6.Exhibits and Reports on Form 8-K  a)
    
    Exhibits filed with this report: ExhibitNo.
    
    Description10.1
    
    
    
    Indenture dated March 3, 2004 between Veritas DGC Inc. and U.S.
Bank National Association, as trustee (Exhibit 4.2 to Veritas DGC
Inc.s Current Report on Form 8-K dated March 3, 2004 is
incorporated herein by reference.)*10.2
    
    
    
    Third Amendment to Credit Agreement dated February 20, 2004 by
and among Veritas DGC Inc., Veritas DGC Limited, Veritas Energy
Services Inc., Veritas Energy Services Partnership, Deutsche Bank
AG, New York Branch, as Administrative Agent, Deutsche Bank AG,
Canada Branch, as Canadian Administrative Agent, and the various
lending institutions named therein.*10.3
    
    
    
    Employee Agreement between Veritas DGC Inc. and Thierry Pilenko
dated January 26, 2004.*10.4
    
    
    
    Retirement Agreement between Veritas DGC Inc. and David B.
Robson dated January 1, 2004.*31.1
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 by Chief Executive Officer.*31.2
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 by principal financial officer.*32.1
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by Chief Executive Officer.*32.2
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by principal financial officer.
   *
    
    filed herewith  b)
    
    Reports on Form 8-K On November 25, 2003, we filed a Current Report on Form 8-K reporting
information under Item 12, Results of Operations and Financial Condition. 18




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##### Table of Contents



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 2004. Veritas DGC Inc.By:
    /s/ Thierry PilenkoTHIERRY PILENKOChairman of the Board and Chief Executive Officer /s/ Vincent M. ThielenVINCENT M. THIELENVice President, Corporate Controller
(Chief Accounting Officer) 19




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##### Table of Contents



EXHIBIT INDEX ExhibitNo.
    
    Description10.1
    
    
    
    Indenture dated March 3, 2004 between Veritas DGC Inc. and U.S.
Bank National Association, as trustee (Exhibit 4.2 to Veritas DGC
Inc.s Current Report on Form 8-K dated March 3, 2004 is
incorporated herein by reference.)*10.2
    
    
    
    Third Amendment to Credit Agreement dated February 20, 2004 by
and among Veritas DGC Inc., Veritas DGC Limited, Veritas Energy
Services Inc., Veritas Energy Services Partnership, Deutsche Bank
AG, New York Branch, as Administrative Agent, Deutsche Bank AG,
Canada Branch, as Canadian Administrative Agent, and the various
lending institutions named therein.*10.3
    
    
    
    Employee Agreement between Veritas DGC Inc. and Thierry Pilenko
dated January 26, 2004.*10.4
    
    
    
    Retirement Agreement between Veritas DGC Inc. and David B.
Robson dated January 1, 2004.*31.1
    
    
    
    Certification pursuant to Section 302 of the Sarbanes- Oxley Act
of 2002 by Chief Executive Officer.*31.2
    
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 by principal financial officer.*32.1
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by Chief Executive Officer.*32.2
    
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by principal financial officer.
  *
    
    filed herewith 20