**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 

**(Mark One)**

**ý**

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period ended October 31, 2004**

 

**OR**

 

**o**

**TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes o No ý

 

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

 

Thenumber of shares of the Company’s common stock, $.01 par value, outstanding at April 30,2005 was 33,849,816 (including 155,370 Veritas Energy Services Inc.exchangeable shares which are identical to the company’s common stock in allmaterial respects).

 

 

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**TABLE OF CONTENTS**

 

**FORM 10-Q**

 
| **PART I. FINANCIAL  INFORMATION**                                                                                           |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                                   |   |
| ITEM 1. FINANCIAL  STATEMENTS                                                                                                |   |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the Three Months  Ended October 31, 2004 and 2003 |   |
| Consolidated Balance Sheets  as of October 31, 2004 and July 31, 2004                                                        |   |
| Consolidated  Statements of Cash Flows for the Three Months Ended October 31, 2004 and 2003                                  |   |
| 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 ABOUT MARKET RISK                                                          |   |
| ITEM 4. CONTROLS AND  PROCEDURES                                                                                             |   |
|                                                                                                                         |   |
| **PART II. OTHER  INFORMATION**                                                                                              |   |
| ** **                                                                                                                   |   |
| ITEM 6. EXHIBITS                                                                                                             |   |
|                                                                                                                         |   |
| **SIGNATURES**                                                                                                               |   |

 

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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  October 31,**      | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                      | ** ** | **Restated****2003** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except per share  amounts)** | ** ** |
|                                                           |       |                                          |       |   |   |
| Revenues                                                       |       | $                                             | 129,581    |   | $ | 102,407 |   |
| Cost of services                                               |       | 116,002                                       |       | 115,850 |   |
| Research and development                                       |       | 4,094                                         |       | 3,445 |   |
| General and administrative                                     |       | 6,359                                         |       | 6,191 |   |
| Operating income (loss)                                        |       | 3,126                                         |       | (23,079 | ) |
| Interest expense                                               |       | 757                                           |       | 4,279 |   |
| Other (income), net                                            |       | (578                                          | )          | (158 | ) |
| Income (loss) before provision for income taxes                |       | 2,947                                         |       | (27,200 | ) |
| Provision for income tax expense (benefit)                     |       | 1,969                                         |       | (215 | ) |
| Net income (loss)                                              |       | $                                             | 978        |   | $ | (26,985 | ) |
|                                                           |       |                                          |       |   |   |
| Net income (loss) per share:                                   |       |                                          |       |   |   |
| Basic:                                                         |       |                                          |       |   |   |
| Net income (loss) per common share                             |       | $                                             | .03        |   | $ | (.80 | ) |
| Weighted average common shares (including exchangeable shares) |       | 33,752                                        |       | 33,608 |   |
|                                                           |       |                                          |       |   |   |
| Diluted:                                                       |       |                                          |       |   |   |
| Net income (loss) per common share                             |       | $                                             | .03        |   | $ | (.80 | ) |
| Weighted average common shares (including exchangeable shares) |       | 34,895                                        |       | 33,608 |   |
|                                                           |       |                                          |       |   |   |
| Comprehensive income (loss):                                   |       |                                          |       |   |   |
| Net income (loss)                                              |       | $                                             | 978        |   | $ | (26,985 | ) |
| Other comprehensive income (net of tax, $0 in all periods):    |       |                                          |       |   |   |
| Foreign currency translation adjustments                       |       | 7,285                                         |       | 5,443 |   |
| Unrealized gain (loss) on investments available for sale       |       | 84                                            |       | (247 | ) |
| Unrealized gain on interest rate swap                          |       | —                                        |       | 462 |   |
| Unrealized loss on hedge transactions                          |       | —                                        |       | (128 | ) |
| Total other comprehensive income                               |       | 7,369                                         |       | 5,530 |   |
| Comprehensive income (loss)                                    |       | $                                             | 8,347      |   | $ | (21,455 | ) |

 

See Notes to Consolidated Financial Statements

 

1

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**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars inthousands, except par value)**

** **
| ** **                                                                                                                                                         | ** ** | **October 31,****2004** | ** ** | **July 31,****2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **(Unaudited)**              | ** ** | ** **                | ** ** |
| ASSETS                                                                                                                                                             |       |                         |       |                      |       |
| Current assets:                                                                                                                                                    |       |                         |       |                      |       |
| Cash and cash equivalents                                                                                                                                          |       | $                            | 134,559    |                      | $          | 116,299 |   |
| Restricted cash investments                                                                                                                                        |       | 227                          |       | 111                       |       |
| Accounts and notes receivable (net of allowance of $833 at  October and $1,109 at July)                                                                       |       | 163,251                      |       | 166,810                   |       |
| Materials and supplies inventory                                                                                                                                   |       | 4,431                        |       | 4,198                     |       |
| Prepayments and other                                                                                                                                              |       | 17,678                       |       | 15,599                    |       |
| Income taxes receivable                                                                                                                                            |       | 6,577                        |       | 12,617                    |       |
| Total current assets                                                                                                                                               |       | 326,723                      |       | 315,634                   |       |
|                                                                                                                                                               |       |                         |       |                      |       |
| Property and equipment                                                                                                                                             |       | 487,062                      |       | 479,639                   |       |
| Less accumulated depreciation                                                                                                                                      |       | 372,299                      |       | 357,976                   |       |
| Property and equipment, net                                                                                                                                        |       | 114,763                      |       | 121,663                   |       |
|                                                                                                                                                               |       |                         |       |                      |       |
| Multi-client data library                                                                                                                                          |       | 318,809                      |       | 313,153                   |       |
| Deferred tax asset                                                                                                                                                 |       | 1,223                        |       | 1,223                     |       |
| Other assets                                                                                                                                                       |       | 23,951                       |       | 24,573                    |       |
| Total                                                                                                                                                              |       | $                            | 785,469    |                      | $          | 776,246 |   |
|                                                                                                                                                               |       |                         |       |                      |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                         |       |                         |       |                      |       |
| Current liabilities:                                                                                                                                               |       |                         |       |                      |       |
| Trade accounts payable                                                                                                                                             |       | $                            | 52,236     |                      | $          | 44,907 |   |
| Other accrued liabilities                                                                                                                                          |       | 63,776                       |       | 74,795                    |       |
| Total current liabilities                                                                                                                                          |       | 116,012                      |       | 119,702                   |       |
| Non-current liabilities:                                                                                                                                           |       |                         |       |                      |       |
| Long-term debt                                                                                                                                                     |       | 155,000                      |       | 155,000                   |       |
| Other non-current liabilities                                                                                                                                      |       | 14,760                       |       | 11,854                    |       |
| Total non-current liabilities                                                                                                                                      |       | 169,760                      |       | 166,854                   |       |
| Stockholders’ equity:                                                                                                                                         |       |                         |       |                      |       |
| Common stock, $.01 par value; issued: 35,041,994 shares and 34,821,298  shares, respectively (excluding Exchangeable Shares of 155,370 and 185,921,  respectively) |       | 350                          |       | 348                       |       |
| Additional paid-in capital                                                                                                                                         |       | 444,172                      |       | 441,982                   |       |
| Accumulated earnings                                                                                                                                               |       | 64,122                       |       | 63,144                    |       |
| Accumulated other comprehensive income:                                                                                                                            |       |                         |       |                      |       |
| Cumulative foreign currency translation adjustment                                                                                                                 |       | 14,616                       |       | 7,331                     |       |
| Other comprehensive income (loss)                                                                                                                                  |       | (799                         | )          | (883                      | )          |
| Unearned compensation                                                                                                                                              |       | (786                         | )          | (604                      | )          |
| Treasury stock, at cost; 1,341,556 shares and 1,317,532 shares,  respectively                                                                                      |       | (21,978                      | )          | (21,628                   | )          |
| Total stockholders’ equity                                                                                                                                    |       | 499,697                      |       | 489,690                   |       |
| Total                                                                                                                                                              |       | $                            | 785,469    |                      | $          | 776,246 |   |

 

See Notes to Consolidated Financial Statements

 

2

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**VERITAS DGC INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                                             | ** ** | **Three Months Ended  October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2004**                                 | ** ** | **Restated****2003** | ** ** |
| ** **                                                                                             | ** ** | **(In thousands)**                       | ** ** |
| Cash flows from operating activities:                                                                  |       |                                     |       |   |   |
| Net income (loss)                                                                                      |       | $                                        | 978        |   | $ | (26,985 | ) |
| Non-cash items included in net income (loss):                                                          |       |                                     |       |   |   |
| Depreciation and amortization, net (other than multi-client)                                           |       | 9,764                                    |       | 9,519 |   |
| Amortization of multi-client library                                                                   |       | 36,272                                   |       | 55,901 |   |
| Loss on disposition of property and equipment                                                          |       | 65                                       |       | 182 |   |
| Equity in loss of joint venture                                                                        |       | —                                   |       | 249 |   |
| Deferred taxes                                                                                         |       | (340                                     | )          | 2,038 |   |
| Amortization of unearned compensation                                                                  |       | 83                                       |       | 149 |   |
| Change in operating assets/liabilities:                                                                |       |                                     |       |   |   |
| Accounts and notes receivable                                                                          |       | 5,845                                    |       | 236 |   |
| Materials and supplies inventory                                                                       |       | (226                                     | )          | 1,644 |   |
| Prepayments and other                                                                                  |       | 1,686                                    |       | (2,574 | ) |
| Income taxes receivable                                                                                |       | 5,745                                    |       | (2,374 | ) |
| Accounts payable and other accrued liabilities                                                         |       | (4,475                                   | )          | (7,264 | ) |
| Other                                                                                                  |       | 3,195                                    |       | (291 | ) |
| Net cash provided by operating activities                                                              |       | 58,592                                   |       | 30,430 |   |
|                                                                                                   |       |                                     |       |   |   |
| Cash flows from investing activities:                                                                  |       |                                     |       |   |   |
| Increase in restricted cash                                                                            |       | (116                                     | )          | — |   |
| Investment in multi-client data library, net cash                                                      |       | (35,625                                  | )          | (40,518 | ) |
| Purchase of property and equipment                                                                     |       | (7,294                                   | )          | (8,581 | ) |
| Sale of property and equipment                                                                         |       | 282                                      |       | 539 |   |
| Sale of (RC)2 software operation                                                                       |       | —                                   |       | 2,000 |   |
| Net cash used by investing activities                                                                  |       | (42,753                                  | )          | (46,560 | ) |
|                                                                                                   |       |                                     |       |   |   |
| Cash flows from financing activities:                                                                  |       |                                     |       |   |   |
| Payments on long-term debt                                                                             |       | —                                   |       | (387 | ) |
| Net proceeds from sale of common stock                                                                 |       | 1,893                                    |       | 497 |   |
| Net cash provided by financing activities                                                              |       | 1,893                                    |       | 110 |   |
| Currency (gain) loss on foreign cash                                                                   |       | 528                                      |       | (268 | ) |
| Change in cash and cash equivalents                                                                    |       | 18,260                                   |       | (16,288 | ) |
| Beginning cash and cash equivalents balance                                                            |       | 116,299                                  |       | 72,097 |   |
| Ending cash and cash equivalents balance                                                               |       | $                                        | 134,559    |   | $ | 55,809 |   |
|                                                                                                   |       |                                     |       |   |   |   |   |
| **Schedule of  non-cash transactions:**                                                           |       |                                     |       |   |   |   |   |
| Capitalization of depreciation and amortization resulting in an  increase in multi-client data library |       | $                                        | 2,913      |   | $ | 5,355 |   |
|                                                                                                        |            |                                          |            |  |  |  |  |  |

 

See Notes to Consolidated Financial Statements

 

3

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**VERITAS DGC INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

###### **1.**              Summary ofsignificant accounting policies

###### ** **

***Restatement ofFinancial Statements***

*** ***

The historical financial information in this documentfor the three months ended October 31, 2003 has been restated due toaccounting errors.  In September 2004,we found various types of errors in our balance sheet related primarily toclerical and account reconciliation errors associated with the intercompanytransfers of property and foreign currency items.  In addition, we found errors in the accountingfor certain customer contracts that contained provisions for customer paymentof equipment mobilization fees, revenue sharing with customers and certainother contingencies.  Correction of theseerrors resulted in a decrease of net income of $1.4 million relating to thefirst three fiscal quarters of fiscal 2004 and $2.6 million related to periodsprior to fiscal 2004.  Since recordingthe required adjustments in the fourth quarter of fiscal 2004 would have had amaterial impact on the financial statements of the fourth quarter and those ofthe full fiscal year, we determined that a restatement of our prior years’financial statements was appropriate. The impact of this restatement was to increase the net loss and net lossper common share for the first quarter of fiscal 2004 by $0.6 million and $0.02per share, respectively.  (See Note 10for the details of the restatement.)

 

The restatement has not caused us to be in defaultunder any of our debt covenants or lease agreements.  We obtained waivers from our lenders underour Credit Facility related to the timing of our delivery of financialstatements to them, extending the due date to June 15, 2005.  Additionally, the restatement has delayed theregistration of our Convertible Senior Notes, resulting in our payment ofliquidated damages to the holders of the Convertible Senior Notes in the amountof $2,153 per day from August 31, 2004 until the registration iscompleted.

 

***Consolidation***

*** ***

The accompanying consolidated financial statementsinclude our accounts and the accounts of majority-owned domestic and foreignsubsidiaries.  All material intercompanybalances and transactions have been eliminated. All material adjustments that, in the opinion of management, arenecessary for a fair statement of the results for the interim periods have beenreflected.  These interim financialstatements should be read in conjunction with our annual audited consolidatedfinancial statements.

 

In December 2003, the Financial AccountingStandards Board issued FIN 46R, a revision to FIN 46 “Consolidation of VariableInterest Entities”.  FIN 46R replaces FIN46 and provides additional clarification on the application of ARB No. 51,“Consolidated Financial Statements,” to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support.  We adopted FIN 46 on April 30,2004.  Adoption did not have a materialeffect on our financial position or results of operations; however, it requiredconsolidation of our 80% owned Indonesian joint venture.  Prior to adoption of FIN 46R this jointventure was accounted for under the equity method.

 

***Use of estimates***

*** ***

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

4

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***Recent AccountingPronouncements***

*** ***

In October 2004, the emerging issues task force(the “EITF”) of the Financial Accounting Standards Board issued EITF 04-8, “*The Effect of Contingently Issuable Debt on Earningsper Share,”* which is effective for periods ending after December 15,2004.  This EITF statement requires us toinclude shares of our common stock issuable upon the assumed conversion of ourConvertible Senior Notes in the calculation of diluted weighted average shares.  We adopted the EITF during the first quarterof fiscal 2005, but adoption did not have a significant effect on our weightedaverage shares calculation.  Thecontingently issuable shares related to our Convertible Senior Notes had noimpact on the calculation of weighted average shares for the quarter ended October 31,2004, as issuance of the shares would have been anti-dilutive.

 

###### **2.**              Multi-client libraryaccounting change

###### ** **

Effective August 1, 2003, we changed our minimumamortization policy with regard to multi-client data and recorded a charge of$22.1 million in the first quarter of fiscal 2004, included in cost of servicesin our Consolidated Statement of Operations. Under the prior method, capitalized costs of multi-client surveys werecharged to cost of services in the period sales occurred, using the salesforecast method, over an estimated five-year useful life.  However, during the last 24 months of asurvey’s useful life, amortization was the greater of the amount resulting fromthe sales forecast method or straight-line amortization of the remaining bookvalue over the remaining portion of the original five-year estimated usefullife.  Under the new method, capitalizedcosts of multi-client surveys are charged to cost of services over an estimatedfive-year useful life based upon the greater of the result (higher expense)under the sales forecast method or cumulative straight-line amortization fromsurvey completion over an estimated five-year useful life.  Notwithstanding this change, the salesforecast method remains our primary method of calculating cost ofservices.  The total amortization periodthat concludes sixty months after survey completion represents the minimumperiod over which the surveys are expected to provide economic benefits.  We believe that commencing the minimumamortization upon survey completion, as opposed to our prior method of doing soonly during the last twenty four months of the survey’s life, better reflectsthe potential diminution of survey value with the passage of time.

 

###### **3.**              Other (income), net

###### ** **

Other (income), net consists of the following:

 
| ** **                             | ** ** | **Three Months Ended  October 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | **2004**                                 | ** ** | **Restated  2003** | ** ** |
| ** **                             | ** ** | **(In thousands)**                       | ** ** |
| Interest income                        |       | $                                        | (819       | ) | $ | (234 | ) |
| Net foreign currency exchange loss     |       | 318                                      |       | 21 |   |
| Loss from unconsolidated joint venture |       | —                                   |       | 249 |   |
| Other                                  |       | (77                                      | )          | (194 | ) |
| Total                                  |       | $                                        | (578       | ) | $ | (158 | ) |

 

5

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###### **4.**              Earnings per commonshare

###### ** **

Basic and diluted earnings per common share arecomputed as follows:

 
| ** **                                                     | ** ** | **Three Months Ended  October 31,**      | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                      | ** ** | **Restated  2003** | ** ** |
|                                                           |       | **(In thousands, except per share  amounts)** |       |
| Net income (loss)                                              |       | $                                             | 978        |   | $ | (26,985 | ) |
|                                                           |       |                                          |       |   |   |
| **Basic:**                                                     |       |                                          |       |   |   |
| Weighted average common shares (including exchangeable shares) |       | 33,752                                        |       | 33,608 |   |
| Net income (loss) per share                                    |       | $                                             | .03        |   | $ | (.80 | ) |
|                                                           |       |                                          |       |   |   |
| **Diluted:**                                                   |       |                                          |       |   |   |
| Weighted average common shares (including exchangeable shares) |       | 33,752                                        |       | 33,608 |   |
| Shares issuable from assumed exercise of options               |       | 1,090                                         |       | — |   |
| Shares issuable from the assumed vesting of restricted stock   |       | 53                                            |       | — |   |
| Total                                                          |       | 34,895                                        |       | 33,608 |   |
| Net income (loss) per share                                    |       | $                                             | .03        |   | $ | (.80 | ) |

 

The Convertible Senior Notes were not convertible asof October 31, 2004 and the shares issuable from such conversion, whileconsidered, are not included in this income per share calculation as they areanti-dilutive (See Note 5 for a description of our Senior Notes.)

 

The following options to purchase common shares havebeen excluded from the computation assuming dilution because the exerciseprices of the options exceeded the average market price of the underlyingcommon shares or the options are anti-dilutive due to a net loss.

 
| ** **           | ** ** | **Three Months Ended  October 31,** | ** ** |
|----------------------|------------|------------------------------------------|------------|
| ** **           | ** ** | **2004**                                 | ** ** | **Restated  2003** | ** ** |
| Number of options    |       | 761,908                                  |       | 3,985,002 |   |
| Exercise price range |       | $ 22.84 - $ 55.13              |       | $10.71  - $55.13 |   |
| Expiring through     |       | March 2012                          |       | March 2012 |   |

 

###### **5.**              Long-term debt

###### ** **

As of October 31, 2004, our long-term debtoutstanding consisted of $155.0 million of Convertible Senior Notes due 2024.In addition, we have a Credit Facility consisting primarily of a revolving loanfacility permitting borrowings of up to $55.0 million and we have variousunsecured lines of credit totaling $8.5 million usable exclusively for lettersof credit and bank guarantees.

 

The Convertible Senior Notes bear interest at a perannum rate which equals the three-month LIBOR rate, adjusted quarterly, minus aspread of 0.75%.  The current interestrate on the Convertible Senior Notes, from March 15, 2005 through June 14,2005, is 2.26%.  The Convertible SeniorNotes are our senior unsecured obligations and are convertible under certaincircumstances into a combination of cash and our common stock.  In general, upon conversion of a note, theholder of such note will receive cash equal to the principal amount of the noteand shares of our common stock for the note’s conversion value in excess ofsuch principal amount.  We entered into aregistration rights agreement in which we agreed to file a registrationstatement with the Securities and Exchange Commission within 90 days of March 3,2004 to register resales of the Convertible Senior Notes and associated sharesof common stock.  We filed a registrationstatement on May 28, 2004 in compliance with the registration rightsagreement; however, the registration statement is not yet effective.  Because we are required to pay liquidateddamages in the event the registration statement did not become effective on orbefore August 31,

 

6

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2004, or under certainother circumstances, we have been incurring such damages in the amount of$2,153 per day since August 31, 2004.

 

Under certain circumstances and at the option of theholder, the Convertible Senior Notesare convertible prior to the maturity date into cash and shares of our commonstock.  Certain of these circumstancesmay result in classification of the Convertible Senior Notes as current on our balance sheet.  These circumstances include:

 

1.                                       theclosing sale price of our common stock is over 120% of the conversion price,which is currently $24.03 (with 120% being $28.84) for 20 trading days in theperiod of 30 consecutive trading days ending on the last trading day of thefiscal quarter preceding the quarter in which the conversion occurs;

 

2.                                       ifwe called the notes for redemption and the redemption has not occurred;

 

3.                                       theoccurrence of a five consecutive trading day period in which the trading priceof the notes was less than 95% of the closing sale price of our common stock onsuch day multiplied by the number of shares of our common stock issuable uponconversion of the notes; or

 

4.                                       theoccurrence of specified corporate transactions.

 

Should any of these circumstances occur, theConvertible Senior Notes would be convertible at the then current stock pricetimes the conversion ratio of 41.6146. This amount would be payable in cashequal to the principal amount of the notes, the par value adjusted fordividends or other equity transactions, and the additional amount payable inshares of our common stock.  Currently,the maximum amount payable by us on conversion is $155 million in cash plusapproximately 6.5 million shares. For clarity, conversion at a $40 stock pricewould result in our payment of $155 million in cash and 2.575 million shares ofcommon stock.  This settlement method isprescribed in the indenture and is not at the discretion of any party.  The shares issuable from such conversion areconsidered in the calculation of diluted earnings per share.

 

As of October 31, 2004, there were no borrowingsand $1.8 million in letters of credit outstanding under the CreditFacility.  Borrowings under the CreditFacility, including swing-line loans, bear interest at a variable ratedetermined on the date of borrowing that is related to various base rates andmargins depending upon our leverage ratio and the location of theborrowing.  The Credit Facility expiresin February 2006.  Borrowings underthe Credit Facility are secured by substantially all assets of the company.

 

During March 2005, we obtained waivers from ourlenders under the Credit Facility related to the late filing of our financialstatements.  On May 12, 2005 weobtained an extension to these waivers. The extended waivers allow us todeliver our required reports for fiscal 2004 and for the first and secondquarters of fiscal 2005 to the lenders by no later than June 15,2005.  If we are unable to meet thisdeadline or are unable to extend it further, our ability to borrow under theCredit Facility will be restricted.

 

We have various unsecured lines of credit, withlending institutions that operate in geographic areas not covered by thelending institutions in our revolving loan facility, totaling $8.5 million thatmay be used exclusively for the issuance of letters of credit and bankguarantees.  As of October 31, 2004,$4.2 million in letters of credit were outstanding under these lines.

 

7

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###### **6.**              Pension plan

###### ** **

We maintain a contributory defined benefit pensionplan (the “Plan”) for eligible participating employees in the UnitedKingdom.  The following is the net periodicbenefit cost by component:

 
| ** **                                       | ** ** | **Three Months Ended  October 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
|                                             |       | **(In thousands)**                       |       |
| Service cost (benefits earned during the period) |       | $                                        | 149        |   | $ | 126 |   |
| Interest cost on projected benefit obligation    |       | 303                                      |       | 248 |   |
| Expected return on plan assets                   |       | (216                                     | )          | (186 | ) |
| Amortization of transition obligation            |       | 2                                        |       | 2 |   |
| Amortization of prior service cost               |       | (36                                      | )          | (33 | ) |
| Amortization of net gain (loss)                  |       | 76                                       |       | 77 |   |
| Net periodic benefit costs                       |       | $                                        | 278        |   | $ | 234 |   |

 

We expect Service Costs to be $0.6 million for thispension plan in fiscal 2005.  As of October 31,2004, our contributions to the plan have been made in accordance with the Schedule ofContributions upon which this estimated Service Cost was based.

 

###### **7.**              Hedge transactions

###### ** **

From time to time we enter into contracts withcustomers whereby payment is not in U.S. dollars, our functional currency.  During the quarter ended October 31,2004, we entered into such contracts with customers whereby payments, to bereceived in November 2004, were to be made in the British Pound Sterlingand the Norwegian Kroner.  To protect usagainst exposure to exchange rate risk, we entered into currency exchangecontracts with financial institutions. As of October 31, 2004, the fair value of these contracts was aloss of $135,000 recorded in foreign currency exchange loss included in “Otherincome, net” in the “Consolidated Statement of Operations and ComprehensiveIncome (Loss).”

 

###### **8.**              Segment information

###### ** **

Beginning in fiscal 2005, we organized the companyinto three geographic regions: North and South America (NASA); Europe, Africa,the Middle East and CIS (EAME); and Asia Pacific (APAC).  This reorganization is designed to move ouroperational decision-making closer to our customers.  Our geographic segments offer a common suiteof products and services to their customers, although each product or servicemay be adapted to meet the needs of the local markets.  This segmentation of our company isrepresentative of the manner in which it is viewed and managed by our seniormanagers and our Board of Directors. The information related to the threemonths ended October 31, 2003 has been restated to reflect the new segmentstructure. A reconciliation of the reportable segments’ results to those of thetotal enterprise is given below:

 
| ** **              | ** ** | **For the Three Months Ended  October 31, 2004** | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|
| ** **              | ** ** | **NASA**                                              | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **              | ** ** | **(In thousands)**                                    | ** ** |
| Revenues                |       | $                                                     | 79,751     |   | $ | 31,774 |   | $ | 18,056 |   | $ | — |   | $ | 129,581 |   |
| Operating income (loss) |       | 7,631                                                 |       | 3,098 |   | (1,135 | ) | (6,468 | ) | 3,126 |   |
| Assets                  |       | 482,438                                               |       | 113,827 |   | 38,368 |   | 150,836 |   | 785,469 |   |
|                         |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **For the Three Months Ended October 31, 2003  Restated** | ** ** |
|-------------------------|------------|----------------------------------------------------------------|------------|
| ** **              | ** ** | **NASA**                                                       | ** ** | **EAME** | ** ** | **APAC** | ** ** | **Corporate** | ** ** | **Total** |   |
| ** **              | ** ** | **(In thousands)**                                             | ** ** |
| Revenues                |       | $                                                              | 81,059     |   | $ | 11,553 |   | $ | 9,795 |   | $ | — |   | $ | 102,407 |   |
| Operating income (loss) |       | (11,185                                                        | )          | (3,148 | ) | (1,085 | ) | (7,661 | ) | (23,079 | ) |
| Assets                  |       | 536,908                                                        |       | 102,699 |   | 34,960 |   | 90,740 |   | 765,307 |   |
|                         |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

8

----

 

Corporate operating income (loss) includes certaingeneral and administrative and research and development expenses not allocatedto the segments.  Corporate assetsconsist primarily of cash and cash equivalents.

 

###### **9.**              Stock basedcompensation

###### ** **

We account for stock-based employee compensation usingthe intrinsic method prescribed in Accounting Principles Board Opinion No. 25and have adopted the disclosure only provisions of Statement of FinancialAccounting Standards (SFAS) No. 148. As required by SFAS No. 148, we disclose the effect on net incomeand earnings per share of equity-based employee compensation, including stockoptions, that would have been recorded using the fair value based method.  We will adopt SFAS No. 123R beginningwith our first quarter of fiscal 2006. This will require us to record the cost of this equity-basedcompensation in our income statement based on the estimated fair value of theawards.

 
| ** **                                                                                                                                 | ** ** | **Three Months Ended  October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2004**                                 | ** ** | **Restated  2003** | ** ** |
| ** **                                                                                                                                 | ** ** | **(In thousands)**                       | ** ** |
| Net income (loss) as reported                                                                                                              |       | $                                        | 978        |   | $ | (26,985 | ) |
| Add: Compensation expense, net of related tax effects                                                                                      |       | 83                                       |       | 150 |   |
| Less: Total stock-based employee compensation expense determined under  fair value based method for all awards, net of related tax effects |       | (679                                     | )          | (1,783 | ) |
| Pro forma net income (loss)                                                                                                                |       | $                                        | 382        |   | $ | (28,618 | ) |
|                                                                                                                                       |       |                                     |       |   |   |
| Earnings (loss) per share – Basic and Diluted                                                                                         |       |                                     |       |   |   |
| As reported                                                                                                                                |       | $                                        | .03        |   | $ | (.80 | ) |
| Pro-forma                                                                                                                                  |       | .01                                      |       | (.85 | ) |

 

9

----

 

###### **10.**       Restatement

###### ** **

The historical financial information in this documentfor the period ended October 31, 2003 has been restated due to accountingerrors.  These errors were discovered during two separate reviews, a comprehensivereview of our balance sheet and a review of specific types of our customercontracts.

 

**Balance Sheet Review**

 

During our fiscal 2004 year-end balance sheet review,we found various types of clerical and account reconciliation errors relatedprimarily to the intercompany transfer of property and foreign currencyitems.  The fixed asset errors ofapproximately $1.9 million affected depreciation and amortization charges overthe past seven years.  We corrected allmatters identified in the balance sheet review in our restatement, althoughsuch items were not individually material.

 

**Contract Review**

 

We also reviewed our accounting for our customercontracts, including those that contain provisions for customer payment ofmobilization fees, revenue sharing with customers and certain datecontingencies.  Because our contractsvary widely in terms and conditions, we reviewed the deliverables of each typeof contract and, where required, applied the guidance of EITF 00-21.  We determined that our accounting treatmentfor certain of these customer contracts was not in accordance with generallyaccepted accounting principles and adjusted our accounts accordingly.  We had recognized mobilization fees asrevenue during the period of mobilization rather than during the period ofseismic data acquisition, as required by Staff Accounting Bulletin (the “SAB”)104.  In contracts with revenue sharingclauses and date contingencies, we recognized revenue before the price to beultimately paid by the related customer was fixed or determinable under SAB No. 104.In all cases, our errors related to customer contracts were related to thetiming of revenue recognition.

 

The following is a summary of the effect of therestatement adjustments on our previously reported net income, earnings pershare and total assets for the three months ended October 31, 2003:

 

| ** **                                      | ** ** | **Increase / (Decrease)  from Previously  Reported Amounts** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                      | ** ** | **(In thousands, except  per share amounts)**                | ** ** |
| ** **                                      | ** ** | ** **                                                   | ** ** |
| Net loss as previously reported                 |       | $                                                            | (26,347    | ) |
| Pretax adjustments resulting from:              |       |                                                         |       |
| The balance sheet review                        |       | (281                                                         | )          |
| The contract review                             |       | (485                                                         | )          |
| Total pretax adjustments                        |       | (766                                                         | )          |
| Tax effect of restatement adjustments           |       | (128                                                         | )          |
| Total net adjustments                           |       | (638                                                         | )          |
| Net loss restated                               |       | $                                                            | (26,985    | ) |
|                                            |       |                                                         |       |
| Loss per common share — basic and diluted: |       |                                                         |       |
| As reported                                     |       | $                                                            | (.78       | ) |
| Effect of net adjustments                       |       | (.02                                                         | )          |
| As restated                                     |       | $                                                            | (.80       | ) |
|                                            |       |                                                         |       |
| Total assets as reported                        |       | $                                                            | 761,550    |   |
| Adjustments                                     |       | 3,757                                                        |       |
| Total assets as adjusted                        |       | $                                                            | 765,307    |   |

 

The following are the restated financial statementsfor the first quarter of fiscal 2004 compared to the previously reportedamounts:

 

10

----

 

**RESTATED**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**

**FOR THE THREE MONTHS ENDED OCTOBER 31, 2003**

**(UNAUDITED)**

 
| ** **                                                         | ** ** | **As  Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------|------------|--------------|------------|
|                                                               |       | **(In thousands, except per share amounts)** |       |
|                                                               |       |                                         |       |            |       |         |       |
| Revenues                                                           |       | $                                            | 104,350    |            | $          | (1,943       | )          | $ | 102,407 |   |
| Cost of services                                                   |       | 117,017                                      |       | (1,167          | )          | 115,850      |       |
| Research and development                                           |       | 3,445                                        |       | —          |       | 3,445        |       |
| General and administrative                                         |       | 6,191                                        |       | —          |       | 6,191        |       |
| Operating loss                                                     |       | (22,303                                      | )          | (776            | )          | (23,079      | )          |
| Interest expense                                                   |       | 4,278                                        |       | 1               |       | 4,279        |       |
| Other income, net                                                  |       | (147                                         | )          | (11             | )          | (158         | )          |
| Loss before provision for income taxes                             |       | (26,434                                      | )          | (766            | )          | (27,200      | )          |
| Income tax benefit                                                 |       | (87                                          | )          | (128            | )          | (215         | )          |
| Net loss                                                           |       | $                                            | (26,347    | )               | $          | (638         | )          | $ | (26,985 | ) |
|                                                               |       |                                         |       |            |       |         |       |
| **Net income (loss), per share:**                                  |       |                                         |       |            |       |         |       |
| **Basic:**                                                         |       |                                         |       |            |       |         |       |
| Income (loss) per common share                                     |       | $                                            | (.78       | )               | $          | (.02         | )          | $ | (.80 | ) |
| Weighted average common shares                                     |       | 33,608                                       |       | —          |       | 33,608       |       |
|                                                               |       |                                         |       |            |       |         |       |
| **Diluted:**                                                       |       |                                         |       |            |       |         |       |
| Income (loss) per common share                                     |       | $                                            | (.78       | )               | $          | (.02         | )          | $ | (.80 | ) |
| Weighted average common shares                                     |       | 33,608                                       |       | —          |       | 33,608       |       |
|                                                               |       |                                         |       |            |       |         |       |
| **Comprehensive income (loss):**                                   |       |                                         |       |            |       |         |       |
| Net income (loss)                                                  |       | $                                            | (26,347    | )               | $          | (638         | )          | $ | (26,985 | ) |
| Other comprehensive income (loss) (net of tax, $0 in all periods): |       |                                         |       |            |       |         |       |
| Foreign currency translation adjustments                           |       | 5,365                                        |       | 78              |       | 5,443        |       |
| Unrealized gain (loss) on investments-available for sale           |       | (247                                         | )          | —          |       | (247         | )          |
| Unrealized gain on interest rate swap                              |       | 462                                          |       | —          |       | 462          |       |
| Unrealized gain (loss) on hedge transaction                        |       | (128                                         | )          | —          |       | (128         | )          |
| Total other comprehensive income (loss)                            |       | 5,452                                        |       | 78              |       | 5,530        |       |
| Comprehensive income (loss)                                        |       | $                                            | (20,895    | )               | $          | (560         | )          | $ | (21,455 | ) |

 

11

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**RESTATED**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED OCTOBER 31, 2003**

**(UNAUDITED)**

 
| ** **                                                                                             | ** ** | **As****   Reported** | ** ** | **Adjustments**    | ** ** | **Restated** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|--------------|------------|
| ** **                                                                                             | ** ** | ** **                 | ** ** | **(In thousands)** | ** ** | ** **   | ** ** |
| **Cash flows from operating activities:**                                                              |       |                       |       |               |       |         |       |
| Net loss                                                                                               |       | $                          | (26,347    | )                  | $          | (638         | )          | $ | (26,985 | ) |
| Non-cash items included in net loss:                                                                   |       |                       |       |               |       |         |       |
| Depreciation and amortization, net (other than multi-client)                                           |       | 9,359                      |       | 160                |       | 9,519        |       |
| Amortization of multi-client library                                                                   |       | 56,213                     |       | (312               | )          | 55,901       |       |
| Loss on disposition of property and equipment                                                          |       | 182                        |       | —             |       | 182          |       |
| Equity in loss of joint venture                                                                        |       | 249                        |       | —             |       | 249          |       |
| Deferred taxes                                                                                         |       | 722                        |       | 1,316              |       | 2,038        |       |
| Amortization of unearned compensation                                                                  |       | 149                        |       | —             |       | 149          |       |
| Change in operating assets/liabilities:                                                                |       |                       |       |               |       |         |       |
| Accounts and notes receivable                                                                          |       | 276                        |       | (40                | )          | 236          |       |
| Materials and supplies inventory                                                                       |       | 1,634                      |       | 10                 |       | 1,644        |       |
| Prepayments and other                                                                                  |       | (2,102                     | )          | (472               | )          | (2,574       | )          |
| Income taxes receivable                                                                                |       | (2,181                     | )          | (193               | )          | (2,374       | )          |
| Accounts payable and other accrued liabilities                                                         |       | (7,246                     | )          | (18                | )          | (7,264       | )          |
| Other                                                                                                  |       | (481                       | )          | 190                |       | (291         | )          |
| Net cash provided by operating activities                                                              |       | 30,427                     |       | 3                  |       | 30,430       |       |
| **Cash flows from investing activities:**                                                              |       |                       |       |               |       |         |       |
| Investment in multi-client library, net cash                                                           |       | (40,507                    | )          | (11                | )          | (40,518      | )          |
| Purchase of property and equipment                                                                     |       | (8,581                     | )          | —             |       | (8,581       | )          |
| Sale of property and equipment                                                                         |       | 539                        |       | —             |       | 539          |       |
| Sale of (RC)2 software operating                                                                       |       | 2,000                      |       | —             |       | 2,000        |       |
| Net cash used by investing activities                                                                  |       | (46,549                    | )          | (11                | )          | (46,560      | )          |
| **Cash flows from financing activities:**                                                              |       |                       |       |               |       |         |       |
| Payments on long-term debt                                                                             |       | (387                       | )          | —             |       | (387         | )          |
| Net proceeds from the sale of common stock                                                             |       | 497                        |       | —             |       | 497          |       |
| Net cash provided by financing activities                                                              |       | 110                        |       | —             |       | 110          |       |
| Currency gain on foreign cash                                                                          |       | (268                       | )          | —             |       | (268         | )          |
| Change in cash and cash equivalents                                                                    |       | (16,280                    | )          | (8                 | )          | (16,288      | )          |
| Beginning cash and cash equivalents balance                                                            |       | 72,626                     |       | (529               | )          | 72,097       |       |
| Ending cash and cash equivalents balance                                                               |       | $                          | 56,346     |               | $          | (537         | )          | $ | 55,809 |   |
|                                                                                                   |       |                       |       |               |       |         |       |
| **Schedule of non-cash transactions:**                                                                 |       |                       |       |               |       |         |       |
| Capitalization of depreciation and amortization resulting in an  increase in multi-client data library |       | $                          | 5,355      |               | $          | —       |       | $ | 5,355 |   |

 

12

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## **Item 2**.        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

*This report on Form 10-Q and thedocuments incorporated by reference contain forward-looking statements, withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These statements include statementsincorporated by reference to other documents we file with the SEC.Forward-looking statements include, among other things, business strategy andexpectations concerning industry conditions, market position, future operations,margins, profitability, liquidity and capital resources. Forward-lookingstatements generally can be identified by the use of terminology such as “may,”“will,” “expect,” “intend,” “estimate,” “anticipate” or “believe” or similarexpressions or the negatives thereof. These expectations are based onmanagement’s assumptions and current beliefs based on currently availableinformation.  Although we believe thatthe expectations reflected in such statements are reasonable, we can give noassurance that such expectation will be correct. You are cautioned not to placeundue reliance on these*forward*-looking statements, which speak only as of the date of this report onForm10-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 combinationof which, could cause our actual results of operations to differ materiallyfrom the forward-looking statements. Important factors that could cause actualresults to differ materially from our expectations are disclosed in “RiskFactors” and elsewhere in our Annual Report on Form 10-K.*

 

#### **Overview**

 

The national oil companies, in general, are currentlyvery active in exploring for oil, and are venturing beyond their own borders todo so.  Independent oil and gas companiesalso seem very optimistic about exploration and, from our experience, are verywilling to exploit the advantages offered by multi-client data: its immediateavailability and relatively low price as compared to proprietary surveys.  Accessing large reserves in the Middle Eastand former Soviet Union is proving more complicated than anticipated, fuelinggrowing concerns about reserve replacement and production sustainability,particularly among the largest oil and gas companies.  We are seeing an increase in explorationexpenditures by oil and gas companies, which, if the trend continues, bodeswell for the seismic industry. Oil and gas companies have started to react tothis surge of exploration activity, trying to secure drilling rigs and seismicvessels several months in advance, a pattern that we have not seen in therecent past because of industry overcapacity.

 

We believe the increase inour overall performance during the first quarter of fiscal 2005 is the resultof our being well positioned to take advantage of the increased explorationspending.  This positioning includeshaving quality multi-client data in areas of current customer interest, dataprocessing abilities that enable us to produce the best possible seismic imagesin difficult areas, and field operations that are capable of providingtechnical as well as health, safety and environmental excellence.

 

During the first quarter offiscal 2005, we reorganized our company into three geographic regions: Northand South America (NASA), Europe, Africa, Middle East and CIS (EAME), and AsiaPacific (APAC).  The managers of theseregions are responsible for all facets of sales and operations and representour customer interface.  Centrallymanaged processing, acquisition, and reservoir professionals support thesemanagers from locations around the globe. We feel this new organization allows our front-line managers to focusexclusively on their customers while allowing our company to develop and deploytechnology consistently across our markets. We have put processes in place that will allow for the free movement ofour seismic equipment across the three regions so that we may maximize ourreturn on investment.

 

Due to our selling and operational efforts and therobust seismic market, we have seen our backlog increase $87 million from $147million at July 31, 2004 to $234 million at April 30, 2005.  We expect to complete most of the work inbacklog over the next twelve months.  Itappears that our traditional pattern of revenue generation will occur againduring fiscal 2005, with revenues in our second and third fiscal quarters beinghigher than in our first and fourth quarters. This pattern is driven by end-of-year spending, which results in highlibrary revenue in our second fiscal quarter, and high land acquisitionactivity during our second and third fiscal quarters, corresponding with thewinter seismic season in Alaska and Canada.

 

13

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#### **Restatement**

 

The historical financial information in this documentfor the first quarter of fiscal year 2004 has been restated due to accountingerrors.  The impact of the restatementresulted in an increase in the net loss and net loss per common share of $0.6million and $0.02 per share, respectively, for the three months ended October31, 2003. (See Note 10 of the Notes to the Consolidated Financial Statementsfor information on the affects of our restatement on this period.)

 

#### **Resultsof operations**

 

#### ***Three months ended October 31, 2004 compared withthree months ended October 31, 2003 (restated)***

 

*Revenues*.  Ourrevenues increased by 27% from $102.4 million in the first quarter offiscal 2004 to $129.6 million in the first quarter of fiscal 2005.  The majority of this increase was generatedin APAC and EAME.  The revenue increasein APAC was due primarily to the move of one of our large 3D vessels, theVeritas Viking II, into the market.  TheEAME increase was driven by sales of multi-client data licenses in the NorthSea and West Africa.  Despite moving theVeritas Viking II to APAC, NASA was able to maintain essentially flat revenuethrough the use of vessels on short-term charters.  Globally, revenue from contract servicesincreased by $21.1 million or 33%, as our vessels spent a higher portion oftheir time performing contract work in Canada, Australia, Malaysia and theNorth Sea and less on multi-client surveys. Revenue from multi-client sales was up due to incremental sales of multi-clientdata licenses in the North Sea and West Africa, as mentioned above, as well asin the Gulf of Mexico.

 

Revenues by segment are as follows:

 
| ** **    | ** ** | **For the Three Months Ended  October 31,** | ** ** |
|---------------|------------|---------------------------------------------|------------|
| ** **    | ** ** | ** **                                  | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **    | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **    | ** ** | ** **                                  | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** |
| NASA          |       | $                                           | 79,751     |   | $ | 81,059 |   | $ | (1,308 | ) | (2 | )% |
| EAME          |       | 31,774                                      |       | 11,553 |   | 20,221 |   | 175 | % |
| APAC          |       | 18,056                                      |       | 9,795 |   | 8,261 |   | 84 | % |
| Total Revenue |       | $                                           | 129,581    |   | $ | 102,407 |   | $ | 27,174 |   | 27 | % |

 

Revenues by contract type are as follows:

 
| ** **         | ** ** | **For the Three Months Ended  October 31,** | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | ** **                                  | ** ** | **Restated** | ** ** | **Change** | ** ** |
| ** **         | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **         | ** ** | ** **                                  | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** |
| Multi-Client:      |       |                                        |       |   |   |   |   |   |   |
| Land               |       | $                                           | 10,816     |   | $ | 13,551 |   | $ | (2,735 | ) | (20 | )% |
| Marine             |       | 34,281                                      |       | 25,437 |   | 8,844 |   | 35 | % |
| Total Multi-Client |       | 45,097                                      |       | 38,988 |   | 6,109 |   | 16 | % |
| Contract:          |       |                                        |       |   |   |   |   |   |   |
| Land               |       | 36,497                                      |       | 36,453 |   | 44 |   | 0 | % |
| Marine             |       | 47,987                                      |       | 26,966 |   | 21,021 |   | 78 | % |
| Total Contract     |       | 84,484                                      |       | 63,419 |   | 21,065 |   | 33 | % |
| Total Revenue      |       | $                                           | 129,581    |   | $ | 102,407 |   | $ | 27,174 |   | 27 | % |

 

*Operating income (loss). *Operating income increasedfrom a loss of $23.1 million in the first quarter of fiscal 2004 to income of$3.1 million in the first quarter of fiscal 2005.  During the first quarter of fiscal 2004, wechanged our multi-client amortization accounting policy to include a minimumamortization from the date of survey completion, instead of only during thelast 24 months of the survey’s book life. As a result of this change, we recorded a charge of $22.1 million incost of services in the first quarter of fiscal 2004.

 

14

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Excluding the charge for the change in our accountingmethod from the first quarter of fiscal 2004, our operating income in the firstquarter of fiscal 2005 was $4.1 million greater than the first quarter offiscal 2004.  This increase is the resultof increased margin of $5.0 million partially offset by increased research anddevelopment costs of $0.7 million and increased general and administrativeexpense of $0.2 million.

 

Our operating income increase was generated by theincreased sales of multi-client data licenses. Operating income from our contract services was lower than in lastyear’s comparable quarter primarily due to bad weather impacting a contractsurvey off the coast of Australia.

 

Research and development costs have increased by $0.7million from the prior year primarily due to our continued development ofmulti-component (compressional and shear wave) acquisition and processing.

 

General and administrative expense increased slightlyby $0.2 million as a result of increased expenditures due to the implementationof requirements from the Sarbanes-Oxley Act and the expenses associated withthe restatement of our historical financial statements.

 

*Interest expense*.Interest expense decreased 81% from $4.3 million in the first quarter of fiscal2004 to $0.8 million in the first quarter of fiscal 2005. This decrease is dueto the issuance of our Convertible Senior Notes and the repayment of our termloans with the proceeds in the third quarter of fiscal 2004. This refinancingresulted in a lower overall debt level and a significantly lower interest rate.Our Convertable Senior Notes accrue interest at a rate of LIBOR less 0.75%,which is much lower than the interest rates on our various tranches of debtduring the first quarter of fiscal 2004.

 

*Income taxes. *Income taxes in the first quarter of fiscal 2005 were67% of income before provision for income taxes due primarily to losses incertain jurisdictions for which we are unable to record deferred tax assets dueto our historical losses.  This unfavorableresult is consistent with treatment in the first quarter of fiscal 2004.

 

#### **Liquidityand Capital Resources**

 

#### ***Cash flow and liquidity***

 

Our internal sources of liquidity are cash and cashequivalents on hand and cash flow from operations.  External sources include public financing,equity sales, equipment financing, our Credit Facility, and trade credit.  We believe that our current cash balance andcash flow from operations are adequate to meet our liquidity needs for the nexttwelve months and expect to increase our cash balance during fiscal 2005.

 

Net cash provided by operating activities increasedfrom $30.4 million in the first quarter of fiscal 2004 to $58.6 million in thefirst quarter of fiscal 2005 while net cash used by investing activities decreasedslightly, from $46.6 million in the first quarter of fiscal 2004 to $42.8million in the first quarter of fiscal 2005. Our cash investment for fiscal 2005 is projected to be approximately$225 million and includes capital expenditures to replace and upgrade existingequipment of approximately $80 million, including replacement of equipment lostfrom the Veritas Viking, and investment in our data library of approximately$145 million.  Insurance proceeds are expectedto cover substantially all of the costs of the Veritas Viking’s replacementequipment.  We expect to fund theremainder of these investments from our current cash on hand and frominternally generated funds.

 

While we believe that we have adequate sources offunds to meet our liquidity needs, our ability to meet our obligations dependson our future performance, which is subject to many factors beyond our control.Key factors affecting future results include utilization levels of acquisitionand processing assets and demand for multi-client library surveys, all of whichare driven by exploration spending and, ultimately, the underlying commodityprices.

 

#### ***Debt structure***

 

As of October 31, 2004, our long-term debt outstandingconsisted of $155.0 million of Convertible Senior Notes due 2024. In addition,we have a Credit Facility composed primarily of a revolving loan facilitypermitting 

 

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borrowings of upto $55.0 million and we have various unsecured lines of credit totaling $8.5million usable exclusively for letters of credit and bank guarantees.

 

The Convertible Senior Notes bear interest at a perannum rate which equals the three-month LIBOR rate, adjusted quarterly, minus aspread of 0.75%.  The interest rate onthe Senior Notes, from March 15, 2005 through June 14, 2005, is 2.26%.  The Convertible Senior Notes are our seniorunsecured obligations and are convertible under certain circumstances into acombination of cash and our common stock. In general, upon conversion of a note, the holder of such note willreceive cash equal to the principal amount of the note and shares of our commonstock for the note’s conversion value in excess of such principal amount.  We entered into a registration rightsagreement in which we agreed to file a registration statement with theSecurities and Exchange Commission within 90 days of March 3, 2004 to registerresales of the Convertible Senior Notes and associated shares of commonstock.  We filed a registration statementon May 28, 2004 in compliance with the registration rights agreement; however,the registration statement is not yet effective.  Because we are required to pay liquidateddamages in the event the registration statement did not become effective on orbefore August 31, 2004, or under certain other circumstances, we have beenincurring such damages in the amount of $2,153 per day since August 31,2004.  We expect to file a registrationstatement on Form S-1 by the end of the current fiscal year.

 

Under certain circumstances and at the option of the holder, the Convertible Senior Notes are convertible prior to thematurity date into cash and shares of our common stock.  Certain of these circumstances may result inclassification of the ConvertibleSenior Notes as current on our balance sheet. These circumstances include:

 

1.                                       theclosing sale price of our common stock is over 120% of the conversion price,which is currently $24.03 (with 120% being $28.84) for 20 trading days in theperiod of 30 consecutive trading days ending on the last trading day of thefiscal quarter preceding the quarter in which the conversion occurs;

 

2.                                       ifwe called the notes for redemption and the redemption has not occurred;

 

3.                                       theoccurrence of a five consecutive trading day period in which the trading priceof the notes was less than 95% of the closing sale price of our common stock onsuch day multiplied by the number of shares of our common stock issuable uponconversion of the notes; or

 

4.                                       theoccurrence of specified corporate transactions.

 

Should any of these circumstances occur, theConvertible Senior Notes would be convertible at the then current stock pricetimes the conversion ratio of 41.6146. This amount would be payable in cashequal to the principal amount of the notes, the par value adjusted for dividendsor other equity transactions, and the additional amount payable in shares ofour common stock.  Currently, the maximumamount payable by us on conversion is $155 million in cash plus approximately6.5 million shares. For clarity, conversion at a $40 stock price would resultin our payment of $155 million in cash and 2.575 million shares of commonstock.  This settlement method isprescribed in the indenture and is not optional at the discretion of any party.  The shares issuable from such conversion areconsidered in the calculation of diluted earnings per share.

 

As of October 31, 2004, there were no borrowings and$1.8 million in letters of credit outstanding under the Credit Facility.  Borrowings under the Credit Facility,including swing-line loans, bear interest at a variable rate determined on thedate of borrowing that is related to various base rates and margins dependingupon our leverage ratio and the location of the borrowing.  The Credit Facility expires in February2006.  Borrowings under the CreditFacility are secured by substantially all assets of the company residing in theU.S. including the accounts receivable from certain of our foreignsubsidiaries.

 

During March 2005, we obtained waivers from ourlenders under the Credit Agreement related to the late filing of our financialstatements.  On May 12, 2005 we obtainedan extension to these waivers. The extended waivers allow us to deliver ourrequired reports for fiscal 2004 and for the first and second quarters offiscal 2005 to the lenders by no later than June 15, 2005.  If we are unable to meet this deadline or areunable to extend it further, our ability to borrow under the Credit Agreementmay be restricted.

 

We have various unsecured lines of credit, withlending institutions that operate in geographic areas not 

 

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covered by thelending institutions in our Credit Facility, totaling $8.5 million that may beused exclusively for the issuance of letters of credit and bankguarantees.  As of October 31, 2004, $4.2million in letters of credit were outstanding under these lines.

 

#### ***Critical accounting policies***

 

While all of our accounting policies are important inassuring that we adhere to current accounting standards, certain policies areparticularly 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 ofOperations - Significant Accounting Policies included in our Annual Report onForm 10-K/A for the fiscal year ended July 31, 2004 which description isincorporated herein by reference.

 

## **Item 3**.        Quantitativeand Qualitative Disclosures About Market Risk

 

From time to time we enter into contracts withcustomers whereby payment is not in our functional currency.  During the quarter ended October 31, 2004, weentered into such contracts with customers whereby payments, to be received inNovember 2004, were to be made in the British Pound Sterling and the NorwegianKroner.  To protect us against exposureto exchange rate risk, we entered into currency exchange contracts withfinancial institutions.  As of October31, 2004, the fair value of these contracts was a loss of $135,000.

 

## **Item 4**.        Controlsand Procedures

 

**Evaluationof Disclosure Controls and Procedures**

 

We carried out an evaluation, under the supervision ofand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as to the effectiveness, design andoperation of our disclosure controls and procedures (as defined in Rule13a-15(e) under the Securities and Exchange Act of 1934, as amended) as ofOctober 31, 2004.  The evaluationconsidered our various procedures designed to ensure that information requiredto be disclosed by us in reports that we file or submit under the Exchange Actis recorded, processed, summarized and reported in the time periods specifiedin the rules and forms of the Securities and Exchange Commission.  Our Chief Executive Officer and Chief FinancialOfficer concluded, as a result of the material weaknesses described below, thatour disclosure controls and procedures were not effective as of October 31,2004.

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting. Internalcontrol over financial reporting is defined as a process designed to providereasonable assurance to our management and Board of Directors regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.

 

We have restated our annual financial statements forthe fiscal periods of 2002 through 2003 due to our failure to properly recordrevenue and expenses in the appropriate periods.  Based upon our investigations and those ofthe Audit Committee of our Board of Directors, we believe these accountingerrors are the result of mistakes and omissions, but the fact that they were notdetected and corrected in a timely manner leads us to conclude that we hadmaterial weaknesses in the operation of our disclosure controls and proceduresand internal control over financial reporting as of the end of the periodcovered by this report.  A materialweakness in internal control over financial reporting is a significantdeficiency, or combination of significant deficiencies, that results in morethan a remote likelihood that a material misstatement of the financialstatements would not be prevented or detected on a timely basis by employees inthe normal course of their work.

 

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Our inquiry into these matters indicated that in ourlargest operating division:

 

•                  Reconciliationswere not always adequately performed or adequately reviewed, with suchreconciliations including:

 

•                  Sub-ledgerto general ledger

•                  Bankaccount to cash balance

•                  Taxprovision to tax return

 

•                  Discrepanciesidentified through reconciliation were not always addressed

 

•                  Periodicreviews of all balance sheet accounts by management personnel were notperformed.

 

A global contract review revealed the following issuesrelated to revenue recognition:

 

•                  Revenuegenerated through the mobilization of our seismic equipment was recognizedduring the period of mobilization, rather than over the period when theequipment was actually used for seismic data acquisition.

 

•                  Revenuewas recognized on a proportional performance basis on projects where thegoverning contracts contained date contingencies that required the use of completedcontract method of revenue recognition.

 

•                  Revenuewas pre-maturely recognized from several arrangements where the customer couldshare in the proceeds from future sales of data licenses. Some, or all, of therevenue from the customer participating in the future revenue should have beendeferred until the net amount ultimately paid by that customer for the datalicense is known.  The periods ofdeferral range from a few months to an indefinite number of years, dependingupon the contractual terms.  In somearrangements, the period of deferral will also depend upon the pace of licensesales, with a high rate of sales shortening the effective deferral period.

 

It should be noted that all of these revenuerecognition issues involved only the timing of revenue recognition.

 

**Changesin Internal Controls Over Financial Reporting**

 

During the first quarter of fiscal 2005, we did notmake any change to our internal control over financial reporting thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting. However, subsequent to the end of the first quarter of fiscal 2005, dueto the material weaknesses noted, our Chief Executive Officer and ChiefFinancial Officer, in conjunction with other members of management and ourAudit Committee, conducted a review of our internal control over financialreporting.  As a result of this review wehave taken the following actions, many of which are ongoing in nature:

 

•                  Increasedthe size and scope of our internal audit department

 

•                  Increasedour documentation, review and remediation efforts with regard to internalcontrols

 

•                  Increasedthe formality of our review processes, such as account reconciliation andcustomer contract review

 

•                  Increasedthe segregation of duties between individuals within each accounting function

 

•                  Installeda software-enabled system to effect monitoring and change management of ourinternal controls

 

•                  Required,on a quarterly basis, support certification regarding accounting and controlsfrom operational management and others with particular knowledge or span ofcontrol

 

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•                  Implementedthe use of an external agency for our whistle-blower hotline

 

•                  Involvedcorporate finance in the hiring and review of divisional accounting personnel

 

•                  Establisheda formal evaluation and implementation process regarding changes in accountingrules

 

Within the division where the internal controldeficiencies were noted we have:

 

•                  Replacedcertain accounting personnel

 

•                  Changedreporting relationships

 

•                  Reorganizedthe accounting function with increased segregation of duties

 

•                  Evaluatedand are addressing staffing requirements, including quantity and qualificationsof personnel

 

Due to the material weaknesses noted above, inpreparing our financial statements for the quarter ended October 31, 2004, weperformed additional procedures to ensure that those financial statements arefairly stated in all material respects in conformity with generally acceptedaccounting principles.

 

**Section404**

 

Section 404 of the Sarbanes-Oxley Act of 2002 requiresthat we document and test the internal controls over financial reporting and toassert in our Annual Report on Form 10-K for the fiscal year ended July 31,2005, whether the internal controls over financial reporting at July 31, 2005are effective.  Any material weakness ininternal controls over financial reporting existing at that date will precludeus from making a positive assertion.  Weare currently undergoing a comprehensive effort to comply with Section 404 ofthe Sarbanes-Oxley Act.

 

In response to the requirements of the Sarbanes-OxleyAct and our material weakness in certain areas, we are formalizing our entirecontrol framework and all of our control procedures.  We have done significant work in evaluating,documenting, testing and remediating this framework and processes in aconcerted effort to be in compliance with Section 404 by our required deadlinefor fiscal 2005.  During the course ofthese activities and in addition to the material weakness in our disclosurecontrols described above, we have identified certain internal control issuesand deficiencies which we believe should be improved and corrected.  We have a remediation plan for these issuesand expect to have completed our remediation and testing prior to the end offiscal 2005 in order to make a positive assertion as to the effectiveness ofinternal controls over financial reporting, however, there can be no assurancethat all the identified issues and deficiencies or any other issues that mayarise from continued testing will be resolved in time to do so.

 

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# **PART II**. OTHER INFORMATION

 

## **Item 6**.        Exhibits

 

***Exhibits filedwith this report:***

** **
| ** ** | **Exhibit  No.** | ** ** | **Description** |
|------------|------------------|------------|-----------------|
|       | *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 Chief 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 Chief Financial  Officer. |

 

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***  filed herewith**

 

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# **SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, on the 1st day ofJune 2005.

 
|   | **Veritas  DGC Inc.** |
|--------|-----------------------|
|   |                  |   |
|   | By:                   |  /s/ Mark E.  Baldwin |   |
|   |                  |  mark  E. Baldwin |
|   |                  |  Executive Vice  President, Chief Financial Officer and Treasurer   (Principal Financial Officer) |
|   |                  |   |
|   |                  |   |
|   |                  |  /s/ Vincent M.  Thielen |   |
|   |                  |  vincent  m. thielen |
|   |                  |  Vice President,  Corporate Controller   (Chief Accounting Officer) |
|        |                       |  |  |  |

 

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