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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7427
VERITAS DGC INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 76-0343152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3701 KIRBY DRIVE, SUITE #112
HOUSTON, TEXAS 77098
(Address of principal executive offices) (Zip Code)
</TABLE>
(713) 512-8300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock, $.01 par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant was $415,298,750 as of September 30, 1999.
The number of shares of the Company's common stock, $.01 par value, (the
"Common Stock"), outstanding at September 30, 1999 was 22,993,788 (including
1,505,595 Veritas Energy Services Inc. exchangeable shares which are identical
to the Common Stock in all material respects).
The registrant's proxy statement to be filed in connection with the
registrant's 1999 Annual Meeting of Stockholders is incorporated by reference
into Part III of this report.
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TABLE OF CONTENTS
FORM 10-K
<TABLE>
<CAPTION>
ITEM PAGE NUMBER
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<C> <S> <C>
PART I
1 Business
General..................................................... 1
Industry Conditions......................................... 2
Services and Markets........................................ 2
Principal Operating Assets.................................. 3
Technology and Capital Expenditures......................... 5
Competition and Other Business Conditions................... 6
Backlog..................................................... 6
Significant Customers....................................... 6
Employees................................................... 7
2 Properties.................................................. 7
3 Legal Proceedings........................................... 7
4 Submission of Matters to a Vote of Security Holders......... 7
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 7
6 Selected Consolidated Financial Data........................ 8
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
7A. Quantitative and Qualitative Disclosures Regarding Market
Risk...................................................... 12
8 Consolidated Financial Statements and Supplementary Data.... 13
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 36
PART III
10 Directors and Executive Officers of the Registrant.......... 36
11 Executive Compensation...................................... 36
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 36
13 Certain Relationships and Related Transactions.............. 36
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 36
Signatures.................................................. 39
</TABLE>
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This report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. Veritas DGC's actual results could differ materially
from those anticipated in the forward-looking statements as a result of certain
factors including those set forth under Item 1. "Business" and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
PART I
ITEM 1. BUSINESS
GENERAL
Veritas DGC is one of the world's leading providers of integrated
geophysical technologies to the petroleum industry worldwide. Oil and gas
companies utilize geophysical technologies to:
- identify new areas where subsurface conditions are favorable for the
production of hydrocarbons;
- determine the size and structure of previously identified oil and gas
fields; and
- optimize development and production of hydrocarbon reserves (reservoir
management).
Veritas DGC acquires, processes and interprets geophysical data and
produces geophysical surveys which are either 3D images or 2D images of the
subsurface geology in the survey area. Veritas DGC also produces 4D surveys,
which record fluid movement in the reservoir, by repeating specific 3D surveys
over time.
Veritas DGC's data acquisition operations are carried out as follows:
- Offshore -- by crews operating from nine geophysical research vessels,
including two advanced Veritas Viking flagships. Of the nine vessels, six
are chartered and three are owned by Veritas DGC.
- On land and in transition (swamp and tidal) areas -- by crews utilizing
technologically advanced geophysical recording equipment having 35,000
channels of recording capacity and capable of being configured to equip
as many as 27 crews for 3D operations.
Veritas DGC conducts surveys on both an exclusive contract basis and a
multi-client basis. When operating on an exclusive contract basis, Veritas DGC's
customer purchases all rights to the completed geophysical survey, including all
related data and interpretive manipulations of the data. When operating on a
multi-client basis, Veritas DGC retains ownership of the survey and all
associated data and seeks to license the survey to multiple customers. In line
with current industry trends, Veritas DGC anticipates that multi-client surveys
will constitute a growing percentage of its revenues. Historically, Veritas DGC
has generally realized higher operating margins from multi-client surveys than
from surveys performed on an exclusive contract basis. For the fiscal year ended
July 31, 1999, geophysical services performed on a contract basis accounted for
approximately 59% of Veritas DGC's revenues, and the licensing of multi-client
geophysical surveys accounted for the remaining 41% of revenues.
Veritas DGC's geophysical data processing operations are conducted at 22
data processing centers in 13 countries worldwide. Three of these centers
operate the latest NEC large vector supercomputers configured primarily for
processing large-scale offshore surveys and performing complex 3D imaging and
prestack depth migration ("PSDM"). PSDM produces a more accurate image of
subsurface geology, particularly beneath obstructions such as complex salt
formations in the Gulf of Mexico and subsurface basalt flows in the North
Atlantic. The other 19 centers operate advanced data processing hardware from
Hewlett-Packard, Sun Microsystems and IBM. All of the centers operate
proprietary Veritas DGC software.
Veritas DGC aggressively pursues innovative new technologies through
research and development efforts both internally and externally. For example,
with the launch of the new data visualization center and the formation of a new
data interpretation division, Veritas DGC offers advanced data visualization,
interpretation and reservoir characterization services. Huge volumes of
geophysical data can be rapidly viewed at the
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visualization center in a collaborative environment, enabling drilling locations
to be identified in significantly less time than was previously possible.
INDUSTRY CONDITIONS
Overall demand for geophysical services is dependent upon the level of
expenditures by oil and gas companies for exploration, production, development
and field management activities, which depends in part on present and expected
future oil and gas prices. Most of fiscal 1999 was characterized by depressed
oil prices, which resulted in lower levels of cash flow for oil and gas
companies and lower spending on exploration and production, including
geophysical services. Recent oil prices are significantly higher than oil prices
experienced throughout most of fiscal 1999. While management believes that these
higher oil prices may result in higher levels of spending for geophysical
services, there can be no assurance that expenditures will increase.
Over the past five years, worldwide demand for advanced geophysical
technologies increased rapidly. The greater precision and improved subsurface
resolution obtainable from 3D geophysical data, combined with advanced
processing techniques, have assisted oil and gas companies in finding new fields
and more accurately delineating existing fields. These improved technologies
have been a key factor in improving drilling success ratios and lowering finding
and field extension costs. Furthermore, improved 4D technology is also enhancing
production monitoring methodologies and the management of existing oil and gas
reservoirs. The recent advances in geophysical technologies, coupled with
improvements in drilling and completion techniques, are significantly enhancing
oil and gas companies' ability to develop, explore for and manage oil and gas
reserves cost-effectively.
SERVICES AND MARKETS
Veritas DGC conducts surveys both on an exclusive basis ("contract") for
customers and on its own behalf for licensing to multiple customers
("multi-client"). The multi-client portion of Veritas DGC's business has been
steadily increasing over the past three years generating 41% of revenues in
fiscal 1999, up from 39% in fiscal 1998 and 31% in fiscal 1997.
The high cost of acquiring and processing geophysical data on an exclusive
basis, particularly in deep water environments, has prompted many oil and gas
companies to participate in multi-client surveys. In response, Veritas DGC has
added significantly to its multi-client data library over the last three years,
increasing its size and geographic breadth, as well as enhancing the quality of
the data through advanced processing. Currently the library is comprised of 2.4
million line kilometers of 2D and 3D surveys in many of the world's major oil
basins. The marine library covers areas in the Gulf of Mexico, the North Sea and
the offshore margins of Southeast Asia, West Africa, North Africa, Canada and
Brazil. The land library includes surveys in Texas, Mississippi, Wyoming and
Alberta, Canada. Veritas DGC is also enhancing certain of its data library
surveys with advanced processing techniques, such as PSDM.
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The following tables set forth Veritas DGC's revenues by contract type and
geographical area:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
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REVENUES BY CONTRACT TYPE 1999 1998 1997
- ------------------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Contract work........................................ $227,699 $324,873 $250,183
Licensing of multi-client data....................... 161,206 204,086 112,532
-------- -------- --------
$388,905 $528,959 $362,715
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------
REVENUES BY GEOGRAPHICAL AREA 1999 1998 1997
- ----------------------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
United States........................................ $203,667 $280,765 $179,898
Canada............................................... 32,325 47,059 52,141
Latin America........................................ 61,187 93,494 51,276
Europe............................................... 35,850 51,089 42,798
Middle East/Africa................................... 20,785 14,090 6,370
Asia Pacific......................................... 35,091 42,462 30,232
-------- -------- --------
Total...................................... $388,905 $528,959 $362,715
======== ======== ========
</TABLE>
In fiscal 1999, 1998 and 1997, 48%, 47% and 50%, respectively, of Veritas
DGC's revenues were attributable to non-U.S. operations and export sales. (See
Note 12 of Notes to Consolidated Financial Statements for additional
geographical information.)
PRINCIPAL OPERATING ASSETS
Veritas DGC acquires, processes and interprets geophysical information
utilizing a wide array of assets as follows.
Land and Transition Zone Acquisition
Veritas DGC's land and transition zone acquisition services are performed
with technologically advanced geophysical equipment. The equipment, as of July
31, 1999, had a combined recording capacity of approximately 30,000 channels
which can be configured to equip up to 22 crews for 3D operations. The
acquisition of Enertec Resource Services Inc. on September 30, 1999 added an
additional 5,000 channels, sufficient to equip up to another five crews.
Each crew consists of: a surveying unit which lays out the lines to be
recorded and marks the site for shot-hole placement or equipment location; an
explosive or mechanical vibrating unit that produces the acoustical impulse; and
a recording unit that synchronizes the shooting and captures the signal via
geophones. On a typical land geophysical survey, the geophysical crew is
supported by several drill crews, which are typically furnished by third parties
under short-term contracts. Drill crews operate in advance of the geophysical
crew and bore shallow holes for explosive charges which, when detonated by the
geophysical crew, produce the necessary acoustical impulse.
During fiscal 1999, Veritas DGC achieved significant progress in the
development of the Veritas Millennium II project, a plan to track and manage all
aspects of geophysical field operations from one remote location. The first
phase of the project involves the use of low earth-orbiting satellites to
transmit data directly from a surveyor's backpack in the field to a central
control center where the data is monitored and analyzed by experts. This allows
for real-time quality control and, via two-way satellite communication, permits
immediate intervention where required. The next phase in Millennium II is to
make project information available to clients in real-time via the internet.
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Marine Acquisition
Marine acquisition services are carried out by Veritas DGC's crews
operating from both owned and chartered vessels which have been modified or
equipped to Veritas DGC's specifications. During the last several years, a
majority of the marine geophysical data acquisition services performed by
Veritas DGC involved 3D surveys. The following table sets forth certain
information concerning the geophysical vessels operated by Veritas DGC as of
July 31, 1999.
<TABLE>
<CAPTION>
YEAR
ENTERED
VESSEL(1) SERVICE LOCATION LENGTH BEAM CHARTER EXPIRATION
- --------- ------- --------------- -------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Acadian Searcher............... 1983 Australia 217 feet 44 feet Owned
Ross Seal(2)................... 1987 Southeast Asia 176 feet 38 feet December 1999
Polar Search................... 1992 Brazil 300 feet 51 feet January 2002
Polar Princess................. 1996 Gulf of Mexico 250 feet 46 feet June 2000
Professor Kurentsov(2)......... 1997 Egypt 225 feet 41 feet October 1999
Veritas Viking................. 1998 Canada 305 feet 72 feet June 2006
Veritas Viking II.............. 1999 North Sea -- UK 305 feet 72 feet June 2007
</TABLE>
- ---------------
(1) Does not include vessels acquired from Enertec Resource Services Inc. which
are discussed below.
(2) The Professor Kurentsov was replaced by a newer vessel, the New Venture, in
the first quarter of fiscal 2000. The New Venture is operating off of West
Africa under a two year charter expiring in September 2001. The Ross Seal is
currently being decommissioned and is expected to be replaced by a newer
vessel in the second quarter of fiscal 2000.
Each vessel generally has an equipment complement consisting of geophysical
recording instrumentation, digital streamer cable, cable location and data
location systems, multiple navigation systems, a source control system which
controls the synchronization of the energy source and a firing system which
generates the acoustical impulses. The streamer cable contains hydrophones that
receive the acoustical impulses reflected by variations in the subsurface
strata. Data acquired by each channel in the digital cable is transmitted to
recording instruments for storage on magnetic media where some processing
sequences may be applied, thus reducing subsequent processing time and the
effective acquisition costs to the customer.
At present, four of Veritas DGC's vessels are equipped with multiple
streamers and multiple energy sources, which acquire more lines of data with
each pass, reducing completion time and acquisition cost. The Veritas Viking and
Viking II are both capable of deploying more than 12 streamer cables.
As a result of the Enertec acquisition on September 30, 1999, Veritas DGC
owns two vessels which acquire high-resolution surveys in the Gulf of Mexico,
mapping seafloor and shallow sub-seafloor hazards that represent a threat to
drilling and construction operations. These surveys are required by the U.S.
government prior to the issuance of permits for drilling and construction.
Data Processing and Interpretation
As of July 31, 1999, Veritas DGC operated 21 data processing centers
capable of processing 2D, 3D and 4D data. A majority of Veritas DGC's data
processing services are performed on 3D seismic data. The centers process data
received from the field, both from Veritas DGC and other geophysical crews, to
produce an image of the earth's subsurface using proprietary computer software
and techniques developed by Veritas DGC. Veritas DGC also reprocesses older
geophysical data using new techniques designed to enhance the
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quality of the data. Veritas DGC's data processing centers have opened at
various times from 1966 through 1999 and are located in:
<TABLE>
<S> <C> <C> <C>
NORTH AMERICA SOUTH AMERICA EUROPE/MIDDLE EAST ASIA PACIFIC
- ----------------------- ----------------------- ------------------ ----------------------
Houston, Texas Buenos Aires, Argentina Crawley, England Singapore
Dallas, Texas Neuquen, Argentina Stavanger, Norway Brisbane, Australia
Austin, Texas Santa Cruz, Bolivia Aberdeen, Scotland Perth, Australia
Midland, Texas Caracas, Venezuela Abu Dhabi, U.A.E. Jakarta, Indonesia
Denver, Colorado Quito, Ecuador Kuala Lumpur, Malaysia
Oklahoma City, Oklahoma
Calgary, Alberta,
Canada
</TABLE>
As a result of the Enertec acquisition, Veritas DGC acquired an additional data
processing center in New Orleans, Louisiana.
Veritas DGC's centers operate high capacity, advanced technology data
processing systems based on NEC, Sun Microsystems, IBM and Hewlett-Packard
computer systems with high-speed networks. These systems utilize Veritas DGC's
proprietary data processing software. The marine and land data acquisition crews
have certain software identical to that utilized in the processing centers,
allowing for ease in the movement of data from the field to the data processing
centers. Veritas DGC operates both land and marine data processing centers and
tailors the equipment and software deployed in an area to meet the local market
demands.
To enhance its speed and capacity in processing large-scale offshore
surveys and performing complex 3D PSDM, Veritas DGC installed an NEC SX-4 large
vector supercomputer in its Houston processing center in early fiscal 1997. The
success of this first system led to the installation of a second in the Crawley
center in August 1997 and a third in Singapore in July 1998. These supercomputer
installations act as global resources for all of Veritas DGC's data processing
operations.
During fiscal 1999, Veritas DGC opened a state of the art visualization
center in Houston, Texas. This center allows teams of explorationists to view
and interpret large volumes of complex 3D data. The visualization center is an
elaborate imaging tool used for advanced interpretive techniques which enhances
the understanding of regional geology and reservoir modeling. The visualization
center allows Veritas DGC to offer the type of collaborative geophysical model
building which is now enabling oil companies to explore areas of complex geology
such as the large sub-salt plays in the deepwater Gulf of Mexico. An additional
visualization center will be added in Crawley, England in fiscal 2000.
TECHNOLOGY AND CAPITAL EXPENDITURES
The geophysical industry is highly technical, and the requirements for the
acquisition and processing of geophysical data have evolved continuously during
the past 50 years. Accordingly, it is significant to Veritas DGC that its
technological capabilities are comparable or superior to those of its
competitors. Veritas DGC maintains its technological capabilities through
continuing research and development, strategic alliances with equipment
manufacturers and by licensing technology from others. Veritas DGC has
introduced several technological innovations that have become industry standard
practice in both acquisition and processing of geophysical data.
Currently, Veritas DGC employs approximately 50 people in its research and
development activities, substantially all of whom are scientists, engineers or
programmers. During fiscal 1999, 1998 and 1997, research and development
expenditures were $7.7 million, $6.2 million and $3.7 million, respectively. The
research and development budget for fiscal 2000 is $8.3 million.
Veritas DGC rarely applies for patents on internally developed technology.
This policy is based upon the belief that most proprietary technology, even
where regarded as patentable, can be more effectively protected by maintaining
confidentiality than through disclosure and a patent enforcement program.
Certain of the equipment, processes and techniques used by Veritas DGC are
subject to the patent rights of others, and
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Veritas DGC holds non-exclusive licenses with respect to a number of such
patents. While the Company regards as beneficial its access to others'
technology through licensing, Veritas DGC believes that substantially all
presently licensed technology could be replaced without significant disruption
to the business should the need arise.
During fiscal 1999, 1998 and 1997, capital expenditures were $52.4 million,
$99.5 million and $96.1 million, respectively. The capital expenditure budget
for fiscal 2000 is approximately $84.0 million. The actual level of future
capital expenditures will depend on the availability of funding and market
requirements as dictated by oil and gas company activity levels. Much of this
capital is earmarked for the acquisition of additional leading edge equipment
such as solid streamers, visualization center and other data processing
hardware, and satellite-linked monitoring and quality control systems. This
equipment will enable Veritas DGC to acquire, process, and interpret data more
efficiently and effectively, ultimately allowing operators quicker access to
their reserves.
COMPETITION AND OTHER BUSINESS CONDITIONS
The acquisition and processing of seismic data for the oil and gas
exploration industry has historically been highly competitive worldwide. As a
result of changing technology and increased capital requirements, the
geophysical industry has consolidated substantially since the late 1980's. The
largest competitors remaining in the market are Western Geophysical (a division
of Baker Hughes), Schlumberger, Compagnie Generale Geophysique and Petroleum
Geo-Services. Success in marketing geophysical surveys is based on several
competitive factors, including price, crew experience, equipment availability,
technological expertise, reputation for quality and dependability and, in the
case of multi-client surveys, customer interest for the area surveyed.
Veritas DGC's data acquisition activities often are conducted under extreme
weather and other hazardous conditions. Accordingly, these operations are
subject to risks of injury to personnel and loss of equipment. Veritas DGC
carries insurance against the destruction of, or damage to, its owned and
chartered vessels, geophysical equipment and property and injury to persons that
may result from its operations and considers the amounts of such insurance to be
adequate. Veritas DGC may not be able to obtain insurance against certain risks
or for equipment located from time to time in certain areas of the world.
Veritas DGC obtains insurance against war, expropriation, confiscation and
nationalization when such insurance is available and when management considers
it advisable to do so. Such coverage is not always available and, when
available, is subject to unilateral cancellation by the insuring companies on
short notice. Veritas DGC also carries insurance against pollution hazards.
Fixed costs, including costs associated with vessel charters and operating
leases, depreciation and interest expense, account for a substantial percentage
of Veritas DGC's costs and expenses. As a result, downtime or low productivity
resulting from reduced demand, equipment failures, and weather interruptions or
otherwise, can result in significant operating losses.
BACKLOG
At July 31, 1999, Veritas DGC's backlog of commitments for services was
$114.0 million, compared with $300.0 million at July 31, 1998. It is anticipated
that a majority of the July 31, 1999 backlog will be completed in the next 12
months. This backlog consists of written orders or commitments believed to be
firm. Contracts for services are occasionally varied or modified by mutual
consent and in certain instances are cancelable by the customer on short notice
without penalty. As a result of these factors, Veritas DGC's backlog as of any
particular date may not be indicative of Veritas DGC's actual operating results
for any succeeding fiscal period.
SIGNIFICANT CUSTOMERS
Historically, Veritas DGC's principal customers have been international oil
and gas companies, foreign national oil companies and independent oil and gas
companies. In fiscal 1999, Royal Dutch/Shell and its subsidiaries accounted for
about 12% of Veritas DGC's revenues. No other customer accounted for 10% or
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more of total revenues in fiscal 1999. No single customer accounted for 10% or
more of total revenues during fiscal 1998 and 1997.
EMPLOYEES
At July 31, 1999, Veritas DGC had approximately 2,800 full-time employees.
With the exception of 40 employees working at the Singapore data processing
center, none of its employees is subject to collective bargaining agreements.
Veritas DGC considers the relations with its employees to be good.
ITEM 2. PROPERTIES
Veritas DGC's headquarters in Houston leases approximately 112,000 square
feet of office space, housing data processing operations, executive, accounting,
research and development and geophysical operating personnel. Veritas DGC leases
additional space aggregating approximately 429,000 square feet which is used
primarily for geophysical data processing operations, exploration and
development information services, geophysical operating personnel and
warehousing in its 21 data processing centers located around the world. These
leases expire at various times during 2000 through 2013. Veritas DGC owns
property in Jackson, Mississippi, comprising 37,551 square feet of office and
workshop facilities and in Calgary, Alberta, Canada comprising 15,000 square
feet of office space and maintenance facilities. Additionally, Veritas DGC owns
approximately two acres in Calgary, Alberta, Canada used for equipment storage.
In 1999, Veritas DGC purchased 18.5 acres of land in Houston, Texas as the
location for a new headquarters office. This land was sold to a developer in
September 1999 in a sale-leaseback transaction associated with the construction
and 15 year lease of a 220,000 square foot office complex. Veritas DGC plans to
move its Houston employees into the complex in late 2000.
ITEM 3. LEGAL PROCEEDINGS
As of September 30, 1999, Veritas DGC was not a party to, nor was its
property the subject of any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended July 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the reported high and low sales prices for
the common stock on the New York Stock Exchange for the indicated fiscal
periods.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ---- ---
<S> <C> <C> <C>
1999 1st Quarter............................................ $34 9/16 $10 5/8
2nd Quarter............................................ 23 15/16 11 13/16
3rd Quarter............................................ 20 1/4 8 3/4
4th Quarter............................................ 23 3/4 16
1998 1st Quarter............................................ $50 1/8 $25
2nd Quarter............................................ 47 5/16 26 1/2
3rd Quarter............................................ 54 1/2 36
4th Quarter............................................ 60 7/8 30 7/16
</TABLE>
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On September 30, 1999, the last reported sale price of Veritas DGC's common
stock on the New York Stock Exchange was $19 1/4 per share. On September 30,
1999, the approximate number of holders of record of common stock was 352.
Historically, Veritas DGC has not paid any dividends on its common stock
and has no present plans to pay any dividends. The payment of any future
dividends on common stock would depend, among other things, upon the current and
retained earnings and financial condition of Veritas DGC and upon a
determination by its board of directors that the payment of dividends would be
desirable. In addition, Veritas DGC's revolving credit facility prohibits the
payment of cash dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $388,905 $528,959 $362,715 $250,596 $215,630
Net income............................ 20,294 66,958 25,125 1,281 5,594
Net income per common
share -- basic..................... .89 2.96 1.33 .07 .31
Net income per common
share -- diluted................... .88 2.87 1.30 .07 .31
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $541,404 $478,490 $385,089 $198,592 $184,340
Long-term debt (including current
maturities)........................ 135,251 75,561 75,971 41,090 36,788
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Most of fiscal 1999 was characterized by depressed commodity prices and a
number of oil and gas company mergers, resulting in reduced exploration and
geophysical spending. Management has undertaken certain initiatives in response
to the current industry downturn to preserve our financial strength and
flexibility. Since September 1998, headcount has decreased from approximately
4,500 to 2,800 employees. In addition, Veritas DGC completed the decommissioning
of its multi-boat operation in the Gulf of Mexico in March 1999. All three
decommissioned vessels were on short-term charters and have been returned to the
vessel owners.
Veritas DGC conducts surveys on both an exclusive contract basis and a
multi-client basis. When operating on an exclusive contract basis, Veritas DGC's
customer purchases all rights to the completed geophysical survey, including all
related data and interpretive manipulations of the data. When operating on a
multi-client basis, Veritas DGC retains ownership of the survey and all
associated data and seeks to license the survey to multiple customers. In line
with current industry trends, Veritas DGC anticipates that multi-client surveys
will constitute a growing percentage of its revenues. Historically, Veritas DGC
has generally realized higher operating margins from multi-client surveys than
from surveys performed on an exclusive contract basis. For the year ended July
31, 1999, geophysical services performed on a contract basis accounted for
approximately 59% of Veritas DGC's revenues, and the licensing of multi-client
geophysical surveys accounted for the remaining 41% of revenues.
RESULTS OF OPERATIONS
Fiscal 1999 compared with Fiscal 1998
Revenues. Revenues decreased by 26%, to $388.9 million from $529.0 million
in fiscal 1998, due to the general downturn in exploration spending driven by
depressed commodity prices. Multi-client revenues
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decreased 21% from the prior year, from $204.1 million to $161.2 million, while
contract revenues decreased 30%, from $324.9 million to $227.7 million. Due to
Veritas DGC's increased activity in the onshore multi-client business, that
revenue stream increased to $33.0 million from $10.9 million in the previous
year, somewhat offsetting the offshore multi-client revenue decline.
Operating Expenses. Costs of services decreased 23%, from $346.9 million to
$266.0 million, but as a percent of revenues increased from 66% to 68%. The
increase in expense as a percent of revenues was mainly due to significant price
declines in the contract business and due to fixed cost elements in operating
expenses.
Depreciation and Amortization. Depreciation and amortization expense
increased 22%, from $56.1 million to $68.4 million, primarily due to $151.9
million of capital expenditures over the past two years.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 11%, from $18.8 million to $16.7 million, resulting primarily
from the reduction of discretionary spending at corporate headquarters.
Interest Expense. Interest expense increased from $7.3 million to $12.6
million due to the issuance in October 1998 of an additional $60.0 million of
the 9 3/4% senior notes.
Other (Income) Expense. Other (income) expense increased from income of
$338,000 in fiscal 1998 to income of $5.1 million in fiscal 1999 primarily due
to net foreign currency losses of $2.3 million in fiscal 1998 as compared with
net foreign currency gains of $1.8 million in fiscal 1999. Interest income was
approximately $4.2 million in each of those years.
Income Taxes. Provision for income taxes decreased from $34.2 million to
$9.6 million as a result of the Company's decreased profitability.
Equity in (Earnings) Loss. Equity in (earnings) loss is related to the
Indonesian joint venture, which posted a loss of $303,000 for fiscal 1999
compared to a net profit of $972,000 in fiscal 1998. Decreases in contract
revenues and a relatively fixed cost base accounted for the decreased
profitability for the fiscal year.
Fiscal 1998 compared with Fiscal 1997
Revenues. Revenues increased by 46%, from $362.7 million in fiscal 1997 to
$529.0 million in fiscal 1998. Multi-client revenues increased 81%, from $112.5
million to $204.1 million, primarily due to the large surveys in the deepwater
Gulf of Mexico where industry interest in fiscal 1998 was high. Most of the U.S.
marine and processing resources were dedicated to multi-client work in fiscal
1998. The onshore multi-client business increased from $2.5 million in fiscal
1997 to $10.9 million in fiscal 1998.
Contract revenues increased 30%, from $250.2 million to $324.9 million,
with the largest growth stemming from additional acquisition and processing
capacity as well as increased operational efficiency. The market for processing
intensive pre-stack time and depth migration was up significantly from fiscal
1997 as customers worked to analyze and interpret the massive 3D surveys shot in
geologically complex areas.
Operating Expenses. Costs of services increased 28%, from $271.7 million to
$346.9 million, but as a percent of revenues decreased from 75% to 66%. The
improvement in operating margins is mainly attributable to significant sales and
performance of multi-client data surveys that generally have higher margins.
Data processing operating margins also showed improvement due to more efficient
equipment. Land and transition zone margins remained consistent.
Depreciation and Amortization. Depreciation and amortization expense
increased 38%, from $40.6 million to $56.1 million, due to the large increase in
capital expenditures over the past two years.
Selling, General and Administrative. Selling, general and administrative
expenses increased 65%, from $11.4 million to $18.8 million, resulting primarily
from the addition of staff to support our expanded operations and costs incurred
in implementing new administrative and accounting systems and a more aggressive
marketing strategy.
9
<PAGE> 12
Interest Expense. Interest expense includes an $800,000 reduction in fiscal
1998 for interest capitalized on the build out of a newly chartered vessel.
Other (Income) Expense. Other (income) expense increased from a loss of
$630,000 to income of $338,000 primarily from interest income earned on higher
average cash balances. This increase was offset by net foreign currency losses
resulting from fluctuations in foreign money markets.
Income Taxes. Provision for income taxes increased from $6.1 million to
$34.2 million as a result of Veritas DGC's increased profitability. The
effective tax rate increased from 20% to 34% due to the write-off of certain of
Veritas DGC's investments in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses
Veritas DGC's internal sources of liquidity are cash, cash equivalents and
cash flow from operations. External sources include public and private
financing, the unutilized portion of a revolving credit facility, equipment
financing and trade credit. Management believes that these sources of funds are
adequate to meet the liquidity needs of Veritas DGC for fiscal 2000.
As of July 31, 1999, Veritas DGC had approximately $135.0 million in senior
notes outstanding due in October 2003. Veritas DGC also has a revolving credit
facility due July 2001 from commercial lenders that provides advances up to
$50.0 million. Advances, however, are limited by a borrowing base ($32.1 million
at July 31, 1999) and bear interest, at Veritas DGC's election, at LIBOR or
prime rate plus a margin based on certain financial ratios maintained by Veritas
DGC. Advances are secured by certain accounts receivable. As of July 31, 1999,
there were no outstanding advances under the credit facility, but $5.8 million
of the credit facility was utilized for letters of credit and an additional
$26.3 million is available for borrowings.
Veritas DGC requires significant amounts of working capital to support its
operations and fund capital spending and research and development programs.
Veritas DGC's capital expenditure budget for fiscal 2000 is approximately $84.0
million, which includes expenditures of approximately $25.0 million to maintain
or replace current operating equipment. Research and development expenditures
for fiscal 2000 are budgeted at $8.3 million. Veritas DGC has also increased its
multi-client activity and significantly expanded its multi-client data library.
Because of the elapsed time between survey execution, sale and ultimate cash
receipt, multi-client work generally requires greater amounts of working capital
than contract work. Depending upon the timing of the sales of the multi-client
surveys and the contract terms relating to the collection of the proceeds from
such sales, Veritas DGC's liquidity may be affected. Veritas DGC seeks
pre-funding commitments from customers for a portion of the cost of these
surveys. However, because of market conditions, purchase commitment levels are
currently much lower than in past years. Veritas DGC believes that these
multi-client surveys have good long-term sales, earnings and cash flow
potential, but there is no assurance that Veritas DGC will recover the costs of
these surveys. In addition to the capital expenditure budget, the planned net
investment in the multi-client data library (the change in the balance sheet
account) for fiscal 2000 is $81.0 million.
Veritas DGC will require substantial cash flow to continue operations on a
satisfactory basis, complete its capital expenditure and research and
development programs and meet its principal and interest obligations with
respect to outstanding indebtedness. While management believes that Veritas DGC
has adequate sources of funds to meet its liquidity needs, its ability to meet
its obligations depends on its future performance, which, in turn, is subject to
general economic conditions, business and other factors beyond Veritas DGC's
control. Key factors affecting future results will include utilization levels of
acquisition and processing assets and the level of multi-client data library
sales, all of which are driven by exploration spending and, ultimately, by
underlying commodity prices.
If Veritas DGC is unable to generate sufficient cash flow from operations
or otherwise to comply with the terms of its revolving credit facility or
indentures, it may be required to refinance all or a portion of its existing
debt or obtain additional financing. Veritas DGC cannot make any assurances that
it would be able to obtain such refinancing or financing, or any refinancing or
financing would result in a level of net proceeds required.
10
<PAGE> 13
To ensure that Veritas DGC has available as many financing options as possible,
a shelf registration allowing the issuance of up to $200.0 million in additional
debt and/or equity was filed with the SEC after the end of fiscal year 1999.
(See Note 14 of Notes to Consolidated Financial Statements.)
Year 2000
Year 2000 Issue. Some software applications, hardware, equipment and
embedded chip systems identify dates using only the last two digits of the year.
These products may be unable to distinguish between dates in the year 2000 and
dates in the year 1900. That inability (referred to as the "Year 2000" issue),
if not addressed, could cause applications, equipment or systems to fail or
provide incorrect information after December 31, 1999, or when using dates after
December 31, 1999. This in turn could have an adverse effect on Veritas DGC,
because it directly depends on its own applications, equipment and systems and
indirectly depends on those of other entities with which Veritas DGC interacts.
Compliance Program. Veritas DGC has prepared a formal plan to address Year
2000 issues as they relate to Veritas DGC's business and its operations. In
accordance with that plan, Veritas DGC has evaluated all internal hardware and
software used in its operations, including those used to support Veritas DGC's
activities, such as geophysical data acquisition and processing equipment and
accounting and payroll systems.
Veritas DGC's State of Readiness. In the ordinary course of business,
Veritas DGC has replaced a significant amount of its hardware and software with
Year 2000 compliant systems. Veritas DGC has also identified all external
relationships, mainly suppliers and customers, and mailed each entity an
internally prepared questionnaire regarding Year 2000 issues. Responses returned
indicate a state of readiness, and non-responses do not pertain to critical
systems. Currently, Veritas DGC estimates that it will complete required
remedial actions by November 30, 1999.
Contingency Planning. As part of the Year 2000 project, Veritas DGC has
determined which of its business activities may be vulnerable to a Year 2000
disruption. An ongoing monitoring program and contingency procedures have been
established in the event of unanticipated non-compliance problems.
Costs to Address Year 2000 Compliance Issues. Cost of compliance to date
approximates $125,000, and Veritas DGC is not aware of any material
contingencies or costs that will be incurred in the future.
Risk of Non-Compliance. While Veritas DGC believes that its Year 2000
compliance program has substantially reduced the risks associated with the Year
2000 issue, there can be no assurance that each and every remedial action will
be successful. Due to the general uncertainty inherent in the Year 2000 issues,
Veritas DGC cannot conclude that its failure or the failure of third parties to
achieve Year 2000 compliance will not adversely affect its financial position,
results of operations or cash flows.
Other
Since Veritas DGC's quasi-reorganization with respect to Digicon Inc. on
July 31, 1991, the tax benefits of net operating loss carryforwards existing at
the date of the quasi-reorganization have been recognized through a direct
addition to paid-in capital, when realization is more likely than not.
Additionally, the utilization of the net operating loss carryforwards existing
at the date of the quasi-reorganization is subject to certain limitations. For
the year ended July 31, 1999, Veritas DGC recognized $4.6 million related to
these benefits, due to increased profitability of Veritas DGC's U.K. operations.
(See Note 5 of Notes to Consolidated Financial Statements.)
Veritas DGC receives some account receivable payments in foreign currency
and is not currently conducting a hedging program because it does not consider
its current exposure to foreign currency fluctuations to be significant.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
as appropriate, at fair value. Gains or losses resulting from changes in the
fair values of those derivatives are accounted for depending on the use of the
derivative and whether it qualifies for hedge
11
<PAGE> 14
accounting. Veritas DGC will be required to implement this statement in its
first quarter of fiscal 2001. Veritas DGC believes that the implementation of
this standard will not have a material adverse effect on Veritas DGC's
consolidated financial position, results of operations or liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
At July 31, 1999, Veritas DGC had no significant market risk related to
foreign currencies and had no derivative financial instruments. At July 31,
1999, Veritas DGC had $135.0 million of 9 3/4% fixed rate debt maturing in
October 2003 with a fair value of $137.4 million, using its current borrowing
rate of 9 1/4%.
12
<PAGE> 15
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Veritas DGC Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and comprehensive income, of changes
in stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Veritas DGC Inc. and its subsidiaries at
July 31, 1999 and 1998 and the results of their operations and their cash flows
for the three years in the period ended July 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
October 8, 1999
13
<PAGE> 16
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues................................................... $388,905 $528,959 $362,715
Costs and expenses:
Cost of services......................................... 266,000 346,896 271,656
Depreciation and amortization............................ 68,435 56,121 40,631
Selling, general and administrative...................... 16,734 18,758 11,408
Other (income) expense:
Interest.............................................. 12,623 7,318 7,484
Merger related costs.................................. 597
Other................................................. (5,050) (338) 630
-------- -------- --------
Total costs and expenses......................... 358,742 428,755 332,406
-------- -------- --------
Income before provision for income taxes and equity in
(earnings) loss of 50% or less-owned companies and
joint ventures........................................... 30,163 100,204 30,309
Provision for income taxes................................. 9,566 34,218 6,062
Equity in (earnings) loss of 50% or less-owned companies
and joint ventures....................................... 303 (972) (878)
-------- -------- --------
Net income................................................. $ 20,294 $ 66,958 $ 25,125
Other comprehensive income (net of tax -- $0 in 1999, 1998
and 1997)
Foreign currency translation adjustments................. (692) (2,597) (129)
Unrealized loss on investments -- available for sale..... (557)
-------- -------- --------
Comprehensive income....................................... $ 19,045 $ 64,361 $ 24,996
======== ======== ========
Per share:
Net income per common share -- basic..................... $ .89 $ 2.96 $ 1.33
======== ======== ========
Weighted average common shares -- basic.................. 22,733 22,594 18,898
======== ======== ========
Net income per common share -- diluted................... $ .88 $ 2.87 $ 1.30
======== ======== ========
Weighted average common shares -- diluted................ 23,001 23,315 19,364
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
14
<PAGE> 17
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 31,
---------------------
1999 1998
-------- --------
(IN THOUSANDS
EXCEPT PAR VALUE)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 73,447 $ 40,089
Restricted cash investments............................... 300 186
Accounts and notes receivable (net of allowance for
doubtful accounts: 1999, $3,038; 1998, $1,248).......... 113,761 151,820
Materials and supplies inventory.......................... 4,417 4,106
Prepayments and other..................................... 8,259 16,290
Investments -- available for sale......................... 3,671
-------- --------
Total current assets............................... 203,855 212,491
Property and equipment:
Land...................................................... 6,837
Geophysical equipment..................................... 212,725 206,449
Data processing equipment................................. 76,320 72,925
Geophysical ship.......................................... 8,524 7,534
Leasehold improvements and other.......................... 52,991 39,116
-------- --------
Total.............................................. 357,397 326,024
Less accumulated depreciation........................... 201,026 151,104
-------- --------
Property and equipment -- net...................... 156,371 174,920
Multi-client data library................................... 138,753 51,143
Investment in and advances to joint ventures................ 2,640 2,943
Goodwill (net of accumulated amortization: 1999, $3,683;
1998, $3,233)............................................. 2,159 2,655
Deferred tax asset.......................................... 23,120 19,157
Long term notes receivable (net of allowance: $1,000)....... 3,696
Other assets................................................ 11,252 15,181
-------- --------
Total.............................................. $541,846 $478,490
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 240 $ 289
Accounts payable -- trade................................. 26,243 42,493
Accrued interest.......................................... 4,010 2,234
Other accrued liabilities................................. 48,640 50,753
Income taxes payable...................................... 5,472 10,682
-------- --------
Total current liabilities.......................... 84,605 106,451
Non-current liabilities:
Long-term debt -- less current maturities................. 135,011 75,272
Other non-current liabilities............................. 6,672 5,071
-------- --------
Total non-current liabilities...................... 141,683 80,343
Commitments and contingent liabilities (See Note 8)
Stockholders' equity:
Preferred stock, $.01 par value; authorized:1,000,000
shares; none issued
Common stock, $.01 par value; authorized: 40,000,000
shares; issued: 21,470,938 and 21,302,865 shares
(excluding 1,505,595 and 1,505,795 Exchangeable Shares,
respectively) at July 31, 1999 and 1998, respectively... 214 213
Additional paid-in capital................................ 208,749 203,258
Accumulated earnings (from August 1, 1991 with respect to
Digicon Inc.)........................................... 114,652 94,358
Accumulated comprehensive income:
Cumulative foreign currency translation adjustment...... (4,352) (3,660)
Unrealized loss on investments -- available for sale.... (557)
Unearned compensation....................................... (602) (746)
Treasury stock, at cost; 150,068 and 50,000 shares at July
31, 1999 and 1998, respectively........................... (2,546) (1,727)
-------- --------
Total stockholders' equity......................... 315,558 291,696
-------- --------
Total.............................................. $541,846 $478,490
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
15
<PAGE> 18
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income................................................ $ 20,294 $ 66,958 $ 25,125
Non-cash items included in net income:
Depreciation and amortization.......................... 68,435 56,121 40,631
Amortization of multi-client data library (Note 1)..... 1,563 689 2,604
Loss on disposition of property and equipment.......... 849 1,549 1,151
Equity in (earnings) loss of 50% or less-owned
companies and joint ventures......................... 303 (972) (878)
Deferred taxes......................................... 678 (7,314) (924)
Amortization of unearned compensation.................. 466
Change in operating assets/liabilities:
Accounts and notes receivable.......................... 32,053 (30,874) (55,499)
Materials and supplies inventory....................... (311) (1,773) (674)
Prepayments and other.................................. 8,386 (5,861) (2,230)
Multi-client data library.............................. (87,967) (30,928) 2,120
Other.................................................. 5,364 (5,598) (4,282)
Accounts payable and other accrued liabilities......... (27,905) 13,173 31,642
Income taxes payable................................... (5,210) 7,196 1,672
Other non-current liabilities.......................... 1,601 604 2,952
-------- -------- --------
Total cash provided by operating activities....... 18,599 62,970 43,410
Financing activities:
Payments of secured term loans............................ (10,854)
Payments of long-term debt................................ (310) (410) (24,976)
Borrowings from long-term debt............................ 60,000 781
Net payments under credit agreements...................... (11,458)
Borrowings from senior notes.............................. 75,000
Debt issue costs.......................................... (1,882) (2,765)
Net proceeds from sale of common stock.................... 1,586 6,131 80,515
Purchase of treasury stock................................ (2,850) (1,727)
-------- -------- --------
Total cash provided (used) by financing
activities...................................... 56,544 3,994 106,243
Investing activities:
(Increase) decrease in restricted cash investments........ (114) 364 (223)
(Increase) decrease in investment in and advances to joint
ventures............................................... 937 (567)
Purchase of Time Seismic Exchange Ltd., net of cash
received............................................... (704)
Purchase of property and equipment........................ (42,366) (97,106) (89,112)
Sale of property and equipment............................ 2,091 221 1,037
-------- -------- --------
Total cash used by investing activities........... (41,093) (95,584) (88,865)
Currency (gain) loss on foreign cash...................... (692) (2,468) 317
-------- -------- --------
Change in cash and cash equivalents....................... 33,358 (31,088) 61,105
Beginning cash and cash equivalents balance............... 40,089 71,177 10,072
-------- -------- --------
Ending cash and cash equivalents balance.................. $ 73,447 $ 40,089 $ 71,177
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE> 19
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in property and equipment for:
Execution of equipment purchase obligations............ 6,388
Accounts payable -- trade.............................. 10,004 2,443 550
Utilization of net operating losses existing prior to the
quasi-reorganization resulting in an increase
(decrease) in:
Deferred tax asset valuation allowance................. (4,641) (1,630) (9,867)
Additional paid-in capital............................. 4,641 1,630 9,867
Treasury stock issued for purchase of Time Seismic
Exchange Ltd........................................... 664
Treasury stock issued in lieu of cash for bonuses
payable................................................ 974
Treasury stock issued for future services resulting in an
increase (decrease) in:
Additional paid-in-capital............................. (126)
Unearned compensation.................................. 280
Restricted stock issued for future services resulting in
an increase in
Additional paid-in-capital............................. 42 915
Unearned compensation.................................. 42 915
Settlement of accounts receivable for long term notes
receivable, net........................................ 3,696
Settlement of accounts receivable and interest payments
for investments -- available for sale.................. 3,809
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest (net of amounts capitalized)
Senior notes......................................... 10,028 6,513 3,496
Equipment purchase obligations....................... 39 113 673
Secured term loans................................... 274
Credit agreements.................................... 53 403
Other................................................ 780 603 656
Income taxes........................................... 11,875 33,369 1,891
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE> 20
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK, ACCUMULATED
ISSUED AT COST EARNINGS (FROM
------------------ ------------------ ADDITIONAL AUGUST 1, 1991 ACCUMULATED
PAR PAID-IN- WITH RESPECT TO UNEARNED COMPREHENSIVE
SHARES VALUE SHARES COST CAPITAL DIGICON INC.) COMPENSATION LOSS
---------- ----- -------- ------- ---------- --------------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 31, 1996.... 11,334,352 $113 $104,469 $ 2,275 $ (934)
Common stock issued for
exchangeable stock...... 4,645,968 47 (47)
Common stock issued for
cash upon exercise of
warrants................ 191,333 2 1,029
Common stock issued for
cash under employee
stock option plan....... 360,387 3 3,121
Common stock issued for
cash, net of issue
costs................... 3,450,000 35 76,416
Registration and filing
costs................... (91)
Utilization of net
operating loss
carryforwards existing
prior to
quasi-reorganization.... 9,867
Cumulative foreign
currency translation
adjustment.............. (129)
Net income................ 25,125
---------- ---- -------- ------- -------- -------- ----- -------
BALANCE, JULY 31, 1997.... 19,982,040 $200 $194,764 $ 27,400 $(1,063)
Common stock issued for
exchangeable stock...... 871,818 9 (9)
Common stock issued for
cash upon exercise of
warrants................ 42,000 189
Common stock issued to
employees............... 407,007 4 6,704 (746)
Common stock reacquired
for cash, including
fees.................... (50,000) (1,727)
Registration and filing
costs................... (20)
Utilization of net
operating loss
carryforwards existing
prior to
quasi-reorganization.... 1,630
Cumulative foreign
currency transaction
adjustment.............. (2,597)
Net income................ 66,958
---------- ---- -------- ------- -------- -------- ----- -------
BALANCE, JULY 31, 1998.... 21,302,865 $213 (50,000) $(1,727) $203,258 $ 94,358 $(746) $(3,660)
Common stock issued for
exchangeable stock...... 200
Common stock issued to
employees............... 167,873 1 2,031 (42)
Common stock reacquired
for cash, including
fees.................... (249,000) (3,917)
Treasury stock issued
under key contributor
incentive plan.......... 80,272 1,626 (652)
Treasury stock issued in
connection with Time
Seismic Exchange Ltd
acquisition............. 44,898 1,066 (402)
Treasury issued for
services under
restricted stock
agreements.............. 23,762 406 (126) (280)
Registration and filing
costs................... (1)
Utilization of net
operating loss
carryforwards existing
prior to
quasi-reorganization.... 4,641
Cumulative foreign
currency transaction
adjustment.............. (692)
Amortization of Unearned
Compensation............ 466
Loss on
Investments -- Available
for Sale................ (557)
Net income................ 20,294
---------- ---- -------- ------- -------- -------- ----- -------
BALANCE, JULY 31, 1999.... 21,470,938 $214 (150,068) $(2,546) $208,749 $114,652 $(602) $(4,909)
========== ==== ======== ======= ======== ======== ===== =======
</TABLE>
18
<PAGE> 21
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
Veritas DGC provides geophysical data acquisition, data processing,
multi-client data sales and exploration and development information services to
the petroleum industry in selected markets worldwide. The accompanying
consolidated financial statements include the accounts of Veritas DGC and all
majority-owned domestic and foreign subsidiaries. Investments in a joint venture
are accounted for on the equity method. All material intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain prior year balances have been reclassified for consistent
presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Veritas DGC Inc.'s financial instruments include cash and short-term
investments, restricted cash investments, accounts and notes receivable,
accounts payable and debt. The fair market value of the $135.0 million senior
notes included in long-term debt and $3.9 million of related accrued interest is
$137.4 million based on the present value of total payments due at Veritas DGC's
current borrowing rate of 9 1/4% at July 31, 1999. The carrying value is a
reasonable estimate of fair value for all other instruments.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
as appropriate, at fair value. Gains or losses resulting from changes in the
fair values of those derivatives are accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Veritas DGC will be
required to implement this statement in its first quarter of fiscal year 2001.
Veritas DGC believes that the implementation of this standard will not have a
material adverse effect on Veritas DGC's consolidated financial position,
results of operations or liquidity.
TRANSLATION OF FOREIGN CURRENCIES
Veritas DGC has determined that the United States ("U.S.") dollar is its
primary functional currency and, accordingly, most foreign entities translate
property and equipment (and related depreciation) and inventories into U.S.
dollars at the exchange rate in effect at the time of their acquisition while
other assets and liabilities are translated at year-end rates. Operating results
(other than depreciation) are translated at the average rates of exchange
prevailing during the year. The remaining foreign entities use the Canadian
dollar as their functional currency and translate all assets and liabilities at
year-end exchange rates and operating results at average exchange rates
prevailing during the year. Adjustments resulting from the translation of assets
and liabilities are recorded in the cumulative foreign currency translation
adjustment account in stockholders'
19
<PAGE> 22
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equity. Remeasurement gains and losses are included in the determination of net
income and are reflected in other costs and expenses. (See Note 10.)
CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, Veritas DGC has
defined "cash equivalents" as items readily convertible into known amounts of
cash with original maturities of three months or less.
RESTRICTED CASH INVESTMENTS
Restricted cash investments in the amounts of $300,000 and $186,000 at July
31, 1999 and 1998, respectively, were pledged as collateral on certain bank
guarantees related to contracts entered into in the normal course of business.
ACCOUNTS RECEIVABLE
Included in accounts and notes receivable at July 31, 1999 and 1998 are
unbilled amounts of approximately $35,209,000 and $43,058,000, respectively.
Such amounts are either not billable to the customer at July 31 in accordance
with the provisions of the contract and generally will be billed in one to four
months or are currently billable and will be invoiced in the next monthly
statement cycle.
INVENTORIES
Inventories of materials and supplies are stated at the lower of average
cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method based on estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE
----------------
<S> <C>
Geophysical equipment................................ 3-5
Data processing equipment............................ 3
Geophysical ship..................................... 5
Leasehold improvements and other..................... 3-10
</TABLE>
Expenditures for routine repairs and maintenance are charged to expense as
incurred; expenditures for additions and improvements, including capitalized
interest, are capitalized and depreciated over the estimated useful life of the
related asset. The net gain or loss on property and equipment disposed of is
included in other costs and expenses. (See Note 10.)
MULTI-CLIENT DATA LIBRARY
Veritas DGC collects and processes certain geophysical data for its own
account to which it retains all ownership rights and which it resells to clients
on a non-transferable, license basis. Veritas DGC capitalizes associated costs
using an estimated sales method. Under that method the amount capitalized equals
actual costs incurred less costs attributed to the precommitted sales contracts
based on the percentage of total estimated costs to total estimated sales
multiplied by actual sales. The capitalized cost of multi-client data library is
likewise charged to cost of services in the period subsequent sales occur based
on the percentage of total estimated costs to total estimated sales multiplied
by actual sales. For marine surveys, any costs remaining 24 months after
completion of a survey are charged to cost of services over a period not to
exceed 24 months. For land surveys any costs remaining 36 months after
completion of a survey are charged to cost of
20
<PAGE> 23
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services over a period not to exceed 24 months. These periods of 48 and 60
months, respectively, represent the periods over which benefits are expected to
be derived. Veritas DGC periodically reviews the carrying value of the
multi-client data library to assess whether there has been a permanent
impairment of value and records losses when it is determined that estimated
sales would not be sufficient to cover the carrying value of the asset.
GOODWILL
Veritas DGC records the purchase price of businesses or joint venture
interests in excess of the fair value of net assets acquired as goodwill which
is amortized using the straight-line method over a period of 10 to 20 years
which approximates the period in which benefits are expected to be derived.
Veritas DGC periodically reviews the carrying value of goodwill in relation to
the current and expected operating results of the businesses or joint ventures
in order to assess whether there has been a permanent impairment of such
amounts.
MOBILIZATION COST
Transportation and other expenses incurred prior to commencement of
geophysical operations in an area, that would not have been incurred otherwise,
are deferred and amortized over the lesser of the term of the related contract
or backlog of contracts in that area or one year. Amounts applicable to
operations for Veritas DGC's own account are included in the cost of the
multi-client data library. Included in other assets at July 31, 1999 and 1998
are unamortized mobilization costs approximating $1,193,000 and $818,000,
respectively.
LEASES
Operating leases include those for office space, specialized geophysical
equipment rented for short periods of time, and Veritas DGC's geophysical ships
which generally are chartered on a short-term basis.
REVENUES
Revenues from data acquisition and data processing services are recognized
on the percentage-of-completion method measured by the amount of data collected
or processed to the total amount of data to be collected or processed or by time
incurred to total time expected to be incurred. Sales from the licensing of
multi-client data surveys are recognized upon delivery of such data based upon
agreed rates set forth in the contract.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense when incurred.
Research and development costs for the years ended July 31, 1999, 1998 and 1997
were $7,693,000, $6,196,000 and $3,725,000, respectively.
STOCK-BASED COMPENSATION
Veritas DGC maintains stock-based compensation plans that are accounted for
using the intrinsic value based method allowed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Under that method, compensation expense is recorded in the
accompanying consolidated financial statements when the quoted market price of
stock at the grant date or other measurement date exceeds the amount an employee
must pay to acquire the stock. As required by SFAS No. 123, "Accounting for
Stock-Based Compensation," the effect on net income and earnings per share of
compensation expense that would have been recorded using the fair value based
method is reported through disclosure. (See Note 7.)
21
<PAGE> 24
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
The computation of earnings per share based upon weighted average common
shares outstanding and earnings per share -- assuming dilution based upon
weighted average common shares outstanding and additional common shares,
utilizing the treasury stock method and average market prices, that would have
been outstanding if dilutive potential common shares had been issued. (See Note
11.)
2. INVESTMENT IN INDONESIAN JOINT VENTURE
Summarized financial information for Veritas DGC's 80% owned Indonesian
joint venture (P.T. Digicon Mega Pratama) which is accounted for under the
equity method due to provisions in the joint venture agreement that give
minority shareholders the right to exercise control is as follows:
<TABLE>
<CAPTION>
JULY 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $ 1,380 $ 2,740
Property and equipment, net................................. 314 613
-------- --------
Total assets...................................... $ 1,694 $ 3,353
======== ========
Current liabilities......................................... $ 438 $ 410
Advances from affiliates.................................... 12,479 13,847
Stockholders' deficit:
Common stock.............................................. 2,576 2,576
Accumulated deficit....................................... (13,799) (13,480)
-------- --------
Total stockholders' deficit....................... (11,223) (10,904)
-------- --------
Total liabilities and stockholders' deficit....... $ 1,694 $ 3,353
======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
-----------------------------
1999 1998 1997
------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................................. $2,472 $ 3,346 $7,240
Cost and expenses:
Cost of services....................................... 2,435 2,378 6,424
Depreciation and amortization.......................... 340 316
Other.................................................. (320) (62)
------ -------- ------
Total.......................................... 2,775 2,374 6,362
------ -------- ------
Net income (loss)........................................ $ (303) $ 972 $ 878
====== ======== ======
</TABLE>
During the years ended July 31, 1999, 1998 and 1997, Veritas DGC charged
P.T. Digicon $157,000 $368,000 and $1,429,000, respectively, relating to
allocations of corporate administrative expenses and actual expenses incurred by
P.T. Digicon for salary cost, insurance and equipment charges. Advances from
Veritas DGC to P.T. Digicon of $12,479,000 and $13,847,000 at July 31, 1999 and
1998, respectively, have no formal repayment terms and do not bear interest.
22
<PAGE> 25
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
JULY 31,
--------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Senior notes due October 2003, at 9 3/4%.................... $135,000 $75,000
Equipment purchase obligations maturing through September
2000, at 10%.............................................. 251 561
-------- -------
Total............................................. 135,251 75,561
Less current maturities..................................... 240 289
-------- -------
Due after one year................................ $135,011 $75,272
======== =======
</TABLE>
The senior notes are due in October 2003 with interest payable
semi-annually at 9 3/4% per annum. The senior notes are unsecured and are
effectively subordinated to all secured debt of Veritas DGC with respect to the
assets securing such debt and to all debt of its subsidiaries whether secured or
unsecured. The indenture relating to the senior notes contains certain covenants
which limit Veritas DGC's ability to, among other things, incur additional debt,
pay dividends and complete mergers, acquisitions and sales of assets. Upon a
change in control of Veritas DGC, as defined in the indenture, the holders of
the senior notes have the right to require Veritas DGC to purchase all or a
portion of such holder's senior note at a price equal to 101% of the aggregate
principal amount. Veritas DGC has the right to redeem the senior notes, in whole
or part, on or after October 15, 2000. Under certain conditions, Veritas DGC may
redeem up to $35.0 million in aggregate principal amount of the senior notes
prior to October 15, 1999.
Veritas DGC maintains a revolving credit facility, expiring July 2001, with
commercial lenders that provides for advances up to the lesser of $50.0 million
or a defined borrowing base (32.1 million at July 31, 1999). Advances bear
interest, at Veritas DGC's election, at LIBOR or prime rate (8% at July 31,
1999) plus a margin based on certain financial ratios maintained by Veritas DGC.
Advances are secured by certain accounts receivable for a limited amount.
Covenants in the agreement limit, among other things, Veritas DGC's right to
take certain actions, including creating secured indebtedness. In addition, the
agreement requires Veritas DGC to maintain certain financial ratios. No advances
were outstanding at July 31, 1999 and July 31, 1998 under the credit agreement,
although $5.8 million in letters of credit had been issued under the facility.
Veritas DGC's equipment purchase obligations represent installment loans
and capitalized lease obligations primarily related to computer and geophysical
equipment.
Annual maturities of long-term debt for the next five years are as follows:
<TABLE>
<CAPTION>
ANNUAL
FISCAL YEAR MATURITIES
- ----------- --------------
(IN THOUSANDS)
<S> <C>
2000.................................................. $ 240
2001.................................................. 11
2004.................................................. 135,000
--------
Total....................................... $135,251
========
</TABLE>
During the year ended July 31, 1999, Veritas DGC incurred interest costs of
$12,808,000. Of this amount, for the years ended July 31, 1999 and 1998 Veritas
DGC capitalized $185,000 and $800,000, respectively. The capitalized amount
represents costs for leasehold improvements to a chartered vessel. No interest
was capitalized during the years ended July 31, 1997.
23
<PAGE> 26
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities include the following:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and benefits................................ $ 5,518 $12,216
Deferred revenues........................................... $10,717 $19,196
Accrued taxes other than income............................. $12,086 $ 9,556
</TABLE>
5. INCOME TAXES
Pretax income was taxed under the following jurisdictions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
----------------------------
1999 1998 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. .................................................. $34,560 $ 90,690 $21,098
Non-U.S................................................ (4,397) 9,514 9,211
------- -------- -------
Total........................................ $30,163 $100,204 $30,309
======= ======== =======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current -- U.S. ........................................ $ 4,916 $36,616 $ 3,352
Deferred -- U.S. ....................................... 3,939 (5,469) (2,940)
Current -- Non-U.S...................................... 3,742 4,952 3,634
Deferred -- Non-U.S..................................... (3,031) (1,881) 2,016
------- ------- -------
Total......................................... $ 9,566 $34,218 $ 6,062
======= ======= =======
</TABLE>
A reconciliation of income tax expense computed at the U.S. statutory rate
to the provision reported in the consolidated statements of income is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
----------------------------
1999 1998 1997
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax at the U.S. statutory rate.................. $10,557 $35,071 $ 10,608
Increase (reduction) in taxes resulting from:
Non-U.S. earnings taxed at other than the U.S.
statutory rate.................................... (1,719) (1,349) 1,159
Write-off of investment.............................. (10,126)
Contingency.......................................... 1,661 1,036 2,877
Non-U.S. losses with no tax recovery................. 1,584 650 (247)
Foreign tax credit net of withholding tax............ (7,466) (9,714) 403
U.S. tax on Subpart F income and dividends........... 4,711 6,688
U.S. tax on branch operations........................ 182 2,567 501
Prior year tax return to tax provision
reconciliation.................................... (771) (366) 344
State Income Tax..................................... 474 590 274
Other................................................ 353 (955) 269
------- ------- --------
Total........................................ $ 9,566 $34,218 $ 6,062
======= ======= ========
</TABLE>
24
<PAGE> 27
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes result from the effect of transactions that are recognized
in different periods for financial and tax reporting purposes. The primary
components of Veritas DGC's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JULY 31,
-------------------------
1999 1998
----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Deferred tax assets:
Difference between book and tax basis of property and
equipment.............................................. $ 6,162 $ 4,067
Difference between book and tax basis of multi-client data
library................................................ 18,107 20,402
Net operating loss carryforwards.......................... 37,121 36,111
Tax credit carryforwards.................................. 19 334
-------- --------
Total............................................. 61,409 60,914
Deferred tax liabilities.................................... (211) (952)
-------- --------
Net deferred tax asset...................................... 61,198 59,962
Valuation allowance......................................... (38,078) (40,805)
-------- --------
Net deferred tax asset...................................... $ 23,120 $ 19,157
======== ========
</TABLE>
A valuation allowance is established when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
valuation allowance is then adjusted when the realization of deferred tax assets
becomes more likely than not. Adjustments are also made to recognize the
expiration of net operating loss and investment tax credit carryforwards, with
equal and offsetting adjustments to the related deferred tax asset. Should
Veritas DGC's income projections result in the conclusion that realization of
additional deferred tax assets is more likely than not, further adjustments to
the valuation allowance are made. Since Veritas DGC's quasi-reorganization with
respect to Digicon on July 31, 1991 the tax benefits of net operating loss
carryforwards existing at the date of the quasi-reorganization have been
recognized through a direct addition to paid-in capital, when realization is
more likely than not. The net reductions in the valuation allowance of
$2,727,000 during 1999 and $1,679,000 in 1998 resulted primarily from
recognition of the expected utilization of net operating loss carryforwards
generated prior to the quasi-reorganization and the expiration of investment tax
credits.
As of July 31, 1999, Veritas DGC had U.S. net operating loss carryforwards
of approximately $69,088,000 and investment tax credit carryforwards of
approximately $19,000. Approximately $44,546,000 of net operating loss
carryforwards and all of the investment tax credit carryforwards existed prior
to the quasi-
25
<PAGE> 28
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reorganization. The following schedule sets forth the expiration dates of the
U.S. and non-U.S. net operating losses.
<TABLE>
<CAPTION>
U.S. NET NON-U.S. NET
FISCAL YEAR OPERATING LOSS OPERATING LOSS
- ----------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C>
2000.............................................. $ 2,739 173
2001.............................................. 30,032 210
2002.............................................. 1,334
2003.............................................. 4,222 5,186
2004.............................................. 6,355 2,736
2005.............................................. 1,198
2006.............................................. 1,347 6,849
2007.............................................. 2,505
2009.............................................. 7,994 114
2010.............................................. 2,710
2011.............................................. 9,986
Indefinite........................................ 19,396
------- -------
Total................................... $69,088 $35,998
======= =======
</TABLE>
Internal Revenue Service regulations restrict the utilization of U.S. net
operating loss carryforwards and other tax benefits (such as investment tax
credits) for any company in which an "ownership change" (as defined in Section
382 of the Internal Revenue Code) has occurred. Veritas DGC has performed the
required testing and has concluded that two "ownership changes" have occurred.
The first occurred in connection with the issuance of common stock through a
public offering made by Veritas DGC on January 6, 1992. The utilization of U.S.
net operating loss carryforwards existing at the date of the first "ownership
change" is limited to approximately $4,041,000 per year. The second "ownership
change" occurred on August 30, 1996 as a result of the stock acquisition of
Veritas Energy Services Inc. The utilization of U.S. net operating losses
incurred between the first and second ownership changes is limited to
approximately $8,875,000 per year, which includes the limitation of
approximately $4,041,000 from the first ownership change. The second limitation
also applies to the limitation from the first ownership change that accumulated
during the periods between the first and second ownership changes. During the
years ended July 31, 1999 and 1998, Veritas DGC utilized approximately
$8,875,000 and $8,875,000 of limitation carryover, respectively.
Non-U.S. operations had net operating loss carryforwards of approximately
$35,998,000 at July 31, 1999, of which approximately $13,166,000 existed prior
to the quasi-reorganization. Approximately $15,457,000 of the total non-U.S. net
operating loss carryforwards are related to United Kingdom operations, have an
indefinite carryforward period, and are available to offset future profits in
Veritas DGC's current trade or business. Approximately $12,092,000 of the United
Kingdom net operating loss carryforwards existed prior to the
quasi-reorganization. Approximately $6,054,000 of the total non-U.S. net
operating loss carryforwards are related to Oman operations, were generated
after the quasi-reorganization and have a carryforward period of five years.
Veritas DGC considers the undistributed earnings of its non-U.S.
subsidiaries to be permanently reinvested. Veritas DGC has not provided deferred
U.S. income tax on those earnings, as it is not practicable to estimate the
amount of additional tax that might be payable should these earnings be remitted
or deemed remitted as dividends or if Veritas DGC should sell its stock in the
subsidiaries.
26
<PAGE> 29
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENT LIABILITIES
Total rentals of vessels, equipment and office facilities charged to
operations amounted to $62,473,000, $57,476,000 and $37,332,000 for the years
ended July 31, 1999, 1998 and 1997, respectively.
Minimum rentals payable under operating leases, principally for office
space and vessel charters with remaining noncancellable terms of at least one
year are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR MINIMUM RENTALS
- ----------- ----------------
(IN THOUSANDS)
<S> <C>
2000................................................. $30,083
2001................................................. 19,410
2002................................................. 15,090
2003................................................. 13,309
2004................................................. 13,300
2005-2013............................................ 35,586
</TABLE>
During 1993 Veritas DGC purchased occurrence-based workers compensation
insurance. The policies for the years ended July 31, 1999 and 1998 were issued
under a guaranteed cost program and, accordingly, there were no deductibles.
Management has evaluated the adequacy of the accrual for the liability for
incurred but unreported workers compensation claims and has determined that the
ultimate resolution of any such claims would not have a material adverse impact
on the financial position of Veritas DGC.
7. EMPLOYEE BENEFITS
Veritas DGC maintains a 401(k) plan in which employees of Veritas DGC's
majority-owned domestic subsidiaries and certain foreign subsidiaries are
eligible to participate. However, employees of foreign subsidiaries who are
covered under a foreign deferred compensation plan are not eligible. Employees
are permitted to make contributions of up to 10% of their salary to a maximum of
$9,500 per year. Generally, Veritas DGC will contribute an amount equal to
one-half of the employee's contribution of up to $8,000 or 8% of the employee's
salary (whichever is less); however, if consolidated pre-tax income for any
fiscal year is less than the amount required to be contributed by Veritas DGC,
Veritas DGC may elect to reduce its contribution, but in no event may it reduce
the total contribution to less than 25% of the employee contribution. Veritas
DGC may make additional contributions from its current or cumulative net profits
in an amount determined by the Board of Directors. Veritas DGC's matching
contributions to the 401(k) plan were $741,000 in 1999, $679,000 in 1998 and
$426,000 in 1997.
Veritas DGC has an employee nonqualified stock option plan under which
options are granted to officers and key employees. Options generally vest over a
period of time and are exercisable over a ten-year period but may not be
exercised earlier than six months after the grant date. The exercise price for
each option shall not be less than the lesser of (i) the fair market value of
the common stock on the grant date or (ii) the average fair market value of the
common stock during the 30 trading days ending on the trading day next preceding
the grant date. Veritas DGC has authorized 3,954,550 shares of common stock to
be issued under the plan.
Veritas DGC also has a stock option plan for non-employee directors (the
"Director Plan") under which options are granted to non-employee directors of
Veritas DGC. The Director Plan provides that every year each eligible director
is granted options to purchase 5,000 shares of Veritas DGC's common stock which
vest over periods up to four years and are exercisable over ten years. The
exercise price for each option granted is
27
<PAGE> 30
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair market value at the date of grant, as defined. Veritas DGC has authorized
600,000 shares of common stock to be issued under the Director Plan.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1999
--------------------------------------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE GRANT AVERAGE
NUMBER OF AVERAGE DATE FAIR CONTRACTUAL
SHARES EXERCISE PRICE VALUE LIFE
--------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
Beginning balance............................ 1,022,539 $18.00
Options granted.............................. 1,019,824 $11.08 7.55 10
Options exercised............................ (23,883) $ 9.81
Options forfeited............................ (90,432) $18.91
---------
Ending balance............................... 1,928,048 $14.43
=========
Options exercisable.......................... 789,781 $14.15
=========
Ending balance by range of exercise price:
$ 4.13-$ 6.20.............................. 99,081 $ 5.72 5.2
$ 6.20-$ 9.29.............................. 89,787 $ 7.30 3.8
$ 9.29-$13.94.............................. 1,004,456 $10.92 9.2
$13.94-$20.91.............................. 647,845 $19.35 7.4
$20.91-$31.36.............................. 27,232 $25.39 7.8
$31.36-$47.04.............................. 55,820 $39.57 7.8
$47.04-$56.50.............................. 3,827 $52.58 7.9
---------
Ending balance.......................... 1,928,048
=========
Options exercisable by range of exercise
price:
$ 4.13-$ 6.20.............................. 99,081 $ 5.72
$ 6.20-$ 9.29.............................. 89,787 $ 7.30
$ 9.29-$13.94.............................. 282,475 $11.26
$13.94-$20.91.............................. 281,010 $19.38
$20.91-$31.36.............................. 11,889 $25.27
$31.36-$47.04.............................. 24,316 $39.41
$47.04-$56.50.............................. 1,223 $52.63
---------
Options exercisable..................... 789,781
=========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1998
-------------------------------------------
WEIGHTED
WEIGHTED AVERAGE GRANT
NUMBER OF AVERAGE DATE FAIR
SHARES EXERCISE PRICE VALUE
---------- -------------- -------------
<S> <C> <C> <C>
Beginning balance...................................... 1,276,364 $15.18
Options granted........................................ 133,426 $30.95 $21.41
Options exercised...................................... (326,733) $11.94
Options forfeited...................................... (60,518) $19.78
----------
Ending balance......................................... 1,022,539 $18.00
==========
Options exercisable.................................... 366,482 $12.38
==========
</TABLE>
28
<PAGE> 31
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1997
-------------------------------------------
WEIGHTED
WEIGHTED AVERAGE GRANT
NUMBER OF AVERAGE DATE FAIR
SHARES EXERCISE PRICE VALUE
---------- -------------- -------------
<S> <C> <C> <C>
Beginning balance...................................... 837,840 $ 8.30
Options granted........................................ 837,241 $19.38 $13.66
Options exercised...................................... (360,385) $ 8.82
Options forfeited...................................... (38,332) $16.30
----------
Ending balance......................................... 1,276,364 $15.18
==========
Options exercisable.................................... 467,536 $ 7.93
==========
</TABLE>
The weighted average fair values of options granted are determined using
the Black-Scholes option valuation method assuming no expected dividends. Other
assumptions used are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.5% 6.1% 6.6%
Expected volatility............................... 49.7% 49.6% 50.2%
Expected life..................................... 10.0 years 10.0 years 10.0 years
</TABLE>
In conjunction with certain employment agreements, Veritas DGC issued
13,025 and 10,000 shares of restricted stock with weighted average grant date
fair values of $33.66 and $20.25 per share, respectively, during the years ended
July 31, 1998 and 1997, respectively, to certain individuals in exchange for
services rendered over a three-year period.
On November 1, 1997, Veritas DGC initiated a compensatory employee stock
purchase plan for up to 500,000 shares of common stock. Participation is
voluntary and substantially all full-time employees meeting limited eligibility
requirements may participate. Contributions are made through payroll deductions
and may not be less than 1% or more than 15% of the participant's base pay as
defined. The participant's option to purchase common stock is deemed to be
granted on the first day and exercised on the last day of the fiscal quarter at
a price which is the lower of 85% of the market price on the first or last day
of the fiscal quarter. During the year ended July 31, 1999, 142,490 shares of
common stock were issued with a weighted average grant date fair value of $14.71
per share. During the year ended July 31, 1998, 52,731 shares of common stock
were issued with a weighted average grant date fair value of $35.37 per share.
On June 9, 1998, Veritas DGC initiated a restricted stock plan for up to
50,000 shares. The eligibility of an employee and the terms and amount of the
grant are determined by the Board of Directors' Compensation Committee.
The following restricted shares were issued for the fiscal years ended 1999
and 1998.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1999
- -------------------------------------------------------------
WEIGHTED
NUMBER OF AVERAGE GRANT
SHARES GRANTED GRANT DATE PRICE VESTING PERIOD
- -------------- ----------- ------------- --------------
<S> <C> <C> <C>
1,500 August 1998 $27.81 3 Years
25,579 March 1999 $11.31 1 Year
</TABLE>
29
<PAGE> 32
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998
- -------------------------------------------------------------
WEIGHTED
NUMBER OF AVERAGE GRANT
SHARES GRANTED GRANT DATE PRICE VESTING PERIOD
- -------------- ----------- ------------- --------------
<S> <C> <C> <C>
3,000 June 1998 $46.75 3 Years
1,400 July 1998 $35.25 3 Years
</TABLE>
Compensation expense relating to the stock-based compensation plans
described above was $466,000, $506,000, and $23,000 for the years ended July 31,
1999, 1998, and 1997, respectively. The effect on net income and earnings per
share that would have been recorded using the fair value based method as
required by SFAS 123 is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Reported net income.................................. $20,294 $66,958 $25,125
======= ======= =======
Pro forma net income................................. $17,215 $64,498 $24,138
======= ======= =======
Reported net income per common share -- basic........ $ 0.89 $ 2.96 $ 1.33
======= ======= =======
Pro forma earnings per common share -- basic......... $ 0.76 $ 2.85 $ 1.28
======= ======= =======
Reported net income per common share -- diluted...... $ 0.88 $ 2.87 $ 1.30
======= ======= =======
Pro forma earnings per common share -- diluted....... $ 0.75 $ 2.77 $ 1.25
======= ======= =======
</TABLE>
The effect on net income and earnings per share may not be representative
of the effects on future net income and earnings per share because some options
vest over several years and additional awards may be granted.
Veritas DGC maintains a contributory defined benefit pension plan (the
"Pension Plan") for eligible participating employees in its United Kingdom
offices. Monthly contributions by employees are equal to 4% of their salaries
with Veritas DGC providing an additional contribution in an actuarially
determined amount necessary to fund future benefits to be provided under the
Pension Plan. Benefits provided are based upon 1/60 of the employee's final
pensionable salary (as defined) for each complete year of service up to 2/3 of
the employee's final pensionable salary and increase annually in line with
inflation subject to a maximum of 5% per annum. The Pension Plan also provides
for 50% of such actual or expected benefits to be paid to a surviving spouse
upon the death of a participant. Pension Plan assets consist mainly of
investments in marketable securities which are held and managed by an
independent trustee. The net periodic pension costs are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service costs (benefits earned during the period)........... $ 578 $ 457 $ 238
Interest costs on projected benefit obligation.............. 581 441 384
Actual return on plan assets................................ (491) (695) (392)
Net amortization and deferral............................... 159 224 5
----- ----- -----
Net periodic pension costs.................................. $ 827 $ 427 $ 235
===== ===== =====
</TABLE>
30
<PAGE> 33
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the Pension Plan is as follows:
<TABLE>
<CAPTION>
JULY 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Plan assets at fair value................................... $ 7,573 $ 6,443
Projected benefit obligation:
Actuarial present value of accumulated vested benefit
obligations............................................ 10,060 7,400
Effect of future salary increases......................... 2,420 1,492
------- -------
Total projected benefit obligation................ 12,480 8,892
------- -------
Projected benefit obligation in excess of plan assets....... (4,907) (2,449)
Unrecognized prior service cost.............................
Unrecognized net loss....................................... 2,948 2,243
------- -------
Pension liability........................................... $(1,959) $ (206)
======= =======
</TABLE>
The weighted average assumptions used to determine the projected benefit
obligation and the expected long-term rate of return on assets are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JULY 31,
---------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Discount rate............................................... 6.0% 6.5% 8.0%
Rates of increase in compensation levels.................... 4.0% 4.5% 6.0%
Expected long-term rate of return on assets................. 6.5% 7.0% 8.5%
</TABLE>
The following is a reconciliation of the beginning and ending balances of
the benefit obligation and the fair value of plan assets:
<TABLE>
<CAPTION>
JULY 31,
----------------
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Benefit obligation at beginning of year..................... $ 8,892 $5,479
Service cost................................................ 578 457
Interest cost............................................... 581 441
Contributions by plan participants.......................... 249 198
Actuarial gains and losses.................................. 2,237 2,367
Benefits paid............................................... (57) (50)
------- ------
Benefit obligation at end of year........................... $12,480 $8,892
======= ======
Fair value of plan assets at beginning of year.............. $ 6,443 $5,277
Actual return on plan assets................................ 491 695
Employer contribution....................................... 447 323
Plan participants' contributions............................ 249 198
Benefits paid............................................... (57) (50)
------- ------
Fair value of plan assets at end of year.................... $ 7,573 $6,443
======= ======
</TABLE>
8. UNREALIZED LOSS ON INVESTMENTS -- AVAILABLE FOR SALE
In April 1999, Veritas DGC exchanged a $4.7 million account receivable from
Miller Exploration Company (Miller), a publicly traded company, for a long term
note receivable paying 18% interest. Interest is paid in common stock warrants,
with an exercise price of $0.01 per share, in advance, at six month intervals.
31
<PAGE> 34
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The common stock underlying these warrants was registered with the SEC in August
1999. In addition, Veritas DGC Inc. exchanged an account receivable from Brigham
Exploration Company (Brigham), a publicly traded company, for shares of Brigham
common stock. The cost basis of the investments available for sale is determined
by the fair market value on the date received.
<TABLE>
<CAPTION>
JULY 31, 1999
---------------------------------
UNREALIZED FAIR
COST BASIS (LOSS)/GAIN VALUE
---------- ----------- ------
<S> <C> <C> <C>
Brigham common stock.................................. $3,809 $(1,143) $2,666
Miller Warrants....................................... 419 586 1,005
------ ------- ------
$4,228 $ (557) $3,671
====== ======= ======
</TABLE>
9. COMMON AND PREFERRED STOCK
The Board of Directors, without any action by the stockholders, may issue
up to one million shares of preferred stock, par value, $.01, in one or more
series and determine the voting rights, preferences as to dividends and in
liquidation and the conversion and other rights of such stock. There are no
shares of preferred stock outstanding as of July 31, 1999.
On May 27, 1997, the Board of Directors of Veritas DGC declared a
distribution of one right for each outstanding share of common stock or
Exchangeable Stock to shareholders of record at the close of business on June
12, 1997 and designated 400,000 shares of the authorized preferred stock as a
class to be distributed under a shareholder rights agreement. Upon the
occurrence of certain events enumerated in the shareholder rights agreement,
each right entitles the registered holder to purchase a fraction of a share of
Veritas DGC's preferred stock or the common stock of an acquiring company. The
rights, among other things, will cause substantial dilution to a person or group
that attempts to acquire Veritas DGC. The rights expire on May 15, 2007 and may
be redeemed prior to that date.
In July 1998, the Board of Directors approved a stock repurchase program
under which Veritas DGC is authorized to buy up to 1,000,000 shares of its
outstanding common stock in open market transactions. At July 31, 1999, Veritas
DGC had repurchased 299,000 shares and the program had expired.
10. OTHER COSTS AND EXPENSES
Other costs and expenses consist of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
-----------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net foreign currency exchange (gains) losses............. $(1,845) $ 2,333 $ 46
Net loss on disposition of property and equipment........ 849 1,549 1,151
Interest income.......................................... (4,210) (4,220) (552)
Other.................................................... 156 (15)
------- ------- ------
Total.......................................... $(5,050) $ (338) $ 630
======= ======= ======
</TABLE>
32
<PAGE> 35
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EARNINGS PER COMMON SHARE
Earnings per common share and earnings per common share -- assuming
dilution are computed as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net income................................................. $20,294 $66,958 $25,125
======= ======= =======
Weighted average common shares............................. 22,733 22,594 18,898
======= ======= =======
Net income per common share -- basic....................... $ .89 $ 2.96 $ 1.33
======= ======= =======
Weighted average common shares -- diluted:
Weighted average common shares........................... 22,733 22,594 18,898
Shares issuable from assumed conversion of:
Options............................................... 268 721 432
Warrants.............................................. 34
------- ------- -------
Total............................................ 23,001 23,315 19,364
======= ======= =======
Net income per common share -- diluted..................... $ .88 $ 2.87 $ 1.30
======= ======= =======
</TABLE>
The following options to purchase common shares have been excluded from the
computation assuming dilution for the years ended July 31, 1999 and 1998 because
the options' exercise price exceeded the average market price of the underlying
common shares. There were no anti-dilutive options for the year ended July 31,
1997.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
----------------------------
1999 1998
-------------- -----------
<S> <C> <C>
Number of options............................... 807,992 22,810
Exercise price range............................ $16 7/8 - $56 1/2 $42 - $56 1/2
Expiring through................................ November 2008 July 2008
</TABLE>
12. SEGMENT AND GEOGRAPHICAL INFORMATION
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise." It requires
Veritas DGC to disclose certain financial information in both annual and interim
reporting about "operating segments." Operating segments are components of a
company that are evaluated regularly by management in deciding how to allocate
its resources and in assessing its performance. The statement also requires
disclosure about the countries from which Veritas DGC derives its revenues and
in which it employs its long-lived assets. Because Veritas DGC's operations
consist of one segment, geophysical technology, no specific segment disclosure
is required. The geographical information required is presented below.
33
<PAGE> 36
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables presents consolidated revenues by country based on the
location of the use of the product or service for the years ended July 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Geographic areas:
Europe............................................. $ 35,850 $ 51,089 $ 42,798
Middle East / Africa............................... 20,785 14,090 6,370
Asia Pacific....................................... 35,091 42,462 30,232
Latin America...................................... 61,187 93,494 51,276
Canada............................................. 32,325 47,059 52,141
United States...................................... 203,667 280,765 179,898
-------- -------- --------
Totals..................................... $388,905 $528,959 $362,715
======== ======== ========
</TABLE>
The following table presents long-lived assets by country based on the
location of the asset.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Geographic areas:
Europe............................................. $ 11,877 $ 39,780 $ 10,231
Middle East / Africa............................... 6,859 8,336 9,712
Asia Pacific....................................... 16,186 21,974 12,991
Latin America...................................... 10,246 10,893 16,702
Canada............................................. 6,609 13,008 17,458
United States...................................... 104,594 80,929 65,660
-------- -------- --------
Totals..................................... $156,371 $174,920 $132,754
======== ======== ========
</TABLE>
During fiscal year 1999 Royal Dutch/Shell and its subsidiaries accounted
for about 12% of Veritas DGC's revenue. No other customer accounted for 10% or
more of revenue in fiscal year 1999. No single customer accounted for 10% or
more of revenue in fiscal years 1998 and 1997.
Veritas DGC generates its revenue in the exploration and production ("E&P")
sector of the petroleum industry and as such, is subject to fluctuations in E&P
spending. E&P spending is directly related to the prices of oil and gas which
are subject to wide and relatively unpredictable variations.
13. SELECTED UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1999
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $146,799 $101,652 $74,610 $65,844
Gross profit.................................... 43,288 31,637 24,980 23,000
Net income...................................... 13,622 5,436 505 731
Net income per common share -- basic*........... .60 .24 .02 .03
Net income per common share -- diluted*......... .60 .24 .02 .03
</TABLE>
34
<PAGE> 37
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1998
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $142,186 $123,569 $122,810 $140,394
Gross profit.................................... 48,933 42,765 47,429 42,936
Net income...................................... 21,319 17,677 16,062 11,900
Net income per common share -- basic*........... .95 .79 .71 .52
Net income per common share -- diluted*......... .94 .76 .69 .51
</TABLE>
* Quarterly per share amounts may not total to annual per share amounts because
weighted average common shares for the quarter may vary from weighted average
common shares for the year.
14. SUBSEQUENT EVENTS
SHELF REGISTRATION
On August 31, 1999, Veritas DGC filed a shelf registration with the SEC
allowing the issuance of up to $200 million in debt, preferred stock or common
stock. A prospectus supplement fully describing the terms of each offering will
be filed for each future issuance under this registration statement.
CORPORATE HEADQUARTERS
On September 10, 1999, Veritas DGC entered into a contract related to the
construction and lease of a new corporate headquarters in Houston, Texas.
Pursuant to the agreement, the developer purchased 18.5 acres of land from
Veritas DGC for $4.2 million, will build a 220,000 sq. ft. office complex, and
will lease the facility to Veritas DGC for fifteen years. Veritas DGC expects to
move its 500 Houston employees, currently occupying five facilities, into the
complex in October 2000.
ENERTEC ACQUISITION
On September 30, 1999, Veritas DGC, VESI and Enertec Resource Services
Inc., a Canadian company, consummated a business combination (the "Combination")
whereby Enertec became a wholly owned subsidiary of VESI. As a result of the
Combination, each share of Enertec stock was converted into the right to receive
VESI Class A Exchangeable Series 1 stock (the "Exchangeable" shares) at an
exchange ratio of 0.345 of a share of the Exchangeable stock for each share of
Enertec. All of the holders of Enertec common shares became holders of
Exchangeable shares and accordingly, 2,437,527 shares of Exchangeable stock were
issued. Each Exchangeable share is convertible, at the option of the
shareholder, into one share of Veritas DGC's common stock. Outstanding options
to purchase shares of Enertec stock were converted into options to purchase
shares of Veritas DGC's common stock at the exchange ratio of 0.345 of a Veritas
DGC stock option for each Enertec option.
The total purchase price of Enertec is estimated at $29.6 million, which is
comprised of $24.5 million of stock, $2.5 million of Veritas DGC options and
$2.6 million of business combination costs. The preliminary allocation of
purchase price, in accordance with APB 16, yields approximately $7.0 million of
current assets, $20.7 million of property and long-term assets, $4.2 million of
current liabilities, $0.1 million of long term liabilities and $6.2 million of
goodwill. This allocation is subject to adjustment over the next fiscal year.
DEBT REPURCHASE
On September 24, 1999, Veritas DGC repurchased $5.5 million of 9 3/4%
senior notes on the open market at a price of $5.7 million.
35
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to the
material appearing under the headings "Election of Directors -- Nominees" and
"Other Information -- Executive Officer Tenure and Identification" in the Proxy
Statement for the 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
material appearing under the heading "Other Information -- Executive
Compensation" in the Proxy Statement for the 1999 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
material appearing under the headings "Election of Directors" and "Other
Information -- Certain Stockholders" in the Proxy Statement for the 1999 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
material appearing under the heading "Other Information -- Certain Transactions"
in the Proxy Statement for the 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Report of Independent Accountants........................... 13
Consolidated Statements of Income and Comprehensive Income
for the Three Years Ended July 31, 1999................... 14
Consolidated Balance Sheets as of July 31, 1999 and 1998.... 15
Consolidated Statements of Cash Flows for the Three Years
Ended July 31, 1999....................................... 16-17
Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended July 31, 1999................... 18
Notes to Consolidated Financial Statements.................. 19-35
</TABLE>
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All other financial statement schedules are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the consolidated financial statements or the notes thereto.
Individual financial statements of 50% or less-owned companies and joint
ventures accounted for by the equity method have been omitted because such 50%
or less-owned companies and joint ventures, considered in the aggregate as a
single subsidiary, would not constitute a significant subsidiary.
FORM 8-K REPORTS DURING THE QUARTER ENDED JULY 31, 1999
No Form 8-K reports were filed during the quarter ended July 31, 1999.
36
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
3-A) -- Restated Certificate of Incorporation with amendments of
Veritas DGC Inc. dated August 30, 1996. (Exhibit 3.1 to
Veritas DGC Inc.'s Current Report on Form 8-K dated
September 16, 1996 is incorporated herein by reference.)
3-B) -- Certificate of Ownership and Merger of New Digicon Inc.
and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s
Registration Statement No. 33-43873 dated November 12,
1991 is incorporated herein by reference.)
3-C) -- By-laws of New Digicon Inc. dated June 24, 1991. (Exhibit
3-C to Digicon Inc.'s Registration Statement No. 33-43873
dated November 12, 1991 is incorporated herein by
reference.)
*3-D) -- Certificate of Amendment to Restated Certificate of
Incorporation of Veritas DGC Inc. dated September 30,
1999.
4-A) -- Specimen certificate for Senior Notes (Series A).
(Included as part of Section 2.2 of Exhibit 4-B to
Veritas DGC Inc.'s Registration Statement No. 333-12481
dated September 20, 1996 is incorporated herein by
reference.)
4-B) -- Form of Trust Indenture relating to the 9 3/4% Senior
Notes due 2003 of Veritas DGC Inc. between Veritas DGC
Inc. and Fleet National Bank, as trustee. (Exhibit 4-B to
Veritas DGC Inc.'s Registration Statement No. 333-12481
dated September 20, 1996 is incorporated herein by
reference.)
4-C) -- Specimen Veritas DGC Inc. Common Stock certificate.
(Exhibit 4-C to Veritas DGC Inc.'s Form 10-K for the year
ended July 31, 1996 is incorporated herein by reference.)
4-D) -- Rights Agreement between Veritas DGC Inc. and ChaseMellon
Shareholder Services, L.L.C. dated as of May 15, 1997.
(Exhibit 4.1 of Veritas DGC Inc.'s Current Report on Form
8-K filed May 27, 1997 is incorporated herein by
reference.)
4-E) -- Form of Restricted Stock Grant Agreement. (Exhibit 4.8 to
Veritas DGC Inc.'s Registration Statement No. 333-48953
dated March 31, 1998 is incorporated herein by
reference.)
4-F) -- Restricted Stock Plan as Amended and Restated September
14, 1999. (Exhibit 4.8 to Veritas DGC Inc.'s Registration
Statement No. 333-87223 dated September 16, 1999 is
incorporated herein by reference.)
4-G) -- Key Contributor Incentive Plan as Amended and Restated
dated March 9, 1999. (Exhibit 4.9 to Veritas DGC Inc.'s
Registration Statement No. 333-74305 dated March 12, 1999
is incorporated herein by reference.)
4-H) -- Specimen for Senior Notes (Series C). (Exhibit 4-K to
Veritas DGC Inc.'s Form 10-Q for the quarter ended
January 31, 1999 is incorporated herein by reference.)
4-I) -- Indenture relating to the 9 3/4% Senior Notes due 2003,
Series B and Series C of Veritas DGC Inc. between Veritas
DGC Inc. and State Street Bank and Trust Company dated
October 28, 1998. (Exhibit 4.3 to Veritas DGC Inc.'s
Current Report on Form 8-K dated November 12, 1998 is
incorporated herein by reference.)
9-A) -- Voting and Exchange Trust Agreement dated August 30, 1996
among Digicon Inc., Veritas Energy Services Inc. and the
R-M Trust Company. (Exhibit 9.1 of Veritas DGC Inc.'s
Current Report on Form 8-K dated September 16, 1996 is
incorporated herein by reference.)
*9-B) -- Voting and Exchange Trust Agreement dated September 30,
1999 among Veritas DGC Inc., Veritas Energy Services Inc.
and CIBC Mellon Trust Company.
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
10-A) -- Support Agreement dated August 30, 1996 between Digicon
Inc. and Veritas Energy Services Inc. (Exhibit 10.1 of
Veritas DGC Inc.'s Current Report on Form 8-K dated
August 30, 1996 is incorporated herein by reference.)
10-B) -- Second Amended and Restated 1992 Non-Employee Director
Stock Option Plan. (Exhibit 10-B to Veritas DGC Inc.'s
Form 10-Q for the quarter ended October 31, 1998 is
incorporated herein by reference.)
*10-C) -- Fifth Amended and Restated 1992 Employee Nonqualified
Stock Option Plan.
10-D) -- 1997 Employee Stock Purchase Plan. (Exhibit 4.1 to
Veritas DGC Inc.'s Registration Statement No. 333-38377
dated October 21, 1997 is incorporated herein by
reference.)
10-E) -- Restricted Stock Agreement dated April 1, 1997 between
Veritas DGC Inc. and Anthony Tripodo. (Exhibit 10-O to
Veritas DGC Inc.'s Form 10-K for the year ended July 31,
1997 is incorporated herein by reference.)
10-F) -- Employment Agreement executed by David B. Robson.
(Exhibit 10-L to Veritas Inc.'s Form 10-K for the year
ended July 31, 1997 is incorporated herein by reference.)
10-G) -- Employment Agreement executed by Stephen J. Ludlow.
(Exhibit 10-B to Veritas DGC Inc.'s Form 10-Q for the
quarter ended April 30, 1997 is incorporated herein by
reference.)
10-H) -- Employment Agreement executed by Anthony Tripodo.
(Exhibit 10-I to Veritas DGC Inc.'s Form 10-Q for the
quarter ended April 30, 1997 is incorporated herein by
reference.)
10-I) -- Employment Agreement executed by Rene M.J. VandenBrand.
(Exhibit 10-N to Veritas DGC Inc.'s Form 10-K for the
year ended July 31, 1997 is incorporated herein by
reference.)
*10-J -- Employment Agreement executed by Timothy L. Wells.
10-K) -- Credit Agreement dated July 27, 1998 among Veritas DGC
Inc., as borrower, and Bank One, Texas, N.A., as issuing
bank, as a bank and as agent for the banks, and the banks
named therein. (Exhibit 10-K to Veritas DGC Inc.'s Form
10-K for the year ended July 31, 1998 is incorporated
herein by reference.)
10-L) -- First Amendment to Credit Agreement among Veritas DGC
Inc., as borrower, and Bank One, Texas, N.A., as issuing
bank, as a bank and as agent for the banks, and the banks
named therein dated October 23, 1998. (Exhibit 10-L to
Veritas DGC Inc.'s Form 10-Q for the quarter ended
October 31, 1998 is incorporated herein by reference.)
10-M) -- Second Amendment to Credit Agreement among Veritas DGC
Inc., as borrower, and Bank One, Texas, N.A., as issuing
bank, as a bank and as agent for the banks, and the banks
named therein dated November 20, 1998. (Exhibit 10-M to
Veritas DGC Inc.'s Form 10-Q for the quarter ended
October 31, 1998 is incorporated herein by reference.)
*21) -- Subsidiaries of the Registrant.
*23) -- Consent of PricewaterhouseCoopers LLP.
*27) -- Financial Data Schedule for the year ended July 31, 1999.
(Filed electronically herewith.)
</TABLE>
- ---------------
* Filed herewith
38
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned; thereunto duly authorized, on the 15th day of
October, 1999.
VERITAS DGC INC.
By: /s/ DAVID B. ROBSON
-------------------------------------
David B. Robson
(Chairman of the Board and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant in the indicated capacities have
signed this report below on the 15th day of October, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ DAVID B. ROBSON Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer, Director
David B. Robson
/s/ STEPHEN J. LUDLOW Vice Chairman, Director
- -----------------------------------------------------
Stephen J. Ludlow
/s/ TIMOTHY L. WELLS President and Chief Operating Officer
- -----------------------------------------------------
Timothy L. Wells
/s/ ANTHONY TRIPODO Executive Vice President,
- ----------------------------------------------------- Chief Financial Officer and Treasurer
Anthony Tripodo
/s/ CLAYTON P. CORMIER Director
- -----------------------------------------------------
Clayton P. Cormier
/s/ RALPH M. EESON Director
- -----------------------------------------------------
Ralph M. Eeson
/s/ JAMES R. GIBBS Director
- -----------------------------------------------------
James R. Gibbs
/s/ STEVEN J. GILBERT Director
- -----------------------------------------------------
Steven J. Gilbert
/s/ STEPHEN J. LUDLOW Director
- -----------------------------------------------------
Stephen J. Ludlow
/s/ BRIAN F. MACNEILL Director
- -----------------------------------------------------
Brian F. MacNeill
/s/ JAN RASK Director
- -----------------------------------------------------
Jan Rask
</TABLE>
39
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
3-A) -- Restated Certificate of Incorporation with amendments of
Veritas DGC Inc. dated August 30, 1996. (Exhibit 3.1 to
Veritas DGC Inc.'s Current Report on Form 8-K dated
September 16, 1996 is incorporated herein by reference.)
3-B) -- Certificate of Ownership and Merger of New Digicon Inc.
and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s
Registration Statement No. 33-43873 dated November 12,
1991 is incorporated herein by reference.)
3-C) -- By-laws of New Digicon Inc. dated June 24, 1991. (Exhibit
3-C to Digicon Inc.'s Registration Statement No. 33-43873
dated November 12, 1991 is incorporated herein by
reference.)
*3-D) -- Certificate of Amendment to Restated Certificate of
Incorporation of Veritas DGC Inc. dated September 30,
1999.
4-A) -- Specimen certificate for Senior Notes (Series A).
(Included as part of Section 2.2 of Exhibit 4-B to
Veritas DGC Inc.'s Registration Statement No. 333-12481
dated September 20, 1996 is incorporated herein by
reference.)
4-B) -- Form of Trust Indenture relating to the 9 3/4% Senior
Notes due 2003 of Veritas DGC Inc. between Veritas DGC
Inc. and Fleet National Bank, as trustee. (Exhibit 4-B to
Veritas DGC Inc.'s Registration Statement No. 333-12481
dated September 20, 1996 is incorporated herein by
reference.)
4-C) -- Specimen Veritas DGC Inc. Common Stock certificate.
(Exhibit 4-C to Veritas DGC Inc.'s Form 10-K for the year
ended July 31, 1996 is incorporated herein by reference.)
4-D) -- Rights Agreement between Veritas DGC Inc. and ChaseMellon
Shareholder Services, L.L.C. dated as of May 15, 1997.
(Exhibit 4.1 of Veritas DGC Inc.'s Current Report on Form
8-K filed May 27, 1997 is incorporated herein by
reference.)
4-E) -- Form of Restricted Stock Grant Agreement. (Exhibit 4.8 to
Veritas DGC Inc.'s Registration Statement No. 333-48953
dated March 31, 1998 is incorporated herein by
reference.)
4-F) -- Restricted Stock Plan as Amended and Restated September
14, 1999. (Exhibit 4.8 to Veritas DGC Inc.'s Registration
Statement No. 333-87223 dated September 16, 1999 is
incorporated herein by reference.)
4-G) -- Key Contributor Incentive Plan as Amended and Restated
dated March 9, 1999. (Exhibit 4.9 to Veritas DGC Inc.'s
Registration Statement No. 333-74305 dated March 12, 1999
is incorporated herein by reference.)
4-H) -- Specimen for Senior Notes (Series C). (Exhibit 4-K to
Veritas DGC Inc.'s Form 10-Q for the quarter ended
January 31, 1999 is incorporated herein by reference.)
4-I) -- Indenture relating to the 9 3/4% Senior Notes due 2003,
Series B and Series C of Veritas DGC Inc. between Veritas
DGC Inc. and State Street Bank and Trust Company dated
October 28, 1998. (Exhibit 4.3 to Veritas DGC Inc.'s
Current Report on Form 8-K dated November 12, 1998 is
incorporated herein by reference.)
9-A) -- Voting and Exchange Trust Agreement dated August 30, 1996
among Digicon Inc., Veritas Energy Services Inc. and the
R-M Trust Company. (Exhibit 9.1 of Veritas DGC Inc.'s
Current Report on Form 8-K dated September 16, 1996 is
incorporated herein by reference.)
*9-B) -- Voting and Exchange Trust Agreement dated September 30,
1999 among Veritas DGC Inc., Veritas Energy Services Inc.
and CIBC Mellon Trust Company.
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10-A) -- Support Agreement dated August 30, 1996 between Digicon
Inc. and Veritas Energy Services Inc. (Exhibit 10.1 of
Veritas DGC Inc.'s Current Report on Form 8-K dated
August 30, 1996 is incorporated herein by reference.)
10-B) -- Second Amended and Restated 1992 Non-Employee Director
Stock Option Plan. (Exhibit 10-B to Veritas DGC Inc.'s
Form 10-Q for the quarter ended October 31, 1998 is
incorporated herein by reference.)
*10-C) -- Fifth Amended and Restated 1992 Employee Nonqualified
Stock Option Plan.
10-D) -- 1997 Employee Stock Purchase Plan. (Exhibit 4.1 to
Veritas DGC Inc.'s Registration Statement No. 333-38377
dated October 21, 1997 is incorporated herein by
reference.)
10-E) -- Restricted Stock Agreement dated April 1, 1997 between
Veritas DGC Inc. and Anthony Tripodo. (Exhibit 10-O to
Veritas DGC Inc.'s Form 10-K for the year ended July 31,
1997 is incorporated herein by reference.)
10-F) -- Employment Agreement executed by David B. Robson.
(Exhibit 10-L to Veritas Inc.'s Form 10-K for the year
ended July 31, 1997 is incorporated herein by reference.)
10-G) -- Employment Agreement executed by Stephen J. Ludlow.
(Exhibit 10-B to Veritas DGC Inc.'s Form 10-Q for the
quarter ended April 30, 1997 is incorporated herein by
reference.)
10-H) -- Employment Agreement executed by Anthony Tripodo.
(Exhibit 10-I to Veritas DGC Inc.'s Form 10-Q for the
quarter ended April 30, 1997 is incorporated herein by
reference.)
10-I) -- Employment Agreement executed by Rene M.J. VandenBrand.
(Exhibit 10-N to Veritas DGC Inc.'s Form 10-K for the
year ended July 31, 1997 is incorporated herein by
reference.)
*10-J -- Employment Agreement executed by Timothy L. Wells.
10-K) -- Credit Agreement dated July 27, 1998 among Veritas DGC
Inc., as borrower, and Bank One, Texas, N.A., as issuing
bank, as a bank and as agent for the banks, and the banks
named therein. (Exhibit 10-K to Veritas DGC Inc.'s Form
10-K for the year ended July 31, 1998 is incorporated
herein by reference.)
10-L) -- First Amendment to Credit Agreement among Veritas DGC
Inc., as borrower, and Bank One, Texas, N.A., as issuing
bank, as a bank and as agent for the banks, and the banks
named therein dated October 23, 1998. (Exhibit 10-L to
Veritas DGC Inc.'s Form 10-Q for the quarter ended
October 31, 1998 is incorporated herein by reference.)
10-M) -- Second Amendment to Credit Agreement among Veritas DGC
Inc., as borrower, and Bank One, Texas, N.A., as issuing
bank, as a bank and as agent for the banks, and the banks
named therein dated November 20, 1998. (Exhibit 10-M to
Veritas DGC Inc.'s Form 10-Q for the quarter ended
October 31, 1998 is incorporated herein by reference.)
*21) -- Subsidiaries of the Registrant.
*23) -- Consent of PricewaterhouseCoopers LLP.
*27) -- Financial Data Schedule for the year ended July 31, 1999.
(Filed electronically herewith.)
</TABLE>
- ---------------
* Filed herewith
<PAGE> 1
EXHIBIT 3-D
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
VERITAS DGC INC.
Veritas DGC Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the board of directors of the
Corporation, resolutions were duly adopted setting forth a proposed amendment
of the Restated Certificate of Incorporation of the Corporation, declaring said
amendment to be advisable and calling a meeting of the stockholders of the
Corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Restated Certificate of Incorporation of the
Corporation be amended as follows,
Article IV, Section 3(c) shall be deleted.
Article IV, Section 4 shall be and read in its entirety as follows:
Section 4.A. VESI Special Voting Stock Designated. A
series of previously outstanding Ordinary Shares, consisting of one such share,
has been duly designated as "Special Voting Stock" (hereinafter referred to as
the "VESI Special Voting Stock"). Each outstanding share of VESI Special
Voting Stock shall be entitled at any relevant date to the number of votes
determined in accordance with the "Plan of Arrangement" (as that term is
defined in that certain "Combination Agreement" dated as of May 10, 1996
(hereinafter referred to as the "VESI Combination Agreement"), by and between
Digicon Inc. and Veritas Energy Services Inc. ("VESI")) on all matters
presented to the stockholders. No dividend or distribution of assets shall be
paid to the holders of VESI Special Voting Stock. The VESI Special Voting
Stock is not convertible into any other class or series of the capital stock of
the Corporation or into cash, property or other rights, and may not be
redeemed. Any shares of VESI Special Voting Stock purchased or otherwise
acquired by the Corporation shall be deemed retired and shall be canceled and
may not thereafter be reissued or otherwise disposed of by the Corporation. So
long as any "VESI Exchangeable Shares" (i.e., "Exchangeable Shares," as that
term is defined in the VESI Combination Agreement) shall be outstanding, the
number of shares comprising the VESI Special Voting Stock shall not be
increased or decreased and no other term of the VESI Special Voting Stock shall
be amended, except upon the unanimous approval of all outstanding Ordinary
Shares.
Section 4.B. ERS Special Voting Stock Designated. A series of
Ordinary Shares, consisting of one such share, is hereby designated as "ERS
Special Voting Stock" (hereinafter referred to as "ERS Special Voting Stock").
Each outstanding share of ERS Special Voting Stock shall be entitled at any
relevant date to the number of votes determined in accordance with the "Plan of
Arrangement" (as that term is defined in that certain "Amended and Restated
Combination Agreement" dated as of March 30, 1999 (hereinafter referred to as
the "ERS Combination Agreement") by and between
1
<PAGE> 2
Veritas DGC Inc. and Enertec Resource Services Inc. ("ERS")) on all matters
presented to the stockholders. No dividend or distribution of assets shall be
paid to the holders of ERS Special Voting Stock. The ERS Special Voting Stock
is not convertible into any other class or series of the capital stock of the
Corporation or into cash, property or other rights, and may not be redeemed.
Any shares of ERS Special Voting Stock purchased or otherwise acquired by the
Corporation shall be deemed retired and shall be canceled and may not
thereafter be reissued or otherwise disposed of by the Corporation. So long as
any "ERS Exchangeable Shares" (i.e., "Exchangeable Shares," as that term is
defined in the ERS Combination Agreement) shall be outstanding, the number of
shares comprising the ERS Special Voting Stock shall not be increased or
decreased and no other term of the ERS Special Voting Stock shall be amended,
except upon the unanimous approval of all outstanding Ordinary Shares.
Section 4.C. Miscellaneous. Any reference herein to "Exchangeable
Shares" encompasses both the VESI Exchangeable Shares and the ERS Exchangeable
Shares.
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation law of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Larry L. Worden its Vice President, this 30th day of September,
1999.
/s/ LARRY L. WORDEN
-------------------------------
Larry L. Worden, Vice President
2
<PAGE> 1
EXHIBIT 9-B
VOTING AND EXCHANGE TRUST AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 30th day of September, 1999.
B E T W E E N:
VERITAS DGC INC.,
a corporation existing under the laws of the State of Delaware
(hereinafter referred to as "Veritas")
OF THE FIRST PART,
- and -
VERITAS ENERGY SERVICES INC.,
a corporation existing under the laws of the Province of
Alberta (hereinafter referred to as "VESI")
OF THE SECOND PART,
- and -
CIBC MELLON TRUST COMPANY,
a trust company existing under the laws of Canada
(hereinafter referred to as the "Trustee")
OF THE THIRD PART.
WHEREAS pursuant to a combination agreement dated as of March 30, 1999,
by and among Veritas, VESI and Enertec Resource Services Inc. ("Enertec") (such
agreement as it may be amended or restated is hereinafter referred to as the
"Combination Agreement") the parties agreed that on the Effective Date (as
defined in the Combination Agreement), Veritas and VESI would execute and
deliver a Voting and Exchange Trust Agreement containing the terms and
conditions set forth in Exhibit D to the Combination Agreement together with
such other terms and conditions as may be agreed to by the parties to the
Combination Agreement acting reasonably;
AND WHEREAS pursuant to an arrangement (the "Arrangement") effected by
Articles of Arrangement dated September 30, 1999 filed pursuant to the Business
Corporations Act (Alberta), each issued and outstanding common share of Enertec
(an "Enertec Common Share") was transferred to VESI in consideration for 0.345
issued and outstanding Class A Exchangeable Shares Series 1 of VESI (the "Series
1 Exchangeable Shares");
AND WHEREAS Appendix A of the above-mentioned Articles of Arrangement
sets forth the rights, privileges, restrictions and conditions attaching to the
Series 1 Exchangeable Shares (collectively, the "Exchangeable Share
Provisions"), a copy of which is attached hereto as Schedule "A";
<PAGE> 2
- 2 -
AND WHEREAS Veritas is to provide voting rights in Veritas to each
holder (other than Veritas and its Subsidiaries) from time to time of Series 1
Exchangeable Shares, such voting rights per Series 1 Exchangeable Share to be
equivalent to the voting rights per share of Veritas Common Stock (the "Veritas
Common Stock");
AND WHEREAS Veritas is to grant to and in favour of the holders (other
than Veritas and its Subsidiaries) from time to time of Series 1 Exchangeable
Shares the right, in the circumstances set forth herein, to require Veritas to
purchase from each such holder all or any part of the Series 1 Exchangeable
Shares held by the holder;
AND WHEREAS the parties desire to make appropriate provision and to
establish a procedure whereby voting rights in Veritas shall be exercisable by
holders (other than Veritas and its Subsidiaries) from time to time of Series 1
Exchangeable Shares by and through the Trustee, which will hold legal title to
one share of Veritas ERS Special Voting Stock (the "Veritas ERS Special Voting
Stock") to which voting rights attach for the benefit of such holders and
whereby the rights to require Veritas to purchase Series 1 Exchangeable Shares
from the holders thereof (other than Veritas and its Subsidiaries) shall be
exercisable by such holders from time to time of Series 1 Exchangeable Shares by
and through the Trustee, which will hold legal title to such rights for the
benefit of such holders;
AND WHEREAS these recitals and any statements of fact in this agreement
are made by Veritas and VESI and not by the Trustee;
NOW THEREFORE in consideration of the respective covenants and
agreements provided in this agreement and for other good and valuable
consideration (the receipt and sufficiency of which are hereby acknowledged),
the parties agree as follows:
1. DEFINITIONS AND INTERPRETATION
(a) DEFINITIONS. In this agreement, the following terms shall have
the following meanings:
"Aggregate Equivalent Vote Amount" means, with respect to any matter,
proposition or question on which holders of Veritas Common Stock are entitled to
vote, consent or otherwise act, the product of (i) the number of shares of
Series 1 Exchangeable Shares issued and outstanding and held by Holders
multiplied by (ii) the Equivalent Vote Amount.
"Applicable Laws" has the meaning set out in Section 5(j).
"Arrangement" has the meaning set out in the recitals hereto.
"Authorized Investments" means short term interest bearing or discount debt
obligations issued or guaranteed by the Government of Canada or a Province of
Canada or a Canadian chartered bank (which may include an affiliate or related
party of the Trustee, including without limitation Mellon Bank Canada and
Canadian Imperial Bank of Commerce) provided that each such obligation is rated
at least RI (middle) by DBRS Inc. or an equivalent rating by Canadian Bond
Rating Service.
<PAGE> 3
- 3 -
"Automatic Exchange Rights" means the benefit of the obligation of Veritas to
effect the automatic exchange of shares of Veritas Common Stock for Series 1
Exchangeable Shares pursuant to Section 5(l) hereof.
"Board of Directors" means the Board of Directors of VESI.
"Business Day" has the meaning set out in the Exchangeable Share Provisions.
"Combination Agreement" has the meaning set out in the recitals hereto.
"Equivalent Vote Amount" means, with respect any matter, proposition or question
on which holders of Veritas Common Stock are entitled to vote, consent or
otherwise act, the number of votes to which a holder of one share of Veritas
Common Stock is entitled with respect to such matter, proposition or question.
"Exchange Right" has the meaning set out in Section 5(a)(i) hereof.
"Exchangeable Share Provisions" has the meaning set out in the recitals hereto.
"Holder Votes" has the meaning set out in Section 4(b) hereof.
"Holders" means the registered holders from time to time of Series 1
Exchangeable Shares, other than Veritas and its Subsidiaries.
"Indemnified Parties" has the meaning set out in Section 9(a) hereof.
"Insolvency Event" means the institution by VESI of any proceeding to be
adjudicated a bankrupt or insolvent or to be dissolved or wound-up, or the
consent of VESI to the institution of bankruptcy, insolvency, dissolution or
winding-up proceedings against it, or the filing of a petition, answer or
consent seeking dissolution or winding-up under any bankruptcy, insolvency or
analogous laws, including without limitation the Companies' Creditors
Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), and the
failure by VESI to contest in good faith any such proceedings commenced in
respect of VESI within 15 days of becoming aware thereof, or the consent by VESI
to the filing of any such petition or to the appointment of a receiver, or the
making by VESI of a general assignment for the benefit of creditors, or the
admission in writing by VESI of its inability to pay its debts generally as they
become due, or VESI not being permitted, pursuant to liquidity or solvency
requirements of applicable law, to redeem any Series 1 Exchangeable Shares in
accordance with the terms thereof, to redeem any shares of any other series of
Class A Exchangeable Shares of VESI in accordance with the terms thereof or to
redeem any Exchangeable Shares of VESI in accordance with the terms thereof.
"Liquidation Call Right" has the meaning set out in the Exchangeable Share
Provisions.
"Liquidation Event" has the meaning set out in Section 5(l)(ii) hereof.
"Liquidation Event Effective Time" has the meaning set out in Section 5(l)(iii)
hereof.
<PAGE> 4
- 4 -
"List" has the meaning set out in Section 4(f) hereof.
"Officer's Certificate" means, with respect to Veritas or VESI, as the case may
be, a certificate signed by any one of the Chairman of the Board, the
Vice-Chairman of the Board, the President, any Vice-President or any other
senior officer of Veritas or VESI, as the case may be.
"Person" includes an individual, partnership, corporation, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"Redemption Call Right" has the meaning set out in the Exchangeable Share
Provisions.
"Retracted Shares" has the meaning set out in Section 5(g) hereof.
"Retraction Call Right" has the meaning set out in the Exchangeable Share
Provisions.
"Series 1 Exchangeable Share Consideration" has the meaning set out in the
Exchangeable Share Provisions.
"Series 1 Exchangeable Share Price" has the meaning set out in the Exchangeable
Share Provisions.
"Series 1 Exchangeable Shares" has the meaning set out in the recitals hereto.
"Subsidiary" has the meaning set out in the Exchangeable Share Provisions.
"Support Agreement" means that certain support agreement made as of even date
hereof between VESI and Veritas.
"Trust" means the trust created by this agreement.
"Trust Estate" means the Voting Share, any other securities, the Exchange Right,
the Automatic Exchange Rights and any money or other property which may be held
by the Trustee from time to time pursuant to this agreement.
"Trustee" means CIBC Mellon Trust Company and, subject to the provisions of
Article 10 hereof, includes any successor trustee or permitted assigns.
"VESI Common Shares" means common shares in the capital stock of VESI.
"Veritas Common Stock" has the meaning set out in the recitals hereto.
"Veritas Consent" has the meaning set out in Section 4(b) hereof.
"Veritas Meeting" has the meaning set out in Section 4(b) hereof.
"Veritas Special ERS Voting Stock" has the meaning set out in the recitals
hereto.
"Veritas Successor" has the meaning set out in Section 11(a)(i) hereof.
<PAGE> 5
- 5 -
"Voting Rights" means the voting rights attached to the Voting Share.
"Voting Share" means the one share of Veritas ERS Special Voting Stock, U.S.
$0.01 par value, issued by Veritas to and deposited with the Trustee, which
entitles the holder of record to a number of votes at meetings of holders of
Veritas Common Stock equal to the Aggregate Equivalent Vote Amount.
(b) INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of
this agreement into articles, sections and paragraphs and the
insertion of headings are for convenience of reference only
and shall not affect the construction or interpretation of
this agreement.
(c) NUMBER, GENDER, ETC. Words importing the singular number only
shall include the plural and vice versa. Words importing the
use of any gender shall include all genders.
(d) DATE FOR ANY ACTION. If any date on which any action is
required to be taken under this agreement is not a Business
Day, such action shall be required to be taken on the next
succeeding Business Day.
2. PURPOSE OF AGREEMENT
The purpose of this agreement is to create the Trust for the benefit of
the Holders, as herein provided. The Trustee will hold the Voting Share
in order to enable the Trustee to exercise the Voting Rights and will
hold the Exchange Right and the Automatic Exchange Rights in order to
enable the Trustee to exercise such rights, in each case as trustee for
and on behalf of the Holders as provided in this agreement.
3. VOTING SHARE
(a) ISSUANCE AND OWNERSHIP OF THE VOTING SHARE. Veritas hereby
issues to and deposits with the Trustee the Voting Share to be
hereafter held of record by the Trustee as trustee for and on
behalf of, and for the use and benefit of, the Holders and in
accordance with the provisions of this agreement. Veritas
hereby acknowledges receipt from the Trustee as trustee for
and on behalf of the Holders of good and valuable
consideration (and the adequacy thereof) for the issuance of
the Voting Share by Veritas to the Trustee. During the term of
the Trust and subject to the terms and conditions of this
agreement, the Trustee shall possess and be vested with full
legal ownership of the Voting Share and shall be entitled to
exercise all of the rights and powers of an owner with respect
to the Voting Share, provided that the Trustee shall:
(i) hold the Voting Share and the legal title thereto as
trustee solely for the use and benefit of the Holders
in accordance with the provisions of this agreement;
and
<PAGE> 6
- 6 -
(ii) except as specifically authorized by this agreement,
have no power or authority to sell, transfer, vote or
otherwise deal in or with the Voting Share and the
Voting Share shall not be used or disposed of by the
Trustee for any purpose other than the purposes for
which this Trust is created pursuant to this
agreement.
(b) LEGENDED SHARE CERTIFICATES. VESI will cause each certificate
representing Series 1 Exchangeable Shares to bear an
appropriate legend notifying the Holders of their right to
instruct the Trustee with respect to the exercise of the
Voting Rights with respect to the Series 1 Exchangeable Shares
held by a Holder.
(c) SAFE KEEPING OF CERTIFICATE. The certificate representing the
Voting Share shall at all times be held in safe keeping by the
Trustee or its agent.
4. EXERCISE OF VOTING RIGHTS
(a) VOTING RIGHTS. The Trustee, as the holder of record of the
Voting Share, shall be entitled to all of the Voting Rights,
including the right to consent to or to vote in person or by
proxy the Voting Share, on any matter, question or proposition
whatsoever that may properly come before the stockholders of
Veritas at a Veritas Meeting or in connection with a Veritas
Consent (in each case, as hereinafter defined). The Voting
Rights shall be and remain vested in and exercised by the
Trustee. Subject to Section 7(o) hereof, the Trustee shall
exercise the Voting Rights only on the basis of instructions
received pursuant to this Article 4 from Holders entitled to
instruct the Trustee as to the voting thereof at the time at
which a Veritas Consent is sought or a Veritas Meeting is
held. To the extent that no instructions are received from a
Holder with respect to the Voting Rights to which such Holder
is entitled, the Trustee shall not exercise or permit the
exercise of such Holder's Voting Rights.
(b) NUMBER OF VOTES. With respect to all meetings of stockholders
of Veritas at which holders of shares of Veritas Common Stock
are entitled to vote (a "Veritas Meeting") and with respect to
all written consents sought by Veritas from its stockholders
including the holders of shares of Veritas Common Stock (a
"Veritas Consent"), each Holder shall be entitled to instruct
the Trustee to cast and exercise, in the manner instructed, a
number of votes equal to the Equivalent Vote Amount for each
Series 1 Exchangeable Share owned of record by such Holder on
the record date established by Veritas or by applicable law
for such Veritas Meeting or Veritas Consent, as the case may
be (the "Holder Votes") in respect of each matter, question or
proposition to be voted on at such Veritas Meeting or to be
consented to in connection with such Veritas Consent.
(c) MAILINGS TO SHAREHOLDERS. With respect to each Veritas Meeting
and Veritas Consent, the Trustee will mail or cause to be
mailed (or otherwise communicate in the same manner as Veritas
utilizes in communications to holders of Veritas Common Stock,
subject to the Trustee's ability to provide this method of
communication and upon being advised in writing of such
method) to each of the
<PAGE> 7
- 7 -
Holders named in the List on the same day as the initial
mailing or notice (or other communication) with respect
thereto is given by Veritas to its stockholders:
(i) a copy of such notice, together with any proxy or
information statement and related materials to be
provided to stockholders of Veritas;
(ii) a statement that such Holder is entitled to instruct
the Trustee as to the exercise of the Holder Votes
with respect to such Veritas Meeting or Veritas
Consent, as the case may be, or, pursuant to Section
4(g) hereof, to attend such Veritas Meeting and to
exercise personally as the proxy of the Trustee, the
Holder Votes thereat;
(iii) a statement as to the manner in which such
instructions may be given to the Trustee, including
an express indication that instructions may be given
to the Trustee to give:
(A) a proxy to such Holder or his designee to
exercise personally the Holder Votes; or
(B) a proxy to a designated agent or other
representative of the management of Veritas
to exercise such Holder Votes;
(iv) a statement that if no such instructions are received
from the Holder, the Holder Votes to which such
Holder is entitled will not be exercised;
(v) a form of direction whereby the Holder may so direct
and instruct the Trustee as contemplated herein; and
(vi) a statement of (A) the time and date by which such
instructions must be received by the Trustee in order
to be binding upon it, which in the case of a Veritas
Meeting shall not be earlier than the close of
business on the Business Day prior to such meeting,
and (B) the method for revoking or amending such
instructions.
The materials referred to above are to be provided by Veritas
to the Trustee, but shall be subject to review and comment by
the Trustee.
For the purpose of determining Holder Votes to which a Holder
is entitled in respect of any such Veritas Meeting or Veritas
Consent, the number of Series 1 Exchangeable Shares owned of
record by the Holder shall be determined at the close of
business on the record date established by Veritas or by
applicable law for purposes of determining stockholders
entitled to vote at such Veritas Meeting or to give written
consent in connection with such Veritas Consent. Veritas will
notify the Trustee in writing of any decision of the board of
directors of Veritas with respect to the calling of any such
Veritas Meeting or the seeking of any such Veritas Consent and
shall provide all necessary information and materials to the
Trustee in each case
<PAGE> 8
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promptly and in any event in sufficient time to enable the
Trustee to perform its obligations contemplated by this
Section 4(c).
(d) COPIES OF STOCKHOLDER INFORMATION. Veritas will deliver to the
Trustee copies of all proxy materials, (including notices of
Veritas Meetings but excluding proxies to vote shares of
Veritas Common Stock), information statements, reports
(including without limitation all interim and annual financial
statements) and other written communications that are to be
distributed from time to time to holders of Veritas Common
Stock in sufficient quantities and in sufficient time so as to
enable the Trustee to send those materials to each Holder at
the same time as such materials are first sent to holders of
Veritas Common Stock. The Trustee will mail or otherwise send
to each Holder, at the expense of Veritas, copies of all such
materials (and all materials specifically directed to the
Holders or to the Trustee for the benefit of the Holders by
Veritas) received by the Trustee from Veritas at the same time
as such materials are first sent to holders of Veritas Common
Stock. The Trustee will make copies of all such materials
available for inspection by any Holder at the Trustee's
principal office in the cities of Calgary and Toronto.
(e) OTHER MATERIALS. Immediately after receipt by Veritas or any
stockholder of Veritas of any material sent or given generally
to the holders of Veritas Common Stock by or on behalf of a
third party, including without limitation dissident proxy and
information circulars (and related information and material)
and tender and exchange offer circulars (and related
information and material), Veritas shall use its best efforts
to obtain and deliver to the Trustee copies thereof in
sufficient quantities so as to enable the Trustee to forward
such material (unless the same has been provided directly to
Holders by such third party) to each Holder as soon as
possible thereafter. As soon as practicable after receipt
thereof, the Trustee will mail or otherwise send to each
Holder, at the expense of Veritas, copies of all such
materials received by the Trustee from Veritas. The Trustee
will also make copies of all such materials available for
inspection by any Holder at the Trustee's principal office in
the cities of Toronto and Calgary.
(f) LIST OF PERSONS ENTITLED TO VOTE. VESI shall, (i) prior to
each annual, general and special Veritas Meeting or the
seeking of any Veritas Consent and (ii) forthwith upon each
request made at any time by the Trustee in writing, prepare or
cause to be prepared a list (a "List") of the names and
addresses of the Holders arranged in alphabetical order and
showing the number of Series 1 Exchangeable Shares held of
record by each such Holder, in each case at the close of
business on the date specified by the Trustee in such request
or, in the case of a List prepared in connection with a
Veritas Meeting or a Veritas Consent, at the close of business
on the record date established by Veritas or pursuant to
applicable law for determining the holders of Veritas Common
Stock entitled to receive notice of and/or to vote at such
Veritas Meeting or to give consent in connection with such
Veritas Consent. Each such List shall be delivered to the
Trustee promptly after receipt by VESI of such request or the
record date for such meeting or seeking of consent, as the
case may be, and in any event within sufficient time as to
enable the Trustee to perform its obligations under this
agreement. Veritas agrees to give VESI written notice (with
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a copy to the Trustee) of the calling of any Veritas Meeting
or the seeking of any Veritas Consent, together with the
record dates therefor, sufficiently prior to the date of the
calling of such meeting or seeking of such consent so as to
enable VESI to perform its obligations under this Section
4(f).
(g) ENTITLEMENT TO DIRECT VOTES. Any Holder named in a List
prepared in connection with any Veritas Meeting or any Veritas
Consent will be entitled (i) to instruct the Trustee in the
manner described in Section 4(c) hereof with respect to the
exercise of the Holder Votes to which such Holder is entitled
or (ii) to attend such meeting and personally to exercise
thereat (or to exercise with respect to any written consent),
as the proxy of the Trustee, the Holder Votes to which such
Holder is entitled.
(h) VOTING BY TRUSTEE, AND ATTENDANCE OF TRUSTEE REPRESENTATIVE,
AT MEETING.
(i) In connection with each Veritas Meeting and Veritas
Consent, the Trustee shall exercise, either in person
or by proxy, in accordance with the instructions
received from a Holder pursuant to Section 4(c)
hereof, the Holder Votes as to which such Holder is
entitled to direct the vote (or any lesser number
thereof as may be set forth in the instructions);
provided, however, that such written instructions are
received by the Trustee from the Holder prior to the
time and date fixed by it for receipt of such
instructions in the notice given by the Trustee to
the Holder pursuant to Section 4(c) hereof.
(ii) The Trustee shall cause such representatives as are
empowered by it to sign and deliver, on behalf of the
Trustee, proxies for Voting Rights to attend each
Veritas Meeting. Upon submission by a Holder (or its
designee) of identification satisfactory to the
Trustee's representatives, and at the Holder's
request, such representatives shall sign and deliver
to such Holder (or its designee) a proxy to exercise
personally the Holder Votes as to which such Holder
is otherwise entitled hereunder to direct the vote,
if such Holder either (A) has not previously given
the Trustee instructions pursuant to Section 4(c)
hereof in respect of such meeting, or (B) submits to
the Trustee's representatives written revocation of
any such previous instructions. At such meeting, the
Holder exercising such Holder Votes shall have the
same rights as the Trustee to speak at the meeting in
respect of any matter, question or proposition, to
vote by way of ballot at the meeting in respect of
any matter, question or proposition and to vote at
such meeting by way of a show of hands in respect of
any matter, question or proposition.
(i) DISTRIBUTION OF WRITTEN MATERIALS. Any written materials to be
distributed by the Trustee to the Holders pursuant to this
agreement shall be delivered or sent by mail (or otherwise
communicated in the same manner as Veritas utilizes in
communications to holders of Veritas Common Stock, subject to
the Trustee's ability to provide this method of communication
and upon being advised in writing
<PAGE> 10
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of such method) to each Holder at its address as shown on the
books of VESI. VESI shall provide, or cause to be provided to
the Trustee for this purpose, on a timely basis and without
charge or other expense:
(A) a current List; and
(B) upon the request of the Trustee, mailing
labels to enable the Trustee to carry out
its duties under this agreement.
The materials referred to above are to be provided by Veritas
to the Trustee, but shall be subject to review and comment by
the Trustee.
(j) TERMINATION OF VOTING RIGHTS. Except as otherwise provided
herein or in the Exchangeable Share Provisions, all of the
rights of a Holder with respect to the Holder Votes
exercisable in respect of the Series 1 Exchangeable Shares
held by such Holder, including the right to instruct the
Trustee as to the voting of or to vote personally such Holder
Votes, shall be deemed to be surrendered by the Holder to
Veritas and such Holder Votes and the Voting Rights
represented thereby shall cease immediately upon the delivery
by such Holder to the Trustee of the certificates representing
such Series 1 Exchangeable Shares in connection with the
exercise by the Holder of the Exchange Right or the occurrence
of the automatic exchange of Series 1 Exchangeable Shares for
shares of Veritas Common Stock, as specified in Article 5
hereof (unless in either case Veritas shall not have delivered
the Series 1 Exchangeable Share Consideration deliverable in
exchange therefor to the Trustee for delivery to the Holders),
or upon the redemption of Series 1 Exchangeable Shares
pursuant to Article 6 or Article 7 of the Exchangeable Share
Provisions, or upon the effective date of the liquidation,
dissolution or winding-up of VESI pursuant to Article 5 of the
Exchangeable Share Provisions, or upon the purchase of Series
1 Exchangeable Shares from the holder thereof by Veritas
pursuant to the exercise by Veritas of the Retraction Call
Right, the Redemption Call Right or the Liquidation Call
Right.
5. EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
(a) GRANT AND OWNERSHIP OF THE EXCHANGE RIGHT. Veritas hereby
grants to the Trustee as trustee for and on behalf of, and for
the use and benefit of, the Holders (i) the right (the
"Exchange Right"), upon the occurrence and during the
continuance of an Insolvency Event, to require Veritas to
purchase from each or any Holder all or any part of the Series
1 Exchangeable Shares held by the Holders, and (ii) the
Automatic Exchange Rights, all in accordance with the
provisions of this agreement. Veritas hereby acknowledges
receipt from the Trustee as trustee for and on behalf of the
Holders of good and valuable consideration (and the adequacy
thereof) for the grant of the Exchange Right and the Automatic
Exchange Rights by Veritas to the Trustee. During the term of
the Trust and subject to the terms and conditions of this
agreement, the Trustee shall possess and be vested with full
legal ownership of the Exchange Right and the Automatic
Exchange Rights and shall be
<PAGE> 11
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entitled to exercise all of the rights and powers of an owner
with respect to the Exchange Right and the Automatic Exchange
Rights, provided that the Trustee shall:
(iii) hold the Exchange Right and the Automatic Exchange
Rights and the legal title thereto as trustee solely
for the use and benefit of the Holders in accordance
with the provisions of this agreement; and
(iv) except as specifically authorized by this agreement,
have no power or authority to exercise or otherwise
deal in or with the Exchange Right or the Automatic
Exchange Rights, and the Trustee shall not exercise
any such rights for any purpose other than the
purposes for which this Trust is created pursuant to
this agreement.
(b) LEGENDED SHARE CERTIFICATES. VESI will cause each certificate
representing Series 1 Exchangeable Shares to bear an
appropriate legend notifying the Holders of:
(i) their right to instruct the Trustee with respect to
the exercise of the Exchange Right in respect of the
Series 1 Exchangeable Shares held by a Holder; and
(ii) the Automatic Exchange Rights.
(c) GENERAL EXERCISE OF EXCHANGE RIGHT. The Exchange Right shall
be and remain vested in and exercised by the Trustee. Subject
to Section 7(o) hereof, the Trustee shall exercise the
Exchange Right only on the basis of instructions received
pursuant to this Article 5 from Holders entitled to instruct
the Trustee as to the exercise thereof. To the extent that no
instructions are received from a Holder with respect to the
Exchange Right, the Trustee shall not exercise or permit the
exercise of the Exchange Right.
(d) PURCHASE PRICE. The purchase price payable by Veritas for each
Series 1 Exchangeable Share to be purchased by Veritas under
the Exchange Right shall be an amount equal to the Series 1
Exchangeable Share Price on the last Business Day prior to the
day of closing of the purchase and sale of such Series 1
Exchangeable Share under the Exchange Right. In connection
with each exercise of the Exchange Right, Veritas will provide
to the Trustee an Officer's Certificate setting forth the
calculation of the Series 1 Exchangeable Share Price for each
Series 1 Exchangeable Share. The Series 1 Exchangeable Share
Price for each such Series 1 Exchangeable Share so purchased
may be satisfied only by Veritas issuing and delivering or
causing to be delivered to the Trustee, on behalf of the
relevant Holder, the Series 1 Exchangeable Share Consideration
representing the total Series 1 Exchangeable Share Price.
(e) EXERCISE INSTRUCTIONS. Subject to the terms and conditions
herein set forth, a Holder shall be entitled, upon the
occurrence and during the continuance of an Insolvency Event,
to instruct the Trustee to exercise the Exchange Right with
respect to all or any part of the Series 1 Exchangeable Shares
registered in the name of such Holder on the books of VESI. To
cause the exercise of the Exchange Right by the
<PAGE> 12
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Trustee, the Holder shall deliver to the Trustee, in person or
by certified or registered mail, at its principal office in
Calgary, Alberta, Toronto, Ontario or at such other places in
Canada as the Trustee may from time to time designate by
written notice to the Holders, the certificates representing
the Series 1 Exchangeable Shares which such Holder desires
Veritas to purchase, duly endorsed in blank, and accompanied
by such other documents and instruments as may be required to
effect a transfer of Series 1 Exchangeable Shares under the
Business Corporations Act (Alberta), other applicable laws, if
any, and the by-laws of VESI and such additional documents and
instruments as the Trustee, VESI and Veritas may reasonably
require together with (i) a duly completed form of notice of
exercise of the Exchange Right, contained on the reverse of or
attached to the Series 1 Exchangeable Share certificates,
stating (A) that the Holder thereby instructs the Trustee to
exercise the Exchange Right so as to require Veritas to
purchase from the Holder the number of Series 1 Exchangeable
Shares specified therein, (B) that such Holder has good title
to and owns all such Series 1 Exchangeable Shares to be
acquired by Veritas free and clear of all liens, claims and
encumbrances, (C) the names in which the certificates
representing Veritas Common Stock issuable in connection with
the exercise of the Exchange Right are to be issued and (D)
the names and addresses of the persons to whom the Series 1
Exchangeable Share Consideration should be delivered and (ii)
payment (or evidence satisfactory to the Trustee, VESI and
Veritas of payment) of the taxes (if any) payable as
contemplated by Section 5(h) of this agreement. If only a part
of the Series 1 Exchangeable Shares represented by any
certificate or certificates delivered to the Trustee are to be
purchased by Veritas under the Exchange Right, a new
certificate for the balance of such Series 1 Exchangeable
Shares shall be issued to the Holder at the expense of VESI.
(f) DELIVERY OF SERIES 1 EXCHANGEABLE SHARE CONSIDERATION; EFFECT
OF EXERCISE. Promptly after receipt of the certificates
representing the Series 1 Exchangeable Shares which the Holder
desires Veritas to purchase under the Exchange Right (together
with such documents and instruments of transfer and a duly
completed form of notice of exercise of the Exchange Right),
duly endorsed for transfer to Veritas, the Trustee shall
notify Veritas and VESI of its receipt of the same, which
notice to Veritas and VESI shall constitute exercise of the
Exchange Right by the Trustee on behalf of the Holder of such
Series 1 Exchangeable Shares, and Veritas shall immediately
thereafter deliver or cause to be delivered to the Trustee,
for delivery to the Holder of such Series 1 Exchangeable
Shares (or to such other persons, if any, properly designated
by such Holder), the Series 1 Exchangeable Share
Consideration, deliverable in connection with the exercise of
the Exchange Right; provided, however, that no such delivery
shall be made unless and until the Holder requesting the same
shall have paid (or provided evidence satisfactory to the
Trustee, VESI and Veritas of the payment of) the taxes (if
any) payable as contemplated by Section 5(h) of this
agreement. In connection with payment of the Series 1
Exchangeable Share Consideration, Veritas shall be entitled to
liquidate some of the Veritas Common Stock that would
otherwise be deliverable to the particular holder of Series 1
Exchangeable Shares in order to fund any statutory withholding
tax obligation. Immediately upon the giving of notice by the
Trustee to Veritas and VESI of the exercise of the Exchange
Right, as provided in this Section
<PAGE> 13
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5(f), the closing of the transaction of purchase and sale
contemplated by the Exchange Right shall be deemed to have
occurred, and the Holder of such Series 1 Exchangeable Shares
shall be deemed to have transferred to Veritas all of its
right, title and interest in and to such Series 1 Exchangeable
Shares and in the related interest in the Trust Estate and
shall cease to be a holder of such Series 1 Exchangeable
Shares and shall not be entitled to exercise any of the rights
of a holder in respect thereof, other than the right to
receive his proportionate part of the total purchase price
therefor, unless such Series 1 Exchangeable Share
Consideration is not delivered by Veritas to the Trustee, for
delivery to such Holder (or to such other persons, if any,
properly designated by such Holder), within five Business Days
of the date of the giving of such notice by the Trustee, in
which case the rights of the Holder shall remain unaffected
until such Series 1 Exchangeable Share Consideration is
delivered by Veritas and any cheque included therein is paid.
Concurrently with such Holder ceasing to be a holder of Series
1 Exchangeable Shares, the Holder shall be considered and
deemed for all purposes to be the holder of the shares of
Veritas Common Stock delivered to it pursuant to the Exchange
Right. Notwithstanding the foregoing until the Series 1
Exchangeable Share Consideration is delivered to the Holder,
the Holder shall be deemed to still be a holder of the sold
Series 1 Exchangeable Shares for purposes of voting rights
with respect thereto under this agreement.
(g) EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION. In the
event that a Holder has exercised its right under Article 6 of
the Exchangeable Share Provisions to require VESI to redeem
any or all of the Series 1 Exchangeable Shares held by the
Holder (the "Retracted Shares") and is notified by VESI
pursuant to Section 6.6 of the Exchangeable Share Provisions
that VESI will not be permitted as a result of liquidity or
solvency requirements of applicable law to redeem all such
Retracted Shares, subject to receipt by the Trustee of written
notice to that effect from VESI and provided that Veritas
shall not have exercised the Retraction Call Right with
respect to the Retracted Shares and that the Holder has not
revoked the retraction request delivered by the Holder to VESI
pursuant to Section 6.1 of the Exchangeable Share Provisions,
the retraction request will constitute and will be deemed to
constitute notice from the Holder to the Trustee instructing
the Trustee to exercise the Exchange Right with respect to
those Retracted Shares which VESI is unable to redeem. In any
such event, VESI hereby agrees with the Trustee and in favour
of the Holder immediately to notify the Trustee of such
prohibition against VESI redeeming all of the Retracted Shares
and immediately to forward or cause to be forwarded to the
Trustee all relevant materials delivered by the Holder to VESI
or to the transfer agent of the Series 1 Exchangeable Shares
(including without limitation a copy of the retraction request
delivered pursuant to Section 6.1 of the Exchangeable Share
Provisions) in connection with such proposed redemption of the
Retracted Shares and the Trustee will thereupon exercise the
Exchange Right with respect to the Retracted Shares that VESI
is not permitted to redeem and will require Veritas to
purchase such shares in accordance with the provisions of this
Article 5.
<PAGE> 14
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(h) STAMP OR OTHER TRANSFER TAXES. Upon any sale of Series 1
Exchangeable Shares to Veritas pursuant to the Exchange Right
or the Automatic Exchange Rights, the share certificate or
certificates representing Veritas Common Stock to be delivered
in connection with the payment of the total purchase price
therefor shall be issued in the name of the Holder of the
Series 1 Exchangeable Shares so sold or in such names as such
Holder may otherwise direct in writing without charge to the
holder of the Series 1 Exchangeable Shares so sold, provided,
however, that such Holder (i) shall pay (and neither Veritas,
VESI nor the Trustee shall be required to pay) any
documentary, stamp, transfer or other similar taxes that may
be payable in respect of any transfer involved in the issuance
or delivery of such shares to a person other than such Holder
or (ii) shall have established to the satisfaction of the
Trustee, Veritas and VESI that such taxes, if any, have been
paid.
(i) NOTICE OF INSOLVENCY EVENT. Immediately upon the occurrence of
an Insolvency Event or any event which with the giving of
notice or the passage of time or both would be an Insolvency
Event, VESI and Veritas shall give written notice thereof to
the Trustee. As soon as practicable after receiving notice
from VESI and Veritas or from any other Person of the
occurrence of an Insolvency Event, the Trustee will mail to
each Holder, at the expense of Veritas, a notice of such
Insolvency Event in the form provided by Veritas, which notice
shall contain a brief statement of the right of the Holders
with respect to the Exchange Right.
(j) QUALIFICATION OF VERITAS COMMON STOCK. Veritas covenants that
if any shares of Veritas Common Stock to be issued and
delivered pursuant to the Exchange Right or the Automatic
Exchange Rights require registration or qualification with or
approval of or the filing of any document including any
prospectus or similar document or the taking of any proceeding
with or the obtaining of any order, ruling or consent from any
governmental or regulatory authority under any Canadian or
United States federal, provincial or state law or regulation
or pursuant to the rules and regulations of any regulatory
authority or the fulfillment of any other legal requirement
(collectively, the "Applicable Laws") before such shares may
be issued and delivered by Veritas to the initial holder
thereof (other than VESI) or in order that such shares may be
freely traded thereafter (other than any restrictions on
transfer by reason of a holder being a "control person" of
Veritas for purposes of Canadian federal or provincial
securities law or an "affiliate" of Veritas or, prior to the
Effective Date, of Enertec for purposes of United States
federal or state securities law), Veritas will in good faith
expeditiously take all such actions and do all such things as
are necessary to cause such shares of Veritas Common Stock to
be and remain duly registered, qualified or approved. Veritas
represents and warrants that it has in good faith taken all
actions and done all things as are necessary under Applicable
Laws as they exist on the date hereof to cause the shares of
Veritas Common Stock to be issued and delivered pursuant to
the Exchange Right and the Automatic Exchange Rights and to be
freely tradeable thereafter (other than restrictions on
transfer by reason of a holder being a "control person" of
Veritas for the purposes of Canadian federal and provincial
securities law or an "affiliate" of Veritas or, prior to the
Effective Date, of Enertec for the purposes of United States
federal or state securities law). Veritas will in good faith
expeditiously take all such
<PAGE> 15
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actions and do all such things as are necessary to cause all
shares of Veritas Common Stock to be delivered pursuant to the
Exchange Right or the Automatic Exchange Rights to be and to
continue to be listed, quoted or posted for trading on all
stock exchanges and quotation systems on which such shares are
listed, quoted or posted for trading at such time.
(k) RESERVATION OF SHARES OF VERITAS COMMON STOCK.
Veritas hereby represents, warrants and covenants that it has
irrevocably reserved for issuance and will at all times keep
available, free from pre-emptive and other rights, out of its
authorized and unissued capital stock such number of shares of
Veritas Common Stock (i) as is equal to the sum of (A) the
number of Series 1 Exchangeable Shares issued and outstanding
from time to time and (B) the number of Series 1 Exchangeable
Shares issuable upon the exercise of all rights to acquire
Series 1 Exchangeable Shares outstanding from time to time and
(ii) as are now and may hereafter be required to enable and
permit Veritas and VESI to meet their respective obligations
hereunder, under the Restated Certificate of Incorporation of
Veritas, under the Support Agreement, under the Exchangeable
Share Provisions and under any other security or commitment
pursuant to the Arrangement with respect to which Veritas may
now or hereafter be required to issue shares of Veritas Common
Stock.
(l) AUTOMATIC EXCHANGE ON LIQUIDATION OF VERITAS.
(i) Veritas will give the Trustee written notice of each
of the following events at the time set forth below:
(A) in the event of any determination by the
board of directors of the Veritas to
institute voluntary liquidation, dissolution
or winding-up proceedings with respect to
Veritas or to effect any other distribution
of assets of Veritas among its stockholders
for the purpose of winding-up its affairs,
at least 60 days prior to the proposed
effective date of such liquidation,
dissolution, winding-up or other
distribution; and
(B) immediately, upon the earlier of (I) receipt
by Veritas of notice of, and (II) Veritas
otherwise becoming aware of, any threatened
or instituted claim, suit, petition or other
proceedings with respect to the involuntary
liquidation, dissolution or winding-up of
Veritas or to effect any other distribution
of assets of Veritas among its stockholders
for the purpose of winding-up its affairs.
(ii) Immediately following receipt by the Trustee from
Veritas of notice of any event (a "Liquidation
Event") contemplated by Section 5(l)(i) above, the
Trustee will give notice thereof to the Holders. Such
notice will be provided by Veritas to the Trustee and
shall include a brief description of the automatic
exchange of Series 1 Exchangeable Shares for shares
of Veritas Common Stock provided for in Section
5(l)(iii) below.
<PAGE> 16
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(iii) In order that the Holders will be able to participate
on a PRO RATA basis with the holders of Veritas
Common Stock in the distribution of assets of Veritas
in connection with a Liquidation Event, immediately
prior to the effective time (the "Liquidation Event
Effective Time") of a Liquidation Event all of the
then outstanding Series 1 Exchangeable Shares shall
be automatically exchanged for shares of Veritas
Common Stock. To effect such automatic exchange,
Veritas shall be deemed to have purchased each Series
1 Exchangeable Share outstanding immediately prior to
the Liquidation Event Effective Time and held by
Holders, and each Holder shall be deemed to have sold
the Series 1 Exchangeable Shares held by it at such
time, for a purchase price per share equal to the
Series 1 Exchangeable Share Price applicable at such
time. In connection with such automatic exchange,
Veritas will provide to the Trustee an Officer's
Certificate setting forth the calculation of the
purchase price for each Series 1 Exchangeable Share.
(iv) The closing of the transaction of purchase and sale
contemplated by Section 5(l)(iii) above shall be
deemed to have occurred immediately prior to the
Liquidation Event Effective Time, and each Holder of
Series 1 Exchangeable Shares shall be deemed to have
transferred to Veritas all of the Holder's right,
title and interest in and to such Series 1
Exchangeable Shares and the related interest in the
Trust Estate and shall cease to be a holder of such
Series 1 Exchangeable Shares and Veritas shall
deliver to the Holder the Series 1 Exchangeable Share
Consideration deliverable upon the automatic exchange
of Series 1 Exchangeable Shares. In connection with
payment of the Series 1 Exchangeable Share
Consideration, Veritas shall be entitled to liquidate
some of the Veritas Common Stock that would otherwise
be deliverable to the particular holder of Series 1
Exchangeable Shares in order to fund any statutory
withholding tax obligation. Concurrently with such
Holder ceasing to be a holder of Series 1
Exchangeable Shares, the Holder shall be considered
and deemed for all purposes to be the holder of the
shares of Veritas Common Stock issued to it pursuant
to the automatic exchange of Series 1 Exchangeable
Shares for Veritas Common Stock and the certificates
held by the Holder previously representing the Series
1 Exchangeable Shares exchanged by the Holder with
Veritas pursuant to such automatic exchange shall
thereafter be deemed to represent the shares of
Veritas Common Stock issued to the Holder by Veritas
pursuant to such automatic exchange. Upon the request
of a Holder and the surrender by the Holder of Series
1 Exchangeable Share certificates deemed to represent
shares of Veritas Common Stock, duly endorsed in
blank and accompanied by such instruments of transfer
as Veritas may reasonably require, Veritas shall
deliver or cause to be delivered to the Holder
certificates representing the shares of Veritas
Common Stock of which the Holder is the holder.
Notwithstanding the foregoing until each Holder is
actually entered on the register of holders of
Veritas Common Stock, such Holder shall be deemed to
still be a holder of the transferred Series 1
Exchangeable Shares for purposes of all voting rights
with respect thereto under this agreement.
<PAGE> 17
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6. RESTRICTIONS ON ISSUANCE OF VERITAS ERS SPECIAL VOTING STOCK
During the term of this agreement, Veritas will not issue any shares of
Veritas ERS Special Voting Stock in addition to the Voting Share.
7. CONCERNING THE TRUSTEE
(a) POWERS AND DUTIES OF THE TRUSTEE. The rights, powers and
authorities of the Trustee under this agreement, in its
capacity as trustee of the Trust, shall include:
(i) receipt and deposit of the Voting Share from Veritas
as trustee for and on behalf of the Holders in
accordance with the provisions of this agreement;
(ii) granting proxies and distributing materials to
Holders as provided in this agreement;
(iii) voting the Holder Votes in accordance with the
provisions of this agreement;
(iv) receiving the grant of the Exchange Right and the
Automatic Exchange Rights from Veritas as trustee for
and on behalf of the Holders in accordance with the
provisions of this agreement;
(v) exercising the Exchange Right and enforcing the
benefit of the Automatic Exchange Rights, in each
case in accordance with the provisions of this
agreement, and in connection therewith receiving from
Holders Series 1 Exchangeable Shares and other
requisite documents and distributing to such Holders
the shares of Veritas Common Stock and cheques and
property, if any, to which such Holders are entitled
upon the exercise of the Exchange Right or pursuant
to the Automatic Exchange Rights, as the case may be;
(vi) holding title to the Trust Estate;
(vii) investing any moneys forming, from time to time, a
part of the Trust Estate as provided in this
agreement;
(viii) taking action at the direction of a Holder or Holders
to enforce the obligations of Veritas under this
agreement; and
(ix) taking such other actions and doing such other things
as are specifically provided in this agreement.
In the exercise of such rights, powers and authorities the
Trustee shall have (and is granted) such incidental and
additional rights, powers and authority not in conflict with
any of the provisions of this agreement as the Trustee, acting
in good faith and in the reasonable exercise of its
discretion, may deem necessary, appropriate or desirable to
effect the purpose of the Trust. Any exercise of such
discretionary rights,
<PAGE> 18
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powers and authorities by the Trustee shall be final,
conclusive and binding upon all persons. For greater
certainty, the Trustee shall have only those duties as are set
out specifically in this agreement.
The Trustee in exercising its rights, powers, duties and
authorities hereunder shall act honestly and in good faith
with a view to the best interests of the Holders and shall
exercise the care, diligence and skill that a reasonably
prudent trustee would exercise in comparable circumstances.
The Trustee shall not be bound to give any notice or do or
take any act, action or proceeding by virtue of the powers
conferred on it hereby unless and until it shall be
specifically required to do so under the terms hereof; nor
shall the Trustee be required to take any notice of, or to do
or to take any act, action or proceeding as a result of any
default or breach of any provision hereunder, unless and until
notified in writing of such default or breach, which notices
shall distinctly specify the default or breach desired to be
brought to the attention of the Trustee and in the absence of
such notice the Trustee may for all purposes of this agreement
conclusively assume that no default or breach has been made in
the observance or performance of any of the representations,
warranties, covenants, agreements or conditions contained
herein.
(b) NO CONFLICT OF INTEREST. The Trustee represents to VESI and
Veritas that at the date of execution and delivery of this
agreement there exists no material conflict of interest in the
role of the Trustee as a fiduciary hereunder and the role of
the Trustee in any other capacity. The Trustee shall, within
90 days after it becomes aware that such a material conflict
of interest exists, either eliminate such material conflict of
interest or resign in the manner and with the effect specified
in Article 10 hereof. If, notwithstanding the foregoing
provisions of this Section 7(b), the Trustee has such a
material conflict of interest, the validity and enforceability
of this agreement shall not be affected in any manner
whatsoever by reason only of the existence of such material
conflict of interest. If the Trustee contravenes the foregoing
provisions of this Section 7(b), any interested party may
apply to the Alberta Court of Queen's Bench an order that the
Trustee be replaced as trustee hereunder.
(c) DEALINGS WITH TRANSFER AGENTS, REGISTRARS, ETC. VESI and
Veritas irrevocably authorize the Trustee, from time to time,
to:
(i) consult, communicate and otherwise deal with the
respective registrars and transfer agents, and with
any such subsequent registrar or transfer agent, of
the Series 1 Exchangeable Shares and Veritas Common
Stock; and
(ii) requisition, from time to time, (A) from any such
registrar or transfer agent any information readily
available from the records maintained by it which the
Trustee may reasonably require for the discharge of
its duties and responsibilities under this agreement
and (B) from the transfer agent of Veritas Common
Stock, and any subsequent transfer agent of such
shares, the share certificates issuable upon the
exercise from time to time of the
<PAGE> 19
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Exchange Right and pursuant to the Automatic Exchange
Rights in the manner specified in Article 5 hereof.
VESI and Veritas irrevocably authorize their respective
registrars and transfer agents to comply with all such
requests. Veritas covenants that it will supply its transfer
agent with duly executed share certificates for the purpose of
completing the exercise from time to time of the Exchange
Right and the Automatic Exchange Rights, in each case pursuant
to Article 5 hereof.
(d) BOOKS AND RECORDS. The Trustee shall keep available for
inspection by Veritas and VESI, at the Trustee's principal
office in Calgary, Alberta, correct and complete books and
records of account relating to the Trustee's actions under
this agreement, including without limitation all information
relating to mailings and instructions to and from Holders and
all transactions pursuant to the Voting Rights, the Exchange
Right and the Automatic Exchange Rights for the term of this
agreement. On or before June 30, 2000, and on or before June
30 in every year thereafter, so long as the Voting Share is on
deposit with the Trustee, the Trustee shall transmit to
Veritas and VESI a brief report, dated as of the preceding
March 31, with respect to:
(i) the property and funds comprising the Trust Estate as
of that date;
(ii) the number of exercises of the Exchange Right, if
any, and the aggregate number of Series 1
Exchangeable Shares received by the Trustee on behalf
of Holders in consideration of the issue and delivery
by Veritas of shares of Veritas Common Stock in
connection with the Exchange Right, during the
calendar year ended on such date; and
(iii) all other actions taken by the Trustee in the
performance of its duties under this agreement which
it had not previously reported.
(e) INCOME TAX RETURNS AND REPORTS. The Trustee shall, to the
extent necessary, prepare and file on behalf of the Trust
appropriate Canadian income tax returns and any other returns
or reports as may be required by applicable law or pursuant to
the rules and regulations of any securities exchange or other
trading system through which the Series 1 Exchangeable Shares
are traded and, in connection therewith, may obtain the advice
and assistance of such experts as the Trustee may consider
necessary or advisable. If requested by the Trustee, Veritas
shall retain such experts for purposes of providing such
advice and assistance.
(f) INDEMNIFICATION PRIOR TO CERTAIN ACTIONS BY TRUSTEE. The
Trustee shall exercise any or all of the rights, duties,
powers or authorities vested in it by this agreement at the
request, order or direction of any Holder upon such Holder
furnishing to the Trustee reasonable funding, security and
indemnity against the costs, expenses and liabilities which
may be incurred by the Trustee therein or thereby, provided
that no Holder shall be obligated to furnish to the Trustee
any such funding, security or indemnity in connection with the
exercise by the Trustee of any of its rights, duties, powers
and authorities with respect to the Voting Share pursuant
<PAGE> 20
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to Article 4 hereof, subject to Section 7(o) hereof, and with
respect to the Exchange Right pursuant to Article 5 hereof,
subject to Section 7(o) hereof, and with respect to the
Automatic Exchange Rights pursuant to Article 5 hereof.
None of the provisions contained in this agreement shall
require the Trustee to expend or risk its own funds or
otherwise incur financial liability in the exercise of any of
its rights, powers, duties or authorities unless funded, given
funds, security and indemnified as aforesaid.
(g) ACTIONS BY HOLDERS. No Holder shall have the right to
institute any action, suit or proceeding or to exercise any
other remedy authorized by this agreement for the purpose of
enforcing any of its rights or for the execution of any trust
or power hereunder unless the Holder has requested the Trustee
to take or institute such action, suit or proceeding and
furnished the Trustee with the funding, security and indemnity
referred to in Section 7(f) hereof and the Trustee shall have
failed to act within a reasonable time thereafter. In such
case, but not otherwise, the Holder shall be entitled to take
proceedings in any court of competent jurisdiction such as the
Trustee might have taken; it being understood and intended
that no one or more Holders shall have any right in any manner
whatsoever to affect, disturb or prejudice the rights hereby
created by any such action, or to enforce any right hereunder
or under the Voting Rights, the Exchange Right or the
Automatic Exchange Rights, except subject to the conditions
and in the manner herein provided, and that all powers and
trusts hereunder shall be exercised and all proceedings at law
shall be instituted, had and maintained by the Trustee, except
only as herein provided, and in any event for the equal
benefit of all Holders.
(h) RELIANCE UPON DECLARATIONS. The Trustee shall not be
considered to be in contravention of any of its rights,
powers, duties and authorities hereunder if, when required, it
acts and relies in good faith upon lists, mailing labels,
notices, statutory declarations, certificates, opinions,
reports or other papers or documents furnished pursuant to the
provisions hereof or required by the Trustee to be furnished
to it in the exercise of its rights, powers, duties and
authorities hereunder and such lists, mailing labels, notices,
statutory declarations, certificates, opinions, reports or
other papers or documents comply with the provisions of
Section 7(i) hereof, if applicable, and with any other
applicable provisions of this agreement.
(i) EVIDENCE AND AUTHORITY TO TRUSTEE. VESI and/or Veritas shall
furnish to the Trustee evidence of compliance with the
conditions provided for in this agreement relating to any
action or step required or permitted to be taken by VESI
and/or Veritas or the Trustee under this agreement or as a
result of any obligation imposed under this agreement,
including, without limitation, in respect of the Voting Rights
or the Exchange Right or the Automatic Exchange Rights and the
taking of any other action to be taken by the Trustee at the
request of or on the application of VESI and/or Veritas
forthwith if and when:
(i) such evidence is required by any other section of
this agreement to be furnished to the Trustee in
accordance with the terms of this Section 7(i); or
<PAGE> 21
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(ii) the Trustee, in the exercise of its rights, powers,
duties and authorities under this agreement, gives
VESI and/or Veritas written notice requiring it to
furnish such evidence in relation to any particular
action or obligation specified in such notice.
Such evidence shall consist of an Officer's Certificate of
VESI and/or Veritas or a statutory declaration or a
certificate made by persons entitled to sign an Officer's
Certificate stating that any such condition has been complied
with in accordance with the terms of this agreement.
Whenever such evidence relates to a matter other than the
Voting Rights or the Exchange Right or the Automatic Exchange
Rights, and except as otherwise specifically provided herein,
such evidence may consist of a report or opinion of any
solicitor, auditor, accountant, appraiser, valuer, engineer or
other expert or any other person whose qualifications give
authority to a statement made by him, provided that if such
report or opinion is furnished by a director, officer or
employee of VESI and/or Veritas it shall be in the form of an
Officer's Certificate or a statutory declaration.
Each statutory declaration, certificate, statement, opinion or
report furnished to the Trustee as evidence of compliance with
a condition provided for in this agreement shall include a
statement by the person giving the evidence:
(iii) declaring that he has read and understands the
provisions of this agreement relating to the
condition in question:
(iv) describing the nature and scope of the examination or
investigation upon which he based the statutory
declaration, certificate, statement, opinion or
report; and
(v) declaring that he has made such examination or
investigation as he believes is necessary to enable
him to make the statements or give the opinions
contained or expressed therein.
(j) EXPERTS, ADVISERS AND AGENTS. The Trustee may:
(i) in relation to these presents act and rely on the
opinion or advice of or information obtained from or
prepared by any solicitor, auditor, accountant,
appraiser, valuer, engineer or other expert, whether
retained by the Trustee or by VESI and/or Veritas or
otherwise, and may retain and employ such assistants
as may be necessary to the proper determination and
discharge of its powers and duties and determination
of its rights hereunder and may pay proper and
reasonable compensation for all such legal and other
advice or assistance as aforesaid; and
<PAGE> 22
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(ii) retain and employ such agents and other assistants as
it may reasonably require for the proper
determination and discharge of its powers and duties
hereunder, and may pay reasonable remuneration for
all services performed for it (and shall be entitled
to receive reasonable remuneration for all services
performed by it) in the discharge of the trusts
hereof and compensation for all disbursements, costs
and expenses made or incurred by it in the
determination and discharge of its duties hereunder
and in the management of the Trust.
(k) INVESTMENT OF MONEYS HELD BY TRUSTEE. Unless otherwise
provided in this agreement, any moneys held by or on behalf of
the Trustee which under the terms of this agreement may or
ought to be invested or which may be on deposit with the
Trustee or which may be in the hands of the Trustee may be
invested and reinvested in the name or under the control of
the Trustee in Authorized Investments, and the Trustee shall
so invest such moneys on the written direction of VESI.
Pending the investment of any moneys as hereinbefore provided,
such moneys may be deposited in the name of the Trustee in any
chartered bank in Canada or, with the consent of VESI, in the
deposit department of the Trustee or any other loan or trust
company authorized to accept deposits under the laws of Canada
or any province thereof at the rate of interest then current
on similar deposits.
(l) TRUSTEE NOT REQUIRED TO GIVE SECURITY. The Trustee shall not
be required to give any bond or security in respect of the
execution of the trusts, rights, duties, powers and
authorities of this agreement or otherwise in respect of the
premises.
(m) TRUSTEE NOT BOUND TO ACT ON REQUEST. Except as in this
agreement otherwise specifically provided, the Trustee shall
not be bound to act in accordance with any direction or
request of VESI and/or Veritas or of the directors thereof
until a duly authenticated copy of the instrument or
resolution containing such direction or request shall have
been delivered to the Trustee, and the Trustee shall be
empowered to act and rely upon any such copy purporting to be
authenticated and believed by the Trustee to be genuine.
(n) AUTHORITY TO CARRY ON BUSINESS. The Trustee represents to VESI
and Veritas that at the date of execution and delivery by it
of this agreement it is authorized to carry on the business of
a trust company in the Province of Alberta but if,
notwithstanding the provisions of this Section 7(n), it ceases
to be so authorized to carry on business, the validity and
enforceability of this agreement and the Voting Rights, the
Exchange Right and the Automatic Exchange Rights shall not be
affected in any manner whatsoever by reason only of such event
but the Trustee shall, within 90 days after ceasing to be
authorized to carry on the business of a trust company in the
Province of Alberta, either become so authorized or resign in
the manner and with the effect specified in Article 10 hereof.
<PAGE> 23
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(o) CONFLICTING CLAIMS. If conflicting claims or demands are made
or asserted with respect to any interest of any Holder in any
Series 1 Exchangeable Shares, including any disagreement
between the heirs, representatives, successors or assigns
succeeding to all or any part of the interest of any Holder in
any Series 1 Exchangeable Shares resulting in conflicting
claims or demands being made in connection with such interest,
then the Trustee shall be entitled, at its sole discretion, to
refuse to recognize or to comply with any such claim or
demand. In so refusing, the Trustee may elect not to exercise
any Voting Rights, Exchange Right or Automatic Exchange Rights
subject to such conflicting claims or demands and, in so
doing, the Trustee shall not be or become liable to any person
on account of such election or its failure or refusal to
comply with any such conflicting claims or demands. The
Trustee shall be entitled to continue to refrain from acting
and to refuse to act until:
(i) the rights of all adverse claimants with respect to
the Voting Rights, Exchange Right or Automatic
Exchange Rights subject to such conflicting claims or
demands have been adjudicated by a final judgment of
a court of competent jurisdiction; or
(ii) all differences with respect to the Voting Rights,
Exchange Right or Automatic Exchange Rights subject
to such conflicting claims or demands have been
conclusively settled by a valid written agreement
binding on all such adverse claimants, and the
Trustee shall have been furnished with an executed
copy of such agreement.
If the Trustee elects to recognize any claim or comply with
any demand made by any such adverse claimant, it may in its
discretion require such claimant to furnish such surety bond
or other security satisfactory to the Trustee as it shall deem
appropriate fully to indemnify it as between all conflicting
claims or demands.
(p) ACCEPTANCE OF TRUST. The Trustee hereby accepts the Trust
created and provided for by and in this agreement and agrees
to perform the same upon the terms and conditions herein set
forth and to hold all rights, privileges and benefits
conferred hereby and by law in trust for the various persons
who shall from time to time be Holders, subject to all the
terms and conditions herein set forth.
8. COMPENSATION
(a) Veritas and VESI jointly and severally agree to pay to the
Trustee reasonable compensation for all of the services
rendered by it under this agreement and will reimburse the
Trustee for all reasonable expenses (including but not limited
to taxes, compensation paid to experts, agents and advisors
and travel expenses) and disbursements, including the cost and
expense of any suit or litigation of any character and any
proceedings before any governmental agency reasonably incurred
by the Trustee in connection with its rights and duties under
this agreement; provided that Veritas and VESI shall have no
obligation to reimburse the Trustee for any expenses or
disbursements paid, incurred or suffered by the Trustee in any
suit or
<PAGE> 24
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litigation in which the Trustee is determined to have acted in
bad faith or with negligence or willful misconduct.
9. INDEMNIFICATION AND LIMITATION OF LIABILITY
(a) INDEMNIFICATION OF THE TRUSTEE. Veritas and VESI jointly and
severally agree to indemnify and hold harmless the Trustee and
each of its directors, officers, employees and agents
appointed and acting in accordance with this agreement
(collectively, the "Indemnified Parties") against all claims,
losses, damages, costs, penalties, fines and reasonable
expenses (including reasonable expenses of the Trustee's legal
counsel on a solicitor and his own client basis) which,
without fraud, negligence, willful misconduct or bad faith on
the part of such Indemnified Party, may be paid, incurred or
suffered by the Indemnified Party by reason of or as a result
of the Trustee's acceptance or administration of the Trust,
its compliance with its duties set forth in this agreement, or
any written or oral instructions delivered to the Trustee by
Veritas or VESI pursuant hereto. In no case shall Veritas or
VESI be liable under this indemnity for any claim against any
of the Indemnified Parties unless Veritas and VESI shall be
notified by the Trustee of the written assertion of a claim or
of any action commenced against the Indemnified Parties,
promptly after any of the Indemnified Parties shall have
received any such written assertion of a claim or shall have
been served with a summons or other first legal process giving
information as to the nature and basis of the claim. Subject
to (ii), below, Veritas and VESI shall be entitled to
participate at their own expense in the defense and, if
Veritas or VESI so elect at any time after receipt of such
notice, either of them may assume the defense of any suit
brought to enforce any such claim. The Trustee shall have the
right to employ separate counsel in any such suit and
participate in the defense thereof but the fees and expenses
of such counsel shall be at the expense of the Trustee unless:
(i) the employment of such counsel has been authorized by
Veritas or VESI, such authorization not to be unreasonably
withheld; or (ii) the named parties to any such suit include
both the Trustee and Veritas or VESI and the Trustee shall
have been advised by counsel acceptable to Veritas or VESI
that there may be one or more legal defenses available to the
Trustee that are different from or in addition to those
available to Veritas or VESI and that an actual or potential
conflict of interest exists (in which case Veritas and VESI
shall not have the right to assume the defense of such suit on
behalf of the Trustee but shall be liable to pay the
reasonable fees and expenses of counsel for the Trustee). This
indemnity shall survive the resignation or removal of the
Trustee and the termination of this agreement.
(b) LIMITATION OF LIABILITY. The Trustee shall not be held liable
for any loss which may occur by reason of depreciation of the
value of any part of the Trust Estate or any loss incurred on
any investment of funds pursuant to this agreement, except to
the extent that such loss is attributable to the fraud,
negligence, willful misconduct or bad faith on the part of the
Trustee.
<PAGE> 25
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10. CHANGE OF TRUSTEE
(a) RESIGNATION. The Trustee, or any trustee hereafter appointed,
may at any time resign by giving written notice of such
resignation to Veritas and VESI specifying the date on which
it desires to resign, provided that such notice shall never be
given less than 60 days before such desired resignation date
unless Veritas and VESI otherwise agree and provided further
that such resignation shall not take effect until the date of
the appointment of a successor trustee and the acceptance of
such appointment by the successor trustee. Upon receiving such
notice of resignation, Veritas and VESI shall promptly appoint
a successor trustee by written instrument in duplicate, one
copy of which shall be delivered to the resigning trustee and
one copy to the successor trustee. Failing acceptance by a
successor trustee, a successor trustee may be appointed by an
order of the Alberta Court of Queen's Bench upon application
of one or more of the parties hereto. Should the retiring
Trustee apply for the appointment of a successor trustee by an
order of the Alberta Court of Queen's Bench it shall be at the
joint and several expense of Veritas and VESI.
(b) REMOVAL. The Trustee, or any trustee hereafter appointed, may
be removed with or without cause, at any time on 60 days'
prior notice by written instrument executed by Veritas and
VESI, in duplicate, one copy of which shall be delivered to
the trustee so removed and one copy to the successor trustee,
provided that, in connection with such removal, provision is
made for a replacement trustee similar to that contemplated in
Section 10(a).
(c) SUCCESSOR TRUSTEE. Any successor trustee appointed as provided
under this agreement shall execute, acknowledge and deliver to
Veritas and VESI and to its predecessor trustee an instrument
accepting such appointment. Thereupon the resignation or
removal of the predecessor trustee shall become effective and
such successor trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers,
duties and obligations of its predecessor under this
agreement, with like effect as if originally named as trustee
in this agreement. However, on the written request of Veritas
and VESI or of the successor trustee, the trustee ceasing to
act shall, upon payment of any amounts then due it pursuant to
the provisions of this agreement, execute and deliver an
instrument transferring to such successor trustee all the
rights and powers of the trustee so ceasing to act. Upon the
request of any such successor trustee, Veritas, VESI and such
predecessor trustee shall execute any and all instruments in
writing for more fully and certainly vesting in and confirming
to such successor trustee all such rights and powers.
(d) NOTICE OF SUCCESSOR TRUSTEE. Upon acceptance of appointment by
a successor trustee as provided herein, Veritas and VESI shall
cause to be mailed notice of the succession of such trustee
hereunder to each Holder specified in a List. If Veritas or
VESI shall fail to cause such notice to be mailed within 10
days after acceptance of appointment by the successor trustee,
the successor trustee shall cause such notice to be mailed at
the expense of Veritas and VESI.
<PAGE> 26
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11. VERITAS SUCCESSORS
(a) CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC. Veritas
shall not enter into any transaction (whether by way of
reconstruction, reorganization, consolidation, merger,
amalgamation, transfer, sale, lease or otherwise) whereby all
or substantially all of its undertaking, property and assets
would become the property of any other Person or, in the case
of a merger or amalgamation, of the continuing corporation
resulting therefrom unless, but may do so if:
(i) such other Person or continuing corporation (the
"Veritas Successor"), by operation of law, becomes,
without further action, bound by the terms and
provisions of this agreement or, if not so bound,
executes, prior to or contemporaneously with the
consummation of such transaction an agreement
supplemental hereto and such other instruments (if
any) as are satisfactory to the Trustee and in the
opinion of legal counsel to the Trustee are necessary
or advisable to evidence the assumption by the
Veritas Successor of liability for all moneys payable
and property deliverable hereunder and the covenant
of such Veritas Successor to pay and deliver or cause
to be delivered the same and its agreement to observe
and perform all the covenants and obligations of
Veritas under this agreement; and
(ii) such transaction shall, to the satisfaction of the
Trustee and in the opinion of legal counsel to the
Trustee, be upon such terms as substantially to
preserve and not to impair in any material respect
any of the rights, duties, powers and authorities of
the Trustee or of the Holders hereunder.
(b) VESTING OF POWERS IN SUCCESSOR. Whenever the conditions of
Section 11(a) hereof have been duly observed and performed,
the Trustee, if required, by Section 11(a) hereof, the Veritas
Successor and VESI shall execute and deliver the supplemental
agreement provided for in Article 12 hereof and thereupon the
Veritas Successor shall possess and from time to time may
exercise each and every right and power of Veritas under this
agreement in the name of Veritas or otherwise and any act or
proceeding by any provision of this agreement required to be
done or performed by the board of directors of Veritas or any
officers of Veritas may be done and performed with like force
and effect by the directors or officers of such Veritas
Successor.
(c) WHOLLY-OWNED SUBSIDIARIES. Nothing herein shall be construed
as preventing the amalgamation or merger of any wholly-owned
subsidiary of Veritas with or into Veritas or the winding-up,
liquidation or dissolution of any wholly-owned subsidiary of
Veritas provided that all of the assets of such subsidiary are
transferred to Veritas or another wholly-owned subsidiary of
Veritas, and any such transactions are expressly permitted by
this Article 11.
<PAGE> 27
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12. AMENDMENTS AND SUPPLEMENTAL AGREEMENTS
(a) AMENDMENTS, MODIFICATIONS, ETC. This agreement may not be
amended or modified except by an agreement in writing executed
by VESI, Veritas and the Trustee and approved by the Holders
in accordance with Section 9.2 of the Exchangeable Share
Provisions.
(b) MINISTERIAL AMENDMENTS. Notwithstanding the provisions of
Section 12(a) hereof, the parties to this agreement may in
writing, at any time and from time to time, without the
approval of the Holders, amend or modify this agreement for
the purposes of:
(i) adding to the covenants of any or all of the parties
hereto for the protection of the Holders hereunder;
(ii) making such amendments or modifications not
inconsistent with this agreement as may be necessary
or desirable with respect to matters or questions
which, in the opinion of the board of directors of
each of Veritas and VESI and in the opinion of the
Trustee and its counsel, having in mind the best
interests of the Holders as a whole, it may be
expedient to make, provided that such boards of
directors and the Trustee and its counsel shall be of
the opinion that such amendments and modifications
will not be prejudicial to the interests of the
Holders as a whole; or
(iii) making such changes or corrections which, on the
advice of counsel to VESI, Veritas and the Trustee,
are required for the purpose of curing or correcting
any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error,
provided that the Trustee and its counsel and the
board of directors of each of VESI and Veritas shall
be of the opinion that such changes or corrections
will not be prejudicial to the interests of the
Holders as a whole.
(c) MEETING TO CONSIDER AMENDMENTS. VESI, at the request of
Veritas, shall call a meeting or meetings of the Holders for
the purpose of considering any proposed amendment or
modification requiring approval pursuant hereto. Any such
meeting or meetings shall be called and held in accordance
with the by-laws of VESI, the Exchangeable Share Provisions
and all applicable laws.
(d) CHANGES IN CAPITAL OF VERITAS AND VESI. At all times after the
occurrence of any event effected pursuant to Section 2(g) or
Section 2(h) of the Support Agreement, as a result of which
either Veritas Common Stock or the Series 1 Exchangeable
Shares or both are in any way changed, this agreement shall
forthwith be amended and modified as necessary in order that
it shall apply with full force and effect, mutatis mutandis,
to all new securities into which Veritas Common Stock or the
Series 1 Exchangeable Shares or both are so changed and the
parties hereto shall execute and deliver a supplemental
agreement giving effect to and evidencing such necessary
amendments and modifications.
<PAGE> 28
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(e) EXECUTION OF SUPPLEMENTAL AGREEMENTS. No amendment to or
modification or waiver of any of the provisions of this
agreement otherwise permitted hereunder shall be effective
unless made in writing and signed by all of the parties
hereto. From time to time VESI (when authorized by a
resolution of its Board of Directors), Veritas (when
authorized by a resolution of its board of directors) and the
Trustee may, subject to the provisions of these presents, and
they shall, when so directed by these presents, execute and
deliver by their proper officers, agreements or other
instruments supplemental hereto, which thereafter shall form
part hereof, for any one or more of the following purposes:
(i) evidencing the succession of any Veritas Successors
to Veritas and the covenants of and obligations
assumed by each such Veritas Successors in accordance
with the provisions of Article 11 and the successor
of any successor trustee in accordance with the
provisions of Article 10;
(ii) making any additions to, deletions from or
alterations of the provisions of this agreement or
the Voting Rights, the Exchange Right or the
Automatic Exchange Rights which, in the opinion of
the Trustee and its counsel, will not be prejudicial
to the interests of the Holders as a whole or are in
the opinion of counsel to the Trustee necessary or
advisable in order to incorporate, reflect or comply
with any legislation the provisions of which apply to
Veritas, VESI, the Trustee or this agreement; and
(iii) for any other purposes not inconsistent with the
provisions of this agreement, including without
limitation to make or evidence any amendment or
modification to this agreement as contemplated
hereby, provided that, in the opinion of the Trustee
and its counsel, the rights of the Trustee and the
Holders as a whole will not be prejudiced thereby.
13. TERMINATION
(a) TERM. The Trust created by this agreement shall continue until
the earliest to occur of the following events:
(i) no outstanding Series 1 Exchangeable Shares are held
by a Holder;
(ii) each of VESI and Veritas elects in writing to
terminate the Trust and such termination is approved
by the Holders of the Series 1 Exchangeable Shares in
accordance with Section 9.2 of the Exchangeable Share
Provisions; and
(iii) 21 years after the death of the last survivor of the
descendants of His Majesty King George VI of the
United Kingdom of Great Britain and Northern Ireland
living on the date of the creation of the Trust.
<PAGE> 29
- 29 -
(b) SURVIVAL OF AGREEMENT. This agreement shall survive any
termination of the Trust and shall continue until there are no
Series 1 Exchangeable Shares outstanding held by a Holder;
provided, however, that the provisions of Articles 8 and 9
hereof shall survive any such termination of this agreement.
14. GENERAL
(a) SEVERABILITY. If any provision of this agreement is held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remainder of this agreement shall not in
any way be affected or impaired thereby and the agreement
shall be carried out as nearly as possible in accordance with
its original terms and conditions.
(b) INUREMENT. This agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective
successors and permitted assigns and to the benefit of the
Holders.
(c) NOTICES TO PARTIES. All notices and other communications
between the parties hereunder shall be in writing and shall be
deemed to have been given if delivered personally or by
confirmed telecopy to the parties at the following addresses
(or at such other address for such party as shall be specified
in like notice):
(i) if to Veritas at:
Veritas DGC Inc.
3701 Kirby Drive, Suite 112
Houston, Texas 77098
Attention: Chairman
Telecopy: (713) 526-5611
(ii) if to VESI at:
Veritas Energy Services Inc.
Suite 300, 615 - Third Avenue S.W.
Calgary, Alberta T2P 0G9
Attention: President
Telecopy: (403) 266-9359
(iii) if to the Trustee at:
if by mail or delivery:
CIBC Mellon Trust Company
600 The Dome Tower
333 - 7th Avenue S.W.
Calgary, Alberta T2P 2Z1
Telecopy: (403) 232-2400
<PAGE> 30
- 30 -
Any notice or other communication given personally shall be
deemed to have been given and received upon delivery thereof
and if given by telecopy shall be deemed to have been given
and received on the date of receipt thereof unless such day is
not a Business Day in which case it shall be deemed to have
been given and received upon the immediately following
Business Day.
(d) NOTICE OF HOLDERS. Any and all notices to be given and any
documents to be sent to any Holders may be given or sent to
the address of such Holder shown on the register of Holders of
Series 1 Exchangeable Shares in any manner permitted by the
Exchangeable Share Provisions and shall be deemed to be
received (if given or sent in such manner) at the time
specified in such Exchangeable Share Provisions, the
provisions of which the Exchangeable Share Provisions shall
apply mutatis mutandis to notices or documents as aforesaid
sent to such Holders.
(e) RISK OF PAYMENTS BY POST. Whenever payments are to be made or
documents are to be sent to any Holder by the Trustee, by VESI
or by Veritas or by such Holder to the Trustee or to Veritas
or VESI, the making of such payment or sending of such
document sent through the post shall be at the risk of VESI or
Veritas, in the case of payments made or documents sent by the
Trustee or VESI or Veritas, and the Holder, in the case of
payments made or documents sent by the Holder.
(f) COUNTERPARTS. This agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument. A
counterpart delivered by facsimile is hereby deemed to be as
effective as a counterpart delivered in original form.
(g) JURISDICTION. This agreement shall be construed and enforced
in accordance with the laws of the Province of Alberta and the
laws of Canada applicable therein.
(h) ATTORNMENT. Veritas agrees that any action or proceeding
arising out of or relating to this agreement may be instituted
in the courts of Alberta, waives any objection which it may
have now or hereafter to the venue of any such action or
proceeding, irrevocably submits to the jurisdiction of the
said courts in any such action or proceeding, agrees to be
bound by any judgment of the said courts and agrees not to
seek, and hereby waives, any review of the merits of any such
judgment by the courts of any other jurisdiction and hereby
appoints VESI at its registered office in the Province of
Alberta as Veritas' attorney for service of process.
<PAGE> 31
- 31 -
IN WITNESS WHEREOF, the parties hereby have caused this agreement to be
duly executed as of the date first above written.
VERITAS DGC INC.
Per: /s/ LARRY WORDEN
-----------------------------------
-----------------------------------
VERITAS ENERGY SERVICES INC.
Per: /s/ LARRY WORDEN
-----------------------------------
-----------------------------------
CIBC MELLON TRUST COMPANY
Per: /s/ DANEAL MC GEEIN
-----------------------------------
/s/ J. FISHER
-----------------------------------
<PAGE> 1
EXHIBIT 10.C
VERITAS DGC INC.
FIFTH AMENDED AND RESTATED
1992 EMPLOYEE NONQUALIFIED STOCK OPTION PLAN
(AS AMENDED AND RESTATED SEPTEMBER 30, 1999)
1. PURPOSE.
The purpose of this 1992 Employee Nonqualified Stock Option Plan (the
"Plan") of Veritas DGC Inc. (the "Company") (formerly known as Digicon Inc.) is
to provide officers and other key employees with a continuing proprietary
interest in the Company. The Plan is intended to advance the interests of the
Company by enabling it (i) to increase the interest in the Company's welfare of
those employees who share the primary responsibility for the management, growth,
and protection of the business of the Company, (ii) to furnish an incentive to
such persons to continue their services to the Company, (iii) to provide a means
through which the Company may continue to induce able management and operating
personnel to enter its employ, and (iv) to provide a means through which the
Company may effectively compete with other organizations offering similar
incentive benefits in obtaining and retaining the services of competent
management and operating personnel.
2. STOCK SUBJECT TO THE PLAN.
The Company may grant from time to time options to purchase shares of
the Company's authorized but unissued common stock, par value $.01 per share, or
treasury shares of the common stock. Subject to adjustment as provided in
Section 11 hereof, the aggregate number of shares which may be issued or covered
by options pursuant to the Plan is 3,954,550 shares, as adjusted for the one for
three reverse stock split effective January 17, 1995. Shares of common stock
applicable to options which have expired unexercised or terminated for any
reason may again be subject to an option or options under the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Compensation Committee of the
Company's board of directors (the "Committee"). The board of directors may, from
time to time, remove members from or add members to the Committee. Vacancies in
the Committee, however caused, shall be filled by the board of directors. No
member of the Committee shall be eligible to receive options under the Plan. The
Committee shall select one of its members chairman and shall hold meetings at
such times and places as it may determine. The Committee may appoint a secretary
and, subject to the provisions of the Plan and to policies determined by the
board of directors, may make such rules and regulations for the conduct of its
business as it shall deem advisable. A majority of the Committee shall
constitute a quorum. All action of the Committee shall be taken by a majority of
its members. Any action may be taken by a written instrument signed by a
majority of the members, and action so taken shall be fully as effective as if
it had been taken by a vote of the majority of the members at a meeting duly
called and held.
<PAGE> 2
(b) Subject to the express terms and conditions of the Plan, the
Committee shall have full power to construe or interpret the Plan, to prescribe,
amend, and rescind rules and regulations relating to it and to make all other
determinations necessary or advisable for its administration.
(c) Subject to the provisions of Sections 4 and 5 hereof, the Committee
may, from time to time, determine which employees of the Company or subsidiary
corporations shall be granted options under the Plan, the number of shares
subject to each option, and the time or times at which options shall be granted.
(d) The Committee shall report to the board of directors the names of
employees granted options, and the number of option shares subject to, and the
terms and conditions of, each option; provided, however that no option may be
granted to an otherwise eligible employee if, after giving effect to the
proposed grant, such employee would then hold options covering more than 500,000
shares of common stock under the Plan.
(e) No member of the board of directors or of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any option.
4. ELIGIBILITY.
All full-time salaried employees of the Company and of its
majority-owned subsidiaries shall be eligible to participate in the Plan, and
options may be granted by the Committee to eligible employees designated by the
Committee, either at the Committee's own initiative or upon the recommendation
of management. In determining the employees to whom options shall be granted and
the number of shares to be covered by each option, the Committee may take into
account the nature of the services rendered by the respective employees, their
present and potential contributions to the success of the Company, and such
other factors as the Committee in its discretion shall deem relevant. The
Company shall effect the granting of options under the Plan in accordance with
the determination made by the Committee.
5. PRICE OF OPTIONS.
The option price per share shall be not less than the lesser of (i)
fair market value of the common stock on the date the option is granted or (ii)
the average fair market value for the common stock during the thirty trading
days ending on the trading day next preceding the date the option is granted.
Fair market value on any day shall be deemed to be the last reported sale price
of the common stock on the principal stock exchange on which the Company's
common stock is traded on that date. If no trading occurred on such date, or, if
at the time the common stock shall not be listed for trading, fair market value
shall be deemed to be the mean between the quoted bid and asked prices for the
common stock on such exchange or in the over-the-counter market, as the case may
be, on that date.
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<PAGE> 3
6. TERM OF OPTION.
No option shall be exercisable after the expiration of ten years from
the date the option is granted.
7. EXERCISE OF OPTIONS.
(a) General. Except as provided below, each option may be exercised at
such times and in such amounts as the Committee in its discretion may provide.
(a) Manner of Exercising Options. Shares of common stock purchased
under options shall at the time of purchase be paid for in full. To the extent
that the right to purchase shares has accrued hereunder, options may be
exercised from time to time by written notice to the Company stating the full
number of shares with respect to which the option is being exercised, and the
time of delivery thereof, which shall be at least 15 days after the giving of
such notice unless an earlier date shall have been mutually agreed upon. At such
time, the Company shall, without transfer or issue tax to the optionee (or other
person entitled to exercise the option) deliver to the optionee (or to such
other person) at the principal office of the Company, or such other place as
shall be mutually acceptable, a certificate or certificates for such shares
against prior payment of the option price in full on the date of notice of
exercise for the number of shares to be delivered by certified or official bank
check or the equivalent thereof acceptable to the Company; provided, however,
that the time of such issuance and delivery may be postponed by the Company for
such period as may be required for it with reasonable diligence to comply with
any requirements of law, the listing requirements of the New York Stock Exchange
or any other exchange on which the common stock may then be listed. If the
optionee (or other person entitled to exercise the option) fails to pay for all
or any part of the number of shares specified in such notice or to accept
delivery of such shares upon tender of delivery thereof, the right to exercise
the option with respect to such undelivered shares shall be terminated.
8. NON-ASSIGNABILITY OF OPTION RIGHTS.
No option granted under the Plan shall be assignable or transferable
otherwise than by will or by the laws of descent and distribution. During the
lifetime of an optionee, the option shall be exercisable only by him.
9. TERMINATION OF EMPLOYMENT.
Except as otherwise provided in this paragraph, options shall terminate
90 days following the termination of the optionee's employment with the Company
for any reason, but shall be exercisable following termination only to the
extent that the option had become vested on the termination date. In the event
that the optionee retires from the Company (at or after age 65) the optionee
shall have the right, subject to the provisions of Section 6, to exercise his
option at any time within one year after such termination, to the extent that
such option had become vested on the termination date. If, however, the optionee
shall die in the employment of the Company, then for the lesser of the maximum
period during which such option might have been exercisable
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<PAGE> 4
or one year after the date of death, his estate, personal representative, or
beneficiary shall have the same right to exercise the option of such employee as
he would have had if he had survived and remained in the employment of the
Company. For purposes of this Section 9, employment by any majority-owned
subsidiary corporation of the Company shall be deemed employment by the Company.
In the discretion of the Committee, a leave of absence approved in
writing by the board of directors of the Company shall not be deemed a
termination of employment; however, no option may be exercised during such leave
of absence.
10. CHANGE OF CONTROL.
If, at any time, a person, entity or group (including, in each case,
all other persons, entities or groups controlling, controlled by, or under
common control with or acting in concert or concurrently with, such person,
entity or group) shall hold, purchase or acquire beneficial ownership (including
without limitation power to vote) of 50% or more of the then outstanding shares
of the Company's common stock, then any portion of the Options which have not
yet become exercisable shall thereupon become immediately exercisable.
11. ADJUSTMENT OF OPTIONS ON RECAPITALIZATION OR REORGANIZATION.
The aggregate number of shares of common stock on which options may be
granted to persons participating under the Plan, the aggregate number of shares
of common stock on which options may be granted to any one such person, the
number of shares thereof covered by each outstanding option, and the price per
share thereof in each such option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of common stock of the
Company resulting from the subdivision or combination of shares or other capital
adjustments, or the payment of a stock dividend after the effective date of this
Plan, or other increase or decrease in such shares effected without receipt of
consideration by the Company; provided, however, that no adjustment shall be
made unless the aggregate effect of all such increases and decreases occurring
in any one fiscal year after the effective date of this Plan will increase or
decrease the number of issued shares of common stock of the Company by 5% or
more; and, provided, further, that any options to purchase fractional shares
resulting from any such adjustment shall be eliminated.
Subject to any required action by the stockholders and to Section 10
hereof, if the Company shall be the surviving or resulting corporation in any
merger or consolidation, any option granted hereunder shall pertain to and apply
to the securities to which a holder of the number of shares of common stock
subject to option would have been entitled had such option been exercised
immediately preceding such merger or consolidation; but a dissolution or
liquidation of the Company, or a merger or consolidation in which the Company is
not the surviving or resulting corporation (except for a change in Control as
defined in Section 10 hereof in which case Section 10 shall govern then
outstanding options) shall cause every option outstanding hereunder to
terminate, except that the surviving or resulting corporation may, in its
absolute and uncontrolled discretion, tender an option or options to purchase
its shares on its
Page 4
<PAGE> 5
terms and conditions, both as to the number of shares and otherwise.
Adjustments under this Section shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
12. AGREEMENTS BY OPTIONEE.
Each individual optionee shall agree:
(a) If requested by the Company, at the time of exercise of any option,
to execute an agreement stating that he is purchasing the shares subject to
option for investment purposes and not with a view to the resale or distribution
thereof;
(b) To authorize the Company to withhold from his gross pay any tax
which it believes is required to be withheld with respect to any benefit under
the Plan, and to hold as security for the amount to be withheld any property
otherwise distributable to the optionee under the Plan until the amounts
required to be withheld have been so withheld.
13. RIGHTS AS A SHAREHOLDER.
The optionee shall have no rights as a stockholder with respect to any
shares of common stock of the Company held under option until the date of
issuance of the stock certificates to him for such shares.
14. EFFECTIVE DATE.
The Plan was effective as of September 1, 1992, upon approval by the
holders of a majority of the shares of outstanding capital stock present at the
December 17, 1992 annual meeting of the Company's stockholders. The Plan was
amended by the board of directors on August 29, 1997, amended and restated by
the board of directors on March 10, 1997, and December 9, 1998, and amended by
the board of directors on March 9, 1999.
15. AMENDMENTS.
(a) The board of directors may, from time to time, alter, suspend or
terminate the Plan, or alter or amend any and all option agreements granted
thereunder but only for one or more of the following purposes:
(1) To modify the administrative provisions of the Plan or options;
(2) To make any other amendment which does not materially alter the
intent or benefits of the Plan; or
Page 5
<PAGE> 6
(3) Increase the maximum number of shares as to which options may
be granted under the Plan either to all persons participating in the
Plan or to any one such person.
(b) It is expressly provided that no such action of the board of
directors may, without the approval of the stockholders, alter the provisions of
the Plan or option agreements granted thereunder so as to:
(1) Decrease the option price applicable to any options granted
under the Plan, provided, however, that the provisions of this clause
(1) shall not prevent the granting, to any person holding an option
under the Plan, of additional options under the Plan exercisable at a
lower option price; or
(2) Alter any outstanding option agreement to the detriment of the
optionee, without his consent.
16. EMPLOYMENT OBLIGATION.
The granting of any option under this Plan shall not impose upon the
Company any obligation whatsoever to employ or to continue to employ any
optionee, and the right of the Company to terminate the employment of any
officer or other employee shall not be diminished or affected by reason of the
fact that an option has been granted to him under the Plan.
17. VES OPTIONS.
In order to carry out the terms of (i) the Combination Agreement dated
May 10, 1996, between the Company and Veritas Energy Services Inc. ("VES") which
was approved by the Company's stockholders at a special meeting held on August
20, 1996 and (ii) the Plan of Arrangement under Part 15 of the Business
Corporations Act (Alberta) relating to the combination of the Company and VES
which, pursuant to an interim order of the Court of Queen's Bench of Alberta
date July 18, 1996, was approved at special meetings of VES optionholders and
shareholders held August 20, 1996, this Plan shall include under its terms each
of the options (the "VES Options") outstanding on the Effective Date (as defined
in the Combination Agreement) (which includes all outstanding options granted
under VES' Stock Option Plan for Directors, Officers and Key Employees (the "VES
Option Plan")) without any further action on the part of any holder thereof
(each a "VES Optionholder"). Effective as of the Effective Time, each VES Option
will be exercisable to purchase that number of shares of the Company's common
stock determined by multiplying the number of VES common shares (the "VES Common
Shares") subject to such VES Option at the Effective Time by the Exchange Ratio
(as defined in the Combination Agreement), at an exercise price per share of
such VES Option immediately prior to the Effective Time, divided by the Exchange
Ratio. On the Effective Date (as defined in the Combination Agreement), such
option price shall be converted into a United States dollar equivalent based on
the noon spot rate of exchange of the Bank of Canada on such date. If the
foregoing calculation results in an exchanged VES Option being exercisable for a
fractional share of the Company's common stock, then the number of shares of
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<PAGE> 7
the Company's common stock subject to such option will be rounded down to the
nearest whole number of shares and the total exercise price for the option will
be reduced by the exercise price of the fractional share. The term,
exercisability, vesting schedule and all other terms and conditions of the VES
Options will otherwise be unchanged and shall operate in accordance with their
terms, notwithstanding anything to the contrary contained herein.
18. ENERTEC OPTIONS
In order to carry out the terms of (i) the Combination Agreement dated
as of March 30, 1999, which was approved by the Company's stockholders at a
special meeting held on September 21, 1999, and (ii) the Plan of Arrangement
under Part 15 of the Business Corporations Act (Alberta) relating to the
combination of the Company and Enertec Resource Services Inc., which, pursuant
to an amended interim order of the Court of Queen's Bench of Alberta dated
August 11, 1999, was approved at special meetings of Enertec option holders and
shareholders held September 22, 1999, this Plan shall include under its terms
each of the options (the "Enertec Options") outstanding on the Effective Date
(as defined in the Combination Agreement)(which includes all outstanding options
granted under Enertec's stock option plans for directors, officers and employees
(collectively, the "Enertec Option Plan")) without any further action on the
part of any holder thereof (each a "Enertec Optionholder"). Effective as of the
Effective Time, each Enertec Option will be exercisable to purchase that number
of shares of the Company's common stock determined by multiplying the number of
Enertec common shares (the "Enertec Common Shares") subject to such Enertec
Option at the Effective Time by the Exchange Ratio (as defined in the
Combination Agreement), at an exercise price per share of the Company's common
stock equal to the exercise price per share of such Enertec Option immediately
prior the Effective Time, divided by the Exchange Ratio. On the Effective Date
(as defined in the Combination Agreement), such option price shall be converted
into a United States dollar equivalent based on the rate of exchange as stated
in The Wall Street Journal next published after the Effective Time. If the
foregoing calculation results in an exchanged Enertec Option being exercisable
for a fractional share of the Company's common stock, then the number of shares
of the Company's common stock subject to such option will be rounded down to the
nearest whole number of shares and the total exercise price for the option will
be reduced by the exercise price of the fractional share. Each exchanged Enertec
Option shall be:
(a) fully vested immediately after the Effective Time; and
(b) for a term commencing at the Effective Time and ending as follows:
(1) for each optionholder who:
(i) is an Enertec director, officer or employee as at the
Effective Time (a "Current Optionholder"); and
(ii) after the Effective Time is employed or retained by the
Company, Enertec or one of their Subsidiaries, on the
date as set forth in subsections 5(b) and (d) of the
Enertec Option Plan;
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<PAGE> 8
(2) for each Current Optionholder who at the Effective Time is not
retained as a director, officer or employee of the Company,
Enertec or one of their subsidiaries, on the date that is the
first business day on or immediately after the date that is 90
days after the later of the Effective Date and the date such
director, officer or employee is terminated; or
(3) notwithstanding the provisions of (1) and (2) above, the
Enertec Option Plan or the Plan, for each Current Optionholder
with an Executive Termination Contract (as defined in the
Combination Agreement), on the current expiry date of such
option (the sixth anniversary date).
The term, exerciseability, and all other terms and conditions of the
Enertec Options will otherwise be unchanged and shall operate in accordance with
their terms, notwithstanding anything to the contrary contained herein."
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<PAGE> 1
EXHIBIT 10-J
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into
by and between Veritas DGC Inc., a Delaware corporation (hereinafter referred
to as "Employer"), and Timothy L. Wells, an individual currently resident in
Harris County, Texas (hereinafter referred to as "Employee") effective as of
July 1, 1999.
Attendant to Employee's employment by Employer, Employer and Employee
wish for there to be a complete understanding and agreement between Employer
and Employee with respect to, among other terms, Employee's duties and
responsibilities to Employer; the compensation and benefits owed to Employee;
the fiduciary duties owed by Employee to Employer; Employee's obligation to
avoid conflicts of interest, disclose pertinent information to Employer, and
refrain from using or disclosing Employer's information; and the term of
employment.
NOW, THEREFORE, in consideration of Employee's continued employment by
Employer and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Employer and Employee agree as
follows:
Section 1. General Duties of Employer and Employee.
a. Employer agrees to employ Employee, and Employee agrees to accept
employment by Employer and to serve Employer in an executive capacity as its
President and Chief Operating Officer. The duties and responsibilities of
Employee include those described for the particular position in the Bylaws of
Employer or other documents of Employer, and such other or additional duties as
may from time-to-time be assigned to Employee by the Board of Directors of
Employer (hereinafter referred to as the "Board") or any duly authorized
committee thereof or an authorized officer of Employer.
b. While employed hereunder, Employee shall devote substantially all of
his time, efforts, skills and attention for the benefit of and with his primary
attention to the affairs of Employer in order that he shall faithfully perform
his duties and obligations. The preceding sentence shall not, however, be
deemed to restrict Employee from attending to matters or engaging in activities
not directly related to the business of Employer, provided that (i) such
activities or matters are reasonable in scope and time commitment and not
otherwise in violation of this Agreement, and (ii) Employee shall not become a
director of any corporation or other entity (excluding charitable or other
non-profit organizations) without prior written disclosure to, and consent of,
Employer.
c. Employee agrees and acknowledges that he owes a fiduciary duty of
loyalty, fidelity and allegiance to act at all times in the best interests of
Employer and to do no act which would injure Employer's business, its interests
or its reputation.
<PAGE> 2
Section 2. Compensation and Benefits.
a. To the extent that Employee has not received or been reimbursed for
the following items under the terms of the Foreign Service Agreement dated as
of September 1, 1998 between him and Veritas DGC Asia Pacific Ltd. (the
"Foreign Services Agreement"), Employer shall pay or reimburse Employee for the
following items:
i. One (1) each least cost airline ticket for Employee and each
of his family members from Singapore to Houston;
ii. All reasonable expenses incurred by Employee for moving his
and his family's personal effects by sea from Singapore to
Houston;
iii. Temporary living accommodations selected by the Company and
reasonable living expenses (excluding entertainment) for a
period designated by the Company;
iv. A relocation bonus equal to one month's salary due within
thirty (30) days of taking up permanent residency in the
Houston, Texas area;
v. Preparation of 1999 tax returns for Singapore and the U.S. by
an accounting firm to be designated by Employer (including a
final accounting under the tax equalization program).
b. As compensation for services to Employer, Employer shall pay to
Employee during the term of this Agreement a salary at an annual rate of
$220,000. The salary shall be payable in equal installments every two weeks or
on such other schedule as Employer may establish from time to time for its
management personnel.
c. Employee shall be reimbursed in accordance with Employer's normal
expense reimbursement policy for all of the actual and reasonable costs and
expenses incurred by him in the performance of his services and duties
hereunder, including, but not limited to, travel and entertainment expenses.
Employee shall furnish Employer with all invoices and vouchers reflecting
amounts for which Employee seeks Employer's reimbursement.
d. Employee shall be entitled to participate in all insurance and
retirement plans, incentive compensation plans (at a level appropriate to his
position) and such other benefit plans or programs as may be in effect from
time-to-time for the key management employees of Employer including, without
limitation, those related to savings and thrift, retirement, welfare, medical,
dental, disability, salary continuance, accidental death, travel accident, life
insurance, incentive bonus, membership in business and professional
organizations, reimbursement of business and entertainment expenses, physical
examinations, and financial, legal and tax counseling.
e. Employer shall indemnify Employee for claims and expenses to the
extent provided in Employer's Bylaws.
-2-
<PAGE> 3
f. All salary, bonus and other payments made by Employer to Employee
pursuant to this Agreement shall be subject to such payroll and withholding
deductions as may be required by law and other deductions applied generally to
employees of Employer for insurance and other employee benefit plans in which
Employee participates.
Section 3. Fiduciary Duty; Confidentiality.
a. In keeping with Employee's fiduciary duties to Employer, Employee
agrees that he shall not knowingly become involved in a conflict of interest,
or upon discovery thereof, allow such a conflict to continue. Moreover,
Employee agrees that he shall disclose to the Board any facts, which might
involve a conflict of interest that has not been approved by the Board.
b. As part of Employee's fiduciary duties to Employer, Employee agrees to
protect and safeguard Employer's information, ideas, concepts, improvements,
discoveries, and inventions and any proprietary, confidential and other
information relating to Employer or its business not generally available to the
public (collectively, "Confidential Information") and, except as may be
expressly required by Employer, Employee shall not, either during his
employment by Employer or thereafter, directly or indirectly, use for his own
benefit or for the benefit of another, or disclose to another, any Confidential
Information, except as may be required by any applicable law, rule, regulation
or order.
c. Upon termination of his employment with Employer, or at any other time
upon request, Employee shall immediately deliver to Employer all documents
embodying any of Employer's Confidential Information.
Section 4. Term and Termination.
a. The term of Employee's employment hereunder shall be for a period of
two years, commencing July 1, 1999 and ending June 30, 2001, unless earlier
terminated in accordance with the terms of this Agreement; provided, that
beginning July 1, 2001 and on each July 1st thereafter, such term of employment
shall be extended automatically for an additional one-year period unless
Employer or Employee gives the other notice of intent to terminate this
Agreement at least thirty days prior to such July 1st.
b. This Agreement shall terminate upon Employee's death.
c. Employer may terminate this Agreement by reason of Employee's
Disability (as hereinafter defined) after such condition of Disability has
existed for at least 180 consecutive days. Employer shall give to Employee
sixty days notice of its intention to effect such termination pursuant to this
Section 4.c. As used in this Agreement, "Disability" shall mean permanent and
total disability within the meaning of Section 22(e)(3) of the Internal Revenue
Code of 1986, as amended, or any successor provision.
-3-
<PAGE> 4
d. Employer may terminate this Agreement upon the determination by a
majority of the entire Board that Cause (as hereinafter defined) exists
therefor. As used in this Agreement, "Cause" means (i) the willful and
continued failure by Employee substantially to perform his obligations under
this Agreement (other than any such failure resulting from his incapacity due
to physical and mental illness) after a demand for substantial performance has
been delivered to him by the Board which specifically identifies the manner in
which the Board believes Employee has not substantially performed such
provisions, (ii) Employee's willfully engaging in conduct materially and
demonstrably injurious to the property or business of Employer, including
without limitation, fraud, misappropriation of funds or other property of
Employer, other willful misconduct, gross negligence or commission of a felony
or other crime of moral turpitude, or (iii) Employee's breach of this
Agreement. If the Board determines that Cause exists, the parties agree that
such determination shall be subject to inquiry or dispute only as to its
reasonableness. If the Board makes such determination, Employer may (A)
terminate this Agreement effective immediately or at a subsequent date or (B)
condition Employee's continued employment upon such considerations or
requirements as may be reasonable under the circumstances and place a
reasonable limitation upon the time within which Employee shall comply with
such considerations or requirements.
e. Employee shall have the right to terminate this Agreement and his
employment hereunder at any time for "Good Reason," which for purposes of this
Agreement means Employer's failure to comply with any of the provisions of
Section 2 of this Agreement and which failure is not remedied within thirty
days after receipt of written notice from Employee.
Section 5. Effect of Termination.
a. Upon termination of this Agreement by Employer for Cause; by Employee
other than for Good Reason; or due to the death or Disability of Employee, all
compensation and benefits shall cease upon the date of termination other than:
(i) those benefits that are provided by retirement and benefit plans and
programs specifically adopted and approved by Employer for Employee that are
earned and vested by the date of termination, (ii) the pro rata annual salary
through the date of termination; (ii) any incentive compensation due Employee
if, under the terms of the relevant incentive compensation arrangement, such
incentive compensation was due and payable to Employee on or before the date of
termination; and (iii) medical and similar benefits the continuation of which
is required by applicable law.
b. Upon termination of (i) this Agreement by Employer in accordance with
Section 4.a.; (ii) Employee's employment by Employer at any time for any reason
other than for Cause or due to Employee's death or Disability; or (iii) this
Agreement by Employee for Good Reason during the term hereof, the obligations
of Employer and Employee under Sections 1 and 2 shall terminate as of the date
this Agreement is terminated, and Employer shall pay or provide to Employee:
i. Employee's pro rata annual salary through the date of
termination;
ii. incentive compensation due Employee, if any, under the terms
of the relevant incentive compensation arrangement; and
-4-
<PAGE> 5
iii. within thirty days of said termination, a severance benefit
equal to two years of Employee's annual base salary.
All other compensation and benefits shall cease upon the date of termination
other than (i) those benefits that are provided by retirement and benefit plans
and programs specifically adopted and approved by Employer for Employee that
are earned and vested by the date of termination, (ii) Employee's pro rata
annual salary through the date of termination, and (iii) medical and similar
benefits the continuation of which is required by applicable law.
As a condition to making the payments specified in this Section 5.b., Employer
will require that Employee execute a release of any claims Employee may have
against Employer at the time of Employee's termination. Such release will be
in such form as Employer reasonably requests.
Section 6. Vacation.
a. Employee will be entitled to paid vacation of not less than four weeks
each year in accordance with Employer's policy and guideline manual. Employee
acknowledges receipt from Employer of a copy of said manual. Vacation may also
be taken by Employee at the time and for the periods as may be mutually agreed
upon between Employer and Employee.
Section 7. Miscellaneous.
a. For a period of one year after the termination of Employee's
employment with Employer, Employee shall not, either on his own account or for
any person, firm, partnership, corporation, or other entity (i) solicit,
interfere with, or endeavor to cause any employee of Employer or its affiliates
to leave his or her employment; or (ii) induce or attempt to induce any such
employee to breach her or his employment agreement with Employer.
b. All notices and other communications required or permitted hereunder
or necessary or convenient in connection herewith shall be in writing and shall
be delivered by hand, by facsimile, by express courier service or by registered
or certified mail, return receipt requested to the addresses set forth below in
this Section 7. All such notices and other communications shall, if delivered
by hand, be deemed given when actually received; if delivered by facsimile, be
deemed given if transmitted by telecopier during normal business hours,
otherwise on the next succeeding business day; and if delivered by mail, be
deemed given on the earlier of (a) when received or (b) three business days
after being so mailed.
If to Employer, to:
Veritas DGC Inc.
3701 Kirby Drive, Suite 630
Houston, Texas 77098
Attention: David B. Robson
If to Employee, to:
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<PAGE> 6
Mr. Timothy L. Wells
c/o Veritas DGC Inc.
3701 Kirby Drive, Suite 630
Houston, Texas 77098
or to such other names or addresses as Employer or Employee, as the case may
be, shall designate by notice to the other party hereto in the manner specified
in this Section.
c. This Agreement shall be binding upon and inure to the benefit of
Employer, its successors, legal representatives and assigns, and upon Employee,
his heirs, executors, administrators, representatives and assigns; provided,
however, Employee agrees that his rights, duties and obligations hereunder are
personal to him and may not be assigned by him without the express written
consent of Employer.
d. This Agreement supersedes, replaces and merges all previous agreements
and discussions relating to the same or similar subject matters between
Employee and Employer, including, specifically, the Foreign Services Agreement,
and constitutes the entire agreement between Employee and Employer with respect
to the subject matter of this Agreement. This Agreement may not be modified in
any respect by any verbal statement, representation or agreement made by any
employee, officer, or representative of Employer or by any written agreement
unless signed by an officer of Employer who is expressly authorized by the
Board to execute such document.
e. If any provision of this Agreement or application thereof to anyone or
under any circumstances shall be determined to be invalid or unenforceable,
such invalidity or unenforceability shall not affect any other provisions or
applications of this Agreement which can be given effect without the invalid or
unenforceable provision or application. In addition, if any provision of this
Agreement is held by an arbitration panel or a court of competent jurisdiction
to be invalid, unenforceable, unreasonable, unduly restrictive or overly broad,
the parties intend that such arbitration panel or court modify said provision
so as to render it valid, enforceable, reasonable and not unduly restrictive or
overly broad.
f. The internal laws of the State of Texas will govern the
interpretation, validity, enforcement and effect of this Agreement without
regard to the place of execution or the place for performance thereof.
Section 8. Arbitration.
a. Employer and Employee agree to submit to final and binding arbitration
any and all disputes or disagreements concerning the interpretation or
application of this Agreement. Any such dispute or disagreement shall be
resolved by arbitration in accordance with the National Rules for the
Resolution of Employment Disputes of the American Arbitration Association (the
"AAA Rules"). Any arbitration must be initiated within one year after the
action or occurrence about which the party initiating the arbitration is
complaining. Arbitration shall take place in Houston, Texas, unless the
parties mutually agree to a different location. Within 30 calendar days of the
initiation of arbitration hereunder, each party shall designate an arbitrator.
The appointed
-6-
<PAGE> 7
arbitrators shall then appoint a neutral arbitrator. Employee and Employer
agree that the decision of the arbitrators shall be final and binding on both
parties. Any court having jurisdiction may enter a judgment upon the award
rendered by the arbitrators. In the event the arbitration is decided in favor
of Employee, Employer shall reimburse Employee for his reasonable costs of
arbitration up to $20,000 in the aggregate. Regardless of the outcome of the
arbitration, Employer shall pay all fees and expenses of the arbitrators and
all of Employer's costs of arbitration.
b. Notwithstanding the provisions of Section 8.a., Employer may, if it so
chooses, bring an action in any court of competent jurisdiction for injunctive
relief to enforce Employee's obligations under Section 3.b., 3.c., or 7.a.
hereof.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Agreement as of the date first written above.
EMPLOYER:
VERITAS DGC INC.
By: /s/ DAVID B. ROBSON
-------------------------------------
David B. Robson
Chairman of the Board
and Chief Executive Officer
EMPLOYEE:
/s/ TIMOTHY L. WELLS
----------------------------------------
Timothy L. Wells
-7-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of the Registrant at July 31,
1999 owned by the Registrant or one or more of its other subsidiaries:
<TABLE>
<CAPTION>
STATE OR COUNTRY
CORPORATE NAME OF SUBSIDIARY OF INCORPORATION
- ---------------------------- --------------------
<S> <C>
Veritas Energy Services Inc................................. Canada
Veritas DGC Land Ltd........................................ Canada
Canex Information Services Ltd.............................. Canada
Veritas Geoservices Ltd..................................... Canada
Veritas Energy Services (US) Inc............................ Canada
Veritas Energy Services Inc................................. Canada
Digicon Geophysical Corp.................................... Delaware
Veritas DGC Asia Pacific Ltd................................ Delaware
Veritas DGC Ltd............................................. United Kingdom
Veritas DGC Australia (Pty) Ltd............................. Australia
Veritas DGC Land Inc........................................ Delaware
Veritas Seismic S.A......................................... Venezuela
Veritas DGC (Malaysia) Sdn. Bhd............................. Malaysia
Veritas DGC (B) Sdn Bhd..................................... Brunei
Veritas Geophysical Inc..................................... Delaware
Veritas DGC Land Guatemala S.A.............................. Guatemala
Digicon de Venezuela C.A.................................... Venezuela
Digicon (Nigeria) Ltd....................................... Nigeria
Veritas DGC Singapore Pte. Ltd.............................. Singapore
P.T. Digicon Mega Pratama................................... Indonesia
Digital Exploration (Nigeria) Limited....................... Nigeria
Seismic Company of America, Inc............................. Delaware
Euroseis, Inc............................................... Delaware
Veritas Geophysical I....................................... Cayman Islands
Veritas Geophysical II...................................... Cayman Islands
Veritas Geophysical III..................................... Cayman Islands
Veritas Geophysical IV...................................... Cayman Islands
Veritas Geophysical do Brasil, Ltda......................... Brazil
Digicon Finance N.V......................................... Netherlands Antilles
VTS Properties, Inc......................................... Delaware
Geophysical Services Inc.................................... Delaware
Digicon Sub Corp............................................ Delaware
Veritas Geophysical (Norway) AS............................. Norway
674916 Alberta Ltd.......................................... Canada
Time Seismic Exchange Ltd................................... Canada
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-09679, No. 333-38377, No. 333-41829, No.
333-48953, No. 333-57603, No. 333-65081, No. 333-70721, No. 333-74305 and No.
333-87223) and the Registration Statements on Form S-3 (No. 33-63875, No.
333-10517, No. 333-17517, No. 333-85569 and No. 333-86247) of Veritas DGC Inc.,
of our report dated October 8, 1999, relating to the financial statements, which
appears in this Form 10-K.
PRICEWATERHOUSECOOPERS
Houston, Texas
October 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 73,447
<SECURITIES> 3,671
<RECEIVABLES> 113,761
<ALLOWANCES> 3,038
<INVENTORY> 4,417
<CURRENT-ASSETS> 230,855
<PP&E> 357,397
<DEPRECIATION> 201,026
<TOTAL-ASSETS> 541,846
<CURRENT-LIABILITIES> 84,605
<BONDS> 0
0
0
<COMMON> 214
<OTHER-SE> 315,344
<TOTAL-LIABILITY-AND-EQUITY> 541,846
<SALES> 0
<TOTAL-REVENUES> 388,905
<CGS> 0
<TOTAL-COSTS> 266,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,623
<INCOME-PRETAX> 30,163
<INCOME-TAX> 9,566
<INCOME-CONTINUING> 20,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,294
<EPS-BASIC> .89
<EPS-DILUTED> .88
</TABLE>
