UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

Commission file number 1-7427

Veritas DGC Inc.

(Exact name of registrant as specified in its charter)

(832) 351-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o No ý

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

The number of shares of the Company’s common stock, $.01 par value, outstanding at May 31, 2005 was 33,849,816 (including 155,370 Veritas Energy Services Inc. exchangeable shares which are identical to the company’s common stock in all material respects).

TABLE OF CONTENTS

FORM 10-Q

PART I.  FINANCIAL INFORMATION

Item 1.                                       Financial Statements

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

See Notes to Consolidated Financial Statements

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VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)

See Notes to Consolidated Financial Statements

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VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Notes to Consolidated Financial Statements

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VERITAS DGC INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.              Summary of significant accounting policies

Restatement of Financial Statements

The historical financial information for the three and six month periods ended January 31, 2004 has been restated due to accounting errors.  In September 2004, we found various types of errors in our balance sheet related primarily to clerical and account reconciliation errors associated with the intercompany transfers of property and foreign currency items.  In addition, we found errors in the accounting for certain customer contracts that contained provisions for customer payment of equipment mobilization fees, revenue sharing with customers and certain other contingencies.  Correction of these errors resulted in a decrease of net income of $1.4 million relating to the first three fiscal quarters of fiscal 2004 and $2.6 million related to periods prior to fiscal 2004.  Since recording the required adjustments in the fourth quarter of fiscal 2004 would have had a material impact on the financial statements of the fourth quarter and those of the full fiscal year, we determined that a restatement of our prior years’ financial statements was appropriate.  The impact of the restatement resulted in a decrease in the net income and net income per share of $645,000 and $0.02, respectively, for the three months ended January 31, 2004 and an increase in the net loss and net loss per common share of $1,283,000 and $0.04, respectively, for the six months ended January 31, 2004.  (See Note 10 for the details of this restatement.)

The restatement has not caused us to be in default under any of our debt covenants or lease agreements.  We obtained waivers from our lenders under our Credit Facility extending the due date for our delivery of financial statements to them to July 29, 2005.  Additionally, the restatement has delayed the registration of our Convertible Senior Notes, resulting in our payment of liquidated damages to the holders of the Convertible Senior Notes in the amount of $2,153 per day from August 31, 2004 until the registration is completed.

Consolidation

The accompanying consolidated financial statements include our accounts and the accounts of majority-owned domestic and foreign subsidiaries. All material intercompany balances and transactions have been eliminated.  All material adjustments that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. These interim financial statements should be read in conjunction with our annual audited consolidated financial statements.

In December 2003, the Financial Accounting Standards Board issued FIN 46R, a revision to FIN 46 “Consolidation of Variable Interest Entities”.  FIN 46R replaces FIN 46 and provides additional clarification on the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.  We adopted FIN 46R on April 30, 2004.  Adoption did not have a material effect on our financial position or results of operations; however, it required consolidation of our 80% owned Indonesian joint venture.  Prior to adoption of FIN 46R this joint venture was accounted for under the equity method.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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Recent Accounting Pronouncements

In October 2004, the Emerging Issues Task Force of the Financial Accounting Standards Board issued EITF 04-8, “The Effect of Contingently Issuable Debt on Earnings per Share,” which is effective for periods ending after December 15, 2004.  This statement requires us to include shares of our stock issuable upon the assumed conversion of our Convertible Senior Notes in the calculation of diluted weighted average common shares.  We adopted the EITF during the first quarter of fiscal 2005, but adoption did not have a significant effect on our weighted average shares calculation.  The contingently issuable shares related to our Convertible Senior Notes had no impact on our weighted average shares for the three and six months ended January 31, 2005, as issuance of the shares would have been anti-dilutive.

2.              Multi-client library accounting change

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

3.              Other (income), net

Other (income) expense, net consists of the following:

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4.              Earnings per common share

Basic and diluted earnings per common share are computed as follows:

The Convertible Senior Notes were not convertible as of January 31, 2005 and the shares issuable from such conversion, while considered, are not included in this income per share calculation as they are anti-dilutive (See Note 5 for a description of our Convertible Senior Notes.)

The following options to purchase common shares have been excluded from the computation assuming dilution because the exercise prices of the options exceeded the average market price of the underlying common shares or the options are anti-dilutive due to a net loss.

5.              Long-term debt

As of January 31, 2005, our long-term debt outstanding consisted of $155.0 million of Convertible Senior Notes due 2024.  In addition, we have a Credit Facility consisting primarily of a revolving loan facility permitting borrowings of up to $55.0 million and various unsecured lines of credit totaling $8.5 million which may be used exclusively for letters of credit and bank guarantees.

The Convertible Senior Notes bear interest at a per annum rate which equals the three-month LIBOR rate, adjusted quarterly, minus a spread of 0.75%.  The current interest rate on the Convertible Senior Notes, from March 15, 2005 through June 14, 2005, equates to 2.26%.  The Convertible Senior Notes are our senior unsecured obligations and are convertible under certain circumstances into a combination of cash and our common stock.  In general, upon conversion of a note, the holder of such note will receive cash equal to the principal amount of the

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note and shares of our common stock for the note’s conversion value in excess of such principal amount.  We entered into a registration rights agreement in which we agreed to file a registration statement with the Securities and Exchange Commission within 90 days of March 3, 2004 to register resales of the notes and the associated shares of common stock.  We filed a registration statement on May 28, 2004 in compliance with the registration rights agreement; however, the registration statement is not yet effective.  Because our registration statement was not effective on August 31, 2004 as required by the indenture, we have been incurring liquidated damages in the amount of $2,153 per day since August 31, 2004.  We will continue to incur these damages until registration is effective.

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

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

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

3.                                       the occurrence of a five consecutive trading day period in which the trading price of the notes was less than 95% of the closing sale price of our common stock on such day multiplied by the number of shares of our common stock issuable upon conversion of the notes; or

4.                                       the occurrence of specified corporate transactions.

Should any of these circumstances occur, the Convertible Senior Notes would be convertible at the then current stock price times the conversion ratio of 41.6146. This amount would be payable in cash equal to the principal amount of the notes, the par value adjusted for dividends or other equity transactions, with the additional amount payable in shares of our common stock.  Currently, the maximum amount payable by us on conversion is $155 million in cash plus approximately 6.5 million shares. For clarity, conversion at a $40 stock price would result in our payment of $155 million in cash and 2.575 million shares of common stock.  This settlement method is prescribed in the indenture and is not optional at the discretion of any party.  The shares issuable from such conversion are considered in the calculation of diluted earnings per share.

As of January 31, 2005, there were no borrowings and $2.1 million in letters of credit outstanding under the Credit Facility.  Borrowings under the Credit Facility, including swing-line loans, bear interest at a variable rate determined on the date of borrowing that is related to various base rates and margins depending upon our leverage ratio and the location of the borrowing.  The Credit Facility expires in February 2006.  Borrowings under the Credit Facility are secured by substantially all of the assets of the company.

We obtained waivers from our lenders under our Credit Facility extending the due date for our delivery of financial statements to them to July 29, 2005.  If we are unable to meet this deadline or are unable to extend it further, our ability to borrow under the Credit Facility will be restricted.

We have various unsecured lines of credit, with lending institutions that operate in geographic areas not covered by the lending institutions in our revolving loan facility, totaling $8.5 million that may be used exclusively for the issuance of letters of credit and bank guarantees.  As of January 31, 2005, $3.3 million in letters of credit were outstanding under these lines.

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6.              Pension plan

We maintain a contributory defined benefit pension plan for eligible participating employees in the United Kingdom.  The following is the net periodic benefit cost by component:

We expect to make contributions of approximately $1.0 million to this pension plan in fiscal 2005.  As of January 31, 2005, we have made contributions to the Plan in accordance with the schedule of contributions upon which this estimated service cost was based.

7.              Hedge transactions

From time to time we enter into contracts with customers whereby payment is not in US Dollars, our functional currency.  During the six months ended January 31, 2005, we entered into contracts with customers whereby payments were to be made in the British Pound Sterling and the Norwegian Kroner.  To protect us against exposure to exchange rate risk, we entered into currency exchange contracts with financial institutions; however, at January 31, 2005, there were no such contracts outstanding.

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8.              Segment information

Beginning in fiscal 2005, we organized the company into three geographic regions: North and South America (NASA); Europe, Africa, the Middle East and CIS (EAME); and Asia Pacific (APAC).  Our regions offer a common suite of products and services to their customers, although each product or service may be adapted to meet the needs of the local markets.  This segmentation of our company is representative of the manner in which it is viewed and managed by our senior managers and our Board of Directors.  The information related to the three and six months ended January 31, 2004 has been restated to reflect the new segment structure.  A reconciliation of the reportable segments’ results to those of the total enterprise is given below:

Corporate operating income (loss) includes certain general and administrative and research and development expenses not allocated to the segments.  Corporate assets consist primarily of cash and cash equivalents.

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9.              Stock based compensation

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

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10.       Restatement

The historical financial information in this document for the three and six month periods ended January 31, 2004 has been restated due to accounting errors.  These errors were discovered during two separate reviews, a comprehensive review of our balance sheet and a review of specific types of our customer contracts.

Balance Sheet Review

During our fiscal 2004 year-end balance sheet review, we found various types of clerical and account reconciliation errors related primarily to the intercompany transfer of property and foreign currency items.  The fixed asset errors of approximately $1.9 million affected depreciation and amortization charges over the past seven years.  We corrected all matters identified in the balance sheet review in our restatement, although such items were not individually material.

Contract Review

We also reviewed our accounting for our customer contracts, including those that contain provisions for customer payment of mobilization fees, revenue sharing with customers and certain date contingencies.  Because our contracts vary widely in terms and conditions, we reviewed the deliverables of each type of contract and, where required, applied the guidance of EITF 00-21.  We determined that our accounting treatment for certain of these customer contracts was not in accordance with generally accepted accounting principles and adjusted our accounts accordingly.  We had recognized mobilization fees as revenue during the period of mobilization rather than during the period of seismic data acquisition, as required by Staff Accounting Bulletin (SAB) No. 104.  In contracts with revenue sharing clauses and date contingencies, we recognized revenue before the price to be ultimately paid by the related customer was fixed or determinable under SAB No.104.  In all cases, our errors related to customer contracts were related to the timing of revenue recognition.

The following is a summary of the effect of the restatement adjustments on our previously reported net income, earnings per share and total assets:

The following are the restated financial statements for the three and six month periods ended January 31, 2004 compared to the previously reported amounts:

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RESTATED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)