VERITAS DGC INC - 10-K Annual Report

Back to GetFilings.com

================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------

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, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-7427

VERITAS DGC INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0343152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

10300 TOWN PARK
HOUSTON, TEXAS 77072
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange

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

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 $ 345,147,938 as of September 28, 2001.

The number of shares of the Company's common stock, $.01 par value,
outstanding at September 28, 2001 was 32,385,359 (including 1,484,914 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 2001 Annual Meeting of Stockholders is incorporated by reference
into Part III of this report.

================================================================================

TABLE OF CONTENTS

FORM 10-K

This report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors
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

We are a leading provider of integrated geophysical services to the
petroleum industry worldwide. Our customers include major, national and
independent oil and gas companies that utilize geophysical technologies to
achieve the following:

o Identify new areas where subsurface conditions are favorable for the
production of hydrocarbons.

o Determine the size and structure of previously identified oil and gas
fields.

o Optimize development and production of hydrocarbon reserves.

We acquire, process, and interpret geophysical data and produce geophysical
surveys that are either 2D or 3D images of the subsurface geology in the survey
area. We also produce 4D surveys, which record fluid movement in the reservoir,
by repeating specific 3D surveys over time. Additionally, we are increasingly
using geophysical data for reservoir characterization to enable our customers to
maximize their recovery of oil and natural gas.

SERVICES AND MARKETS

We conduct geophysical surveys on both a contract and a multi-client basis.
Approximately 46% of our business was done on a multi-client basis in fiscal
year 2001. The high cost of acquiring and processing geophysical data on an
exclusive basis has prompted many oil and gas companies to increase their
licensing of multi-client surveys. In response, we have added significantly to
our multi-client data library, increasing its size and geographic breadth, as
well as enhancing the quality of the data through advanced processing. Currently
our library consists of 165,900 line kilometers of 2D survey data and 109,700
square kilometers of 3D data, 65% of which was acquired and processed within the
past three years. The marine library covers areas in the Gulf of Mexico, the
North Atlantic, Southeast Asia, West Africa, North Africa, Canada and Brazil.
The land data library includes surveys in Texas, Mississippi, Oklahoma, Wyoming
and Alberta, Canada.

These tables describe our revenues by contract type and geographic area.

In fiscal 2001, 2000 and 1999, 60%, 63%, 48%, respectively, of our revenues
were attributable to non-U.S. operations and export sales. (See Note 13 of Notes
to Consolidated Financial Statements for additional geographic information.)

1

PRINCIPAL OPERATING ASSETS

We acquire, process, and interpret geophysical information utilizing a wide
array of assets as follows.

LAND ACQUISITION

Our land acquisition activities are performed with technologically advanced
geophysical equipment. The equipment, as of July 31, 2001, had a combined
recording capacity of 41,000 channels.

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.

MARINE ACQUISITION

Our marine acquisition crews operate from both owned and chartered vessels
that have been modified or equipped to our specifications. All of the vessels we
utilize are equipped to perform both 2D and 3D geophysical surveys. During the
last several years, a majority of the marine geophysical data acquisition
services we performed involved 3D surveys. The following table contains certain
information concerning the geophysical vessels we operate.

Each vessel generally has an equipment complement consisting of geophysical
recording instrumentation, digital geophysical streamer cable, cable location
and geophysical 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. Streamer cables contain
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, five of our vessels are equipped with multiple streamers and
multiple energy sources. These vessels acquire more lines of data with each
pass, which reduces completion time and the effective acquisition cost. The
Veritas Viking and Viking II are both capable of deploying 12 streamer cables.
We plan to take delivery of a third Viking class vessel, the Veritas Vantage, in
May, 2002. This vessel has been leased under a term expiring in April 2010 and
is currently being outfitted to our specifications.

DATA PROCESSING AND INTERPRETATION

We operate 16 data processing centers capable of processing 2D, 3D and 4D
data. A majority of our data processing services are performed on 3D seismic
data. The centers process data received from the field, both from our own and
other geophysical crews, to produce an image of the earth's subsurface using
proprietary computer software and techniques. We also reprocess older
geophysical data using new techniques designed to enhance the quality of the
data. Our data processing centers have opened at various times since 1966 and
are at present located in:

2

Our processing centers operate high capacity, advanced technology data
processing systems on high-speed networks. These systems run our proprietary
data processing software. The marine and land data acquisition crews have
software compatible with that utilized in the processing centers, allowing for
ease in the movement of data from the field to the data processing centers. We
operate both land and marine data processing centers and tailor the equipment
and software deployed in an area to meet the local market demands.

We operate four visualization centers in Houston, Calgary, Perth and
Crawley. These centers allow teams of geoscientists and engineers to view and
interpret large volumes of complex 3D data. The visualization centers are
imaging tools used for advanced interpretive techniques that enhance the
understanding of regional geology and reservoir modeling. These visualization
centers allow us to offer the type of collaborative geophysical model building
that is enabling oil companies to explore areas of complex geology such as the
large sub-salt plays in the deepwater Gulf of Mexico.

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 us that our technological
capabilities are comparable or superior to those of our competitors. We maintain
our technological capabilities through continuing research and development,
strategic alliances with equipment manufacturers or by acquiring technology
under license from others. We have introduced several technological innovations
that have become industry standard practice in both acquisition and processing
of geophysical data.

Currently, we employ approximately 90 people in our research and development
activities, substantially all of whom are scientists, engineers or programmers.
During fiscal 2001, 2000 and 1999, research and development expenditures were
$9.9 million, $8.3 million and $7.7 million, respectively. Our research and
development budget for fiscal 2002 is $11.1 million.

During fiscal 2001, 2000, and 1999, capital expenditures were $96.9 million,
$55.9 million, and $52.4 million, respectively. Our capital expenditure budget
for fiscal 2002 is approximately $100.0 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 spending levels. A substantial
portion of our fiscal 2002 capital expenditure budget is allocated to begin
replacement of the fluid-filled streamers on our boats with solid streamers,
which are more efficient to use and maintain and will improve the quality of our
data. Another significant portion of the budget is allocated to the outfitting
of the Veritas Vantage seismic vessel.

COMPETITION

The acquisition and processing of geophysical data for the oil and gas
industry has historically been highly competitive worldwide. Success in
marketing geophysical services 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 in the area surveyed.

As a result of changing technology and increased capital requirements, the
geophysical industry has consolidated substantially since the late 1980's. Our
largest competitors are Western-Geco (a joint venture between Schlumberger and
Baker Hughes), Compagnie Generale Geophysique and Petroleum Geo-Services.

BACKLOG

At July 31, 2001, our backlog of commitments for services was $193.9
million, compared with $102.5 million at July 31, 2000. Approximately 40% of
this backlog is related to pre-funding of multi-client work. It is anticipated
that a majority of the July 31, 2001 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 subject to modification by mutual consent and
in certain instances are cancelable by the customer on short notice without
penalty. As a result of these factors, our backlog as of any particular date may
not be indicative of our actual operating results for any succeeding period.

3

SIGNIFICANT CUSTOMERS

Historically, our principal customers have been major oil and gas companies,
national oil companies and independent oil and gas companies. In fiscal 2001 and
fiscal 2000, no customer accounted for 10% or more of total revenues. In fiscal
1999, Royal Dutch/Shell and its subsidiaries accounted for approximately 12% of
our revenues.

EMPLOYEES

At July 31, 2001, we employed approximately 4,300 people on a full-time
basis. Our monthly employment figures are subject to seasonal variation and
averaged 3,800 during fiscal 2001. With the exception of 30 employees working at
the Singapore data processing center, none of our employees are subject to
collective bargaining agreements. We consider our relations with our employees
to be good.

ITEM 2. PROPERTIES

In the first quarter of fiscal 2001 we moved all of our Houston employees
into our new 218,151 square foot leased office and warehouse complex. The
complex houses data processing operations, as well as executive, accounting,
research and development and operating personnel. This lease expires in 2015. We
lease additional space aggregating approximately 416,081 square feet, which is
used by operations around the world. These leases expire at various times
through 2015.

ITEM 3. LEGAL PROCEEDINGS

As of September 30,2001, we were not a party to, nor was our 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, 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth the high and low sales prices for our common
stock as reported by the New York Stock Exchange for the periods shown.

On September 28, 2001, the last reported sales price for our common stock on
the New York Stock Exchange was $ 11.15 per share. On September 28, 2001, there
were approximately 334 record holders of common stock.

We have not paid any dividends on our common stock and have no present plans
to pay any dividends. The payment of any future dividends on common stock would
depend, among other things, upon our current and retained earnings, our
financial condition, and upon a determination by our Board of Directors that the
payment of dividends would be desirable. In addition, the indentures governing
our senior notes and our revolving credit facility restrict the payment of cash
dividends.

4

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Sustained oil prices in the $25 to $30 / bbl range throughout fiscal 2001
led to relatively robust levels of exploration spending on a global basis. The
deepwater regions in the Gulf of Mexico were particularly active. In North
America, natural gas prices as high as $10 / mcf led to high interest in
gas-prone areas such as the Rocky Mountain foothills. Brazil's opening of its
offshore basins to foreign investment fueled significant interest there.

We were well positioned to take advantage of the increased spending and were
able to exploit some new areas. We performed extensive multi-client surveys in
the Canadian Rockies that were well funded by customers. We performed contract
and multi-client work off Brazil and the East Coast of Canada and we entered the
Canadian and Alaskan Arctic to acquire contract surveys. In our established
areas, we sold significant numbers of licenses to our Gulf of Mexico surveys and
continued to have high utilization of our land crews in North America. Our
processing centers throughout the world ran at capacity most of the year.
Through the third quarter of fiscal 2001 we generated six consecutive quarters
of earnings growth. However, delays of certain large multi-client sales during
quarter four resulted in reduced quarterly profits, but still left us with
annual earnings of almost three times those of the prior year.

RESULTS OF OPERATIONS

FISCAL 2001 COMPARED WITH FISCAL 2000

Revenues. Revenues increased by 35%, from $353.1 million in fiscal 2000 to
$477.3 million in fiscal 2001, due to the upturn in exploration spending driven
by higher commodity prices. Multi-client revenues increased 20% from $181.9
million to $218.9 million, while contract revenues increased 51%, from $171.2
million to $258.4 million. Contract revenue showed the stronger year on year
increase due to our expansion into new market areas, such as Alaska, the
Canadian Arctic, offshore Canada, and Brazil.

Operating Income. Operating income increased by 100%, from $23.2 million in
fiscal 2000 to $46.4 million in fiscal 2001. Approximately $2 million of this
$23 million increase was due to the adjustment of receivable reserves. These
adjustments were made due to improved collection of past due receivables and the
improved ability of a long-term debtor to repay debt. Cost of services increased
to 68% from 66% due to the increased percentage of lower margin contract revenue
as described above. Research and development increased by 19%, from $8.3 million
in fiscal 2000 to $9.9 million in fiscal 2001. This increase was due to higher
numbers of employees dedicated to research and development. Selling, general and
administrative expense increased by 44%, from $17.7 million in fiscal 2000 to
$25.5 million in fiscal 2001. The primary increases in cost were associated with
the move to the new Houston headquarters building, increased corporate marketing
efforts and higher incentive compensation payments.

Other income. Other income increased by $3.0 million from fiscal 2000 to
fiscal 2001 due partly to an additional $1.5 million in interest income
resulting from the higher cash balances in fiscal 2001. In addition, gains on
sales of assets of $1.3 million in fiscal 2001 were an improvement of $1.6
million over the $0.3 million loss on sales of assets experienced in fiscal
2000.

Provision for income taxes. The provision for income taxes increased by
$10.9 million from fiscal 2000 to fiscal 2001 due to the increased profitability
of the company. The effective income tax rate in fiscal 2001 was 41% compared to
43% in fiscal 2000.

5

FISCAL 2000 COMPARED WITH FISCAL 1999

Revenues. Revenues decreased by 9%, from $388.9 million in fiscal 1999 to
$353.1 million in fiscal 2000, due to the general downturn in exploration
spending driven by our customers' concern that commodity prices would return to
the low levels of prior years. Multi-client revenues increased 13% from $161.2
million to $181.9 million, while contract revenues decreased 25%, from $227.7
million to $171.2 million. Multi-client revenues as a percent of total revenues
grew from 41% in fiscal 1999 to 52% in fiscal 2000. This reflects the trend in
customer preference to obtain geophysical data through licensing rather than
outright ownership.

Operating Income. Operating income declined by 38%, from $37.7 million in
fiscal 1999 to $23.2 million in fiscal 2000. Cost of services was approximately
34% of revenue in both years. Research and development expenses increased 8%
from $7.7 million in fiscal 1999 to $8.3 million in fiscal 2000 due to increased
emphasis on leading edge technologies, including reservoir characterization.
Selling, general and administrative expenses increased 6% from $16.7 million in
fiscal 1999 to $17.7 million in fiscal 2000 resulting from termination costs
related to the resignation of our former chief executive officer. Interest
expense increased from $12.6 million in fiscal 1999 to $14.1 million in fiscal
2000 due to the issuance of $60.0 million of 9.75% senior notes at the end of
October 1998.

Other income. Other income decreased from $5.1 million in fiscal 1999 to
$3.3 million in fiscal 2000. In fiscal 1999 other income was primarily composed
of net foreign currency gains of $1.8 million and interest income of $4.2
million as compared with interest income of $3.6 million in fiscal 2000, due to
lower cash balances during the year.

Income taxes. Provision for income taxes decreased from $9.6 million in
fiscal 1999 to $5.0 million in fiscal 2000 as a result of our lower net income
and the mix between U.S. and non-U.S. source income.

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES

Our internal sources of liquidity are cash, cash equivalents and cash flow
from operations. External sources include public financing, equity sales, the
unutilized portion of a revolving credit facility, equipment financing and trade
credit. We believe that these sources of funds are adequate to meet our
liquidity needs for fiscal 2002.

As of July 31, 2001, we had $135.0 million in senior notes outstanding due
in October 2003. These notes contain a change of control provision allowing the
holders to require us to call the notes under certain conditions. We also have a
revolving credit facility due August 2003 from commercial lenders that provides
U.S. advances up to $80.0 million and non-U.S. advances up to $20 million.
Advances bear interest, at our election, at LIBOR plus a margin or prime rate
plus a margin. These margins are based on either certain of our financial ratios
or our credit rating. At July 31, 2001 the LIBOR margin was 1.25% and the prime
rate margin was 0%. As of July 31, 2001, there were no outstanding advances
under the credit facility, but $7.9 million of the credit facility was utilized
for letters of credit, leaving $72.1 million available for borrowings.

We require significant amounts of working capital to support our operations
and fund our research and development program. Our capital expenditure budget
for fiscal 2002 is approximately $100.0 million, which includes expenditures of
approximately $60 million to expand or upgrade our marine fleet. We have planned
$47.2 million additional net investment in our data library (measured as the
change in the balance sheet account) and planned $11.1 million for research and
development spending in fiscal 2002.

We will require substantial cash flow to continue our investment in
multi-client library, complete our capital expenditure and research and
development programs and meet our principal and interest obligations with
respect to outstanding indebtedness. While we believe that we have adequate
sources of funds to meet our liquidity needs, our ability to meet our
obligations depends on our future performance, which, in turn, is subject to
many factors beyond our control. Key internal factors affecting future results
include utilization levels of acquisition and processing assets and the level of
multi-client data library licensing, all of which are driven by the external
factors of exploration spending and, ultimately, underlying commodity prices.

To ensure that we have available as many financing options as possible, we
have filed a shelf registration allowing the issuance of up to $200 million in
debt, preferred stock or common stock. On October 26, 1999, we filed a
prospectus supplement relating to the sale of up to 2.0 million shares of our
common stock, from time to time through ordinary brokerage transactions, under
the shelf registration. As of July 31, 2001, we had issued approximately 1.3
million shares in connection with these transactions, generating approximately
$30.1 million in net proceeds. In October 2000 we sold 3.1 million shares of
stock in a public offering and netted $82.4 million in proceeds.

6

OTHER

Since our quasi-reorganization on July 31, 1991 with respect to Digicon
Inc., the tax benefits of net operating loss carryforwards existing at the date
of the quasi-reorganization have been recognized through a direct addition to
additional paid-in capital, when realization is more likely than not.
Additionally, the utilization of the net operating loss carryforwards existing
at the date of the quasi-reorganization is subject to certain limitations. For
the year ended July 31, 2001, we recognized $1.7 million related to these
benefits.

We receive some account receivable payments in foreign currency. We
currently do not conduct a hedging program because we do not consider our
current exposure to foreign currency fluctuations to be significant, although we
have hedged certain future charter payments to be made in a foreign currency.

In July 2001, the Financial Accounting Standards Board issued SFAS No.141
(Business Combinations) and SFAS No.142 (Goodwill and Other Intangible Assets.)
We have adopted the use of these new accounting statements. The main effect of
SFAS No.141 is to require purchase accounting be used in all future business
combinations, disallowing the pooling-of-interests method allowed under APB
Opinion No.16. SFAS No.142 defines the booking and subsequent treatment of
goodwill and other intangible assets derived from business combinations and
supercedes APB Opinion No.17. The adoption of this statement had no impact on
our results. This statement requires us to discontinue our amortization of
goodwill and requires that we test goodwill and other intangible assets for
impairment in a specific manner on an annual basis or when certain events
trigger such a test.

In August 2001, the Financial Accounting Standards Board issued SFAS No.143
(Disposal of Long-lived Assets). We will adopt the use of this accounting
statement in fiscal 2003. We have not yet completed our evaluation of the effect
of this statement on our accounting practices.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires us to record derivative financial instruments on our balance sheet as
assets or liabilities, as appropriate, at fair value. We adopted this statement
in fiscal 2001 and there was no impact of adoption.

RISK FACTORS

An investment in our common stock is subject to a number of risks discussed
below. You should carefully consider these discussions of risks and the other
information included in this report.

AS A PROVIDER OF GEOPHYSICAL TECHNOLOGIES, OUR BUSINESS IS SUBSTANTIALLY
DEPENDENT ON THE LEVEL OF CAPITAL EXPENDITURES BY OIL AND GAS COMPANIES.

Capital expenditures by oil and gas companies have tended in the past to
follow trends in the price of oil and natural gas, which have fluctuated widely
in recent years. These capital expenditures may also be affected by worldwide
economic conditions. Should there be a sustained period of substantially reduced
capital expenditures by oil and gas companies, as we have experienced in recent
years, the demand for geophysical services likely will drop and there will be an
adverse effect on our results of operations and cash flow during the affected
period.

WEAK DEMAND OR TECHNOLOGICAL OBSOLESCENCE COULD IMPAIR THE VALUE OF OUR
MULTI-CLIENT DATA LIBRARY; CHANGES IN ACCOUNTING PRACTICES COULD AFFECT OUR
METHODS OF ACCOUNTING FOR OUR MULTI-CLIENT DATA LIBRARY.

We have invested significant amounts in acquiring and processing
multi-client data and expect to continue to do so for the foreseeable future.
There is no assurance that we will recover all the costs of such surveys.
Technological, regulatory or other industry or general economic developments
could render all or portions of our multi-client data library obsolete or reduce
its value.

In accordance with industry practice, we capitalize our investments in our
multi-client library and charge these investments to cost of services as sales
are made. Certain accounting authorities are reviewing accounting practices
relating to the capitalization of expenditures made in the development of
certain data bases, particularly in the context of "e-commerce" companies. We
cannot predict whether future accounting changes could adversely affect our
balance sheet or results of operations.

WE ARE DEPENDENT ON ACHIEVING AND MAINTAINING TECHNOLOGICAL ADVANCES, WHICH
CREATES RISKS REGARDING TECHNOLOGICAL OBSOLESCENCE, REQUIREMENTS FOR SUBSTANTIAL
FUTURE CAPITAL EXPENDITURES, THE UNAVAILABILITY OF NECESSARY TECHNOLOGY AND THE
FAILURE OF NEW TECHNOLOGIES.

The development of geophysical data acquisition and processing equipment has
been characterized by rapid technological

7

advancements in recent years. We expect this trend to continue. We will be
required to invest substantial capital in the future to maintain our leading
edge technology. Furthermore, manufacturers of geophysical equipment may develop
new systems that render our equipment, even if recently acquired, obsolete or
less desirable, requiring significant additional capital expenditures. Since
some of our competitors are themselves leading designers and manufacturers of
seismic equipment, we may not have access to their technology. Even if critical
new and advanced equipment is available to us, we may not have funds available
or be able to obtain necessary financing on acceptable terms to acquire it.
Further, any investment we may make in a perceived technological advance may not
be effective, economically successful or otherwise accepted in the market.

WE FACE INTENSE COMPETITION IN OUR INDUSTRY, WHICH COULD ADVERSELY AFFECT OUR
RESULTS.

Competition among geophysical service providers historically has been, and
will continue to be, intense. Competitive factors in recent years have included
price, crew experience, equipment availability, technological expertise and
reputation for quality, safety and dependability. Some of our competitors
operate substantially more data acquisition crews than we do and have
significantly greater financial and other resources. These larger and
better-financed operators could enjoy an advantage over us in a competitive
environment for contract awards and data sales and in the development of new
technologies. Other competitors operate with extremely low overhead and compete
vigorously on price in certain markets where that is the determining factor in
awarding work. These low-cost competitors can have a competitive advantage over
us in these markets.

HIGH FIXED COSTS COULD RESULT IN OPERATING LOSSES.

Our business has high fixed costs. As a result, downtime or low productivity
due to reduced demand, weather interruptions, equipment failures or other causes
can result in significant operating losses. Low utilization rates may hamper our
ability to recover the cost of necessary capital investments.

OUR REVENUES ARE SUBJECT TO FLUCTUATIONS THAT ARE BEYOND OUR CONTROL, WHICH
COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS IN ANY FINANCIAL PERIOD.

Our operating results may, in the future, vary in material respects from
quarter to quarter. Factors that could cause variations include the timing of
the receipt and commencement of contracts for data acquisition, customers'
budgetary cycles, the timing of offshore lease sales and the effect of such
timing on the demand for geophysical activities, seasonal factors and the timing
of sales of geophysical data from our multi-client data library, which may be
significant to us and which are not typically made in a linear or consistent
pattern. Combined with our high fixed costs, these revenue fluctuations could
produce unexpected adverse results of operations in any financial period.

WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, WHICH COULD ADVERSELY
AFFECT OUR BUSINESS.

Our success depends upon attracting and retaining highly skilled
professionals and other technical personnel. A number of our employees are
highly skilled scientists and highly trained technicians, and our failure to
continue to attract and retain such individuals could adversely affect our
ability to compete in the geophysical services industry. We may confront
significant and potentially adverse competition for key personnel, particularly
during periods of increased demand for geophysical services. In addition, our
success will depend to a significant extent upon the abilities and efforts of
members of our senior management, the loss of whom could adversely affect our
business.

WE FACE RISKS ASSOCIATED WITH OUR FOREIGN REVENUE GENERATING ACTIVITIES.

Substantial portions of our revenues are derived from foreign activities
and, as a result, significant portions of our revenues are denominated in
foreign currencies. These revenues are impacted by foreign currency
fluctuations. In addition, net assets reflected on the balance sheets of our
foreign subsidiaries, and therefore on our consolidated balance sheet, are
subject to currency fluctuations. Foreign revenues are also subject to special
risks that may disrupt markets, including the risk of war, terrorism, civil
disturbances, embargo and government activities. Revenue generating activities
in certain foreign countries may require prior United States government approval
in the form of an export license and otherwise be subject to tariffs and
import/export restrictions. There can be no assurance that we will not
experience difficulties in connection with future foreign revenues and, in
particular, adverse effects from foreign currency fluctuations.

WE OPERATE UNDER HAZARDOUS CONDITIONS THAT SUBJECT US TO RISK OF DAMAGE TO
PROPERTY OR PERSONAL INJURIES AND MAY INTERRUPT OUR BUSINESS.

8

Our seismic data acquisition activities involve operating under extreme
weather and other hazardous conditions. These operations are subject to risks of
loss to property and injury to personnel from fires, accidental explosions, ice
floes and high seas. Although we carry insurance against these risks in amounts
we consider adequate, these events could result in an interruption of our
business or significant liability. We may not obtain insurance against all risks
or for certain equipment located from time to time in certain areas of the
world.

THE TRADING PRICE OF OUR SECURITIES COULD BE SUBJECT TO SIGNIFICANT
FLUCTUATIONS.

The trading price of our securities fluctuates. Factors such as fluctuations
in our financial performance, and that of our competitors, as well as general
market conditions could have a significant impact on the future trading prices
of our securities. The trading prices also may be affected by weakness in oil
prices, changes in interest rates and other factors beyond our control. These
factors may have an adverse effect on the trading price of our securities.

OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION, WHICH MAY ADVERSELY AFFECT
OUR FUTURE OPERATIONS.

Our operations are subject to a variety of federal, provincial, state,
foreign and local laws and regulations, including environmental laws. We invest
financial and managerial resources to comply with these laws and related permit
requirements. Failure to timely obtain the required permits may result in crew
downtime and operating losses. Because laws and regulations change frequently,
we cannot predict the impact of government regulations on our future operations.
The adoption of laws and regulations that have the effect of curtailing
exploration by oil and gas companies could also adversely affect our operations
by reducing the demand for our geophysical services.

CERTAIN PROVISIONS OF OUR CHARTER, DELAWARE LAW AND OUR SHAREHOLDER RIGHTS PLAN
MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IN SITUATIONS THAT
MAY BE VIEWED AS DESIRABLE BY OUR STOCKHOLDERS.

The General Corporation Law of the State of Delaware contains provisions
that may delay or prevent an attempt by a third party to acquire control of us.
Our certificate of incorporation and bylaws contain provisions that authorize
the issuance of preferred stock, and establish advance notice requirements for
director nominations and actions to be taken at stockholder meetings. These
provisions could also discourage or impede a tender offer, proxy contest or
other similar transaction involving control of us, even if viewed favorably by
stockholders. In addition, we have adopted a stockholder rights plan that would
likely discourage a hostile attempt to acquire control of us.

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING STATEMENTS

This report on Form 10-K and the documents incorporated by reference contain
forward-looking statements, within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements include statements incorporated by reference to other Veritas DGC
documents filed with the SEC. Forward-looking statements include, among other
things, business strategy and expectations concerning industry conditions,
market position, future operations, margins, profitability, liquidity and
capital resources. Forward-looking statements generally can be identified by the
use of terminology such as "may," "will," "expect," "intend," "estimate,"
"anticipate" or "believe" or the negatives thereof. Although we believe that the
expectations reflected in such statements are reasonable, we can give no
assurance that such expectation will be correct. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this report on Form 10-K. Our operations are subject to a number of
uncertainties, risks and other influences, many of which are outside our control
and any one of which, or a combination of which, could cause our actual results
of operations to differ materially from the forward-looking statements.
Important factors that could cause actual results to differ materially from our
expectations are disclosed in "Risk Factors" and elsewhere in this report on
Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

At July 31, 2001, we had limited market risk related to foreign currencies.
In March 2001, we entered into a contract requiring payments in Norwegian kroner
to charter the seismic vessel M/V Seisquest. The contract requires 36 monthly
payments commencing on June 1, 2001. To protect our exposure to exchange rate
risk, we entered into multiple forward contracts as cash flow hedges fixing our
exchange rates for Norwegian kroner to the U.S. dollar. The total fair value of
the open forward contracts at July 31, 2001 in U.S. dollars is $8.8 million. At
July 31, 2001, we had $135.0 million of 9 3/4% fixed rate debt maturing in
October 2003 with a fair value of $136.8 million based on the trading price of
101.3, with a yield to maturity of 9.06% at July 31, 2001.

9

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

10

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, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended July 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America 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 our opinion.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
September 27, 2001

11

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

See Notes to Consolidated Financial Statements

12

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements

13

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Consolidated Financial Statements

14

VERITAS DGC INC. AND SUBSIDIARIES

SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Consolidated Financial Statements

15

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999

See Notes to Consolidated Financial Statements

16

VERITAS DGC INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

We provide integrated geophysical technologies to the petroleum industry
worldwide. The accompanying consolidated financial statements include our
accounts and the accounts of majority-owned domestic and foreign subsidiaries.
Investment in an 80% owned joint venture is accounted for on the equity method
due to provisions in the joint venture agreement that give minority shareholders
the right to exercise control. All material intercompany balances and
transactions have been eliminated.

USE OF ESTIMATES

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

RECLASSIFICATION OF PRIOR YEAR BALANCES

Certain prior year balances have been reclassified for consistent
presentation.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our 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 is $136.8 million based on the trading price of 101.3 with a
yield to maturity of 9.06% at July 31, 2001. The carrying value is a reasonable
estimate of fair value for all other financial instruments.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No.141
(Business Combinations) and SFAS No.142 (Goodwill and Other Intangible Assets.)
We have adopted the use of these new accounting statements.. The main effect of
SFAS No.141 is to require purchase accounting be used in all future business
combinations, disallowing the pooling-of-interests method allowed under APB
Opinion No.16. SFAS No.142 defines the booking and subsequent treatment of
goodwill and other intangible assets derived from business combinations and
supercedes APB Opinion No.17. The adoption of this statement had no impact on
our results. This statement requires us to discontinue our amortization of
goodwill and requires that we test goodwill and other intangible assets for
impairment in a specific manner on an annual basis or when certain events
trigger such a test.

In August 2001, the Financial Accounting Standards Board issued SFAS No.143
(Disposal of Long-lived Assets). We will adopt the use of this accounting
statement in fiscal 2003. We have not yet completed our evaluation of the effect
of this statement on our accounting practices.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires us to record derivative financial instruments on our balance sheet as
assets or liabilities, as appropriate, at fair value. We adopted this statement
in fiscal 2001 and there was no impact of adoption.

TRANSLATION OF FOREIGN CURRENCIES

The U.S. dollar is the functional currency of all of our operations except
Canada, which uses the Canadian dollar as its functional currency. Currency
gains and losses result from the remeasurement of assets and liabilities
denominated in currencies other than their functional currency. (See Note 11)

17

CASH EQUIVALENTS

For purposes of the Consolidated Statements of Cash Flows, we define "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 amount of $206,000 at July 31, 2000 were
pledged as collateral on certain bank guarantees related to contracts entered
into in the normal course of business.

ACCOUNTS RECEIVABLE

Unbilled amounts of approximately $51.7 million and $52.7 million are
included in accounts and notes receivable at July 31, 2001 and 2000,
respectively. Such amounts were not billable to the customer at the fiscal year
end in accordance with the provisions of the contract and generally will be
billed in one to four months.

INVENTORIES

Inventories of materials and supplies are stated at the lower of average
cost or market.

INVESTMENTS AVAILABLE FOR SALE

Our marketable securities are considered available for sale and are
reported at fair value, with change in fair values recorded as unrealized gains
and losses in Accumulated Other Comprehensive Income within stockholders'
equity. Realized gains and losses are calculated using the specific
identification method.

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:

Expenditures for routine repairs and maintenance are charged to expense as
incurred. Planned major maintenance projects such as dry-docking are accrued in
advance of the actual cash expenditure. Such accruals were $1.4 million and $3.0
million at July 31, 2001 and 2000, respectively. 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 that is disposed is included in other costs and expenses.
(See Note 11)

MULTI-CLIENT DATA LIBRARY

We collect and process geophysical data for our own account and retain all
ownership rights. We license the data to clients on a non-transferable basis. We
capitalize costs associated with acquiring and processing the data. The
capitalized cost of multi-client data is charged to cost of services in the
period sales occur based on the percentage of total estimated costs to total
estimated sales multiplied by actual sales. Any costs remaining 36 months after
completion of a survey are charged to cost of services over a period not to
exceed 24 months. The total amortization period of sixty months represents the
minimum period over which benefits from these surveys are expected to be
derived. We periodically review the carrying value of the multi-client data
library to assess whether there has been a permanent impairment of value and
record losses when it is determined that estimated sales would not be sufficient
to cover the carrying value of the asset. We have recorded no such losses in the
years ended July 31, 2001, 2000 and 1999.

18

During the fourth quarter of fiscal 2001 we changed the book life of marine
surveys to from 48 months to 60 months. We believe that 60 months more
accurately represents the time over which we will derive benefits from our
current portfolio of marine surveys. This change in accounting estimate was made
prospectively and had an immaterial impact on the Company's results for the year
ended July 31, 2001.

GOODWILL

For acquisitions accounted for under the purchase method, we record 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. This amortization will be
discontinued in the beginning of fiscal 2002 with our adoption of SFAS No. 142.
We periodically review the carrying value of goodwill, as well as the
amortization period, to determine whether current events or circumstances
warrant adjustments to the carrying value or estimated useful life. These
evaluations are based on projected future estimated cash flows.

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. Amounts applicable to operations performed
for our own account are included in the cost of the multi-client data library.
Included in other assets at July 31, 2001 and 2000, are unamortized mobilization
costs approximating $5.1 million and $2.8 million, respectively.

LEASES

Operating leases include those for office space, specialized geophysical
equipment, and our geophysical vessels, which are chartered on a short-term
basis relative to their useful lives.

REVENUES

Revenues from the licensing of multi-client data surveys are based upon
agreed rates set forth in the contract and are recognized upon delivery of such
data. Revenues from contract 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. Revenues generated from external
pre-funding of data library projects are recognized on a similar percentage-of-
completion method, modified slightly to account for the timing of pre-funding.

STOCK-BASED COMPENSATION

We maintain 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 8.)

EARNINGS PER SHARE

The computation of earnings per share -- basic is based on the weighted
average common shares outstanding (including the exchangeable shares -- see
Notes 2 and 10). The computation of earnings per share -- diluted is based upon
the weighted average common shares outstanding (including the exchangeable
shares) 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 12.)

2. BUSINESS COMBINATIONS

On February 2, 2001, we consummated a merger with Reservoir Characterization
Research and Consulting, Inc., ("RC2"), a Colorado corporation. Under the terms
of the agreement, we acquired 100% of RC2 in exchange for 1,137,466 shares of
our common stock. The total purchase price of RC2 was $34.4 million, comprised
of $33.0 million of stock and $1.4 million of options. The

19

acquisition was accounted for as a purchase with the allocation of purchase
price, in accordance with APB 16, yielding $2.2 million of current assets, $8.5
million of property and long term assets, $2.3 million of liabilities, and $26.0
million of goodwill.

On September 30, 1999, Veritas DGC, Veritas Energy Services Inc. ("VES") and
Enertec Resource Services Inc. ("Enertec"), a Canadian company, consummated a
business combination (the "Combination") whereby Enertec became a wholly owned
subsidiary of VES. As a result of the Combination, each share of Enertec stock
was converted into the right to receive VES Class A Exchangeable Series 1 stock
(the "Class A shares) at an exchange ratio of 0.345 of a Class A share for each
share of Enertec. All of the holders of Enertec common shares became holders of
Class A shares and accordingly, 2,437,527 Class A shares were issued. Each Class
A share is convertible, at the option of the holder, into one share of common
stock of Veritas DGC. Outstanding options to purchase shares of Enertec stock
were converted into options to purchase approximately 236,000 shares of common
stock of Veritas DGC.

The total purchase price of Enertec was approximately $28.0 million,
comprised of approximately $24.7 million of stock, $0.9 million of our stock
options and $2.4 million of business combination costs. The acquisition was
accounted for as a purchase with the allocation of purchase price, in accordance
with APB 16, yielding approximately $4.9 million of current assets, $13.4
million of property and long-term assets, $2.6 million of liabilities and $12.3
million of goodwill. Goodwill is being amortized over ten years.

On April 28, 2000 we sold our marine high-resolution survey business, KC
Offshore, L.L.C. and its subsidiary Kinco Operating, Inc., to the Racal
Corporation for $6.9 million.

Pro forma revenue, net income before extraordinary item, net income and
earnings per share of the combined Veritas DGC/Enertec entity, presented as if
the Combination had occurred on August 1, 1999 and 1998, are shown below. This
pro forma financial information is not necessarily indicative of the actual
results that would have been achieved had the Combination occurred at the
beginning of the periods presented.

3. LONG-TERM DEBT

Long-term debt is as follows:

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 any of our secured debt (none at July 31, 2001), with respect to
the assets securing such debt, and to all debt of our subsidiaries whether
secured or unsecured. The indenture relating to the senior notes contains
certain covenants that

20

limit our ability to, among other things, incur additional debt, pay dividends
and complete mergers, acquisitions and sales of assets. Upon a change in our
control, as defined in the indenture, each holder of the senior notes has the
right to require us to purchase all or a portion of such holder's senior note at
a price equal to 101% of the aggregate principal amount. We have the right to
redeem the senior notes, in whole or part, on or after October 15, 2000. On
September 24, 1999, we repurchased $5.5 million of 9 3/4% senior notes on the
open market at a price of $5.7 million, resulting in an extraordinary loss of
$0.2 million, net of tax. On December 3, 1999, we reissued $1.0 million of
9 3/4% senior notes at a price of $1.0 million. On December 10, 1999, we
reissued $4.6 million of 9 3/4% senior notes at a price of $4.7 million.

We maintain a revolving credit agreement expiring August 2003 with
commercial lenders that provides for U.S. advances up to $80.0 million and
non-U.S. advances up to $20.0 million. Advances bear interest, at our election,
at LIBOR plus a margin or prime rate plus a margin, with the margins based on
certain financial ratios maintained by us or our credit rating. At July 31, 2001
the LIBOR margin was 1.25% and the prime rate margin was 0%. Covenants in the
agreement limit, among other things, our right to take certain actions,
including creating indebtedness. In addition, the agreement requires us to
maintain certain financial ratios. No advances were outstanding at July 31,
2001, under the credit agreement, although $7.9 million in letters of credit had
been issued under the facility.

During the year ended July 31, 2001, we incurred interest costs of $14.2
million. For the years ended July 31, 2001 and 2000, we capitalized $523,000 and
$185,000, respectively. No amount was capitalized for the year ended July 31,
2000. The capitalized amounts represent costs for capital improvements to
chartered vessels.

4. OTHER ACCRUED LIABILITIES

Other accrued liabilities include the following:

5. INCOME TAXES

Pretax income was taxed under the following jurisdictions:

The provision for income taxes consists of the following:

21

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:

The non-U.S. operations category includes non-U.S. earnings taxed at other
than the U.S. statutory rate, non-U.S. losses with no tax recovery, foreign tax
credits and deductions, foreign withholding taxes and U.S. tax on Subpart F
income, dividends and foreign branch operations.

Deferred taxes result from the effect of transactions that are recognized in
different periods for financial and tax reporting purposes. The primary
components of our net deferred tax asset are as follows:

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 the
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 the quasi-reorganization on July 31, 1991,
with respect to Digicon, 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 $8.9 million during 2001 and
$1.8 million in 2000 resulted primarily from recognition of the expected
utilization of net operating loss carryforwards generated prior to the
quasi-reorganization.

As of July 31, 2001, we had U.S. net operating loss carryforwards of
approximately $32.6 million. Approximately $11.8 million of net operating loss
carryforwards existed prior to the quasi-reorganization.

22

The following schedule sets forth the expiration dates of the U.S. and
non-U.S. net operating losses.

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. We performed the required
testing and concluded that two "ownership changes" occurred. The first occurred
in connection with the issuance of common stock through a public offering we
made 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 $4.0 million per year. The second "ownership change" occurred in
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 $8.9 million per year, which
includes the limitation of approximately $4.0 million from the first ownership
change. We utilized approximately $8.9 million of limitation carryover in each
of the years ended July 31, 2001 and 2000. U.S. net operating loss carryforwards
increased by $4.2 million as a result of the acquisition of RC2. These loss
carryforwards expire in years from 2017 to 2020.

Non-U.S. operations had net operating loss carryforwards of approximately
$35.3 million at July 31, 2001, of which approximately $9.7 million existed
prior to the quasi-reorganization. Approximately $12.5 million 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 our current trade or business. Approximately $9.1 million of
the United Kingdom net operating loss carryforwards existed prior to the
quasi-reorganization. Approximately $3.1 million of the total non-U.S. net
operating loss carryforwards are related to Singapore operations and have an
indefinite carryforward period.

We consider the undistributed earnings of our non-U.S. subsidiaries to be
permanently reinvested. We have 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 we should sell its stock in the subsidiaries.

6. COMMITMENTS AND CONTINGENT LIABILITIES

Total rentals of vessels, equipment and office facilities charged to
operations amounted to $78.8 million, $57.0 million, and $62.5 for the years
ended July 31, 2001, 2000 and 1999, 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:

23

We carry workers compensation insurance that limits our liability on a per
claim and per policy year basis. 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 our financial position.

7. EMPLOYEE BENEFITS

We maintain a 401(k) plan in which employees of our majority-owned domestic
subsidiaries and certain foreign subsidiaries are eligible to participate.
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 15% of their salary to a maximum of $10,500 per year.
Generally, we 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 we are required to contribute, we may elect to reduce our contribution,
but in no event may we reduce the total contribution to less than 25% of the
employee contribution. We may make additional contributions from our current or
cumulative net profits in an amount determined by the Board of Directors. Our
matching contributions to the 401(k) plan were $971,000 in 2001, $821,000 in
2000, and $741,000 in 1999.

We have two employee nonqualified stock option plans under which options are
granted to officers and key employees. Options generally vest over three years
and are exercisable over a ten-year period from the date of grant. The exercise
price for each option is the fair market value of the common stock on the grant
date. Our Board of Directors has authorized 5,954,550 shares of common stock to
be issued under the option plans.

We also maintain a stock option plan for non-employee directors (the
"Director Plan") under which options are granted to our non-employee directors.
The Director Plan provides that every year each eligible director is granted
options to purchase 5,000 shares of our common stock which vest over a period of
three years from the date of grant and are exercisable over ten years from the
date of grant. The exercise price for each option granted is the fair market
value at the date of grant. The Board of Directors has authorized 600,000 shares
of common stock to be issued under the Director Plan.

24

(1) Life remaining at date of exchange

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:

On November 1, 1997, we 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, 2001 61,001 share of common stock were
issued with a weighted average grant date fair value of $27.04 per share. During
the year ended July 31, 2000, 130,744 shares of common stock were issued with a
weighted average grant date fair value of $13.57 per share. During the year
ended July 31, 2000, 130,744 shares of common stock were issued with a weighted
average grant date fair value of $13.57 per share.

On June 9, 1998, we initiated a restricted stock plan. This plan was amended
and restated on March 7, 2000 for available shares of 173,975. On March 8, 2001
an additional 200,000 shares were reserved for use under the new 2001 plan. The
eligibility of an employee and the terms and amount of the grant are determined
by the Board of Directors' Compensation Committee. In addition, we have issued
restricted stock in conjunction with certain employment agreements.

26

These tables represent the restricted shares issued for fiscal 2001 and
2000.

* Vested upon resignation of former chief executive officer

Compensation expense relating to the stock-based compensation plans
described above was $712,000, $1.1 million and $466,000 for the years ended July
31, 2001, 2000 and 1999, 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:

The pro forma effect on net income and earnings per share may not be
representative of the pro forma effects on future net income and earnings per
share because some options vest over several years and additional awards may be
granted.

We maintain a contributory defined benefit pension plan (the "Pension Plan")
for eligible participating employees in the United Kingdom. Monthly
contributions by employees are equal to 4% of their salaries. We provide 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 that
are held and managed by an independent trustee. The net periodic pension costs
are as follows:

27

The funded status of the Pension Plan is as follows:

Amounts recognized in the consolidated balance sheet consist of:

The weighted average assumptions used to determine the projected benefit
obligation and the expected long-term rate of return on assets are as follows:

The following is a reconciliation of the beginning and ending balances of
the benefit obligation and the fair value of plan assets:

28

8. UNREALIZED LOSS ON INVESTMENTS -- AVAILABLE FOR SALE

In April 1999, we exchanged a $4.7 million account receivable from Miller
Exploration Company ("Miller"), a publicly traded company, for a long-term note
receivable bearing 18% interest. Effective October 15, 2000, the note bears
interest at 9 3/4%. Interest is paid in Miller common stock warrants, with an
exercise price of $0.01 per share, in advance, at six-month intervals. During
fiscal 2001 we exchanged 500,000 warrants for 496,923 shares of Miller common
stock.

In 1999 we exchanged an account receivable from Brigham Exploration Company
("Brigham"), a publicly traded company, for shares of Brigham common stock. We
sold these shares in fiscal 2001 for $4.1 million generating a recognized gain
of $27,000.

9. HEDGE TRANSACTION

In March 2001, we entered into a contract requiring payments in Norwegian
kroner to charter the seismic vessel M/V Seisquest. The contract requires 36
monthly payments commencing on June 1, 2001. To protect our exposure to exchange
rate risk, we entered into multiple forward contracts as cash flow hedges
effectively locking our exchange rate for Norwegian kroner to the U.S. dollar.
The unrealized loss on the hedge transaction is summarized below:

10. COMMON AND PREFERRED STOCK AND SPECIAL VOTING STOCK AND EXCHANGEABLE SHARES

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, 2001.

On May 27, 1997, our Board of Directors 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 our 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 us. The rights expire on
May 15, 2007 and may be redeemed prior to that date.

Two shares of special voting stock of Veritas DGC are authorized and
outstanding, each as a series of common shares. One special voting share was
issued in connection with the combination of Digicon Inc. (Veritas DGC's former
name) and Veritas Energy Services Inc. in August of 1996. The other special
voting share was issued in connection with the combination of Veritas DGC,
Veritas Energy Services and Enertec Resources Inc. in September 1999.

These special voting shares possess a number of votes equal to the number of
outstanding Veritas Energy Services exchangeable shares and Veritas Energy
Services Class A exchangeable shares, Series 1 that are not owned by Veritas DGC
or any of its subsidiaries. Such exchangeable shares were issued to the former
stockholders of Veritas Energy Services and Enertec Resources in business
combinations with Veritas DGC. In any matter submitted to Veritas DGC
stockholders for a vote, each holder of a Veritas Energy Services exchangeable
share has the right to instruct a trustee as to the manner of voting for one of
the votes comprising the Veritas Energy Services special voting share for each
Veritas Energy Services exchangeable share owned by the holder. Likewise, each
holder of a Veritas Energy Services class A exchangeable share, series 1 has the
right to instruct a trustee as to the manner of voting for one of the votes
comprising the Enertec special voting share for each Veritas Energy Services
class A exchangeable shares, series 1 owned by the holder. The Veritas Energy
Services exchangeable shares and the Veritas Energy Services class A
exchangeable shares, series 1 are convertible on a one-for-one basis into shares
of the common stock and, when coupled with the voting rights afforded by the
special voting shares, have rights virtually identical to Veritas DGC common
stock.

29

11. OTHER COSTS AND EXPENSES

Other costs and expenses consist of the following:

12. EARNINGS PER COMMON SHARE

Earnings per common share -- basic and earnings per common share -- diluted
are computed as follows:

The following options to purchase common shares have been excluded from the
computation assuming dilution for the years ended July 31, 2001, 2000 and 1999
because the options' exercise price exceeded the average market price of the
underlying common shares.

30

13. SEGMENT AND GEOGRAPHICAL INFORMATION

We have two segments, land and marine operations, both of which provide
geophysical products and services to the petroleum industry. The two segments
have been aggregated, as they are so similar in their economic characteristics
and the nature of their products, production processes and customers. A
reconciliation of the reportable segments' results to those of the total
enterprise is given below.

This table presents consolidated revenues by geographic area based on the
location of the use of the product or service for the years ended July 31, 2001,
2000 and 1999:

This table presents long-lived assets by geographic area based on the
location of the asset.

In fiscal 2001 and 2000, no customer accounted for 10% or more of total
revenue. In fiscal 1999 Royal Dutch/Shell and its subsidiaries accounted for
about 12% of our revenue.

We generate our revenue in the exploration and production ("E&P") sector of
the petroleum industry and, therefore, are 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.

31

14. SELECTED UNAUDITED QUARTERLY FINANCIAL DATA

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.

32

VERITAS DGC INC. AND SUBSIDIARIES

FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II

(1) Estimates were revised due to improved collections of past due receivables.

(2) Estimate was revised due to published report of debtor's intent and ability
to repay debt.

33

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 to appear under the headings "Election of Directors -- Nominees" and
"Other Information -- Executive Officer Tenure and Identification" in the Proxy
Statement for the 2001 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference to the
material to appear under the heading "Other Information -- Executive
Compensation" in the Proxy Statement for the 2001 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 to appear under the headings "Election of Directors" and "Other
Information -- Certain Stockholders" in the Proxy Statement for the 2001 Annual
Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference to the
material to appear under the heading "Other Information -- Certain Transactions"
in the Proxy Statement for the 2001 Annual Meeting of Stockholders.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

Financial Statement Schedule II -- Valuation and Qualifying Accounts appears
on page 33. 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, 2001

No Form 8-K reports were filed during the quarter ended July 31, 2001.

34

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 27th day of
September, 2001.

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 27th day of September 2001.

/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/ MATTHEW D. FITZGERALD Executive Vice President, Chief Financial
-------------------------------------- Officer and Treasurer
Matthew D. Fitzgerald

/s/ CLAYTON P. CORMIER Director
--------------------------------------
Clayton P. Cormier

/s/ LAWRENCE C. FICHTNER Director
--------------------------------------
Lawrence C. Fichtner

/s/ JAMES R. GIBBS Director
--------------------------------------
James R. Gibbs

/s/ STEVEN J. GILBERT Director
--------------------------------------
Steven J. Gilbert

/s/ BRIAN F. MACNEILL Director
--------------------------------------
Brian F. MacNeill

/s/ JAN RASK Director
--------------------------------------
Jan Rask

35

EXHIBIT INDEX

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.

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 -- 1992 Non-Employee Director Stock Option Plan as
amended and restated March 7, 2000. (Exhibit 10-B
to Veritas DGC Inc.'s Form 10-Q for the quarter
ended April 30, 2000 is incorporated herein by
reference.)

10-C -- 1992 Employee Nonqualified Stock Option Plan as
amended and restated March 7, 2000. (Exhibit 10-C
to Veritas DGC Inc.'s Form 10-Q for the quarter
ended April 30, 2000 is incorporated herein by
reference.)

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.
(Exhibit 10-K to Veritas DGC Inc.'s Form 10-K for
the year ended July 31, 1999.)

10-K -- Credit Agreement among Veritas DGC Inc., as
borrower, and Bank One, Texas, N.A., as issuing
bank, as a bank and agent for the banks, and the
banks therein named dated November 1, 1999.
(Exhibit 10-N to Veritas DGC Inc.'s Form 10-Q for
the quarter ended October 31, 1999 is incorporated
herein by reference.)

10-L -- Sales agency agreement between Veritas DGC Inc. and
Paine Webber Incorporated, dated October 26, 1999.
(Exhibit 10-N to Veritas DGC Inc.'s Form 10-Q for
the quarter ended October 31, 1999 is incorporated
herein by reference.)

10-M -- Form of Indemnity Agreement between Veritas DGC
Inc. and its executive officers and directors as
amended and restated March 7, 2000. (Exhibit 10-M
to Veritas DGC Inc.'s Form 10-Q for the quarter
ended April 30, 2000 is incorporated herein by
reference.)

10-N -- Employee Agreement executed by Richard C. White.
(Exhibit 10-Q to Veritas DGC Inc.'s Form 10-Q for
the quarter ended January 31, 2000 is incorporated
herein by reference.)

10-O -- Indemnity Agreement between Veritas DGC Inc. and
Richard C. White. (Exhibit 10-O to Veritas DGC
Inc.'s Form 10-Q for the quarter ended April 30,
2000 is incorporated herein by reference.)

10-P -- Settlement Agreement between Veritas DGC Inc. and
Richard C. White. (Exhibit 10-P to Veritas DGC
Inc.'s Form 10-Q for the quarter ended October 31,
2000 is incorporated herein by reference.)

10-Q -- Deferred Compensation Plan effective January 1,
2001. (Exhibit 10-Q to Veritas DGC Inc.'s for 10-Q
for the quarter ended October 31, 2000 is
incorporated by reference.)

10-R -- Rabbi Trust Agreement between Veritas DGC Inc. and
Austin Trust Company relating to the Deferred
Compensation Plan. (Exhibit 10-R to Veritas DGC
Inc.'s Form 10-Q for the quarter ended October 31,
2000 is incorporated herein by reference.)

10-S -- 2001 Key Employee Nonqualified Stock Option Plan
effective February 1, 2001. (Exhibit 10-S to
Veritas DGC Inc.'s Form 10-Q for the quarter ended
January 31, 2001 is incorporated by reference.

10-T -- Key Employee Restricted Stock Plan effective
February 1, 2001. (Exhibit 10-T to Veritas DGC
Inc.'s Form 10-Q for the quarter ended January 31,
2001 is incorporated herein by reference.)

10-U -- Employment Agreement between Veritas DGC Inc. and
Matthew D. Fitzgerald. (Exhibit 10-U to Veritas DGC
Inc.'s Form 10-Q for the quarter ended April 30,
2001 is incorporated herein by reference.)

*10-V -- Employment Agreement between Veritas DGC Inc. and
Anthony Tripodo.

*10-W -- Credit Agreement among Veritas DGC Inc., as
borrower, and Wells Fargo, Inc., as a bank and
agent for the banks named therein, dated July 19,
2001.

*21 -- Subsidiaries of the Registrant.

*23 -- Consent of PricewaterhouseCoopers LLP.

*99 -- Audit Committee Charter, revised and approved by
the Board of Directors on June 12, 2001

----------

* Filed herewith