| VERITAS DGC INC ITEM 1A Risk Factors Our recently announced merger agreement with CGG may cause uncertainties among our customers |
| Some customers may be hesitant to contract for our services in light of uncertainties about our ability to perform due to our recently announced plan to merge with CGG or may prefer not to do business with us following the completion of the merger |
| If we are unable to reassure our customers to continue utilizing our services, our financial results may be adversely affected |
| In the event our recently announced plan to merge with CGG is not consummated, our ability to carry on our business at current levels may be affected |
| Closing of our current agreement to merge with CGG is contingent upon a number of items, including, among other things, approval of the merger by an affirmative vote of a majority of our shareholders and approval of the issuance of CGG shares in the merger by the affirmative vote of two-thirds of CGG’s shareholders, as well as the receipt of necessary regulatory approvals from several agencies in several countries |
| There can be no assurance that all such approvals will be obtained, and, in the event any approval required under the merger agreement as a condition to closing is not obtained, the merger may not be consummated |
| If the merger is not consummated, we may have difficulty retaining and recruiting employees in vital areas and we may have difficulty retaining current customers or attracting new customers |
| Our closing stock price was dlra57dtta27 on July 31, 2006 and closed at dlra70dtta07 on September 5, 2006, after announcement of the merger |
| The increase in the stock price is primarily due to the premium to be paid related to the merger |
| In the event our previously announced merger with CGG is not consummated, the price of our common shares may be adversely affected because 5 ______________________________________________________________________ the stockholders will not receive the premium contemplated by the merger agreement |
| As a provider of geophysical technologies, our business is substantially dependent on the level of exploration expenditures by oil and gas companies |
| Exploration expenditures by oil and gas companies are affected by several factors, including actual and forecasted petroleum commodity prices and such companies’ own short term and strategic plans |
| These expenditures may also be affected by worldwide economic conditions |
| Should there be a sustained period of substantially reduced exploration expenditures by oil and gas companies, the demand for geophysical services likely will drop and have an adverse effect on our results of operations and cash flow during the affected period |
| In recent years, many of our customers had been using a substantial portion of their discretionary cash to pay down debt, buy back their stock, drill low-risk prospects and maximize production from existing fields rather than exploring for new prospects |
| While we believe this trend has ended, due to recent commodity price increases and current supply and demand forecasts, there can be no guarantee that oil and gas companies will engage in substantial or prolonged exploration programs involving seismic spending |
| While petroleum commodity prices are currently high from a historical perspective, history has shown these prices to be very volatile |
| Weak demand or technological obsolescence could impair the value of 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 |
| For example, in fiscal 2003 and fiscal 2002 we incurred dlra4dtta9 million and dlra55dtta3 million, respectively, in impairment charges related to slow moving surveys in our multi-client library |
| These surveys were found to be impaired for various reasons, including slow acreage turnover in the case of US land surveys, a border dispute in the case of a Shetland-Faroes survey and excessive acquisition cost in the case of a Gulf of Mexico survey |
| Additionally, our individual surveys have a book life of five years, so particular surveys may be subject to significant amortization even though sales of licenses associated with that survey are weak or non-existent, thus reducing our profits |
| 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 advancements in recent years |
| We will be required to invest substantial capital in the future to maintain our 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 |
| Because 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 we expect 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 and have significantly greater financial and other resources than we do |
| 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 |
| 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 |
| 6 ______________________________________________________________________ Our revenue is subject to fluctuations that are beyond our control, which could adversely affect our results of operations in any financial period |
| Our operating results vary in material respects from quarter to quarter and will most likely continue to do so in the future |
| Factors that 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 licenses to geophysical data in 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 fiscal 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 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 and possible uncertainties caused by our recently announced plan to merge with CGG 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 revenue are derived from foreign activities |
| During the fiscal years ended July 31, 2006 and 2005, approximately 57prca and 53prca of our revenue, respectively, was attributable to activities outside the United States |
| During the fiscal years ended July 31, 2006 and 2005, we recognized revenue from customers residing in the following foreign countries that represented more than 1prca of our consolidated revenue on a gross basis for that fiscal year: July 31, 2006 2005 Country of origin (In millions) Australia $ 71dtta8 $ 38dtta7 Brazil 42dtta2 6dtta4 Cameroon 10dtta3 0dtta5 Canada 140dtta0 90dtta7 India 10dtta1 12dtta1 Indonesia 11dtta4 1dtta8 Malaysia 6dtta4 19dtta2 Nigeria 0dtta6 12dtta0 Norway 29dtta3 21dtta5 Oman 14dtta8 22dtta3 Peru 17dtta0 4dtta3 South Africa 0dtta8 6dtta9 Trinidad and Tobago 14dtta9 — United Kingdom 47dtta7 43dtta1 Foreign revenue is subject to certain risks, including those related to rates of currency exchange, border disputes, war, terrorism, civil disturbances, embargo, and government activities such as radical changes in tax regulations or investment laws |
| We are exposed to these risks in all of our foreign operations to some degree, and our exposure could be material to our financial condition and results of operations where the political and legal environment is less stable and we generate significant revenue or have large local investments, such as in Brazil, Nigeria, and Oman |
| 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 |
| These laws change over time and may result in limitations on our ability to compete globally |
| In addition, non-US persons employed by our separately incorporated foreign subsidiaries conduct business in foreign jurisdictions, some of which have been subject to US trade embargoes and have been identified by the US government as state sponsors of terrorism or are subject to sanctions by the US Office of Foreign Assets 7 ______________________________________________________________________ Control |
| For example, during fiscal 2006 we generated dlra5dtta4 million of revenue from Libyan customers (Libya was identified by the US government as a state sponsor of terrorism until September 2004), dlra0dtta7 million of revenue from Iranian customers and dlra7 thousand of revenue from a Syrian customer |
| We have typically generated revenue in these countries through the performance of data processing, reservoir consulting services and the sale of software licenses and software maintenance |
| The governments of Iran and Syria have been identified by the US government as state sponsors of terrorism and are subject to sanctions by the US Office of Foreign Assets Control and either directly or indirectly control the activities of our customers within their borders |
| Our relations with customers in these countries are current and on going |
| We have procedures in place to conduct these operations in compliance with applicable US laws |
| However, failure to comply with US laws on foreign operations could result in material fines and penalties, damage to our reputation, and a reduction in the value of our shares of common stock |
| In addition, our activities in these countries could reduce demand for our stock among certain investors |
| Finally, some of our operational activities result in accounts receivable or accounts payable that are denominated in foreign currencies and, therefore, subject to fluctuations in foreign currency exchange rates |
| There can be no assurance that we will not experience difficulties in connection with future foreign revenue generation 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 |
| 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 |
| These types of 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 prices of our securities fluctuate |
| 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 |
| Any one or combination of these factors may cause a decline in the trading price of our securities |
| We may be unable to repurchase our Convertible Senior Notes as may be required upon a change in control or on the specified dates at the option of the holder or to pay the required cash upon conversion of the notes |
| Upon a change in control, as defined in the indenture governing our Convertible Senior Notes, and on March 15, 2009, 2014 and 2019, the holders of the notes have the right to require us to repurchase the notes for cash |
| In addition, upon conversion of the notes, the holders will have the right to receive a cash payment |
| If we do not have sufficient funds to pay the repurchase price for all of the notes tendered upon a change in control, the cash due upon repurchases of the notes on March 15, 2009, 2014 or 2019 or the cash due upon conversion, an event of default under the indenture governing the notes would occur as a result of such failure |
| In addition, cash payments in respect of notes tendered for repurchase or conversion are subject to limits and might be prohibited, or create an event of default, under our Credit Facility as well as other agreements relating to borrowings that we may enter into from time to time |
| Our failure to make cash payments in respect of the Convertible Senior Notes could result in an event of default under our Credit Facility |
| There can be no guarantee that our available sources of cash will be sufficient to allow us to make the required cash payments |
| Our business is subject to governmental regulation, which may adversely affect our future operations or the accounting thereof |
| 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 |
| 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 |
| 8 ______________________________________________________________________ We follow the generally accepted accounting principles of the United States (GAAP) as promulgated and/or enforced by the Financial Accounting Standards Board, the Securities and Exchange Commission and other organizations |
| Changes in GAAP can affect the reporting of our future results |
| 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 our company |
| 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 |
| In September 2006, we amended our shareholder rights plan to provide that no rights will be issued to our current shareholders in connection with our previously announced plan to merge with CGG The amounts we amortize from our data library each period may fluctuate significantly, and these fluctuations can have a significant effect on our reported results of operations |
| How we account for our multi-client data library has a significant effect on our reported results of operations |
| We amortize the cost of our multi-client library based primarily upon our estimates of future sales of licenses to data, known as the sales forecast method |
| Although we also employ a minimum amortization for each survey in our data library based on straight-line amortization over five years, this amortization is secondary to that derived from the sales forecast method |
| The estimates used in the sales forecast method are inherently imprecise and may vary from period to period depending upon market developments and our expectations |
| We update our estimates on a quarterly basis and change our amortization rates accordingly |
| Substantial changes in amortization rates can have a significant effect on our reported results of operations |
| We have the ability to issue additional equity securities, which would lead to dilution of our issued and outstanding common stock |
| The issuance of additional equity securities or securities convertible into equity securities would result in dilution of then existing stockholders’ equity interests in us |
| Our board of directors has the authority to issue, without vote or action of stockholders, up to 1cmam000cmam000 shares of preferred stock in one or more series, and has the ability to fix the rights, preferences, privileges and restrictions of any such series |
| Any such series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of our common stock |
| Our board of directors has no present intention of issuing any such preferred stock, but reserves the right to do so in the future |
| In addition, we are authorized to issue, without stockholder approval, up to 78cmam500cmam000 shares of common stock, of which approximately 35cmam871cmam367 shares were outstanding as of July 31, 2006 |