<PAGE> 1
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
----------------------------------------------------------------------
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
Commission file number 0-27070
---------------------------------------------------
VENTURE SEISMIC LTD.
(Exact name of small business issuer as
specified in its charter)
ALBERTA, CANADA N/A
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
3110 - 80th Avenue S.E.
Calgary, Alberta T2C 1J3
(Address of principal executive offices)
(403) 777-9070
(Issuer's telephone number)
----------------------------------------------------
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 6,714,584 Common Shares, no
par value, were outstanding as of August 12, 1998.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
<PAGE> 2
VENTURE SEISMIC LTD.
INDEX TO FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
----
<S> <C>
Consolidated Balance Sheets
June 30, 1998 and September 30, 1997 ....................... 3
Consolidated Statements of Income (Loss)
Three and nine months ended June 30, 1998 and 1997 ......... 4
Consolidated Statements of Cash Flows
Nine months ended June 30, 1998 and 1997 ................... 5
Notes to Consolidated Financial Statements ................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ....... 18
Item 6. Exhibits and Reports on Form 8-K .......................... 19
Signatures ......................................................... 19
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VENTURE SEISMIC LTD.
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
------------- ------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 345,158 $ 68,066
Accounts receivable 4,648,828 2,586,688
Work-in-progress 133,000 521,594
Other receivables 148,427 297,707
Prepaid expenses and deposits 166,831 204,276
------------- -------------
5,442,244 3,678,331
ADVANCE TO CONTINENTAL HOLDINGS LTD. (NOTE 4) 4,000,000 --
CAPITAL ASSETS 20,149,803 17,383,026
INTANGIBLE ASSETS 1,420,763 1,554,503
------------- -------------
$ 31,012,810 $ 22,615,860
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank indebtedness $ 550,000 $ --
Accounts payable and accrued liabilities 4,063,238 1,036,147
Deferred revenue -- 800,000
Income taxes payable 35,504 118,708
Current portion of long term debt (note 5) 2,672,700 6,580,703
------------- -------------
7,321,442 8,535,558
------------- -------------
LONG TERM DEBT (NOTE 5) 5,389,533 3,746,490
------------- -------------
DEFERRED INCOME TAXES 322,426 674,076
------------- -------------
SHAREHOLDERS' EQUITY
Share capital (note 6) 16,760,098 7,671,366
Retained earnings 1,343,890 1,949,549
Cumulative translation adjustment (124,579) 38,821
------------- -------------
17,979,409 9,659,736
------------- -------------
$ 31,012,810 $ 22,615,860
============= =============
</TABLE>
3
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VENTURE SEISMIC LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE $ 4,367,091 $ 5,623,773 $ 26,073,516 $ 21,306,774
DIRECT EXPENSES 5,958,200 4,330,862 21,864,969 15,481,083
------------- ------------- ------------- -------------
GROSS MARGIN (1,591,109) 1,292,911 4,208,547 5,825,691
------------- ------------- ------------- -------------
EXPENSES
General and administrative 615,767 479,652 1,716,388 1,365,942
Depreciation 886,242 558,258 2,427,170 1,644,207
Amortization 44,580 44,580 133,740 121,740
------------- ------------- ------------- -------------
1,546,589 1,082,490 4,277,298 3,131,889
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS (3,137,698) 210,421 (68,751) 2,693,802
OTHER INCOME (EXPENSE)
Interest and other income 40,385 13,952 161,855 20,502
Interest expense (265,671) (104,112) (854,993) (377,450)
------------- ------------- ------------- -------------
(225,286) (90,160) (693,138) (356,948)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (3,362,984) 120,261 (761,889) 2,336,854
------------- ------------- ------------- -------------
INCOME TAXES (RECOVERY)
Current (511,000) (99,738) 105,834 603,878
Deferred (696,745) 161,638 (262,064) 428,800
------------- ------------- ------------- -------------
(1,207,745) 61,900 (156,230) 1,032,678
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (2,155,239) $ 58,361 $ (605,659) $ 1,304,176
============= ============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE
(NOTE 3)
Basic $ (0.46) $ 0.02 $ (0.14) $ 0.42
Diluted (U.S. GAAP) $ (0.46) $ 0.02 $ (0.14) $ 0.42
Fully diluted (Cdn GAAP) $ (0.46) $ 0.02 $ (0.14) $ 0.33
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic 4,635,000 3,114,000 4,188,000 3,108,000
Diluted (U.S. GAAP) 4,635,000 3,114,000 4,188,000 3,108,000
Fully diluted (Cdn GAAP) 4,635,000 5,354,000 4,188,000 5,348,000
</TABLE>
4
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (605,659) $ 1,304,176
Items not involving cash:
Depreciation and amortization 2,560,910 1,765,947
Deferred income taxes (262,064) 428,800
Gain on sale of capital assets (74,034) --
Cumulative translation adjustment (252,716) (84,231)
Net change in non-cash working capital 657,066 (692,630)
------------- -------------
2,023,503 2,722,062
------------- -------------
FINANCING ACTIVITIES:
Proceeds on issuance of common shares 9,088,462 100,000
Increase in bank indebtedness 550,000 342,249
Proceeds from long term debt 6,444,122 4,472,041
Principal payments on long term debt (8,709,082) (3,261,932)
Net change in non-cash working capital -- (100,000)
------------- -------------
7,373,502 1,552,358
------------- -------------
INVESTING ACTIVITIES:
Purchase of capital assets (5,279,833) (3,118,167)
Proceeds on sale of capital assets 159,920 --
Advance to Continental Holdings Ltd. (4,000,000) --
Acquisitions -- (312,000)
------------- -------------
(9,119,913) (3,430,167)
------------- -------------
INCREASE IN CASH FOR THE PERIOD 277,092 844,253
CASH, BEGINNING OF PERIOD 68,066 --
------------- -------------
CASH, END OF PERIOD $ 345,158 $ 844,253
============= =============
</TABLE>
5
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VENTURE SEISMIC LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Basis of Financial Statement Presentation
The interim consolidated financial statements of Venture Seismic Ltd. (the
"Company") are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position of the Company as at June 30, 1998,
operating results for the three and nine month periods ended June 30, 1998 and
1997 and statements of cash flows for the nine months ended June 30, 1998 and
1997. The unaudited consolidated financial statements presented herein should be
read in conjunction with the audited consolidated financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-KSB for its fiscal year ended September 30, 1997, as amended. The
foregoing interim results for the three and nine month periods ended June 30,
1998 are not necessarily indicative of the results for the fiscal year ending
September 30, 1998 or any other period.
The consolidated financial statements are prepared in accordance with Canadian
generally accepted accounting principles ("Cdn GAAP"). Certain of these
principles differ from those applicable in the United States ("U.S. GAAP").
Differences, if material, are disclosed in note 3 - Reconciliation to United
States Accounting Principles.
2. Currency Presentation and Exchange Rates
All dollar amounts, unless otherwise stated, are expressed in U.S. dollars.
Since the completion of its initial public offering in November 1995, the
Company has selected U.S. dollars as its currency for financial reporting and
display purposes on the basis that the securities of the Company are listed for
trading on the Nasdaq National Market ("Nasdaq") and the primary users of the
financial statements of the Company are U.S. residents. Accordingly, the Company
applies the "current rate" method to translate its accounts measured in Canadian
("Cdn") dollars to U.S. dollars. Under this method, average exchange rates are
used for items included in the consolidated income statement and period end
exchange rates are used for the assets and liabilities. Any significant gains or
losses are included as a separate component of shareholders' equity.
For translation purposes, the exchange rates of Cdn dollars to U.S. dollars, is
calculated using the exchange rates reported by the Federal Reserve Bank of New
York, as the noon buying rate in New York for cable transfers in Cdn dollars, as
certified for custom purposes. The average exchange rates during the three month
periods ended June 30, 1998 and 1997 are US $0.6912 = $1.00 Cdn and US $0.7214 =
$1.00 Cdn, respectively. The average exchange rates during the nine month
periods ended June 30, 1998 and 1997 are US $0.6999 = $1.00 Cdn and US $0.7326 =
$1.00 Cdn, respectively. The period end
6
<PAGE> 7
exchange rates at June 30, 1998 and September 30, 1997 are US $0.6795 = $1.00
Cdn and US $0.7241 = $1.00 Cdn, respectively.
3. Reconciliation to United States Accounting Principles
For the periods ended June 30, 1998 and 1997 there were no material differences
in net income as calculated in accordance with Cdn GAAP and U.S. GAAP.
The Company adopted the Financial Accounting Statements Board Statement of
Financial Accounting Standards No. 128 "Earnings per Share" in the quarter ended
December 31, 1997. In accordance with this pronouncement, basic earnings (loss)
per share ("EPS") is computed by dividing net earnings (loss) by the weighted
average number of common shares of the Company ("Shares") outstanding during the
period. Diluted EPS is determined on the assumption that outstanding dilutive
stock options and warrants have been exercised and the aggregate proceeds were
used to reacquire Shares using the average price of Shares for the period.
During the three and nine month periods ended June 30, 1998, all outstanding
stock options and warrants were anti-dilutive so were not considered in the
calculation of diluted EPS.
<TABLE>
<CAPTION>
Three months ended June 30, 1998
--------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
<S> <C> <C> <C>
Basic and Diluted EPS $ (2,155,239) 4,635,000 $ (0.46)
</TABLE>
<TABLE>
<CAPTION>
Nine months ended June 30, 1998
--------------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
<S> <C> <C> <C>
Basic and Diluted EPS $ (605,659) 4,188,000 $ (0.14)
</TABLE>
4. Advance to Continental Holdings Ltd.
In April 1998, the Company loaned $4,000,000 to Continental Holdings Ltd.
("Continental") in conjunction with a definitive Securities Purchase Agreement
to acquire 100% of the outstanding capital stock of Continental (the
"Acquisition") entered into in March 1998. The loan was used by Continental to
fund a portion of the cost, aggregating approximately $13,500,000, of equipping
and refurbishing (the "Refurbishment") a second marine vessel, the Pacific
Titan. The loan is payable in quarterly installments of principal and interest
commencing December 1, 1999 and bears interest at the prime lending rate of the
Royal Bank of Canada, plus 1%. Subsequent to June 30, 1998, the Acquisition was
completed (see note 7 (i)) and the loan became intercompany debt, due and
payable to the Company.
7
<PAGE> 8
5. Long term debt
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Capital loans, bearing interest at the lender's cost of funds plus 2.75%,
payable in monthly principal installments of $169,225 ($241,750 Cdn) due
February, September and November 2001, and July 2002 $ 6,245,225 $ 5,244,650
Equipment lease, bearing interest at 9%, payable in quarterly installments of
$196,290 comprised of principal and interest, due April 2001 1,817,008 --
Equipment lease purchase contracts -- 5,082,543
------------ ------------
8,062,233 10,327,193
Less current portion (2,672,700) (6,580,703)
------------ ------------
$ 5,389,533 $ 3,746,490
============ ============
</TABLE>
A general security agreement on all equipment and a fixed charge on certain
equipment have been pledged as collateral for the long term debt. Aggregate
principal payments on a fiscal year basis for long term debt are as follows:
<TABLE>
<S> <C>
1998, remainder of fiscal year $ 662,930
1999 2,687,583
2000 2,748,964
2001 1,593,506
2002 369,250
------------
$8,062,233
============
</TABLE>
6. Share capital
On November 10, 1997, the Company called for redemption, at a redemption price
of $0.10 per Warrant, all of the Company's 1,610,000 outstanding redeemable
Warrants ("Warrants") which were not exercised prior to 5:00 p.m. on January 5,
1998 (the "Redemption Date"). During December 1997 and January 1998, 1,513,690
Warrants were exercised, at an exercise price of $6.00 per Warrant to purchase
one Share, resulting in the issuance of 1,513,690 Shares and gross proceeds to
the Company of $9,082,140. The Company incurred issue costs of $73,170 on the
Redemption Date in connection with the exercise of the Warrants. The 96,310
Warrants outstanding which were not exercised prior to the Redemption Date were
redeemed by the Company for an aggregate of $9,631.
During the nine month period ended June 30, 1998, the Company recorded in the
share capital account an income tax benefit of $89,123 associated with expenses
related to the issuance of Shares in the fiscal year ended September 30, 1996.
8
<PAGE> 9
7. Subsequent events
Subsequent to June 30, 1998:
i) on July 29, 1998, the Company completed the acquisition (the
"Acquisition") of 100% of the outstanding capital stock of Continental
in exchange for consideration paid by the Company to the Continental
shareholders of an aggregate of: cash payments of $500,000, the issuance
of negotiable promissory notes in the aggregate principal amount of
$1,000,000, due and payable on or before January 1, 1999, bearing
interest at the prime rate of the Royal Bank of Canada plus 1%, and
2,080,000 Shares or approximately 31% of the Shares outstanding as of
August 11, 1998. The Acquisition was approved at a Special Meeting of
the Company's Shareholders held on July 20, 1998.
ii) on July 29, 1998, Continental closed a financing agreement with a
third party for a term loan of approximately $3,100,000 principal
amount, bearing interest at 8.75%, payable in quarterly installments of
approximately $200,000 comprised of principal and interest, due October
2003. The term loan is secured by a first priority security interest in
the lease of the Pacific Titan and mortgage in certain equipment. The
Company has agreed to act as guarantor for the term loan and has
subordinated any debt owed to it by Continental to the lender of the
term loan. The proceeds of the loan were used to finance a portion of
the Refurbishment.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the description of historical facts contained herein, this Form
10-QSB contains certain forward-looking statements that involve risks and
uncertainties. Actual results could differ from those anticipated due to a
number of factors including the timing of deployment of the Pacific Titan, the
capital intensive nature of the Company's business and its need for additional
funds for operations and debt service requirements (including funds to upgrade
Continental's seismic vessels with 3D capability, if undertaken), quarterly
fluctuations in operating results, dependence upon principal customers and on
the activity of the oil and gas industry, fluctuations in commodity prices,
risks associated with international operations and regulatory, competitive and
contractual risks. Factors which could cause such results to differ materially
from those described in the forward looking statements include those set forth
in the Company's Annual Report on Form 10-KSB for its fiscal year ended
September 30, 1997 as filed with the Securities and Exchange Commission on
December 24, 1997, as amended. References to the Company herein, include, where
appropriate, its wholly owned subsidiaries Boone Geophysical, Inc. ("Boone") and
Hydrokinetic Surveys of Canada Ltd. ("Hydrokinetic"). Except where specifically
noted, the discussion herein does not include reference to Continental Holdings
Ltd. ("Continental"), which became a wholly-owned subsidiary of the Company on
July 29, 1998, after the June 30, 1998 period.
RESULTS OF OPERATIONS
Revenue for the three month period ended June 30, 1998 ("1998 three months")
decreased by approximately 22% to $4,367,091 as compared to $5,623,773 for the
three month period ended June 30, 1997 ("1997 three months"). This decrease was
primarily due to substantially lower than expected revenues generated by Boone,
which was significantly compounded by substantially less activity by the Company
in the Canadian market during the quarter, as compared to the 1997 three months.
The reduced revenue at Boone was primarily related to production inefficiencies
for projects in progress as a result of timing demands and equipment shortages.
The shortage of equipment for the number of projects in progress and the overlap
in the timing of such projects resulted in excessive equipment movement during
the quarter, which in turn resulted in significantly reduced production and
revenue. In addition, certain disputes arose regarding charges for performance
of extra and/or premium rate charges for work outside the normal conditions
anticipated, which resulted in collection difficulties and a subsequent
write-off of disputed charges of approximately $400,000.
Boone contributed revenue of $4,259,695 for the 1998 three months as compared to
$2,478,853 for the 1997 three months. As a percentage of revenue, Boone
contributed approximately 98% of the Company's revenue for the 1998 three months
as compared to approximately 44% for the 1997 three months. Revenue from
operations in the Canadian market for the 1998 three months decreased by
approximately 97% to $107,396 as compared to $3,144,920 for the 1997 three
months. This significant decline in revenue in the Canadian market was primarily
the result of management's decision to focus its efforts in the Southern United
States market and the need to relocate a
10
<PAGE> 11
greater amount of Canadian seismic equipment and crews to the Southern United
States to attempt to meet increased demands in that market segment.
Revenue for the nine month period ended June 30, 1998 ("1998 nine months")
increased by approximately 22% to $26,073,516 as compared to $21,306,774 for the
nine month period ended June 30, 1997 ("1997 nine months"). This increase was
primarily attributable to additional revenue generated from increased operations
in the Southern United States by Boone, offset partially by significantly lower
than expected revenues generated by Boone and the minimal activity in the
Canadian market for the 1998 three months, as discussed above. Boone contributed
revenue of $16,243,612 for the 1998 nine months as compared to $5,539,711 for
the 1997 nine months. As a percentage of revenue, Boone contributed
approximately 62% of the Company's revenue for the 1998 nine months as compared
to approximately 26% for the 1997 nine months. Revenue for the 1998 nine months
from operations in the Canadian market decreased by approximately 38% to
$9,829,904 as compared to $15,767,063 for the 1997 nine months.
During the 1998 nine months, three customers accounted for 37% of the Company's
revenue and during the 1997 nine months, one customer accounted for 42% of the
Company's revenue. Although the projects performed by the Company were generally
short term, the inability to replace significant customers would cause the
Company's revenue and operating results to fluctuate significantly from period
to period, and the loss of certain customers would have a material adverse
impact on the Company's business. Because of the limited number of data
acquisition crews owned by the Company, and thus the limited number of crews the
Company is able to deploy at any given time, the Company anticipates that a
substantial portion of future revenues will continue to be attributable to a few
customers, who may change from time to time.
Direct expenses for the 1998 three and nine months increased by 38% and 41% to
$5,958,200 and $21,864,969, respectively, as compared to $4,330,862 and
$15,481,083 for the 1997 three and nine months, respectively. Direct expenses as
a percentage of revenue increased to approximately 136% and 84% for the 1998
three and nine months, respectively, as compared to approximately 77% and 73%
for the 1997 three and nine months, respectively. The increase in direct
expenses as a percentage of revenue in the 1998 three and nine months as
compared to the 1997 three and nine months was primarily due to increased
operations in the Southern United States, where the Company typically engages in
lower margin projects due to a more highly competitive marketplace, and was
compounded in the 1998 three months by inefficiencies in meeting certain
customer commitments for projects in progress as a result of timing demands and
equipment shortages. The increase in direct expenses as a percentage of revenue
for the 1998 three and nine months as compared to the 1997 three and nine months
was also related to the decision to write-off disputed charges for performance
of extra and/or premium rate charges for work outside the normal conditions
anticipated and the decreased activity by the Company in the Canadian market,
where the Company typically undertakes projects which generate higher margins
than in the Southern United States' market.
11
<PAGE> 12
General and administrative expenses for the 1998 three and nine months increased
by approximately 28% and 26% to $615,767 and $1,716,388, respectively, as
compared to $479,652 and $1,365,942 for the 1997 three and nine months,
respectively. This increase was primarily attributable to increased activity
levels in the Southern United States' market.
Depreciation expense for the 1998 three and nine months increased by 59% and 48%
to $886,242 and $2,427,170, respectively, as compared to $558,258 and $1,644,207
for the 1997 three and nine months, respectively. The increase in depreciation
expense is primarily attributable to seismic data acquisition equipment acquired
to expand Boone's operations, but also includes the acquisition of three 2D
systems used in operations in Canada during the period, the purchase of 250
seismic acquisition remote units for use in both markets and the purchase of
various other seismic equipment mainly for use in the United States' market.
Amortization expense for the 1998 three and nine months of $44,580 and $133,740,
respectively, is related to the amortization of goodwill recognized on the
acquisition of Boone, which the Company acquired in June 1996, and the
acquisition of Hydrokinetic, which the Company acquired in April 1997. The
comparable charge for the 1997 three months was $44,580. The comparable charge
for the 1997 nine months of $121,740 did not include a charge for the
amortization of Hydrokinetic goodwill for the entire period since this
acquisition occurred in April 1997.
Interest and other income for the 1998 three and nine months increased to
$40,385 and $161,855, respectively, as compared to $13,952 and $20,502 for the
1997 three and nine months, respectively. The increase primarily resulted from
interest earned on additional funds on deposit resulting from the exercise of
the Warrants in the first and second quarter of fiscal 1998.
Interest expense for the 1998 three and nine months increased by approximately
155% and 127% to $265,671 and $854,993, respectively, as compared to $104,112
and $377,450 for the 1997 three and nine months, respectively. This increase
primarily resulted from additional capital loans and equipment leases for
seismic equipment to meet demand for increased operations in the Southern United
States during the 1998 nine months compared to the 1997 nine months. The
purchase options on these lease contracts were exercised in December 1997 and
January 1998 for an aggregate purchase price of approximately $3,200,000 with
proceeds from the exercise of the Warrants.
As a result of the Acquisition, on a going-forward basis, the Company will incur
significant increases in expenses related to operations at Continental,
particularly depreciation and amortization expenses and, to a lesser extent,
will also incur an increase to interest expense on long term debt.
The Company's effective income tax rate was approximately 36% and 21% for the
1998 three and nine months, respectively, as compared to 44% for the 1997 three
and nine months. Variances from this rate are primarily due to a greater portion
of the net loss for the 1998 three and nine months being incurred in the United
States where the Company is subject to a lower statutory tax rate and
amortization of goodwill on the acquisitions of Boone and Hydrokinetic, which
have no tax basis.
12
<PAGE> 13
The Company from time to time explores various acquisitions and/or business
combinations or financing opportunities and is currently engaged in discussions
relating to such opportunities. Any such initiatives may involve the issuance of
Shares or other securities and/or cash and financial commitments, either of
which may adversely affect the Company's consolidated financial condition or
results of operations.
YEAR 2000
The Company has commenced a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and will develop an
implementation plan to resolve the issue. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
or hardware may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a major system failure or miscalculations. The
Company expects to identify Year 2000 problems in its existing software and
hardware and if necessary modify its existing software and hardware or convert
to new software or hardware in late 1998 or early 1999, in order to address Year
2000 problems, if any. The cost, if any, for any required modifications or
conversions, has not yet been determined. If necessary modifications or
conversions to new software and hardware are not completed on a timely basis,
the Year 2000 problem may have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has not
developed any contingency plans, in the event it is unable to make any required
modifications or conversions.
CONTINENTAL ACQUISITION
After receipt of shareholder approval at a Special Meeting held on July 20,
1998, on July 29, 1998, the Company completed the Acquisition of 100% of the
outstanding capital stock of Continental in exchange for consideration paid by
the Company to the Continental shareholders of an aggregate of: (i) cash
payments of $500,000, (ii) the issuance of negotiable promissory notes in the
aggregate principal amount of $1,000,000, due and payable on or before January
1, 1999, bearing interest at the prime rate of the Royal Bank of Canada plus 1%,
and (iii) 2,080,000 Shares. As a result of the Acquisition, the former
Continental shareholders own approximately 31% of the outstanding Shares as of
August 11, 1998. In addition, Mr. Leslie Stinn, a former principal shareholder
of Continental, and a 13.6% shareholder of the Company after the Acquisition,
was elected a director of the Company. The Company has agreed for a period of
three years following closing of the Acquisition to use its best efforts to
nominate to its Board of Directors an individual selected by the former
Continental shareholders. Pursuant to the Acquisition, Continental entered into
three year employment agreements with Mr. Stinn and Mr. Roy Self, providing for
monthly compensation of $7,000 each. Mr. Self is also a former principal
shareholder of Continental, and a 13.6% shareholder of the Company after the
Acquisition.
Continental, based in Alberta, Canada, is engaged in marine seismic data
acquisition. Since 1987 Continental has been engaged primarily in performing
offshore seismic surveys to acquire seismic data on possible oil and gas
reserves for its customers. Continental also performs surveys, as a joint
venture or independently, on a non-exclusive basis, for sale to multiple
parties. Continental has completed seismic surveys in the Persian Gulf, the
North Sea, the Falkland Islands area, the Mediterranean and off the coasts of
West Africa and Norway. Continental has entered into an agreement in principle
to lease a second marine vessel (the "Pacific Titan"), for a five year period
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commencing February 1998, at an annual cost (the "Lease Payments") of $2,700,000
increasing to $3,100,000 by the final year of the lease (the "Lease").
Continental is currently negotiating certain terms of the Lease, including the
timing of the Lease Payments. Depending upon the outcome of such negotiations
and the final terms of the Lease, Continental may be required to make, within
the next few months, a substantial portion of the Lease Payments for the first
year of the Lease, or a substantial deposit on the Lease, which may have a
material adverse effect on the Company's financial condition and results of
operations. The Pacific Titan, which is being refurbished and outfitted with
certain capital improvements (the "Refurbishment") at a cost estimated as of
August 12, 1998, to be approximately $13,500,000 (in addition to the Lease
Payments), is scheduled to be ready for deployment in September 1998. The
Company currently anticipates, based upon customer demand, market conditions and
available acceptable financing, that within the next twelve months it may elect
or enter into agreements which would require it to undertake additional capital
expenditures of approximately $2,000,000 per vessel, to outfit each of the SV
Calgary and the Pacific Titan, with equipment to conduct 3D seismic surveys.
In connection with the Acquisition, (i) in April 1998, the Company loaned
$4,000,000 to Continental to fund a portion of the cost of equipping the Pacific
Titan, and (ii) Continental paid bonuses aggregating approximately $721,500 to
certain members of management and redeemed for approximately $524,000 certain of
its preferred shares.
As the Acquisition has been consummated, the assets and liabilities and results
of operations of Continental will be reflected on a consolidated basis in the
financial statements of the Company as of July 1, 1998. The financial statements
included herein and, except where specifically noted, Management's Discussion
and Analysis of Financial Condition and Results of Operations do not reflect the
Acquisition. As a result of the Acquisition, the Company's long term debt has
increased by approximately $3,100,000 in connection with a term loan entered
into by Continental with a third party on July 29, 1998 bearing interest at
8.75%, payable in quarterly installments of approximately $200,000 comprised of
principal and interest, due October 2003. The term loan is secured by a first
priority security interest in the Lease and mortgage in certain equipment. The
Company has agreed to act as guarantor for the term loan and has subordinated
any debt owed to it by Continental to the lender of the term loan. In addition,
any future debt of Continental, including any debt incurred to finance
additional capital expenditures to upgrade Continental's vessels to 3D
capability, would be reflected on a consolidated basis in the Company's
financial statements.
Reference is made to the Company's Annual Report on Form 10-KSB for its fiscal
year ended September 30, 1997, as amended, the Company's Current Report on Form
8-K, as filed with the SEC on May 28, 1998, and the Company's Proxy Statement,
as filed with the SEC on June 23, 1998 which includes certain financial and
other information relating to Continental and the Acquisition.
QUARTERLY FLUCTUATIONS
The Company's business is subject to substantial quarterly variations as a
result of seasonal activity variations in the seismic industry in Western
Canada. Generally, increased activity occurs in the Canadian seismic industry
during the Canadian winter season, from November to March. During this period,
the colder weather freezes the
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ground and permits easier access to marshy terrain in the northern areas of
Western Canada and agricultural areas. During the spring, bans are placed on
road use, which temporarily limits access to many areas where the Company
conducts its operations. Further, due to the soft wet ground conditions and
marshy terrain in the northern areas of Western Canada, both of which are
extremely sensitive to traffic and heavy equipment, the extent to which the
Company can conduct its operations during the spring and summer is significantly
reduced. As a result the Company has historically experienced a fluctuation in
quarterly results with generally increased activity in the Company's first and
second fiscal quarters and a significant decrease in revenues and net income
during its third and fourth fiscal quarters. With the acquisition of Boone in
June 1996, the Company has diversified its operations by expanding into the
Southern United States, which has somewhat reduced the seasonality traditionally
associated with Company's Canadian operations. Management believes that, as a
result of the Acquisition, seasonality associated with the Company's operations
will be further reduced. Due to the factors noted above, the Company's results
of operations may be subject to fluctuations, particularly on a quarterly basis
and the Company's stock price may be affected by such results.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had cash of $345,158 and a working capital deficit
of $1,882,198, which includes the current portion of long term debt in the
amount of $2,672,700.
The Company maintains operating lines of credit in Canada and the United States.
The Canadian line of credit provides for an aggregate of up to $1,200,000 in
advances available to the Company subject to a limit of: i) the excess in value
of current assets over current liabilities (excluding the current portion of
long-term debt) and ii) 70% of the value of the accounts receivable of the
Company which are less than ninety days old. Borrowings under the Canadian
operating line are payable on demand and bear interest at the bank's prime rate
plus .75%. The Company's Canadian trade receivables have been pledged as
collateral for borrowings under the Canadian operating line. The Canadian
operating line contains financial covenants, which, as a result of the
Acquisition, the Company anticipates that it may not be in compliance with such
covenants as of September 30, 1998 (the date of measurement), which would
require the Company to seek a waiver or pursue financing options in order to
attempt to restore compliance. The United States line of credit provides for an
aggregate of up to $250,000 in advances available to the Company. Borrowings
under the United States operating line are payable on demand and bear interest
at prime plus 1.00%. The Company's United States trade receivables have been
pledged as collateral for borrowings under the United States operating line. At
June 30, 1998, advances under the Company's operating lines of credit aggregated
$550,000.
In addition to operating lines of credit at June 30, 1998, the Company had long
term debt consisting of capital loans of $6,245,225 and an equipment lease of
$1,817,008. The capital loans bear interest at the lender's cost of funds plus
2.75% and are payable in
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monthly principal installments of $169,225 and mature in February, September and
November 2001, and July 2002. The equipment lease bears interest at 9% and is
repayable in quarterly installments of $196,290 comprised of principal and
interest and matures in April 2001. A general security agreement on all
equipment and a fixed charge on certain equipment have been pledged as
collateral for the long term debt. In addition, the Company has assigned a
portion (aggregating $1,400,000; $2,000,000 Cdn) of the proceeds of its key-man
life insurance policies (aggregating $2,100,000; $3,000,000 Cdn) on Brian Kozun,
the Company's Chief Executive Officer to two of its lenders. Debt service
requirements relating to the Company's long term debt at June 30, 1998
(excluding any long term debt of Continental, including the term loan;
Continental's long term debt at August 12, 1998 will increase the Company's debt
service requirements by approximately $120,000 per month) is estimated to
aggregate approximately $3,175,000 (including principal and interest payments)
during the twelve month period ending June 30, 1999. At June 30, 1998, the
Company was not in compliance with the capital loans covenant relating to the
maintenance of a working capital ratio of not less than 1:1, and has obtained a
waiver from the lender whereby the Company must continue to make timely payments
on its loans and must be in compliance with the working capital covenant by
September 30, 1998. The Company may not be in compliance with the capital loans
covenants at September 30, 1998, which would require the Company to seek a
waiver from each lender or pursue alternative financing options in order to
attempt to restore compliance, including a possible debt or equity (which would
be dilutive to existing shareholders) financing or strategic merger or other
corporate transaction, although there can be no assurance the Company would be
able to secure a waiver or restore compliance. In the event of a default
relating to the Company's indebtedness, it is likely that Shareholders would
forfeit all or a substantial portion of their investment in the Company.
Net operating cash flows provided by operating activities for the 1998 nine
months amounted to $2,023,503 as compared to $2,722,062 for the 1997 nine
months. The decrease in operating cash flow for the 1998 nine months as compared
to the 1997 nine months is attributable to operating inefficiencies and
collection difficulties in the United States which resulted in decreased cash
generated from operations, and a greater impact of non-cash items such as
depreciation offset partially by a positive change in non-cash working capital
amounts.
Net cash provided by financing activities for the 1998 nine months of $7,373,502
is attributable to cash provided on the exercise of 1,513,690 of the Company's
Warrants during December 1997 and January 1998 combined with increases in the
Company's long term debt and bank indebtedness. This increase in net cash
provided by financing activities was partially offset by the repayment of
approximately $8,700,000 of long term debt during the 1998 nine months,
including approximately $3,200,000 used to exercise equipment lease contract
purchase options.
Cash used in investing activities of $9,119,913 for the 1998 nine months
resulted from the purchase of additional seismic data acquisition equipment, the
disposal of certain field equipment, and a $4,000,000 advance to Continental
prior to the consummation of
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the Acquisition.
Included in the June 30, 1998 accounts receivable balance of $4,683,828 and the
accounts payable and accrued liabilities balance of $4,108,238 were certain
reimbursable amounts which are not included in the Company's revenue or direct
costs. In accordance with the terms of various project agreements, certain costs
are paid by the Company and passed on or flowed through to the customer at cost.
As a result, these reimbursable costs are included in accounts receivable and
accounts payable even though they do not impact revenue or direct expenses. The
collection of accounts receivable and the payment of accounts payable are
expected to continue to occur in the normal 30 to 60 day time period following
billing.
Work-in-progress as at June 30, 1998 was $133,000 as compared to $521,594 as at
September 30, 1997. The decreased value of work-in-progress primarily reflects
the smaller component of project work which was still in progress at June 30,
1998 and, in accordance with the project terms, will be billed and recognized in
accounts receivable upon completion of the project.
The Company had deferred revenue as at June 30, 1998 of $nil as compared to
$800,000 as at September 30, 1997. Deferred revenue represents billings in
excess of revenue amounts earned on projects, and varies depending upon the
completion status of projects.
The Company will require satisfactory operating cash flows and substantial
additional financing to continue operations, complete planned capital
expenditures and meet its principal and interest obligations with respect to the
Company's long term debt. There is no assurance that the Company will be able to
generate sufficient cash flow from operations or obtain additional financing on
acceptable terms, if at all. If funds generated from operations are not
sufficient and if the Company cannot obtain additional financing, the Company
will be required to alter its current plans and assumptions to generate
sufficient funds to satisfy the Company's cash requirements, although there can
be no assurance that the Company will be able to alter such plans. Further, as a
result of the Acquisition, the Company will require additional cash to fund
operations and capital expenditure requirements of Continental, including any
capital improvements the Company may elect or be required (as a result of a
contract for a project) to undertake to upgrade Continental's vessels to 3D
capability, and to meet Continental's obligation with respect to its long term
debt.
The Company's ability to meet its debt service and other obligations depends on
its future performance, which is subject to general economic conditions, oil and
gas commodity prices and other business factors beyond the Company's control. If
the Company is unable to generate sufficient cash flow from operations or to
comply with the terms of its long term debt it may be required to refinance all
or a portion of its existing debt or to obtain additional financing, although
there can be no assurance that the Company will be able to obtain such
refinancing or additional financing on terms acceptable to the Company, if at
all. Any future issuances of equity securities would likely result in dilution
to Shareholders, while incurring additional indebtedness would result in
increased interest expense and debt charges.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has received correspondence, including a draft of a statement of
claim, from, and has been advised by, Canaccord Capital Corporation
("Canaccord"), a Canadian investment bank, indicating that Canaccord may pursue
legal action against each of the Company and Continental with respect to a claim
of entitlement to a fee of approximately $300,000 in connection with the
Acquisition. In October and November, 1997, representatives of the Company,
Continental and Canaccord had preliminary discussions regarding the arrangement
by Canaccord for the Company of a possible private financing to assist in
funding costs related to a potential acquisition of Continental by the Company.
As of August 12, 1998, the Company had not received notice of any formal legal
proceedings.
In November 1997, the Company received notice that the Canadian taxation
authorities have disallowed certain expenses incurred by the Company related to
the 1994, 1995 and 1996 taxation years. The Company has also deducted similar
expenses in 1997. These reassessments and the potential reassessment for the
1997 taxation year, would result in additional income taxes aggregating
approximately $340,000 ($485,000 Cdn). Based on a recently decided court case,
involving another company with a set of circumstances similar to the Company's
situation, the Company has filed notices of objection with the basis of the
reassessment. The Company does not expect to receive a decision regarding the
outcome of these notices of objections until the similar court case proceeds
through the appeal process. Should the reassessments be upheld, any resulting
loss would be charged to operations in the year the outcome was determined. In
accordance with GAAP, the Company has not established a reserve for the
potential reassessment, due to the determination by management of the Company of
the probability of success on the merits by management of the Company. As of
August 12, 1998, the Company had not received a decision regarding the outcome
of the notices of objection.
Item 4. Submission of Matters to a Vote of Security Holders
On July 20, 1998, the Company held a Special Meeting of Shareholders
(the "Meeting"). At the Meeting the following matters were approved and
ratified: (i) the Securities Purchase Agreement by and among the
Company, Continental Holdings Ltd. and the shareholders of Continental
named therein, dated March 27, 1998; (ii) the resolution fixing the
number of directors of the Company at six until the next annual meeting
of its shareholders; (iii) the resolution electing Leslie J. Stinn as
director of the Company until the next annual meeting of its
shareholders; and (iv) the amendment to the Company's 1995 Stock Option
Plan, as amended, increasing the number of Common Shares reserved for
issuance thereunder from 450,000 to 750,000.
1. The Securities Purchase Agreement was approved and ratified by a
vote of 1,722,203 for; 37,850 against; and 24,500 abstaining.
2. The resolution fixing the number of directors of the Company at six
until the next annual meeting of its shareholders was approved and
ratified by a vote of 3,835,444 for; 16,450 against; and 23,400
abstaining.
3. The resolution electing Leslie J. Stinn as director of the Company
until the next annual meeting of its shareholders was approved and
ratified by a vote of 3,852,294 for and 23,000 withheld.
4. The amendment to the Company's 1995 Stock Option Plan, as amended,
increasing the number of Common Shares for issuance thereunder from
450,000 to 750,000 was approved and ratified by a vote of 1,461,922
for; 287,481 against; and 35,150 abstaining.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.10 1995 Stock Option Plan, as amended.
10.37 Waiver letter from Roynat Inc., dated July 9, 1998.
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarterly
period ended June 30, 1998:
1. May 28, 1998, the Company reported the following information under
Item 7:
(a) Financial statements of Business acquired
Continental Holdings Ltd. balance sheet as at December 31, 1997 and
1996 and the statements of income and retained earnings and cash
flows for each of the years in the three year period ended December
31, 1997 and Auditors' Report thereon.
(b) Pro Forma Financial Information
1) Pro forma consolidated balance sheet (unaudited) as at September
30, 1997 combining the audited balance sheet of Venture Seismic
Ltd. and Continental Holdings Ltd. as at September 30, 1997 and
December 31, 1997, respectively.
2) Pro forma consolidated income statement (unaudited) combining
the income statement of Venture Seismic Ltd. for the year ended
September 30, 1997 with the income statement of Continental
Holdings Ltd. for the year ended December 31, 1997.
3) Pro forma interim consolidated income statement (unaudited)
combining the income statement of Venture Seismic Ltd. for the
six months ended March 31, 1998 with the income statement of
Continental Holdings Ltd. for the six months ended December 31,
1997.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Company caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Venture Seismic Ltd.
/s/ Gregory B. Wiebe
By: Gregory B. Wiebe
Vice President Finance and Chief Financial Officer
Dated: August 14, 1998
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<PAGE> 1
Exhibit 10.10
VENTURE SEISMIC LTD.
1995 STOCK OPTION PLAN, AS AMENDED
1. PURPOSE.
The purpose of this plan (the "Plan") is to secure for VENTURE SEISMIC
LTD. (the "Company") and its shareholders the benefits arising from capital
stock ownership by employees, officers and directors of, and consultants or
advisors to, the Company and its subsidiary corporations who are expected to
contribute to the Company's future growth and success. Those provisions of the
Plan which make express reference to Section 422 shall apply only to Incentive
Stock Options (as that term is defined in the Plan).
2. TYPE OF OPTIONS AND ADMINISTRATION.
(a) Types of Options. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (or a
committee designated by the Board of Directors, the "Committee") and
may be either incentive stock options ("Incentive Stock Options")
meeting the requirements of Section 422 of the United States Internal
Revenue Code of 1986, as amended or replaced from time to time (the
"Code") or non-statutory options which are not intended to meet the
requirements of Section 422 of the Code.
(b) Administration. The Plan will be administered by the Board of
Directors or the Committee, whose construction and interpretation of
the terms and provisions of the Plan shall be final and conclusive.
The delegation of powers to the Committee shall be consistent with
applicable laws or regulations (including, without limitation,
applicable state law and Rule 16b-3 promulgated under the United States
Securities Exchange Act of 1934 (the "Exchange Act"), or any successor
rule ("Rule 16b-3")). The Board of Directors or the Committee may in
its sole discretion grant options to purchase the Company's Common
Shares, no par value ("Common Shares"), and issue shares upon exercise
of such options as provided in the Plan. The Board of Directors or the
Committee shall have authority, subject to the express provisions of
the Plan, to construe the respective option agreements and the Plan, to
prescribe, amend and rescind rules and regulations relating to the
Plan, to determine the terms and provisions of the respective option
agreements, which need not be identical, and to make all other
determinations in the judgment of the Board of Directors or the
Committee necessary or desirable for the administration of the Plan.
The Board of Directors or the Committee may correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in
any option agreement in the manner and to the extent it shall deem
expedient to carry the Plan into effect and it shall be the sole and
final judge of such expediency. No director or person acting pursuant
to authority delegated by the Board of Directors or the Committee shall
be liable for any action or determination under the Plan made in good
faith. Subject to
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adjustment as provided in Section 15 below, the aggregate number of
shares of Common Stock that may be subject to Options granted to any
person in a calendar year shall not exceed 225,000 shares or 30% of the
maximum number of shares which may be issued and sold under the Plan, as
set forth in Section 4 hereof, as such section may be amended from time
to time.
(c) Applicability of Rule 16b-3. Those provisions of the Plan which
make express reference to Rule 16b-3 shall apply to the Company only at
such time as the Company's Common Stock is registered under the
Exchange Act, subject to the last sentence of Section 3(b), and then
only to such persons as are required to file reports under Section 16
(a) of the Exchange Act (a "Reporting Person").
3. ELIGIBILITY.
(a) General. Options may be granted to persons who are, at the time of
grant, employees, officers or directors of, or consultants or advisors
to, the Company or any subsidiaries of the Company as defined in
Sections 424(e) and 424(f) of the Code ("Participants") provided, that
Incentive Stock Options may only be granted to individuals who are
employees of the Company (within the meaning of Section 3401 (c) of the
Code). A person who has been granted an option may, if he or she is
otherwise eligible, be granted additional options if the Board of
Directors or the Committee shall so determine.
(b) Grant of Options to Reporting Persons. The selection of a director
or an officer who is a Reporting Person (as the terms "director" and
"officer" are defined for purposes of Rule 16b-3) as a recipient of an
option, the timing of the option grant, the exercise price of the
option and the number of shares subject to the option shall be
determined either (i) by the Board of Directors, (ii) by a committee
consisting of two or more directors having full authority to act in the
matter, or (iii) pursuant to provisions for automatic grants set forth
in Section 3 (c) below.
(c) Directors' Options. Directors of the Company who are not employees
of the Company ("Eligible Directors") will receive an option ("Director
Option") to purchase 5,000 Common Shares on the date that such person
is first elected or appointed a director ("Initial Director Option").
Commencing on the day immediately following the date of the annual
meeting of stockholders for the Company's fiscal year ending September
30, 1996, each Eligible Director will receive an automatic grant
("Automatic Grant") of a Director Option to purchase 1,000 Common
Shares, other than Eligible Directors who received an Initial Director
Option since the most recent Automatic Grant, on the day immediately
following the date of each annual meeting of stockholders, as long as
such director is a member of the Board of Directors. The exercise
price for each share subject to a Director Option shall be equal to the
fair market value of the Common Shares on the date of grant. Director
Options shall become exercisable in four equal annual installments
commencing one year from the date the option is granted and will expire
the earlier of 10 years after the date of grant or 90 days
after the termination of the director's service on the Board.
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4. STOCK SUBJECT TO PLAN.
The stock subject to options granted under the Plan shall be authorized
but unissued or reacquired Common Shares. Subject to adjustment as provided in
Section 15 below, the maximum number Common Shares of the Company which may be
issued and sold under the Plan is 750,000 shares. If an option granted under
the Plan shall expire, terminate or is canceled for any reason without having
been exercised in full, the unpurchased shares subject to such option shall
again be available for subsequent option grants under the Plan.
5. FORMS OF OPTION AGREEMENTS.
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients.
6. PURCHASE PRICE.
(a) General. The purchase price per share of stock deliverable upon
the exercise of an option shall be determined by the Board of Directors
or the Committee at the time of grant of such option; provided,
however, that in the case of an Incentive Stock Option, the exercise
price shall not be less than 100% of the Fair Market Value (as
hereinafter defined) of such stock, at the time of grant of such
option, or less than 110% of such Fair Market Value in the case of
options described in Section 11 (b). "Fair Market Value" of a share of
Common Stock of the Company as of a specified date for the purposes of
the Plan shall mean the closing price of a Common Share on the
principal securities exchange (including the Nasdaq National Market) on
which such shares are traded on the day immediately preceding the date
as of which Fair Market Value is being determined, or on the next
preceding date on which such shares are traded if no shares were traded
on such immediately preceding day, or if the shares are not traded on a
securities exchange, Fair Market Value shall be deemed to be the
average of the high bid and low asked prices of the shares in the
over-the-counter market on the day immediately preceding the date as of
which Fair Market Value is being determined or on the next preceding
date on which such high bid and low asked prices were recorded. If the
shares are not publicly traded, Fair Market Value of a Common Share
(including, in the case of any repurchase of shares, any distributions
with respect thereto which would be repurchased with the shares) shall
be determined in good faith by the Board of Directors or the Committee.
In no case shall Fair Market Value be determined with regard to
restrictions other than restrictions which, by their terms, will never
lapse.
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<PAGE> 4
(b) Payment of Purchase Price. Options granted under the Plan may
provide for the payment of the exercise price by delivery of cash or a
check to the order of the Company in an amount equal to the exercise
price of such options, or by any other means which the Board of
Directors or the Committee determines are consistent with the purpose of
the Plan and with applicable laws and regulations (including, without
limitation, the provisions of Rule 16b-3 and Regulation T promulgated by
the Federal Reserve Board if applicable).
7. OPTION PERIOD.
Subject to earlier termination as provided in the Plan, each option and
all rights thereunder shall expire on such date as determined by the Board of
Directors or the Committee and set forth in the applicable option agreement,
provided, that such date shall not be later than (10) ten years after the date
on which the option is granted.
8. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the option agreement evidencing such option, subject to the provisions
of the Plan. Subject to the requirements in the immediately preceding
sentence, if an option is not at the time of grant immediately exercisable, the
Board of Directors may (i) in the agreement evidencing such option, provide for
the acceleration of the exercise date or dates of the subject option upon the
occurrence of specified events, and/or (ii) at any time prior to the complete
termination of an option, accelerate the exercise date or dates of such option.
9. NONTRANSFERABILITY OF OPTIONS.
No option granted under this Plan shall be assignable or otherwise
transferable by the optionee except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined in
the Code or Title 1 of the Employee Retirement Income Security Act, or the
rules thereunder, if applicable. An option may be exercised during the
lifetime of the optionee only by the optionee. In the event an optionee dies
during his employment by the Company or any of its subsidiaries, or during the
three-month period following the date of termination of such employment, his
option shall thereafter be exercisable, during the period specified in the
option agreement, by his executors or administrators to the full extent to
which such option was exercisable by the optionee at the time of his death
during the periods set forth in Section 10 or 11 (d).
10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Except as provided in Section 11 (d) with respect to Incentive Stock
Options and except as otherwise determined by the Committee at the date of
grant of an Option, and subject to the provisions of the Plan, an optionee may
exercise an option at any time within three months following the termination of
the optionee's employment or other relationship with the Company or within one
(1) year if such termination was due to the death or disability of the optionee
but, except in the case of the optionee's death, in no
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<PAGE> 5
event later than the expiration date of the Option. If the termination of the
optionee's employment is for cause or is otherwise attributable to a breach by
the optionee of an employment or confidentiality or non-disclosure agreement,
the option shall expire immediately upon such termination. The Board of
Directors shall have the power to determine what constitutes a termination for
cause or a breach of an employment or confidentiality or non-disclosure
agreement, whether an optionee has been terminated for cause or has breached
such an agreement, and the date upon which such termination for cause or breach
occurs. Any such determinations shall be final and conclusive and binding upon
the optionee.
11. INCENTIVE STOCK OPTIONS.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) Express Designation. All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such in
the option agreement covering such Incentive Stock Options.
(b) 10% Shareholder. If any employee to whom an Incentive Stock Option
is to be granted under the Plan is, at the time of the grant of such
option, the owner of stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company (after
taking into account the attribution of stock ownership rules of Section
424(d) of the Code), then the following special provisions shall be
applicable to the Incentive Stock Option granted to such individual:
(i) The purchase price per Common Share subject to such Incentive
Stock Option shall not be less than 110% of the Fair Market Value of
one Common Share at the time of grant; and
(ii) the option exercise period shall not exceed five years from
the date of grant.
(c) Dollar Limitation. For so long as the Code shall so provide,
options granted to any employee under the Plan (and any other incentive
stock option plans of the Company) which are intended to constitute
Incentive Stock Options shall not constitute Incentive Stock Options to
the extent that such options, in the aggregate, become exercisable for
the first time in any one calendar year for Common Shares with an
aggregate Fair Market Value, as of the respective date or dates of
grant, of more than $100,000.
(d) Termination of Employment, Death or Disability. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the
optionee is, and has been continuously since the date of grant of his
or her option, employed by the Company, except that:
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<PAGE> 6
(i) an Incentive Stock Option may be exercised within the period
of three months after the date the optionee ceases to be an employee
of the Company (or within such lesser period as may be specified in
the applicable option agreement), provided, that the agreement with
respect to such option may designate a longer exercise period and
that the exercise after such three-month period shall be treated as
the exercise of a non-statutory option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an
employee, the Incentive Stock Option may be exercised by the person
to whom it is transferred by will or the laws of descent and
distribution within the period of one year after the date of death
(or within such lesser period as may be specified in the applicable
option agreement); and
(iii) if the optionee becomes disabled (within the meaning of
Section 22(e) (3) of the Code or any successor provisions thereto)
while in the employ of the Company, the Incentive Stock Option may
be exercised within the period of one year after the date the
optionee ceases to be such an employee because of such disability
(or within such lesser period as may be specified in the applicable
option agreement).
For all purposes of the Plan and any option granted hereunder,
"employment" shall be defined in accordance with the provisions of Section
1.421-7 (h) of the Income Tax Regulations (or any successor regulations).
Notwithstanding the foregoing provisions, no Incentive Stock Option may be
exercised after its expiration date.
12. ADDITIONAL PROVISIONS.
(a) Additional Option Provisions. The Board of Directors or the
Committee may, in its sole discretion, include additional provisions in
option agreements covering options granted under the Plan, including
without limitation restrictions on transfer, repurchase rights, rights
of first refusal, commitments to pay cash bonuses, to make, arrange for
or guaranty loans or to transfer other property to optionees upon
exercise of options, or such other provisions as shall be determined by
the Board of Directors or the Committee; provided, that such additional
provisions shall not be inconsistent with any other term or condition
of the Plan and such additional provisions shall not cause any
Incentive Stock Option granted under the Plan to fail to qualify as an
Incentive Stock Option within the meaning of Section 422 of the Code.
(b) Acceleration, Extension, Etc. The Board of Directors or the
Committee may, in its sole discretion, (i) accelerate the date or dates
on which all or any particular option or options granted under the Plan
may be exercised or (ii) extend the dates during which all, or any
particular, option or options granted under the Plan may be exercised;
provided, however, that no such extension shall be permitted if it
would cause the Plan to fail to comply with Section 422 of the Code or
with Rule 16b-3 (if applicable).
6
<PAGE> 7
13. GENERAL RESTRICTIONS.
(a) Investment Representations. The Company may require any person to
whom an Option is granted, as a condition of exercising such option or
award, to give written assurances in substance and form satisfactory to
the Company to the effect that such person is acquiring the Common
Shares subject to the option, for his or her own account for investment
and not with any present intention of selling or otherwise distributing
the same, and to such other effects as the Company deems necessary or
appropriate in order to comply with federal and applicable state
securities laws, or with covenants or representations made by the
Company in connection with any public offering of its Common Shares,
including any "lock-up" or other restriction on transferability.
(b) Compliance With Securities Law. Each Option shall be subject to
the requirement that if, at any time, counsel to the Company shall
determine that the listing, registration or qualification of the shares
subject to such option or award upon any securities exchange or
automated quotation system or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or that the
disclosure of non-public information or the satisfaction of any other
condition is necessary as a condition of, or in connection with the
issuance or purchase of shares thereunder, such option or award may not
be exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval, or satisfaction of such condition
shall have been effected or obtained on conditions acceptable to the
Board of Directors. Nothing herein shall be deemed to require the
Company to apply for or to obtain such listing, registration or
qualification, or to satisfy such condition.
14. RIGHTS AS A SHAREHOLDER.
The holder of an option shall have no rights as a shareholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares.
No adjustment shall be made for dividends or other rights for which the record
date is prior to the date such stock certificate is issued.
7
<PAGE> 8
15. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS, REORGANIZATIONS AND RELATED
TRANSACTIONS.
(a) Recapitalizations and Related Transactions. If, through or as a
result of any recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar transaction, (i) the
outstanding Common Shares are increased, decreased or exchanged for a
different number or kind of shares or other securities of the Company,
or (ii) additional shares or new or different shares or other non-cash
assets are distributed with respect to such Common Shares or other
securities, an appropriate and proportionate adjustment shall be made
in (x) the maximum number and kind of shares reserved for issuance
under or otherwise referred to in the Plan, (y) the number and kind of
shares or other securities subject to any then outstanding options
under the Plan, and (z) the price for each share subject to any then
outstanding options under the Plan, without changing the aggregate
purchase price as to which such options remain exercisable.
Notwithstanding the foregoing, no adjustment shall be made pursuant to
this Section 15 if such adjustment (i) would cause the Plan to fail to
comply with Section 422 of the Code or with Rule 16b-3 or (ii) would be
considered as the adoption of a new plan requiring stockholder
approval.
(b) Reorganization, Merger and Related Transactions. All outstanding
Options under the Plan shall become fully exercisable for a period of
sixty (60) days following the occurrence of any Trigger Event, whether
or not such Options are then exercisable under the provisions of the
applicable agreements relating thereto. For purposes of the Plan, a
"Trigger Event" is any one of the following events :
(i) the date on which Common Shares are first purchased pursuant
to a tender offer or exchange offer (other than such an offer by the
Company, any Subsidiary, any employee benefit plan of the Company
or of any Subsidiary or any entity holding shares or other
securities of the Company for or pursuant to the terms of such
plan), whether or not such offer is approved or opposed by the
Company and regardless of the number of shares purchased pursuant to
such offer;
(ii) the date the Company acquires knowledge that any person or
group deemed a person under Section 13(d)-3 of the Exchange Act
(other than the Company, any Subsidiary, any employee benefit plan
of the Company or of any Subsidiary or any entity holding Common
Shares or other securities of the Company for or pursuant to the
terms of any such plan or any individual or entity or group or
affiliate thereof which acquired its beneficial ownership interest
prior to the date the Plan was adopted by the Board), in a
transaction or series of transactions, has become the beneficial
owner, directly or indirectly (with beneficial ownership determined
as provided in Rule 13d-3, or any successor rule, under the Exchange
Act), of securities of the Company entitling the person or group to
30% or more of all votes (without
8
<PAGE> 9
consideration of the rights of any class or stock to elect directors
by a separate class vote) to which all shareholders of the Company
would be entitled in the election of the Board of Directors were an
election held on such date;
(iii) the date, during any period of two consecutive years, when
individuals who at the beginning of such period constitute the Board
of Directors of the Company cease for any reason to constitute at
least a majority thereof, unless the election, or the nomination for
election by the shareholders of the Company, of each new director
was approved by a vote of at least two thirds of the directors then
still in office who were directors at the beginning of such period;
and
(iv) the date of approval by the shareholders of the Company of an
agreement (a "reorganization agreement") providing for:
(A) The merger of consolidation of the Company with
another corporation where the shareholders of the Company,
immediately prior to the merger or consolidation, do not
beneficially own, immediately after the merger or consolidation,
shares of the corporation issuing cash or securities in the
merger or consolidation entitling such shareholders to 65% or
more of all votes (without consideration of the rights of any
class of stock to elect directors by a separate class vote) to
which all shareholders of such corporation would be entitled in
the election of directors or where the members of the Board of
Directors of the Company, immediately prior to the merger or
consolidation, do not, immediately after the merger or
consolidation, constitute a majority of the Board of Directors
of the corporation issuing cash or securities in the merger or
consolidation; or
(B) The sale or other disposition of all or substantially
all the assets of the Company.
(c) Board Authority to Make Adjustments. Any adjustments under this
Section 15 will be made by the Board of Directors, whose determination
as to what adjustments, if any, will be made and the extent thereof
will be final, binding and conclusive. No fractional shares will be
issued under the Plan on account of any such adjustments.
16. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
(a) General. In the event of a consolidation or merger sale of all or
substantially all of the assets of the Company in which outstanding
Common Shares are exchanged for securities, cash or other property of
any other corporation or business entity or in the event of a
liquidation of the Company, the Board of Directors of the Company, or
the board of directors of any corporation assuming the obligations of
the Company, may, in its discretion, take any one or more of the
following actions, as to outstanding options: (i) in the event of a
merger under the
9
<PAGE> 10
terms of which holders of the Common Shares of the Company will receive
upon consummation thereof a cash payment for each share surrendered in
the merger (the "Merger Price"), make or provide for a cash payment to
the optionees equal to the difference between (A) the Merger Price times
the number of Common Shares subject to such outstanding options (to the
extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding options in
exchange for the termination of such options, and (ii) in the event the
provisions of Section 15 are not applicable, provide that all or any
outstanding options shall become exercisable in full immediately prior to
such event and upon written notice to the optionees, provide that all
unexercised options will terminate immediately prior to the consummation
of such transaction unless exercised by the optionee within a specified
period following the date of such notice.
(b) Substitute Options. The Company may grant options under the Plan
in substitution for options held by employees of another corporation
who become employees of the Company, or a subsidiary of the Company, as
the result of a merger or consolidation of the employing corporation
with the Company or a subsidiary of the Company, or as a result of the
acquisition by the Company, or one of its subsidiaries, of property or
stock of the employing corporation. The Company may direct that
substitute options be granted on such terms and conditions as the Board
of Directors considers appropriate in the circumstances.
17. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time
to terminate such employment or to increase or decrease the compensation of the
optionee.
18. OTHER EMPLOYEE BENEFITS.
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares
received upon such exercise will not constitute compensation with respect to
which any other employee benefits of such employee are determined, including,
without limitation, benefits under any bonus, pension, profit-sharing, life
insurance or salary continuation plan, except as otherwise specifically
determined by the Board of Directors.
19. AMENDMENT OF THE PLAN.
(a) The Board of Directors may at any time, and from time to time,
modify or amend the Plan in any respect; provided, however, that if at
any time the approval of the shareholders of the Company is required
under Section 422 of the Code or any successor provision with respect
to Incentive Stock Options, or under Rule 16b-3
10
<PAGE> 11
or by the Alberta Business Corporation Act, the Board of Directors may
not effect such modification or amendment without such approval; and
provided, further, that the provisions of Section 3 (c) hereof shall
not be amended more than once every six months, other than to comport
with changes in the Code, the Employer Retirement Income Security Act
of 1974, as amended, or the rules thereunder.
(b) The modification or amendment of the Plan shall not, without the
consent of an optionee, affect his or her rights under an option
previously granted to him or her. With the consent of the optionee
affected, the Board of Directors may amend outstanding option
agreements in a manner not inconsistent with the Plan. The Board of
Directors shall have the right to amend or modify (i) the terms and
provisions of the Plan and of any outstanding Incentive Stock Options
granted under the Plan to the extent necessary to qualify any or all
such options for such favorable federal income tax treatment (including
deferral of taxation upon exercise) as may be afforded incentive stock
options under Section 422 of the Code and (ii) the terms and provisions
of the Plan and of any outstanding option to the extent necessary to
ensure the qualification of the Plan under Rule 16b-3.
20. WITHHOLDING.
(a) The Company shall have the right to deduct from payments of any
kind otherwise due to the optionee any federal, provincial or state or
local taxes of any kind required by law to be withheld with respect to
any shares issued upon exercise of options under the Plan. Subject to
the prior approval of the Company, which may be withheld by the Company
in its sole discretion, the optionee may elect to satisfy such
obligations, in whole or in part, (i) by causing the Company to
withhold Common Shares otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company Common Shares already
owned by the optionee. The shares so delivered or withheld shall have
a Fair Market Value equal to such withholding obligation as of the date
that the amount of tax to be withheld is to be determined. An optionee
who has made an election pursuant to this Section 20(a) may only
satisfy his or her withholding obligation with Common Shares which are
not subject to any repurchase, forfeiture, unfulfilled vesting or other
similar requirements.
(b) The acceptance of Common Shares upon exercise of an Incentive Stock
Option shall constitute an agreement by the optionee (i) to notify the
Company if any or all of such shares are disposed of by the optionee
within two years from the date the option was granted or within one
year from the date the shares were issued to the optionee pursuant to
the exercise of the option, and (ii) if required by law, to remit to
the Company, at the time of and in the case of any such disposition, an
amount sufficient to satisfy the Company's federal, state and local
withholding tax obligations with respect to such disposition, whether
or not, as to both (i) and (ii), the optionee is in the employ of the
Company at the time of such disposition.
11
<PAGE> 12
(c) Notwithstanding the foregoing, in the case of a Reporting Person whose
options have been granted in accordance with the provisions of Section
3 (b) herein, no election to use shares for the payment of withholding
taxes shall be effective unless made in compliance with any applicable
requirements of Rule 16b-3.
21. CANCELLATION AND NEW GRANT OF OPTIONS, ETC.
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of Common Shares and having an option exercise price per
share which may be lower or higher than the exercise price per share of the
canceled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) Effective Date. The Plan shall become effective when adopted by
the Board of Directors, but no Incentive Stock Option granted under the
Plan shall become exercisable unless and until the Plan shall have been
approved by the Company's shareholders. If such shareholder approval
is not obtained within twelve months after the date of the Board's
adoption of the Plan, no options previously granted under the Plan
shall be deemed to be Incentive Stock Options and no Incentive Stock
Options shall be granted thereafter. Amendments to the Plan not
requiring shareholder approval shall become effective when adopted by
the Board of Directors; amendments requiring shareholder approval (as
provided in Section 19) shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted after the
date of such amendment shall become exercisable (to the extent that
such amendment to the Plan was required to enable the Company to grant
such Incentive Stock Option to a particular optionee) unless and until
such amendment shall have been approved by the Company's shareholders.
If such shareholder approval is not obtained within twelve months of
the Board's adoption of such amendment, any Incentive Stock Options
granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the
Company to grant such option to a particular optionee. Subject to this
limitation, options may be granted under the Plan at any time after the
effective date and before the date fixed for termination of the Plan.
(b) Termination. Unless sooner terminated in accordance with Section
16, the Plan shall terminate upon the earlier of (i) the close of
business on the day next preceding the tenth anniversary of the date of
its adoption by the Board of Directors, or (ii) the date on which all
shares available for issuance under the Plan shall have been issued
pursuant to the exercise or cancellation of options granted under the
Plan. If the date of termination is determined under (i) above, then
12
<PAGE> 13
options outstanding on such date shall continue to have force and effect
in accordance with the provisions of the instruments evidencing such
options.
23. PROVISION FOR FOREIGN PARTICIPANTS.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities,
currency, employee benefit or other matters.
24. GOVERNING LAW.
The provisions of this Plan shall be governed and construed in accordance
with the laws of the province of Alberta, Canada without regard to the
principles of conflicts of laws.
Adopted by the Board of Directors on September 14, 1995, as most recently
amended by the Board of Directors on June 3, 1998.
13
<PAGE> 1
Exhibit 10.37
-------------
ROYNAT INC.
SUITE 4500, CANTERRA TOWER, 400 - 3RD AVENUE, S.W.
CALGARY, ALBERTA T2P 4H2
TEL: (403) 269-7755 FAX: (403) 269-7701
July 9, 1998
Venture Seismic Ltd.
3110 - 80th Avenue S.E.
Calgary, Alberta
T2C 1J3
Attention: Mr. Brian Kozun, President
Dear Sir:
RE: WORKING CAPITAL COVENANT
- -----------------------------
With reference to your June 30, 1998 interim financial statement and its
working capital ratio, we acknowledge that it contravenes our covenant
requirements of 1:1, excluding 25% of the current portion of long term debt,
and we hereby waive violation of the covenant as at June 30, 1998 and at the
date of this letter. We do not plan on taking any action so long as the
company continues to make timely payments on its loans and makes arrangements
to comply with its working capital covenant by year end.
Yours truly,
Roynat Inc. Per:
/s/ Paul Gaudet
Assistant Vice-President
/sb
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME (LOSS) AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 345,158
<SECURITIES> 0
<RECEIVABLES> 4,648,828
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,442,244
<PP&E> 27,728,364
<DEPRECIATION> 7,578,561
<TOTAL-ASSETS> 31,012,810
<CURRENT-LIABILITIES> 7,321,442
<BONDS> 5,389,533
0
0
<COMMON> 16,760,098
<OTHER-SE> 1,219,311
<TOTAL-LIABILITY-AND-EQUITY> 31,012,810
<SALES> 0
<TOTAL-REVENUES> 4,367,091
<CGS> 0
<TOTAL-COSTS> 5,958,200
<OTHER-EXPENSES> 1,546,859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 265,671
<INCOME-PRETAX> (3,362,984)
<INCOME-TAX> (1,207,745)
<INCOME-CONTINUING> (2,155,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,155,239)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
