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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
[ X ] SECURITIES EXCHANGE ACT OF 1934 [FEE -REQUIRED]
For the fiscal year ended October 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from [ ] to [ ]
Commission file number 0-22636
CANMAX INC.
(Exact name of Registrant as specified in its Charter)
Wyoming 75-2461665
(State of other jurisdiction of (I.R.S.Employer
Incorporation or organization) Identification No.)
150 W. Carpenter Frwy., Irving, Texas 75039
(Address of principal executive offices, and zip code)
(972) 541-1600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
the filing requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
As of January 14, 1997, 5,012,869 shares of common stock of Canmax Inc.
were outstanding and the aggregate market value of such common stock held
by nonaffiliates (based on the last reported close of the common stock on
NASDAQ SmallCap Market tier of the NASDAQ Stock Market on such date), was
$9,088,331.
Part III of this Annual Report incorporates by references information in the
Proxy Statement for the Annual Meeting of Stockholders of Canmax Inc. to be
held on April 14, 1997.
PART I
Item 1. BUSINESS
The Company
Canmax Inc. (hereinafter referred to as the "Company") was incorporated on
July 10, 1986 under the name 311824 B.C. Ltd. under the Company Act of the
Province of British Columbia, Canada. The Company changed its name to
International Retail Systems Inc. on August 13, 1986. On August 7, 1992,
the Company renounced its original province of incorporation and
incorporated under the laws of the State of Wyoming. On November 30, 1994,
the Company changed its name to Canmax Inc. The Company was listed on the
NASDAQ SmallCap Market tier of the NASDAQ Stock Market on February 10, 1994,
and trades under the symbol: CNMX.
The principal executive offices of the Company are located at 150 West
Carpenter Freeway, Irving, Texas 75039, and its telephone number is (972)
541-1600.
General
The Company, through its wholly-owned subsidiary, Canmax Retail Systems,
Inc., develops and licenses sophisticated software systems, sells ancillary
hardware, and licenses certain third party software to operators of
convenience stores and gas stations. It provides related development,
customization, and software enhancements to its customers and provides
services such as integration, installation and training, and a 24 hour, 365
day per year, help desk.
The Company closed two subsidiaries, The Point of Sale Corporation and
Dataplane Technologies, Inc., and ceased operation of Canmax Retail Systems
(British Columbia) during the year.
Major Contracts
EDS
In April 1993, the Company and Electronic Data Systems Corporation ("EDS")
signed agreements which provide for the Company and EDS to jointly market
the Company's products and services and provided EDS with an option to
purchase up to 25% of the Company's Common Stock. These agreements were
amended in October 1994 and will expire April 22, 1998.
Under the amended agreements, EDS will exclusively market the Company's
products to the retail petroleum industry. The Company will offer EDS, on a
customer-by-customer basis, an opportunity to market its services to the
Company's customers and prospective customers. Pursuant to the amended
agreements, the Company received $2,600,000 in cash from EDS of which
$2,000,000 was used to enhance the Company's products, $500,000 was used for
marketing expenses, and $100,000 was received as consideration for a
software license granted to EDS. EDS also provided $2,000,000 in services
(measured by reference to EDS cost or where cost was not available, at a 25%
discount to EDS commercial rates). In connection with the amended
agreements, EDS received an option to purchase Common Stock of the Company
in an amount equal to up to 25% of the shares of common stock of the
Company calculated on a fully diluted basis at the time of exercise. The
exercise price of the option is not less than 75% of the market value of
the Common Stock at the time of exercise, minus $4,000,000, subject to
adjustment. The $4,000,000 offset was negotiated and is subject to
adjustment for royalties paid by the Company to EDS when the Company
licenses software without EDS involvement.
During 1994, the Company purchased $1,972,329 in services from EDS.
Pursuant to the amended agreements, $861,659 of this amount was not paid
and has been added to the original $4,000,000 option amount. The balance
of $1,110,670 was offset against EDS' liability to the Company for site
licenses sold to EDS.
In connection with prospective business opportunities with major oil
companies, the Company and EDS jointly incurred $2,130,130 in product
development costs. EDS funded that total cost which included reimbursing
the Company for $1,679,977 in expenses paid by the Company. By agreement,
the Company owed EDS for one-half of the total cost in fiscal 1994. That
development obligation in the amount of $1,065,065 owed to EDS and
additional EDS obligations totaling $34,935 were extinguished by issuing
229,167 shares of Common Stock of the Company to EDS on November 15, 1994.
The amount of funding received by the Company from EDS, less the Company's
development obligation amount, $614,912, was recognized as development
revenue by the Company in fiscal 1994. In fiscal 1995, EDS and the Company
jointly incurred $346,190 in product development costs. By agreement, the
Company owed EDS for one-half of the total cost. The Company's obligation
of $173,095 was converted to 36,061 shares in common stock on April 20, 1995.
During 1994, the Company sold EDS 788 site licenses for $1,810,670. Pursuant
to the contract, the amount receivable for this transaction was used to
offset amounts payable to EDS of $1,110,670 and to settle a disputed
$400,000 liability with respect to deferred marketing funding that arose
from an amendment to the original agreements with EDS. The balance of
$300,000 was received in cash after October 31, 1994.
In addition to the site license revenues described in the preceding
paragraph, the Company recognized additional revenue from EDS of
approximately $0.9 million and $1.9 million for fiscal 1995 and 1994,
respectively, for services and development work in conjunction with
prospective business opportunities with major oil companies. During fiscal
1996, the Company recognized revenue of approximately $0.8 million from EDS
for services, site license fees, and development.
Under the amended agreements, the cost of future product development work
performed in order to jointly compete for contracts with major oil companies
will, at the Company's option, be incurred by EDS. Where a contract is
signed, the Company will receive site license fees and other revenues. In
the event the Company funds such development work, the Company will receive
a higher site license fee from EDS or the customer, if the contract is
signed.
At October 31, 1996, EDS held a total of 265,228 shares in the Company
(229,167 issued on November 15, 1994 and 36,061 issued on April 20, 1995)
in consideration for amounts owed to EDS. This represents approximately
5.3% of the outstanding common stock of the Company. EDS has an option to
purchase up to 25% of the shares of common stock of the Company, calculated
on a fully diluted basis at the time of exercise, and their current 5.3%
ownership forms part of the total of 25%.
The Southland Corporation and NCR
On December 7, 1993, the Company signed a five-year agreement with The
Southland Corporation ("SLC") whereby the Company will provide SLC with
software licenses, development services, ancillary hardware, and help desk
services. SLC chose the company's proprietary convenience store automation
software, C-Serve, as the basis for its automation of store functions and
operations at its more than 5,600 corporate and franchise operated 7-Eleven
convenience stores in the U.S. and Canada. Software license and product
revenue and service revenue recorded by the Company in fiscal 1996, 1995 and
1994 and under this contract totaled $2,581,422, $3,733,487 and $2,117,753,
respectively. Development revenues recorded under this contract in fiscal
1996, 1995 and 1994, totaled $970,779, $1,792,206 and $2,468,358,
respectively. Canmax contracted with NCR during 1995 to successfully bid
for two additional contracts with SLC. The first project, a business
requirements definition, is complete and resulted in revenue to the company
of $532,000 in fiscal 1995. The second project was to develop a
preliminary Point of Sale system for SLC and commenced in fiscal 1995 and
was completed in fiscal 1996. Revenue recorded under the second project was
$472,916 and $1,755,202 in fiscal 1995 and 1996, respectively.
In fiscal 1996, Canmax reached agreement with NCR to develop for The
Southland Corporation a next generation Windows NT based version of the
Canmax "C-Serve" convenience store software for $9.5 million. The resulting
product will be used in Southland's approximately 5,000 7-Eleven stores in
the United States. NCR was chosen by Southland to provide project
management and other professional services for this project. Revenues to
Canmax will occur over an 11-month period, which started in May 1996, and
will continue through April 1997. The $9.5 million in revenues is in
addition to previous contracts awarded to Canmax from the Southland
Corporation. During 1996, the Company recognized revenue of $3,920,098
under this agreement.
MARKET AND STRATEGY
Management estimates that there are over 200,000 gas stations/convenience
stores in the U.S. and over 500,000 worldwide. Relatively few of these
stores currently employ any degree of automation.
Recent studies reveal a continuing trend toward store automation although
the market remains significantly underserved by higher levels of technology
and automation. This trend demonstrates the continuing desire of
convenience stores to automate and will rely on service providers such as
the Company to provide solutions-based, consultative services that guide
them through the store automation, evaluation, and implementation process.
Management strategy to compete in the marketplace can be summarized as
follows:
. Solutions based products and services for the automation and
management of convenience store/gas stations;
. Continued commitment to high levels of customer servicing via the
Company's "best in class" help desk and newly implemented account
management staff;
. Continued commitments to strategic partnerships which will provide the
Company visibility to buying audiences worldwide; and
. Continued investment in the Company's development initiatives.
Sales and Marketing
Sales initiatives focus on strategic market segments representing various
locations and customer size. The Company has elected to direct sales and
marketing efforts on the following segments:
. Corporate Accounts ... customers with a major, world-wide presence
representing 20% of the locations;
. National Accounts... customers with a national presence representing
60% of the locations; and
. Regional Accounts... customers with local, regional presence
representing 20% of the locations
The Company recently complimented the new management team with the addition
of a new Vice President of Sales and Marketing. A complete restructuring of
the sales staff, strategic focus, and initiatives are commencing under his
leadership. The process of guiding Customers through an analysis, decision,
and implementation cycle is now a concurrent effort by Sales and Account
Management. Sales and Marketing activities and Account Management
activities, such as cultivating and strategically developing existing
accounts, are coordinated.
Competition
The Company believes its competition can be categorized as follows:
. pump manufacturers,
. point-of-sale equipment manufacturers, and
. specialized application software companies.
Pump manufacturers supply the majority of point-of-sale devices used by gas
stations and convenience stores. They supply specialized equipment with
proprietary interfaces specific to their pump control consoles. The
proprietary nature of their products limits the technology used and the
ability to interface to other devices. Their primary intent, however, is
to provide a complementary service to the sale of their "core" product -
pumps.
Software firms, such as the Company, specializing in gas and convenience
store applications enjoy the advantage of bringing specialized knowledge
and applications to Customers. The industry, however, does not enjoy a
strong reputation as service consultants who deliver solutions that
meet/exceed customer expectations. The Company's service strategy is
designed to employ "Pathmation," a consultative servicing process to
understand customer needs, while guiding and delivering appropriate
products better than other marketplace alternatives.
Many of the Company's current and prospective competitors have
substantially greater financial, technical and marketing resources than
the Company. The most significant threat is the possibility of some
consolidation or alliance of major suppliers creating a larger, stronger
presence in the marketplace. The Company also anticipates that additional
competitors may enter certain of the Company's markets, resulting in even
greater competition. There can be no assurance that the Company will be
able to compete with existing or new competitors. Increased competition
could result in significant price reductions with negative effects upon the
Company's gross margins and a loss of market share, which could materially
and adversely affect the Company's business, financial condition and
operating results.
Products and Services
Canmax products and services are designed to provide guidance for the
retail petroleum and convenience store. This process is called
"Pathmation". Pathmation is the art of analyzing a customer's needs,
assessing the options, then using the best resources available to build a
path that leads our customers to their ultimate goal. The Pathmation steps
to success are to:
. Define business goals.
. Define business processes which support business goals.
. Determine technology requirements to support defined business processes.
. Develop an implementation plan encompassing business processes,
technology training and on-going support.
. Deploy modified business processes, technology, and support
infrastructure.
. Continuously validate results with business goals and changes in
business practices to align implementation.
With a system flexibility that conforms to a changing business and a
scaleable server that saves valuable time, VISTA is versatile in its
functions. Vista is a decision support, communications, and remote store
management system that resides at corporate headquarters. Through a
communications network, it provides for the transmission of data messages
from headquarters to the remote store and from the store to headquarters.
Features include fuel and retail pricebook maintenance, tax book
maintenance, vendor pricebook maintenance, and exception reporting for
stores. Also, analytical perspectives for any level of the business are
given without pre-definition. Other features include:
-batch or on-line communications
-remote on-line support
-sales analysis from store to store, zone to zone and region to region
-addition of new parameters at any time
-decision support
-report writer
The Canmax C-SERVE store automation software product combines an extensive
list of features from point-of-sale to inventory tracking. It provides
integrated card processing, pump control, and scanning capabilities as well
as the ability to communicate with corporate headquarters.
Canmax also provides integration services, customer help desk, training,
and comprehensive system documentation.
SITES provides efficient call handling, automatic problem escalation, and
customer reporting 24 hours a day, 7 days a week. Trained support
technicians handle everything from "how do I..." questions to dispatching
field service for hardware problems. Support services also include free
software and user guide updates as well as ensuring that technicians
respond to all problems in a timely manner. SITES management reports help
identify and resolve recurring issues, such as the need for additional
training at the store or potential hardware failures.
Additional Product Offerings
Additional revenues are generated from the following:
. Modification and custom development contracts,
. Installation and training services,
. Annual maintenance and support services contracts, and
. The provision of third-party ancillary software and hardware.
Product Development
Due to the rapid pace of technological change in its industry, the Company
believes that its future success will depend, in part, on its ability to
enhance and develop its software products to meet customer needs.
C-Serve is being enhanced through the use of sophisticated software
development tools to be operating system independent. This independence is
seen as a competitive advantage and currently the company provides C-Serve
running in a Unix environment. A Windows NT based version of C-Serve is
currently under development and is scheduled for release in 1997.
During the last three fiscal years, the Company has expensed the following
amounts on product development activities:
1996 $1,371,853
1995 2,267,039
1994 2,432,040
The Company incurred $128,874 in 1996, $0 in 1995, and $3,522,948 in 1994
in software development costs which were capitalized. In fiscal 1994,
because of the uncertainty of future revenue in the near term from certain
products, the Company recorded a writedown of $4,127,232 of capitalized
software costs (see Management's Discussion and Analysis - Results Of
Operation 1995 vs 1994).
Concentration of credit risk and significant customers
The Company derives its sales primarily from customers in the retail
petroleum and convenience store market. The Company performs periodic
credit evaluations of its customers and generally does not require
collateral. Billed receivables are generally due within 30 days. Credit
losses have historically been insignificant. A significant portion of the
Company's revenues is from three customers.
The Southland Corporation accounted for 64%, 61%, and 50%, NCR (formerly
AT&T Global Information Solutions Company) accounted for 22%, 12%, and 0%,
and EDS accounted for 7%, 10%, and 38% of the Company's revenues for 1996,
1995, and 1994, respectively. At October 31, 1996 and 1995, accounts
receivable from The Southland Corporation accounted for 46% and 54%,
respectively, of total accounts receivable. At October 31, 1996 and 1995,
accounts receivables from NCR accounted for 37% and 28%, respectively of
total accounts receivable. Management feels the allowance for doubtful
accounts adequately provides for any losses that may occur.
Backlog
Product is generally delivered to customers when ordered. There is no
backlog of orders; however the Company has signed contracts with customers
for the future delivery of products and services. As of October 31, 1996,
the Company had a backlog of approximately $8,400,000 associated with long
term service and development contracts. The Company expects that $6,900,000
of this backlog will be provided in fiscal 1997. Revenue from these
contracts may be affected by changes in customer requirements, competition,
technology, and economic factors. There can be no assurance that the
Company's expectation of revenue will be realized in full.
Employees
As at January 14, 1997, the Company had 109 full time employees and 30
contractors. The functional distribution of the employees was: sales and
marketing and professional services - 7; product development and advanced
research - 47; general and administration - 12; and service, support and
education - 43. All are located in Irving, Texas. None of its employees is
represented by a labor union, and the Company considers employee relations
to be excellent. All contractors are engaged on specific software
development projects.
Other
The Company does not believe it has been or will be materially affected by
environmental laws.
Item 2. PROPERTIES
The Company occupies 47,178 square feet of office space in a stand-alone
building located at 150 West Carpenter Freeway, Irving, Texas, pursuant to
a lease which expires August 31, 1998. The space is used for executive,
administrative, sales and engineering personnel, as well as for inventory
storage and demonstration purposes. The Company does not have an option to
renew the lease. The Company believes that its existing facilities are
adequate to meet its current and foreseeable requirements and that suitable
additional or substitute space will be available as needed.
Item 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries are party to any material
legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market for Common Stock
The Company has only one class of shares, common stock without par value,
which is traded on the NASDAQ SmallCap Market tier of the Nasdaq Stock
Market. Each share ranks equally as to dividends, voting rights,
participation in assets on winding-up and in all other respects. No shares
have been or will be issued subject to call or assessment. There are no
preemptive rights, provisions for redemption or purchase for either
cancellation or surrender or provisions for sinking or purchase funds.
The Company's common stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol CNMX. On November 25, 1995, the
Company's common stock was granted a temporary exception to the Minimum Bid
Price listing requirement and the Company's stock remained listed and
traded under the symbol CNMXC.
At the time, the Company's stock had been trading below the minimum bid
price of $1.00. Nasdaq granted the Company a temporary listing exception
subject to the Company achieving a minimum bid price in excess of $1.00 on
or before January 22, 1996. In order to meet the Nasdaq listing
requirements, the Board of Directors of the Company approved a one-for-five
reverse stock split effective December 21, 1995. From this date, the
Company had a temporary new trading symbol of CNMCD, previously CNMXC. The
Company's stock has traded in excess of the minimum bid price requirement
since December 21, 1995.
On January 15, 1996, Nasdaq advised the Company that it was in compliance
with all requirements necessary for continued listing on The Nasdaq SmallCap
Market tier of The Nasdaq Stock Market. Effective January 17, 1996, the
Company's trading symbol reverted back to CNMX. While the Company
anticipates meeting Nasdaq listing requirements in the future, there can be
no assurances that the Company will continue to comply with the listing
requirements.
Pursuant to the amended April 22, 1993 agreements with EDS, the Company has
granted EDS an option to purchase up to 25% of the shares of common stock of
the Company calculated on a fully diluted basis at the time of exercise.
The option is exercisable at any time from April 22, 1994 to April 22, 1998.
The price is 75% of the then market value of the Company's stock determined
as the average of the mean between the bid and the asked price per share as
reported by a nationally accepted over-the-counter market for each of the
sixty trading days prior to EDS' notice to exercise the option. The
exercise price will be reduced by $4,861,659, provided under the amended
EDS agreements, less royalties paid by the Company to EDS.
The table below shows the high and low closing prices of the Company's
common stock as reported by NASDAQ for each quarter during the past two
years.
Fiscal 1997 High (1) Low (1)
Quarter Ended January 31, 1997
(through January 14, 1997) $ 2.50 $ 1.50
___________________________________________________________________
Fiscal 1996 High (1) Low (1)
Quarter Ended October 31, 1996 $ 3.25 $ 1.50
Quarter Ended July 31, 1996 $ 4.50 $ 1.63
Quarter Ended April 30, 1996 $ 4.63 $ 2.50
Quarter Ended January 31, 1996 $ 4.31 $ 2.19
___________________________________________________________________
Fiscal 1995 High (1) Low (1)
Quarter Ended October 31, 1995 $ 5.94 $ 2.19
Quarter Ended July 31, 1995 $ 7.80 $ 3.30
Quarter Ended April 30, 1995 $ 6.90 $ 3.45
Quarter Ended January 31, 1995 $ 8.75 $ 4.40
(1) All per share amounts have been retroactively adjusted to reflect a
one-for-five reverse stock of the Company's Common Stock, effective
December 21, 1995.
The closing price for the Company's common stock on January 14, 1997 as
reported by NASDAQ was $1.81.
Dividends
To date, the Company has not paid dividends on its shares of common stock.
The Company presently intends to retain all future earnings for its
business and does not anticipate paying cash dividends on its common stock
in the foreseeable future.
Holders of Record
There were 521 stockholders of record as at January 14, 1997, and
approximately 5,500 beneficial stockholders.
Item 6. SELECTED FINANCIAL DATA
Consolidated Statements of Operations Data:
.............................Year ended October 31................
1996 1995 1994 1993 1992
Revenues $12,263,860 $8,996,087 $9,674,595 $4,659,029 $2,224,185
Cost of software 4,053,334 4,040,446 2,462,659 1,325,436 632,693
licenses, product
and development
revenues
Operating expenses 8,039,865 8,639,666 9,060,473 4,447,071 3,577,981
Interest expense 28,047 50,425 66,345 28,812 5,634
Write down of - - 4,127,232 - -
capitalized
software
Net income (loss) 142,614 (3,734,450) (6,042,114) (1,142,290) (1,992,123)
Net income (loss)
per share (1) $ 0.02 $ (0.79) $ (1.54) $ (0.31) $ (0.60)
Consolidated Balance Sheet Data:
........................Year ended October 31................
1996 1995 1994 1993 1992
Total assets $5,650,133 $4,701,902 $5,327,798 $6,882,954 $2,050,914
Working capital 208,466 (468,653) 146,029 525,958 (747,871)
Non-current 255,908 265,015 1,374,556 146,296 55,505
obligations
Shareholders 2,075,318 1,718,672 1,909,905 4,044,761 496,394
equity
(1) All per share amounts have been retroactively adjusted to reflect a
one-for-five reverse stock split of the Company's common stock, effective
December 21, 1995.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED OCTOBER 31, 1996, 1995 AND
1994
General
The Company generates its revenues primarily through three sources:
(i) licensing its sophisticated software systems and selling or licensing
ancillary hardware and third party software to operators of petroleum
retail and convenience stores;
(ii) providing related development, customization, and enhancement to its
customers, and
(iii) providing maintenance by way of 24 hour, 365 day per year help desk,
and other services.
The following table sets forth certain financial data as a percentage of
total net revenues and the percentage change for the periods indicated.
Percentage
Percentage of Total Revenues Increase (Decrease)
1996 1995
vs. vs.
1996 1995 1994 1995 1994
Revenue:
Software
licenses and
product revenue 15.4 34.8 50.7 (39.5) (36.2)
Development 60.3 42.2 41.5 94.5 5.3
Service agreements 24.3 23.0 7.8 44.1 72.4
100.0 100.0 100.0 36.3 (7.0)
Costs and expenses:
Cost of software
licenses, product
revenues and
development
revenues 33.1 44.9 25.5 0.0 64.1
Product development 11.2 25.2 25.1 (39.5) 6.8
Customer service 17.5 24.1 20.9 (0.9) 6.9
Administration 26.0 30.2 20.8 17.3 35.2
and general
Sales and 3.4 7.1 13.7 (35.3) (51.9)
marketing
Depreciation and 7.5 9.4 13.1 7.9 (33.0)
amortization
Interest and 0.2 0.6 0.7 (44.4) (24.0)
financing costs
Write down of
capitalized software - - 42.6 - (100.0)
98.8 (141.5) (162.4)
Net income (loss) 1.2 (41.5) (62.4)
Results of Operations - 1996 versus 1995
Revenue
For the year ended October 31, 1996, the Company had revenues of
$12,263,860, an increase of $3,267,773, or 36.3%, over 1995. The
improvement in revenue is a result of growth in service agreement revenues
and significant growth in development revenue as the Company completed a
project to develop a preliminary (non scanning) point of sale software
application in UNIX for The Southland Corporation (SLC) and commenced a
project to produce a scanning point of sale application and other
associated inventory, merchandising, and back office functions for SLC in
a Windows NT environment.
Software license and product revenue for the year ended October 31,1996 was
$1,892,076, a decrease of $1,235,359, or 39.5%, over 1995. The decrease is
primarily due to the sale during 1995 of software and hardware components to
SLC in accordance with their contract which did not occur during 1996. The
provision of these items to SLC under their contract commenced during 1995
and concluded during the first quarter of 1996.
Development revenue for the year ended October 31, 1996 was $7,392,040, an
increase of $3,590,832, or 94.5%, over 1995. While development revenue from
the base contract with SLC declined in accordance with the terms of the
contract compared with the same period in 1995, the Company recognized
additional development revenue of $1,868,824 for work associated with a
contract between the Company and NCR Corporation (NCR) to develop a
preliminary (non scanning) point of sale software application in UNIX for
SLC. This project was completed in July 1996. In fiscal 1996, Canmax
reached agreement with NCR to develop for the Southland Corporation a next
generation Windows NT based version of the Canmax "C-Serve" convenience
store software for $9.5 million. The resulting product will be used in
Southland's approximately 5,000 7-Eleven stores in the United States. NCR
was chosen by Southland to provide project management and other professional
services for this project. Revenues to Canmax will occur over an eleven-
month period, which started in May 1996, and will continue through April
1997. The $9.5 million in revenues is in addition to previous contracts
awarded to Canmax from the Southland Corporation. During 1996, the Company
recognized revenue of $3,920,098 under this agreement. No such revenue was
recorded in 1995.
Service agreements revenue for the year ended October 31, 1996 was
$2,979,743, an increase of $912,299, or 44.1%, over 1995. This improvement
results from an increase in revenue form the 24 hour/7 day a week help desk
services of 49.4%, reflecting an increase in the number of sites supported
from 3,654 as of October 31, 1995 to 5,912 as of October 31,1996. While
the number of sites increased by 61.8%, revenue increased at a lower rate
due to the structure of the support contract with SLC which provided for a
minimum payment until a certain volume of support calls was reached. These
increases were offset by a reduction in installation and training revenue
resulting from a decrease in the number of sites installed and trained in
1996 compared with 1995.
Gross Margin
Gross margin as a percentage of software license, product and development
revenue was 56.3% for the year ended October 31,1996 compared with 41.7%
for the same period in 1995.
Gross margin on software sales was 52.0% for the year ended October 31,
1996 compared with 47.6% for the same period in 1995. This improvement
was due to a change in mix of products sold away from low margin products
sold to SLC during 1995 to a mix that is more representative, of higher
margin products sold during 1996. Gross margin on hardware sales was
24.8% for the year ended October 31, 1996 compared with 18.7% for the same
period in 1995. The improvement in 1996 was due to the sale of hardware
with higher than normal margins compared with 1995 which was impacted by an
inventory writedown of slow moving and obsolete items. As previously
reported, gross margins on software, hardware, and product license revenue
for the year ended October 31, 1996 were negatively impacted by a $217,623
writedown of software and hardware inventory recorded in the second quarter
of 1996.
For the year ended October 31, 1996, the gross margin on development
revenue was 62.9% compared with 50.1% for the same period in 1995. The
improvement is a result of improved profit margins negotiated on the
development projects mentioned above.
Expenses
For the year ended October 31, 1996, customer service costs decreased 0.9%
compared with the same period in 1995. The decline in cost despite the
increase in the number of' sites supported from 3,654 to 5,912 is due to
lower operating costs for the service arising from increased efficiencies
and lower overall expenditure levels.
For the year ended October 31, 1996, product development costs declined
from $2,267,039 for the same period in 1995 to $1,371,853, a reduction of
39.5%. The reduction was due to an overall reduction in product development
funded by the Company and, as previously reported, due to the
capitalization of software development costs amounting to $128,874 relating
to a new credit card processing network interface the Company developed
during the first quarter of 1996.
Administrative and general expenses increased 17.3% for the year ended
October 31, 1996 compared with 1995, predominately as a result of the
establishment of a business development unit responsible for identifying
new business opportunities and project management. Sales and Marketing
expenses declined 35.3% for the year ended October 31, 1996 compared with
the same period in 1995. These cost reductions are a result of lower
expenditure levels.
During the year ended October 31, 1996, the Company announced it would
close its wholly owned subsidiary, Dataplane Technologies Inc., on August
31, 1996. Dataplane had designed and developed certain communication
processor boards which allow C-Serve to handle some of the communication
protocols and device interfaces used in the industry. The Company
determined that the technology had a limited life and it would no longer
continue to develop and manufacture the technology. Canmax has licensed
the manufacturing rights of the technology to Bass Inc. for the next three
years and anticipates providing for future requirements through Bass. In
addition, the Company closed its non operating subsidiary, The Point of
Sale Corporation.
The cost of closing these subsidiaries has been included in part in the
writedown of $217,623 of inventory discussed above and $25,000 included in
depreciation and amortization representing the write off of intellectual
property.
At October 31, 1996, the Company ceased operations of its wholly owned
subsidiary, Canmax Retail Systems (British Columbia), which had been
providing software development services on a software development project
which was completed on October 31, 1996. Management anticipates closing
down this company over the next six months and does not expect to incur any
additional material costs to complete the closure.
As a result of the foregoing, the Company generated net income of
$142,614, or $0.02 cents per share, for 1996 as compared with incurring a
net loss of $3,734,450, or $0.79 cents per share, for the year ended
October 1995.
Results of Operations - 1995 versus 1994
Summary
For the year ended October 31, 1995, the Company incurred a net loss of
$3,734,450, or $0.79 cents per share, compared to a net loss of $6,042,144
for the year ended October 31, 1994, or $1.54 cents per share. Of the loss
for the year, $3,095,258, or 82.9%, was incurred in the first half of the
year as the Company continued to invest significantly in bidding for
potential new business and as a result of reduced revenues due to delays
in the rollout schedule for The Southland Corporation and installation
delays for the Army and Air Force Exchange (AAFES). Revenues for the first
half of fiscal 1995 were 10.7% below the same period in 1994 and expenses
were up 37.8% over the comparable period.
In June of 1995, the Company took actions to reduce expenditures and focus
on operational stability and revenue improvement as part of a five step
plan for restructuring the Company. The Plan, completed in January of 1996,
included:
. Replacing several members of senior management including the Chief
Financial Officer, Vice President of Development, Chief Operations Officer
and Vice President of Marketing. Further, the former President and Chief
Executive Officer was replaced by Mr. Roger Bryant on November 15, 1994.
. Modifying the composition of the Board of Directors to comprise four
outside members and three inside members
. Improving productivity through process improvement.
. Implementing a restructuring of operations in June 1995 to reduce
expenditure levels through lower staff numbers and strong cost
containment. These cost reductions contributed towards the improvement
in cash flows experienced by the Company during the second half of 1995.
Improved cash flow during the second half of 1995 contributed to the
reduction in liabilities and an overall strengthening of the balance
sheet during the second half of 1995.
Revenue for the fourth quarter of 1995 was $3,141,786, up 34.2% over the
same period of the prior year on an operating basis, adjusting for a one
time sale of licenses to EDS (for future use) for $1,810,670 in the prior
year. Revenue growth was attributed to a strong demand for software and
help desk services and continued demand for licenses. Operating expenses
for the fourth quarter of fiscal 1995 were down 39.2% over the same period
in 1994 and the Company reported a net profit of $111,922 for the quarter
resulting from revenue growth and significantly reduced costs.
Revenues
Revenues for fiscal 1995 declined 7.0% from $9,674,595 to $8,996,087 for
fiscal 1994.
Revenue from software sales declined from $2,927,307 in fiscal 1994 to
$1,385,137 in fiscal 1995. Fiscal 1994 software revenue included one time
sales of the company's proprietary software, C-Serve, to EDS and AAFES
amounting to $2,082,700. Excluding these sales, software revenues increased
from $844,607 in fiscal 1994 to $1,388,137 in fiscal 1995 as a result of
increased sales of third party software to The Southland Corporation for
installation in their 7-Eleven stores under the five year agreement with
the Company.
Revenue from hardware and component parts declined by 3% from $1,919,534 in
fiscal 1994 to $1,742,297 in fiscal 1995. The Company continued to sell
hardware and components to The Southland Corporation for use in their 7-
Eleven store as part of the five year agreement with the Company.
Service agreement revenue increased 172% from $758,963 in fiscal 1994 to
$2,067,444 in fiscal 1995. This increase resulted from installation
services provided to AAFES during the year where the Company installed its
proprietary C-Serve software in some 68 locations during the year and from
an increase in the number of installed sites supported by the Company's 24
hour / 7 day a week help desk. The number of supported locations increased
from 1747 at October 31, 1994 to 3654 at October 31, 1995. Of the increase
of 1907 locations, AAFES accounted for 68 to bring their total supported
sites to 82 at October 31, 1995 and The Southland Corporation increased from
1166 to 2951 at October 31, 1995 as the Company continued to rollout and
install the system developed for The Southland Corporation under the five
year agreement with the Company. The Company continued to support 411 ARCO
locations at October 31, 1995, up from 391 at October 31, 1994.
Development revenue declined from $4,012,520 in fiscal 1994 to $3,801,208
in fiscal 1995, or 5.3%. The decline is a result of the reduction in joint
development work on business opportunities for major oil companies with EDS,
compared with fiscal 1994. Of the revenue for fiscal 1995, approximately
60% is attributable to work performed for The Southland corporation as part
of the five year agreement and under a contract with NCR to develop a
point-of-sale system for the 7-Eleven stores.
Gross Margin
Gross Margin, as a percentage of software license, product and development
revenue, decreased from 72.4% in fiscal 1994 to 41.7% in fiscal 1995. Gross
Margin on software sales declined from 75.2% in fiscal 1994 to 32.1 % in
fiscal 1995 as a result of low margin third party software products sold to
The Southland Corporation under the terms of the five year agreement with
the Company and due to significantly lower sales of the Company's
proprietary software C-Serve. Gross margin on hardware sales declined from
58.9% to 27.9% as a result of low margins on sales on components to The
Southland Corporation and inventory adjustments. Cost of revenue for
development revenue declined from 78.1% to 50.1% as a result of an increase
in direct expenses attributable to development revenue. The additional
costs arose as a result of a change in the mix of staff working on the
projects. During the year ended October 31, 1995 the Company had a larger
percentage of contractors employed on development projects than in the
prior year compared to the number of full-time employees. Contractors can
be up to two or three times more expensive than employees.
Expenses
Customer service expenses increased 6.9% in fiscal 1995 from $2,024,837 to
$2,165,145. Costs were essentially flat compared to prior year despite a
172.4% increase in revenue, without any reduction in support levels or
customer satisfaction. The company commenced the 1995 fiscal year with
sufficient resources to support the revenue growth.
During fiscal 1995, the Company spent $2,267,039 on product development,
or 6.8% less than fiscal 1994. However, during fiscal 1994, the Company
wrote off $4,127,232 of software development costs which was initially
capitalized and subsequently written off in October 1994 because of
uncertainty of future revenue in the near term. Expenditure on such
activities in fiscal 1995 was significantly reduced, and the Company did
not capitalize any development costs in fiscal 1995.
Administration and general expenses increased 35.2% in fiscal 1995 from
$2,012,286 to $2,721,483 predominately as a result of expenditure and
expansion in the first half of fiscal 1995. In the second half of 1995,
administration and general expenses were lower than the comparable period
in 1994 primarily as a result of cost reduction through lower staff numbers
and expenditure control.
Sales and marketing costs decreased 51.9% in fiscal 1995 from $1,323,718 to
$636,748. The reduction was a result of a reduction in the number of staff
members and other cost reductions resulting from a refocus of activities
from large contracts to smaller, less time consuming and less expensive
contracts.
Depreciation and amortization decreased from $1,267,592 in fiscal 1994 to
$849,251 in fiscal 1995, a reduction of 33%. The reduction is due to the
effect of writing down previously capitalized software development costs in
fiscal 1994.
For the year ended October 31, 1995, the Company incurred a net loss of
$3,734,450, or a net loss of $0.79 per share, as compared to a net loss of
$6,042,114, or a net loss of $1.54 per share, for the year ended October 31,
1994.
Writedown of Capitalized Software
The Company regularly evaluates the carrying value of capitalized software
costs in accordance with FASB 86. At October 31, 1994 the Company reviewed
the value of its capitalized software and determined that there was some
uncertainty associated with future revenue opportunities in the near term
from certain products. Accordingly, capitalized software was written down
by $4,127,232 to a carrying value of $813,387.
The write-down of capitalized software projects during the fourth quarter
of fiscal 1994 consisted primarily of two projects, EDS Development Projects
($1.5 million) and Remote Store Management ($2.0 million).
EDS Development Projects
During fiscal 1994, the Company entered into a Joint Marketing Agreement
(JMA) with EDS whereby the Company's core product offering, C-Serve, would
be jointly marketed by EDS and the Company to the retail petroleum and
convenience store industry. C-Serve is a sophisticated point of sale system
developed by the Company specifically for the use in gas stations and
convenience stores. Prospective customers approached by EDS and the Company
often requested modifications and enhancements to the base C-Serve product
which required development efforts to be undertaken. The Company elected
to undertake the development for four of these potential customers in 1994
as it was believed by management of the Company that the enhancements, in
addition to solving the particular customers' needs, had broad market
application to its target customer base. The Company's intention was that
once development was completed, the enhancements would become further
options available on the base C-Serve product and thus the costs capitalized
would be recovered from the Company's estimate of sales for the base C-Serve
product. EDS agreed to fund a portion of the development costs. An
agreement was reached whereby EDS would fund 50% of the jointly incurred
product development costs. This arrangement has been disclosed in Note 3 to
Notes to Consolidated Financial Statements. The Company capitalized its
portion of development costs incurred based upon FASB 86 criteria during
1994 on each of these EDS development projects. As development on these
projects progressed during fiscal 1994, it became apparent to management of
the Company that specific orders from these Customers and orders from other
Customers would not materialize. Thus, management concluded in the fourth
quarter of fiscal 1994 that the EDS development projects should be written
off.
RSMS - Remote Store Management System
The remote store management system (RSMS) was originally conceived as a
corporate headquarters system to remotely access C-Serve locations. The
company had determined that this type of system was required to service
the emerging and long term needs of the industry and its customers. The
Company believed that the future success of C-Serve and future sales
opportunities required the completion of this product.
The RSMS system was to be implemented in a client server environment and
development was planned in two phases. Version one would support the
ability to set up store parameters at the corporate headquarters and down
load these to the remote location. Further, sales information and other
pertinent information collected at the store level could be uploaded to
the corporate headquarters for consolidation, accounting, and reporting
purposes. Version two would include the functionality to support corporate
merchandise price books.
The Company entered into a contract with The Southland Corporation during
1993 and the RSMS project was expanded to include the requirements for The
Southland Corporation. The requirements for The Southland Corporation were
to be incorporated into the RSMS design. In mid 1994, The Southland
Corporation amended their requirements to specifically exclude a client
server application.
For the year ended October 31, 1994 the Company reviewed the RSMS product
and concluded that the project had diverged significantly from its original
design and was now specific to the requirements of The Southland
Corporation. Further, there was an emerging requirement from the industry
which reversed the trends identified at the commencement of the project,
such that price book management was now more important than two way data
interchange. Consequently, management of the Company concluded during the
fourth quarter of Fiscal 1994 that the product had limited or no
application for customers and accordingly the unamortized capitalized costs
of the software was written down to its net realizable value of $0.
Liquidity and Capital Resources
At October 31, 1996, the Company has a net working capital surplus of
$208,466. During the twelve months ended October 31, 1996, the Company
provided cash from operating activities of $888,220.
The Company was able to maintain liquidity during 1996 primarily from net
proceeds arising from the sale of common stock from the exercise of stock
options which provided cash of $208,940 during the second quarter of 1996
and from cash provided by operating activities during the third and fourth
quarter of 1996.
There is an emerging preference by customers for systems, solutions, and
software that run under Microsoft Windows family of operating systems. To
date, the Company has experienced only isolated instances of sales
resistance for its current UNIX based systems; however, it is seen as
critical to the future growth of the corporation that it develop a Windows
based product. Work on a next generation Windows based product commenced
in May of 1996 and is currently expected to be completed in 1997.
Completion of this project is dependent on the successful and timely
conclusion of key components of the development project currently in
process for The Southland Corporation. Once the development is completed,
the Company will be uniquely positioned in the market place and will offer
both a Windows NT based and UNIX solution to its customers.
Management of the Company believes the development of the Windows based
product in conjunction with The Southland Corporation should ensure that
the new product offering encompasses state of the art technology and
industry best practices for the management of retail gas stations and
convenience stores.
The majority of the Company's new product will be developed in conjunction
with a development project currently being performed for The Southland
Corporation. However, the Company will need to perform additional
development effort that is not funded by work done for The Southland
Corporation. Costs necessary to perform the additional development to
bring the new product to market and provide for infrastructure improvements
are estimated to be in the range of $1.0-$3.0 million. The Company believes
that it may be necessary to raise additional capital to complete development
of its next generation product within the necessary window of opportunity
and to provide vital marketing and other support services. No financing
arrangements have been entered into by the Company at this time. Any future
equity capital funding would be dilutive. There can be no assurances that
the Company will be able to obtain suitable financing.
The Company has not made significant outlays for capital expenditure in
fiscal 1995 or 1996. Recent capital expenditures have consisted primarily
of purchases of computer equipment and software. The Company's practice is
to finance capital expenditure through leasing providing suitable terms can
be obtained. The Company currently anticipates that capital expenditure in
fiscal 1997 will be approximately $400,000 and may include hardware and
software.
The Company believes that its existing sources of liquidity will provide
adequate cash to fund its operations for at least the next twelve months.
If cash generated by operations is insufficient to satisfy the Company's
liquidity requirements, the Company may be required to sell additional
equity or debt securities or obtain lines of credit, delay new product
development or restructure operations to reduce costs.
Management does not consider that inflation had a significant impact on the
Company's operations to date, nor is it expected to have an impact next year.
Cautionary Statement
The foregoing "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, which represent the
Company's expectations or beliefs concerning, among other things, future
operating results and various components thereof and the adequacy of future
operations to provide sufficient liquidity. The Company cautions that such
matters necessarily involve significant risks and uncertainties that could
cause actual operating results and liquidity needs to differ materially
from such statements, including, without limitation: user acceptance of
Windows NT as an operating system, continued acceptance of UNIX based
software and the Company's products and services, timing of completion of
development projects and new products, competitive factors such as pricing
and the release of new products and services by competitors, potential need
for additional financing to fund product development, marketing and related
support services, general economic conditions, product demand and
manufacturing efficiencies.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is presented at pages F-1
to F-19.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item will be contained in the Registrant's
definitive proxy statement which the Registrant will file with the
commission no later than February 28, 1997 (120 days after the Registrant's
fiscal year end covered by this Report) and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Registrant's
definitive proxy statement which the Registrant will file with the
commission no later than February 28, 1997 (120 days after the Registrant's
fiscal year end covered by this Report) and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Registrant's
definitive proxy statement which the Registrant will file with the
commission no later than February 28, 1997 (120 days after the Registrant's
fiscal year end covered by this Report) and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Registrant's
definitive proxy statement which the Registrant will file with the
commission no later than February 28, 1997 (120 days after the Registrant's
fiscal year end covered by this Report) and is incorporated herein by
reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) List of Financial Statements
The response to this item is submitted as a separate section of the Report.
See the index on page F-1.
(3) Exhibits
The following exhibits are filed with this report:
3.01 Articles of Incorporation and Bylaws of International Retail
Systems Inc. (1)
10.01 Escrow Agreement (1)
10.02 Stock Option Plan (1)
10.03 Joint Marketing Agreement with EDS (1)
10.04 Stock Option Agreement (1)
10.05 Contract with The Southland Corporation (2)
10.06 Contract with AT&T - Business Requirements Definition (3)
10.07 1996 Management Incentive Plan (4)
10.08 Amended Stock Option Plan (5)
10.09 Contract with NCR (+)
11.01 Statement re: Computation of earnings per share
27 Financial Data Schedule
(1) Incorporated by reference to the Exhibit identified in parentheses,
filed as an exhibit to the Registrant's Registration Statement on
Form 10, filed October 15, 1993.
(2) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended October 31, 1994, and incorporated
herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended October 31, 1995.
(4) Filed as an exhibit to the Company's Report on Form 10-Q for the
period ended April 30, 1996.
(5) Filed as an exhibit to the Company's Report on Form 10-Q for the
period ended July 31, 1996.
(+) Confidential treatment requested
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended October 31, 1996. During fiscal 1995, the Company filed amended
Forms 10-Q for the quarters ended April 30, 1994, July 31, 1994,
January 31, 1995 and April 30, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CANMAX INC.
(Registrant)
Date: January 27, 1997 By: /s/ ROGER D. BRYANT
(Roger D. Bryant, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ ROGER D. BRYANT President, Chief January 27, 1996
(Roger D. Bryant) Executive Officer and
Director (Principal
Executive Officer)
/s/ PHILIP M. PARSONS Executive Vice President, January 27, 1997
(Philip M. Parsons) Chief Financial Officer
and Director (Principal
Financial Officer and
Chief Accounting Officer)
/s/ DEBRA L. BURGESS Executive Vice President January 27, 1997
(Debra L. Burgess) Chief Operating Officer
Director
/s/ ROBERT M. FIDLER Director January 27, 1997
(Robert M. Fidler)
(a) The following documents are filed as a part of this annual report on
Form 10-K for Canmax Inc.:
Canmax Inc. and Subsidiaries
Index To Financial Statements
Item 14(a) (1) and (2)
1. The Consolidated Financial Statements, the Notes to Consolidated
Financial Statements and the Report of Ernst & Young LLP, Independent
Auditors, for the fiscal year ended October 31,1996:
Report of Ernst & Young LLP, Independent Auditors. F-2
Consolidated Balance Sheets at October 31, 1996 and
October 31, 1995. F-3
Consolidated Statements of Operations for the fiscal
years ended October 31, 1996, October 31, 1995, and
October 31, 1994. F-4
Consolidated Statements of Shareholders' Equity for
the fiscal years ended October 31, 1996, October 31,
1995, and October 31, 1994. F-5
Consolidated Statements of Cash Flows for the fiscal
years ended October 31, 1996, October 31, 1995, and
October 31, 1994. F-6
Notes to Consolidated Financial Statements. F-7
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or because
the required information is shown in the consolidated financial
statements or notes hereto.
Report of Independent Auditors
The Board of Directors and Shareholders
Canmax Inc.
We have audited the accompanying consolidated balance sheets of Canmax Inc.
and subsidiaries as of October 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended October 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Canmax Inc.
and subsidiaries at October 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
December 19, 1996
Canmax Inc. and Subsidiaries
Consolidated Balance Sheets
October 31
1996 1995
ASSETS
Current assets:
Cash $ 908,772 $ 477,364
Accounts receivable, less
allowance for doubtful
accounts of $95,207 in
1996 and $71,177 in 1995 2,027,288 1,221,458
Inventory 388,800 474,481
Prepaid expenses and other 202,513 76,259
Total current assets 3,527,373 2,249,562
Property and equipment (note 4) 1,411,567 1,634,325
Capitalized software costs, net of
accumulated amortization of $607,857
in 1996 and $381,811 in 1995 516,999 614,171
Intellectual property rights, net of
accumulated amortization of $620,173
in 1996 and $497,005 in 1995 50,000 173,168
Other assets 144,194 30,676
$ 5,650,133 $ 4,701,902
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,724,195 $ 1,290,263
Accrued liabilities (note 5) 778,521 511,641
Deferred revenue 558,122 586,836
Current portion of lease obligations 128,282 109,475
Current portion of long-term debt 34,022 -
Advances from shareholders (note 6) 95,765 220,000
Total current liabilities 3,318,907 2,718,215
Lease obligations (note 7) 169,794 200,015
Development obligation (note 3) - 65,000
Long-term debt (note 8) 86,114 -
Commitments (notes 7 and 11)
Shareholders' equity (notes 3 and 9)
Common stock, no par value, 44,169,100
shares authorized; 5,012,869 and
4,935,269 shares issued and outstanding
in 1996 and 1995, respectively 18,372,574 18,163,634
Option to purchase common stock
(note 3) 4,861,659 4,861,659
Accumulated deficit (21,152,714) (21,295,328)
Foreign currency translation
adjustment (6,201) (11,293)
Total shareholders' equity 2,075,318 1,718,672
$ 5,650,133 $ 4,701,902
See accompanying notes.
Canmax Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended October 31
1996 1995 1994
Revenues:
Software licenses and product revenue $ 1,892,077 $ 3,127,435 $ 4,903,112
Development 7,392,040 3,801,208 4,012,520
Service agreements 2,979,743 2,067,444 758,963
12,263,860 8,996,087 9,674,595
Costs and expenses:
Cost of software licenses and
product revenue 1,313,598 2,143,721 1,585,233
Cost of development revenues 2,739,736 1,896,725 877,426
Customer service 2,146,281 2,165,145 2,024,837
Product development 1,371,853 2,267,039 2,432,040
Administration and general 3,193,140 2,721,483 2,012,286
Sales and marketing 412,009 636,748 1,323,718
Depreciation and amortization 916,582 849,251 1,267,592
Interest and financing costs 28,047 50,425 66,345
Writedown of capitalized software - - 4,127,232
12,121,246 12,730,537 15,716,709
Net income (loss) $ 142,614 $(3,734,450) $(6,042,114)
Net income (loss) per common and
common equivalent share $ .02 $ (.79) $ (1.54)
Weighted average common and
common equivalent shares outstanding 6,851,148 4,706,382 3,918,889
See accompanying notes.
Canmax Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Option to Foreign
Purchase Currency
Common Stock Common Accumulated Translation
Shares Amount Stock Deficit Adjustment Total
Balance at October
31, 1993 3,816,096 $12,607,640 $ 2,947,301 $( 11,518,764) $ 8,584 $ 4,044,761
Shares issued:
For cash on
exercise of
options 102,000 666,848 - - - 666,848
For cash on
exercise of
warrants 117,950 656,163 - - - 656,163
For services 40,000 307,257 - - - 307,257
For conversion of
advances from
shareholders 55,128 376,631 - - - 376,631
Net loss - - - (6,042,114) - (6,042,114)
Translation adjustment - - - - (13,999) (13,999)
Original EDS option
to purchase common
stock - - 1,052,699 - - 1,052,699
Liability to EDS
converted to option
to purchase common
stock - - 861,659 - - 861,659
Balance at October
31, 1994 4,131,174 14,614,539 4,861,659 (17,560,878) (5,415) 1,909,905
Shares issued:
For cash on
exercise of
options 294,200 1,321,000 - - - 1,321,000
For conversion
of advances
from shareholder 30,000 150,000 - - - 150,000
EDS 265,228 1,273,095 - - - 1,273,095
Private Placement 214,667 805,000 - - - 805,000
Net loss - - - (3,734,450) - (3,734,450)
Translation
adjustment - - - - (5,878) (5,878)
Balance at October
31, 1995 4,935,269 18,163,634 4,861,659 (21,295,328) (11,293) 1,718,672
Shares issued
for cash on
exercise of
options 77,600 208,940 - - - 208,940
Net income - - - 142,614 - 142,614
Translation
adjustment - - - - 5,092 5,092
Balance at October
31, 1996 5,012,869 $18,372,574 $ 4,861,659 $(21,152,714) $ (6,201) $ 2,075,318
See accompanying notes.
Canmax Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended October 31
1996 1995 1994
Operating activities:
Net income (loss) $ 142,614 $ (3,734,450) $ (6,042,114)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Issuance of common stock
for accrued interest and
services - - 343,888
Writedown of capitalized software - - 4,127,232
Inventory write down 217,623 - -
Loss on disposal of assets 3,329 - -
Depreciation and amortization 916,582 849,251 1,267,592
Accounts payable to EDS
converted to option to purchase
common stock - - 861,659
Changes in operating assets
and liabilities:
Accounts receivable (805,830) 154,535 (218,412)
Accounts receivable from EDS - 446,976 (446,976)
Accounts receivable from
stockholders - - 71,921
Inventory (131,942) (151,566) (88,041)
Prepaid expenses and other (126,254) (43,358) 47,497
Accounts payable 433,932 533,286 (85,550)
Accounts payable to EDS - 67,539 205,907
Accrued liabilities 266,880 (84,707) (3,627)
Accrued interest - - (22,939)
Deferred revenue (28,714) 432,901 (21,217)
Net cash provided by
(used in) operating activities 888,220 (1,529,593) (3,180)
Investing activities:
Purchase of property and
equipment (347,939) (163,575) (1,106,379)
Capitalized software costs (128,874) - (3,127,459)
Increase in other assets (113,518) - -
Net cash used in investing
activities (590,331) (163,575) (4,233,838)
Financing activities:
Net proceeds from issuance of
common stock 208,940 2,126,000 1,323,011
Agreements with EDS:
-proceeds - - 1,065,065
-funds used for marketing - - (272,975)
Increase (decrease) in leasehold
obligations (11,414) (102,971) 227,836
Repayment of shareholder
advances (124,235) (107,200) -
Advances from shareholders - 250,000 227,200
Decrease in development
obligations (65,000) - -
Proceeds from borrowing 123,602 - -
Repayment on borrowing (3,466) - -
Net cash provided by financing
activities 128,427 2,165,829 2,570,137
Effect of exchange rate
changes on cash 5,092 (5,878) 4,381
Net increase (decrease) in cash 431,408 466,783 (1,662,500)
Cash at beginning of year 477,364 10,581 1,673,081
Cash at end of year $ 908,772 $ 477,364 $ 10,581
See accompanying notes.
Canmax Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Nature of Business
Canmax Inc. (the "Company") was incorporated on July 10, 1986 as 311824
B.C. Ltd. under the Company Act of the Province of British Columbia,
Canada. On August 13, 1986, the Company changed its name to International
Retail Systems Inc. On August 7, 1992, International Retail Systems
renounced its original province of incorporation and reincorporated in the
state of Wyoming. On November 30, 1994, the name of the Company was changed
to Canmax Inc.
The Company, through its wholly owned subsidiary, Canmax Retail Systems,
Inc., develops and licenses sophisticated software systems, sells ancillary
hardware, and licenses certain third party software to operators of
convenience stores and gas stations. The Company provides related
development, customization, and software enhancements to its customers and
provides services such as integration, installation and training, and a 24
hour, 365 day per year, help desk.
In December 1995, the Company's Board of Directors authorized a one-for-five
reverse stock split of the Company's Common Stock, effective December 21,
1995. All applicable share and per share data have been retroactively
restated to give effect to the reverse stock split.
Liquidity
At October 31, 1996, the Company has an accumulated deficit of $21,152,714
and a net working capital surplus of $208,466. To maintain liquidity during
the next year, the Company must increase revenue volumes through the
successful completion of on-going development contracts with customers, the
introduction of new products to the marketplace, and increasing the market
share for existing products and services. The Company commenced work on a
next generation Windows based product in May of 1996 which is expected to be
completed in 1997. The majority of the Company's new product will be
developed in conjunction with a development project currently in process for
The Southland Corporation. Completion of the Company's next generation
Windows based product is dependent on the successful and timely conclusion
of key components of the development project currently in process for The
Southland Corporation.
To complete development of the next generation Windows based product, the
Company will need to perform additional development effort that is not
funded by work currently being performed for The Southland Corporation.
Costs necessary to perform the additional development, to bring the new
product to market and provide for infrastructure improvements are estimated
to be in the range of $1.0 - $3.0 million. The Company believes that it
may be necessary to raise additional capital to complete development of its
next generation product within the necessary window of opportunity and to
provide vital marketing and other support services. If cost generated by
operations is insufficient to satisfy the Company's liquidity requirements,
the Company may be required to sell additional debt or equity securities or
obtain lines of credit, delay new product development or restructure
operations to reduce costs. No financing arrangements to support this
development project have been entered into by the Company at this time.
2. Summary of Significant Policies
Principles of consolidation
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Canmax Retail Systems Inc. (Texas),
Canmax Retail Systems Inc. (British Columbia), The Point of Sale
Corporation and Dataplane Technologies, Inc. All significant intercompany
transactions have been eliminated.
Revenue Recognition
Revenue from software licenses and product sales is recognized when the
software or products have been delivered to the customer and collectibility
is probable and no significant vendor obligations remain after delivery.
Revenue from software development contracts is recognized as the Company
performs the services in accordance with the contract terms. Revenue from
maintenance agreements is recognized ratably over the term of the agreement.
Revenue from long-term contracts is recognized using the percentage-of-
completion method. Progress to completion is measured based upon the
relationship that total costs incurred to date bears to the total costs
expected to be incurred on a specific project. Losses on fixed price
contracts are recorded when estimable.
Inventory
Inventory is stated at the lower of cost (first in - first out) or market
and is primarily comprised of computer hardware and purchased software.
Property and equipment
Depreciation and amortization of property and equipment is calculated using
the straight-line method over the estimated useful lives of assets ranging
from three to five years.
Capitalized software costs
Under provisions of the Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," software development costs are charged to expense when
incurred until technological feasibility for the product has been
established, at which time the costs are capitalized until the product is
available for release. The Company begins amortizing capitalized software
costs upon general release of the software products to customers. The Company
evaluates the net realizable value for each of its capitalized projects by
comparing the estimated future gross revenues from a project less estimated
future disposal costs to the amount of the unamortized capitalized cost. The
Company recorded a writedown of $4,127,232 in 1994 for projects for which
the net book value was in excess of net realizable value. Remaining costs
are being amortized using the greater of 1) the ratio that current gross
revenues for a capitalized software project bears to the total of current
and future gross revenue for that project or 2) the straight-line method
over the remaining economic life of the related projects which is estimated
to be a period of between four and five years. Amortization of capitalized
software costs amounted to $226,046, $119,216, and $692,486 in 1996, 1995,
and 1994, respectively.
Intellectual property rights
Intellectual property rights consist of the rights to computer software used
in the Company's products. Expenditures are recorded at cost and are being
amortized on a straight-line basis over a projected life of five years.
Amortization of intellectual property rights amounted to $123,168, $130,596,
and $130,596 in 1996, 1995, and 1994, respectively.
Foreign currency translation
The Company's functional currency is the United States dollar. For
operations outside the United States, monetary assets and liabilities
denominated in foreign currencies are converted at the exchange rate in
effect at the balance sheet date and non-monetary assets and liabilities at
the rate in effect on the dates of the transactions. Revenues and expenses
are converted at rates approximating exchange rates in effect at the time
of the transactions. Gains or losses arising on conversion of foreign
currency transactions are included in operations in the period they occur
or losses on fixed term monetary liabilities which are included in
shareholders' equity.
Net income (loss) per share
Net income (loss) per common and common equivalent share is based upon the
weighted average number of common shares outstanding as adjusted for the
one-for-five reverse stock split. Net income (loss) per share data are
based upon the weighted average number outstanding shares of common stock
plus dilutive common stock equivalents. Common stock equivalent shares
consist of stock options (using the treasury stock method), and an option
to purchase common stock held by EDS (see Note 3).
Income taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Statement of cash flows
For purposes of the statements of cash flows, the Company considers all
cash and highly liquid short-term deposits to be cash equivalents. Total
interest paid during 1996, 1995, and 1994 amounted to $50,349, $43,733, and
$52,653, respectively.
Concentration of credit risk and significant customers
The Company derives its sales primarily from customers in the retail
petroleum market. The Company performs periodic credit evaluations of its
customers and generally does not require collateral. Billed receivables
are generally due within 30 days. Credit losses have historically been
insignificant. A significant portion of the Company's revenues is from
three customers.
The Southland Corporation accounted for 64%, 61%, and 50%, NCR (formerly
AT&T Global Information Solutions Company) accounted for 22%, 12%, and 0%,
and EDS accounted for 7%, 10%, and 38% of the Company's revenues for 1996,
1995, and 1994, respectively. At October 31, 1996 and 1995, accounts
receivable from The Southland Corporation accounted for 46% and 54%,
respectively, of total accounts receivable. At October 31, 1996 and 1995,
accounts receivable from NCR accounted for 37% and 28%, respectively of
total accounts receivable. Management feels the allowance for doubtful
accounts adequately provides for any losses that may occur.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with
provisions of the Accounting Principles Board's Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees."
Reclassifications
Certain amounts appearing in the 1995 consolidated balance sheet have been
reclassified to conform to the 1996 presentation.
3. EDS Agreements
The Company signed agreements with Electronic Data Systems Corporation
("EDS") in April 1993 which were amended in October 1994. Under the terms
of the amended agreements, EDS markets the Company's software services and
hardware technology to the retail petroleum marketplace exclusively, and
the Company offers EDS the right to participate with its customers and
prospective customers. EDS provided $2,600,000 in cash of which $2,000,000
was used for product development, $500,000 was used to support the
Company's marketing efforts, and $100,000 as consideration for a software
license granted to EDS. EDS also provided $2,000,000 in services to the
Company.
In connection with the above agreements, EDS received an option to purchase
up to 25% of the common stock of the Company calculated on a fully diluted
basis at the time of exercise at an exercise price of not less than 75% of
the market value of the common stock at the time of exercise, minus
$4,000,000, which will be reduced by royalties or similar payments received
by EDS from any licensing of the Company's product other than through EDS.
The stock option is exercisable at EDS' option any time between April 22,
1994 and April 22, 1998. The Company accounted for the transaction as
follows:
$4,000,000 as an option to purchase common stock,
$ 500,000 as a deferred marketing credit with respect to the
cash intended for marketing support, and
$ 100,000 as revenue with respect to the software license.
The financial statements include the following non-cash transactions
related to the services provided by EDS to the Company pursuant to the EDS
agreements:
. services received from EDS and included in expenses - $1,188,168 and
$663,210 in 1995 and 1994, respectively, and
. programming services received from EDS and capitalized as software
costs - $389,489 in 1994.
During 1994, the Company purchased services from EDS valued at $1,972,329.
By agreement $861,659 of this amount was not paid by the Company and has
been added to the original $4,000,000 option amount. The balance,
$1,110,670, was offset against EDS' liability to the Company for site
licenses sold to EDS.
In connection with prospective business opportunities with major oil
companies, the Company and EDS jointly incurred $2,130,130 in product
development costs. EDS funded that total cost, which included reimbursing
the Company for $1,679,977 in expenses paid by the Company. By agreement,
the Company owed EDS for one-half of the total cost. That development
obligation for $1,065,065 and other amounts due to EDS of $34,935 were
converted into 229,167 common shares of the Company on November 15, 1994.
The price per share of $4.80 was determined pursuant to agreement with EDS
and represents 75% of market value. In fiscal 1995, EDS and the Company
jointly incurred $346,190 in product development costs. By agreement the
Company owed EDS for one half of the total cost. On April 20, 1995, the
$173,095 development obligation was converted into 36,061 common shares of
the Company at a conversion rate of $4.80 per share.
During 1994 the Company sold EDS 788 site licenses for $1,810,670. Pursuant
to the contract, the amount receivable for this transaction was used to
offset amounts payable to EDS of $1,110,670 and to settle a disputed
$400,000 liability relating to deferred marketing funding that arose from
an amendment to the original agreements with EDS.
In addition to the site license revenues described in the preceding
paragraph, the Company recognized additional revenue from EDS of
approximately $0.9 million and $1.9 million for fiscal 1995 and 1994,
respectively, for services and development work in conjunction with
prospective business opportunities with major oil companies. During fiscal
1996, the Company recognized revenue of approximately $0.8 million from EDS
for services, site license fees, and development.
A summary of transactions with EDS for each of the last four fiscal years
is set forth below:
Recorded As
Option to
Year/ Total Purchase Deferred
Transaction Amount of Common Common Capitalized Marketing Revenue
Description Transaction Stock Stock Software Credit (Expense)
1993
Cash received
from EDS for
option to
purchase
Company's
common
stock $2,000,000 $2,000,000 $ - $ - $ - $ -
Cash for
marketing
from EDS 500,000 - - - 500,000 -
Licenses sold
to EDS 100,000 - - - - 100,000
Development
services
provided by
EDS 947,301 947,301 - 537,112 - (410,189)
1994
Development and
programming
services
purchased
from EDS 1,052,699 1,052,699 - 389,489 - (633,210)
Other services
purchased
from EDS 1,972,329 861,659 - - - (1,972,329)
Sale of 788
site licenses
to EDS 1,810,670(1) - - - - 1,810,670
Development
revenue 614,912 - - - - 614,912
Product &
services
revenue 1,250,764 - - - - 1,250,764
1995
Other
development
services
purchased
from EDS 1,188,168 - - - - (1,188,168)
Conversion of
development
obligations
due to EDS
shares of the
Company's
common stock 1,273,095(2) - 1,273,095 - - -
Development
Revenue 175,513 - - - - 175,513
Product &
services
revenue 751,440 - - - - 751,440
1996
Other services
purchased
from EDS 84,327 - - - - (84,327)
Development
revenue 143,415 - - - - 143,415
Product &
services
revenue 690,751 - - - - 690,748
(1) $1,110,670 of the sales amount was used to offset existing EDS
obligations. $400,000 was used to settle a disputed obligation with EDS
and $300,000 was paid in cash to the Company.
(2) EDS obligations were converted into 265,228 shares of the Company's
common stock.
4. Property and equipment
Property and equipment consist of the following at October 31:
1996 1995
At cost:
Furniture and fixtures $ 925,637 $ 915,161
Computer equipment 1,630,937 1,371,273
Computer software 388,041 322,372
Leasehold improvements 593,843 593,843
3,538,458 3,202,649
Less accumulated depreciation and
amortization (2,126,891) (1,568,324)
$ 1,411,567 $ 1,634,325
Depreciation and amortization expense amounted to $567,368, $519,439, and
$444,511 in 1996, 1995, and 1994, respectively.
5. Accrued Liabilities
Accrued liabilities consist of the following at October 31:
1996 1995
Accrued compensation and benefits $ 405,924 $ 99,245
Accrued rent 150,755 134,697
Other 221,842 277,699
$ 778,521 $ 511,641
6. Advances from shareholders
During 1994, Dwight Romanica advanced the Company $300,000. The advance
was unsecured and the Company paid interest of $24,000. Half of the
advance ($150,000) was repaid by February 28, 1995 and $150,000 was
exchanged for 30,000 common shares.
During 1995, a director, W. Thomas Rinehart advanced the company $250,000.
The advance was unsecured and has an interest rate of 10%. The Company
repaid principal of $30,000 and paid interest of $13,456 in fiscal 1995;
repaid principal of $124,235 and interest of $37,732 in fiscal 1996. The
remaining principal balance of $95,765 is due on demand and is being repaid
in weekly installments.
7. Leasehold and capital lease obligations
Through October 31, 1996, a total of $593,843 of leasehold obligations were
incurred on behalf of the Company. Of this amount, $0, $0 and $300,000
were incurred in 1996, 1995 and 1994, respectively. These costs have been
capitalized as leasehold improvements and are to be repaid with interest
calculated at 8% to 11% per annum in monthly installments of $11,104, over
the remaining lease term, which terminates on August 31, 1998.
The Company leased equipment under capital leases in 1996 totaling $106,050.
The capital lease obligations are to be repaid with interest at 15% to 16%
per annum in monthly installments of $2,995 through June, 2000.
Future minimum payments due under leasehold and capital lease obligations
are as follows:
Years ended October 31:
1997 $ 153,732
1998 134,100
1999 35,940
2000 21,874
2001 -
Total future minimum lease payments 345,646
Less amount representing interest 47,570
Present value of minimum lease payments 298,076
Less current portion 128,282
Leasehold and capital lease obligations
less current portion $ 169,794
8. Long-Term Debt
Long-term debt consists of the following at October 31:
1996
Bank term loan $ 120,136
Less current portion 34,022
$ 86,114
Interest is charged on outstanding amounts at the prime rate (8.25% at
October 31, 1996), payable monthly. Obligations due under the bank term
loan are secured by investments in government securities totaling $133,335
at October 31, 1996. Such restricted investments are classified as other
noncurrent assets.
Future maturities of long-term debt are as follows:
1997 $ 34,022
1998 35,210
1999 36,499
2000 14,405
$ 120,136
9. Stock Options
In 1990, the Company adopted a stock option plan (the "Stock Option Plan").
The Stock Option Plan authorizes the Board of Directors to grant up to
1,200,000 options to purchase common shares of the Company. No options will
be granted to any individual director or employee which will, when
exercised, exceed 5% of the issued and outstanding shares of the Company.
The term of any option granted under the Stock Option Plan is fixed by the
Board of Directors at the time the options are granted, provided that the
exercise period may not be longer than 10 years from the date of granting.
The exercise price of any options granted under the Stock Option Plan is the
fair market value at the date of grant. Activity under the Stock Option
Plan for the three years ended October 31, 1996 was as follows:
Number of shares Option price per share
Options outstanding at
October 31, 1993 258,710 $2.15- $15.00
Options granted 272,300 5.00- 7.85
Options exercised 102,000 1.95- 12.10
Options canceled 17,100 6.75- 15.00
Options outstanding at
October 31, 1994 411,910 1.95- 6.25
Options granted 418,200 2.50- 5.00
Options exercised 294,200 3.75- 5.00
Options canceled 45,360 5.00- 6.75
Options outstanding at
October 31, 1995 490,550 2.50- 5.00
Options granted 729,600 1.88- 4.19
Options exercised 77,600 1.90- 2.88
Options canceled 91,500 2.25- 6.25
Options outstanding at
October 31, 1996 1,051,050 $1.88- $ 5.00
Effective December 29, 1995, employee options to purchase 87,100 shares of
the Company's Common stock were repriced to the then current market price.
The repricing was made because management believed that the higher priced
options were no longer a motivating factor for key employees and officers.
The options repriced are reflected in the cancellation and grant activity
for 1996.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
SFAS No. 123 "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the company's
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
All options granted under the Stock Option Plan have up to 10 year terms and
have vesting periods which range from 0 to 3 years from the grant date.
Pro Forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
assumptions for 1996; applicable risk-free interest rates based on the
current treasury-bill interest rate at the grant date, which ranged from
5.2% to 5.6%; dividend yields of 0%; volatility factors of the expected
market price of the company's common stock of between 0.8 and 0.9; and an
expected life of the option of between 2 and 7 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company' employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
effects of applying SFAS No. 123 in computing the pro forma disclosures
presented below are not indicative of future amounts as only options
granted subsequent to October 31, 1995 have been included in the pro forma
computations. The Company's pro forma information follows:
1996
Pro forma net loss $(443,104)
Pro forma loss
per share $ (0.09)
A summary of the Company's stock option activity, and related information
for the year's ended October 31, 1996 is as follows:
1996
________________________________
Number of Weighted-Average
Shares Exercise Price
Outstanding -
beginning of year 490,550 4.10
Granted 729,600 2.19
Exercised 77,600 2.69
Canceled 91,500 4.86
Outstanding-
end of year 1,051,050 3.04
Exerciseable at
end of year 623,300 3.67
Weighted-average
fair value of options
granted during the
year 2.18
The weighted average remaining contractual life of options outstanding at
October 31, 1996 is 5.37 years.
10. Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of
October 31 are as follows:
1996 1995
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 32,370 $ 24,200
Provisions and accrued expenses 69,700 -
Less: valuation allowance (102,070) (24,000)
Total current - -
Noncurrent:
Capitalized software and
intellectual property 417,613 896,104
Property and equipment 19,927 20,741
Net operating loss 6,503,397 6,101,502
Other - 40,717
Less: valuation allowance (6,940,937) (7,059,064)
Total noncurrent - -
Total deferred tax assets $ - $ -
The valuation allowance for deferred tax assets decreased by $40,057 during
the year ended October 31, 1996.
The reconciliation of income tax provision at the statutory United States
federal income tax rates to income tax provision is:
1996 1995 1994
Income tax provision $ 48,489 $(1,269,713) $(2,039,918)
(benefit) at statutory rate
Benefit of net operating loss
not recognized - 1,331,851 2,039,918
Other (48,489) (62,138) -
$ - $ - $ -
At October 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $19.1 million which expire in
2006 through 2010. Utilization of net operating losses may be subject to
annual limitations due to the ownership change limitation provided by the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses before utilization. At October 31, 1996
the net operating losses carry forwards of the Company and its subsidiaries
were not subject to any material annual limitation.
11. Commitments
The Company leases office space and computer equipment under noncancellable
operating leases. Future minimum lease payments for the fiscal years ending
October 31 are as follows:
1997 $ 608,277
1998 511,323
1999 27,238
$ 1,146,838
Total rent expense amounted to $498,631, $633,060, and $528,940 for 1996,
1995, and 1994, respectively.
12. Benefit Plan
Effective January 1, 1994, the Company implemented an Internal Revenue Code
Section 401(k) Profit Sharing Plan for all employees of the Company. The
Plan provides for voluntary contributions by employees into the Plan subject
to the limitations imposed by the Internal Revenue Code Section 401(k). The
Company may match employee contributions to a discretionary percentage of
the employees contribution. The Company's matching funds are determined at
the discretion of the Board of Directors and are subject to a seven year
vesting schedule from the date of original employment. The Company made no
matching contributions during the years ended October 31, 1996, 1995 and
1994.