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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER 0-22636
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CANMAX INC.
(Exact name of registrant as specified in its charter)
WYOMING 75-2461665
State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization No.)
150 W. CARPENTER FRWY.
IRVING, TEXAS 75039
(Address of principal executive offices)
(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:
TITLE OF EACH CLASS
COMMON STOCK, WITHOUT PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements 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 amount to this
Form 10-K or any amount to this Form 10-K. [ ]
As of October 22, 1998, 6,611,005 shares of Common Stock were outstanding.
The aggregate market value of the 4,546,543 shares of Common Stock held by
nonaffiliates of Canmax Inc. as of such date approximated $1,318,497 using the
beneficial ownership rules as adopted pursuant to Section 13 of the Securities
Exchange Act of 1934 to exclude stock that may be beneficially owned by
directors, executive officers or ten percent stockholders, some of whom might
not be held to be affiliates upon judicial determination.
The number of outstanding shares of Common Stock of Canmax Inc. as of
January 22, 1999 was 6,611,005.
DOCUMENT INCORPORATED BY REFERENCE
Part III of this Annual Report incorporates by reference information in the
Proxy Statement for the Annual Meeting of Stockholders Canmax Inc. to be filed
with Securities and Exchange Commission on or before March 1, 1999.
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FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
Annual Report on Form 10-K include "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Forward-looking statements are statements other
than historical information or statements of current condition. Some
forward-looking statements may be identified by the use of such terms as
"expects," "will," "anticipates," "estimates," "believes" and words of similar
meaning. These forward-looking statements relate to business plans, programs,
trends, results of future operations, satisfaction of future cash requirements,
funding of future growth, acquisition plans and other matters. In light of the
risks and uncertainties inherent in all such projected matters, the inclusion of
forward-looking statements in this Form 10-K should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved or that operating expectations will be realized.
Revenues and results of operations are difficult to forecast and could differ
materially from those projects in forward-looking statements contained herein,
including without limitation statements regarding the Company's belief of the
sufficiency of capital resources and its ability to compete in the
Telecommunications Business. Actual results could differ from those projected in
any forward-looking statements for, among others, the following reasons: (a)
increased competition in the prepaid phone card business from existing and new
competitors, (b) the relatively low barriers to entry for start-up prepaid
operators, (c) the price-sensitive nature of consumer demand, (d) the relative
lack of customer loyalty to any particular prepaid card company, (e) the
Company's dependence upon favorable pricing from its suppliers to compete in the
prepaid phone card industry, (f) increased consolidation in the
telecommunication industry, which may result in larger competitors being able to
compete more effectively, (g) the failure to attract or retain key employees and
(h) continuing changes in governmental regulations affecting the
telecommunications industry. The Company does not undertake to update any
forward-looking statements contained herein. For a discussion of these factors
and others, please see "Certain Business Factors" in Item 1 of this Annual
Report on Form 10-K. Readers are cautioned not to place undue reliance on the
forward-looking statements made in, or incorporated by reference into, this
Annual Report on Form 10-K or in any document or statement referring to this
Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
THE COMPANY
Canmax Inc. was incorporated on July 10, 1986 under Company Act of the
Province of British Columbia, Canada, and subsequently changed its name to
"International Retail Systems Inc." On August 7, 1992, Canmax renounced its
original province of incorporation and elected to continue its domicile under
the laws of the State of Wyoming, and on November 30, 1994 its name was changed
to "Canmax Inc." Canmax was listed on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market from February 10, 1994 through June 8, 1998. Canmax's common
stock currently trades on the OTC Bulletin Board, under the symbol "CNMX." As
used herein, the terms "Canmax" and the "Company" refer collectively to Canmax
Inc. and its consolidated subsidiaries.
During the fiscal year ended October 31, 1998, Canmax operated two distinct
businesses in the software and telecommunications industries. On December 7,
1998, Canmax sold its retail automation software business (the "Software
Business") to Affiliated Computer Services, Inc. ("ACS"). Therefore, Canmax will
no longer engage in the Software Business, and is now operating only in the
telecommunications industry (the "Telecommunications Business"). During the
fiscal year ended October 31, 1998, the Software Business accounted for 81% of
Canmax's revenues (approximately $9.38 million), 72% of Canmax's costs and
expenses (approximately $9.48 million) and 4% of Canmax's losses (approximately
$103,000). The Software Business accounted for all of Canmax's revenues, costs
and expenses and earnings for all fiscal years through and including October 31,
1997.
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Canmax's principal executive offices are located at 150 West Carpenter
Freeway, Irving, Texas 75039, and its telephone number is (972) 541-1600.
TELECOMMUNICATIONS BUSINESS
GENERAL. On January 30, 1998, Canmax acquired USCommunication Services,
Inc. ("USC") in a private stock transaction. USC provided a number of
telecommunication and internet products and services, including prepaid calling
cards, public internet access kiosks, pay telephones, and pallet exchange
services. USC primarily marketed its products and services to individuals and
businesses in the transportation industry through national and regional
truckstops and trucking fleets. USC's products were sold at selected locations
throughout the U.S., such as locations operated by Pilot Travel Centers, Petro
Stopping Centers, and All American Travel Centers. USC also marketed its
services directly through prepaid calling card recharge sales. The Company
concluded its merger with USC believing that this would give it access to the
telecommunications market. Certain capabilities of USC, along with distribution
channels, failed to meet the expectations of Canmax. On June 15, 1998, Canmax
and former principals of USC executed an agreement to rescind the USC
acquisition effective May 27, 1998.
During its experience with USC, Canmax decided to develop its in house
capabilities to expand its telecommunications operations. The Company chose to
make its entry into the telecommunications industry via the prepaid calling card
market. The prepaid calling card industry has grown significantly in recent
years and industry estimates project revenue growth from prepaid phone cards in
the United States from an estimated $1.5 billion in 1997 to in excess of $5
billion shortly after the year 2000. In August of 1998, the Company entered into
a three-year agreement (the "PT-1 Agreement") with PT-1 Communications, Inc.
("PT-1") to acquire long distance telecommunications and debit services for use
in the Company's marketing and distribution of domestic and international
prepaid calling cards. Canmax conducts its Telecommunications Business through
Canmax Telecom, Inc., its wholly-owned subsidiary. The Company plans to continue
to resell prepaid phone cards acquired from PT-1 until such time as it is able
to install and operate its own debit platform and switching facilities.
The Company believes that, if provided sufficient capital to achieve market
presence, it will be a strong competitor in the industry and that experience in
software development and customer service will permit it to develop efficient
applications to complement its telecommunications business, such as applications
that may allow the immediate on-site activation of prepaid phone cards at the
time of their purchase. The Company also expects to enter other segments of the
telecommunications industry.
REGULATORY ENVIRONMENT. Businesses offering prepaid calling cards are
subject to federal and state governmental regulations applicable to providers of
long distance telephone services. At the federal level, the industry is
regulated by the Federal Communications Commission (the "FCC"), while at the
state level, telecommunication service providers are subject to regulation by
various state agencies. Federal regulations require that long distance telephone
service providers maintain both domestic interstate and international tariffs
that contain the then effective rates, terms and conditions of service.
Intrastate long distance telecommunication service providers are also subject to
various state regulations, which typically require prior state certification,
notification and/or registration and tariff approval. Generally, companies
offering such services must obtain and maintain certificates of public
convenience and necessity from state regulatory authorities in each state which
they offer service and file tariffs and obtain tariff approval prior to
providing intrastate telecommunication services. Pursuant to the Company's
agreement with PT-1, PT-1 is responsible for all tariff and other regulatory
filings with regard to the prepaid calling cards purchased by Canmax. Therefore
Canmax has not made separate tariff filings for its long distance services. The
Company will need to obtain appropriate state and federal regulatory approvals
prior to operating its own debit platform and switching facilities.
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SOFTWARE BUSINESS--DISCONTINUED OPERATIONS
Prior to December 7, 1998, Canmax, through its wholly owned subsidiary
Canmax Retail Systems, Inc., developed and provided enterprise wide technology
solutions to the convenience store and retail petroleum industries. On December
7, 1998, Canmax sold its Software Business to Affiliated Computer Services, Inc.
("ACS") for an initial payment of $4.0 million and contingent payments of up to
$3.625 million (the "Software Business Sale"). See "Recent Events--Software
Business Sale". As of October 31, 1998, Canmax's Software Business products had
been installed in over 5,900 locations. Canmax's primary customers of the
Software Business included The Southland Corporation ("Southland"), ARCO and the
Army and Air Force Exchange.
BUSINESS STRATEGY
Canmax's core business operations are in the telecommunications industry,
and are initially focused on the provision of prepaid long distance services.
Canmax also expects to enter other segments of the prepaid telecommunications
industry such as dial tone and supporting hardware services and prepaid enabling
hardware and cellular services. The Company's entry into these additional
industry segments will be dictated by its development of its capabilities and
capacities in these areas and market factors. To be successful in the
Telecommunications Business, Canmax will need to establish new distribution
channels and a new customer base for its telecommunications products. Although
Canmax intends to continue to market its telecommunications products to the
convenience store and retail petroleum industries in which it conducted its
Software Business, Canmax's prior relationships in the convenience store and
retail petroleum industries do not necessarily provide Canmax any advantages in
future marketing efforts. Industry estimates indicate that the market for
prepaid phone cards in the United States in 1997 was in excess of $1.5 billion,
and project the growth of this industry to in excess of $5 billion shortly after
the year 2000.
The Company's prepaid long distance services are currently being offered
across a system maintained by PT-1 pursuant to the PT-1 Agreement. The PT-1
Agreement provides favorable pricing to Canmax and allows it to compete on a
global basis in the prepaid telecommunications market. The Company expects to
leverage its experience in the retail software industry with its
telecommunications operations to allow it to offer point of sale activation for
its prepaid telecommunications products. Although Canmax believes that its
personnel and the proceeds from the Software Business Sale will position it to
be successful in its new line of business, Canmax has no significant history of
operations in the telecommunications industry and therefore Canmax's entry into
the new line of business is subject to risks similar to other emerging
companies, such as its limited operating history in this industry segment, its
dependence upon existing management and certain key employees, the presence of
competition from various sources (some of which may have substantially greater
financial resources than Canmax) and continuing changes in governmental
regulations affecting the telecommunications industry. See "--Certain Business
Factors."
Canmax also continues to review an acquisition strategy within its current
industries and other related markets. Any material acquisitions may result in
significant changes in Canmax's business.
PRODUCTS AND SERVICES
TELECOMMUNICATIONS BUSINESSES
PREPAID PHONE CARDS. Canmax provides convenient, cost-effective
telecommunications products and services to individuals and businesses through
its prepaid phone card (the "Canmax Card"). The Canmax Card provides customers
with a single point of access to prepaid telecommunications services at a fixed
rate charge per minute regardless of the time of day or, in the case of domestic
calls, the distance of the call. Canmax's services currently include domestic
calling, outbound international long distance calling, as well as enhanced
features such as customized greetings and sequential calling. The Canmax Card
enables consumers to place local, long distance and international calls from
virtually any touch-tone phone, without the need of coins, operator assistance,
collect or other third party billing processes. Consumers may access the
services of the Canmax Card by dialing a toll-free number and entering a
personal
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identification number printed on the back of the card. A voice prompt guides
users through the card's features and, at the beginning of each call, announces
the balance remaining on a card. Time spent on a call or using the card's
enhanced features is automatically deducted from the balance remaining on the
card. Users are reminded when one minute remains on the card. Cards expire upon
the earlier of six months after the date of first use or the expiration date
printed on the card. Pursuant to the PT-1 Agreement, PT-1 provides all customer
support and troubleshooting for the Canmax Card.
MAJOR SUPPLIERS. Canmax currently acquires all of its prepaid telephone
cards from PT-1, which supplies long distance telecommunications and debit
services to Canmax for use in Canmax's marketing and distribution of domestic
and international prepaid long distance calling cards. The PT-1 Agreement
provides Canmax "most favored nations" pricing, meaning Canmax is to receive the
lowest cost offered by PT-1 to any other customer for like services. The PT-1
Agreement also prohibits Canmax from selling other prepaid calling cards or
telecommunications products except through PT-1 pursuant to the PT-1 Agreement;
however, the PT-1 Agreement does not prohibit Canmax from either acquiring other
entities that have commitments to obtain telecommunication services or acquiring
and operating its own switch and/or debit card platform and obtaining long
distance carrier service from a third party to the extent that such third party
carrier offers better rates than provided by PT-1.
PT-1 manages a state-of-the-art digital switch based network consisting of
more than 130,000 switch ports, approximately 50,000 prepaid card processing
ports, and a central switching center located at PT-1's headquarters in
Flushing, New York. PT-1 offers 24-hour customer support for its prepaid cards.
Canmax believes that multiple suppliers are available to meet all of its product
and service needs at competitive prices and rates and expects the availability
of such products and services to continue in the future; however, the continuing
availability of alternative sources cannot be assured. Transition from Canmax's
existing suppliers, if necessary, could have a disruptive effect on Canmax's
operations and could give rise to unforeseen delays and/or expenses. Canmax is
not aware of any current circumstances that would require Canmax to seek
alternative suppliers for any of the products or services used in the operation
of its business.
CUSTOMERS. TSI, a distributor for the Company and a PT-1 affiliate,
accounted for approximately 25% of revenues from continuing operations during
the year ended October 31, 1998, and approximately 77% of trade accounts
receivable balance at such date. The concentration of revenues through this
distributor is due in part to the Company's relatively recent entry into the
Telecommunications Business and limited revenues from continuing operations
through October 31, 1998. The Company expects the concentration of revenues
through this distributor to decrease as Company sales increase.
SOFTWARE BUSINESS--DISCONTINUED OPERATIONS
C-SERVE AND OTHER PRODUCTS. Prior to the Software Business Sale, Canmax's
primary product offering consisted of its C-Serve software, a comprehensive
site-based store automation software solution, and its Vista software, a
headquarters-based management system. The products and services of the Software
Business enabled retailers and operators to interact electronically with
customers, capture data at the point of sale, manage site operations and
logistics and communicate electronically with their sites, vendors and
credit/debit networks. The products and services of the Software Business also
included (a) software development, customization and enhancements, (b) systems
integration, installation and training services, and (c) 24 hour a day, 365 day
per year help desk services. In October, 1997 Canmax completed an enhanced
version of its C-Serve product to run on the Windows NT operating system in
conjunction with a development project with NCR Corporation ("NCR") and The
Southland Corporation ("Southland"). At the time of the Software Business Sale,
Canmax was developing a generic version of its C-Serve software to run under the
Microsoft Windows family of operating systems.
MAJOR CONTRACTS. In December, 1993, Canmax signed a five year agreement
with Southland to provide software licenses, development services, and provide
hardware and help desk services (the "Master Agreement"). Southland chose
Canmax's proprietary convenience store automation software, C-Serve, as the
basis for its automation of store functions and operations at its corporate and
franchise operated
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7-Eleven convenience stores in the United States. Software licensing, product
and service revenue under the Master Agreement during the fiscal years ended
October 31, 1998, 1997, and 1996 totaled approximately $3,160,000, $2,051,000,
and $2,581,000 respectively, while development revenues recorded under the
Master Agreement during these same periods totaled approximately $859,000,
$799,000 and, $1,564,000 respectively.
On October 31, 1997, Canmax and Southland entered into Amendment No. 3 to
the Master Agreement (the "Southland Amendment"), pursuant to which Southland
exercised its right under the Master Agreement to use, possess and modify the
source code for the software developed by Canmax for Southland for a one-time
license fee of $1.0 million. The Southland Amendment also contained Southland's
agreement to purchase from Canmax on or before December 7, 1998, no less than
$4.0 million of hardware, software maintenance, help desk, development and other
services. Canmax recognized revenues of approximately $8,197,000 from Southland
from October 31, 1997 through October 31, 1998. The Master Agreement with
Southland terminated on December 7, 1998, the date of the Software Business
Sale; however, Southland still retains rights to the source code for the
software developed by Canmax for Southland. Any residual rights or obligations
under the Master Contract were assigned to and assumed by ACS upon consummation
of the Software Business Sale.
During fiscal 1996, Canmax reached an agreement with NCR to develop for
Southland a next generation Windows NT based version of the Canmax C-Serve
convenience store software for $9.5 million. NCR was chosen by Southland to
provide project management and other professional services for the project.
Modifications to project requirements increased total project revenues from $9.5
million to $11.5 million. Since this project was completed in 1997, no
development revenues under such agreement were recognized by Canmax in fiscal
1998, as compared to $7,560,000 and $3,920,000 in fiscal years 1997 and 1996,
respectively.
CONCENTRATION OF REVENUES; CUSTOMER CONCENTRATION. Historically, Canmax's
revenues have been concentrated in Southland which accounted for approximately
87%, 92% and 83% of Canmax's total Software Business revenue for fiscal years
ended October 31, 1998, 1997 and 1996, respectively. Canmax's revenues derived
from its relationship with Southland include revenues from products and services
provided directly by Canmax to Southland and indirectly through NCR to Southland
pursuant to NCR's contract with Southland. No other customer accounted for over
10% of Canmax's total revenues during such periods.
At October 31, 1998, 1997 and 1996, Southland accounted for 87%, 95% and
83%, respectively, of Canmax's total accounts receivable of the Software
Business. Because a significant portion of Canmax's revenues were derived from
its relationship with Southland, the timing of payments received from Southland
affected the percentage of the current assets of Canmax classified as either
cash (or cash equivalents) or accounts receivable. On December 7, 1998, the
Software Business was sold to ACS, at which time all rights and obligations
under contracts between Canmax and Southland were transferred to and assumed by
ACS.
During the fiscal years ended October 31, 1998, 1997 and 1996, Canmax
expensed approximately $0, $615,000, $1,287,000, respectively, on product
development activities associated with the Software Business. Canmax capitalized
approximately $730,000, $209,000 and $129,000 of software development costs
during the fiscal years ended October 31, 1998, 1997 and 1996, respectively.
COMPETITION
The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. Currently, numerous
companies sell prepaid calling cards and Canmax expects competition to increase
in the future. Other providers currently offer one or more of each of the
services offered by Canmax. Telecommunication service companies compete for
consumers based on price, with the dominant providers conducting extensive
advertising campaigns to capture market share. As a service provider in the long
distance telecommunications industry, Canmax competes with three dominant
providers, AT&T Corp. ("AT&T"), MCI WorldCom Inc. ("WorldCom"), and Sprint
Corporation
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("Sprint"), all of which are substantially larger than Canmax and have (i)
greater financial, technical, engineering, personnel and marketing resources;
(ii) longer operating histories; (iii) greater name recognition; and (iv) larger
consumer bases than Canmax. These advantages afford Canmax's competitors the
ability to (a) offer greater pricing flexibility, (b) more attractive incentive
packages to encourage retailers to carry competitive products, (c) negotiate
more favorable distribution contracts with retailers, and (d) negotiate more
favorable contracts with suppliers of telecommunication services. Canmax also
competes with other smaller, emerging carriers in both the prepaid long distance
card retail and wholesale markets, including IDT Corporation, RSL Communications
and Telegroup, Inc. Canmax believes that additional competitors will be
attracted to the prepaid calling card market, including internet-based service
providers and other telecommunications companies. Canmax also believes that
existing competitors are likely to continue to expand their service offerings to
appeal to retailers and consumers.
The ability of Canmax to compete effectively in the telecommunications
services industry will depend upon Canmax's ability to (i) continue to provide
high quality services at prices generally competitive with, or lower than, those
charged by its competitors and (ii) develop new innovative products and
services. There can be no assurance that competition from existing or new
competitors or a decrease in the rates charged for telecommunications services
by major long distance carriers or other competitors will not have a material
adverse effect on Canmax business, financial condition and results of
operations, or that Canmax will be able to compete successfully in the future.
CERTAIN BUSINESS FACTORS
LIMITED OPERATING HISTORY; NET LOSSES
The Company commenced its Telecommunications Business in early 1998. For the
year ended October 31, 1998, the Company recorded net losses from continuing
operations of approximately $2.6 million on revenues from continuing operations
of approximately $2.2 million. These losses were primarily attributable to the
Company's unsuccessful acquisition of USC and a one time charge of approximately
$1.2 million incurred in connection with the disposition of USC. Canmax's
revenues from the Telecommunications Business other than revenues derived
through USC for the year ended October 31, 1998 were $1.5 million with
associated costs and expenses of $2.5 million and net losses of $1.0 million.
Until the Company substantially increases its distribution network and customer
base, it expects to continue to experience losses.
COMPETITION
The telecommunications industry is highly competitive. Telecommunications
providers face competition from multiple sources, including AT&T, WorldCom and
Sprint as well as smaller emerging carriers such as IDT Corporation, RSL
Communications and TeleGroup, Inc. The prepaid calling card business is a
rapidly growing segment of the telecommunications industry with relatively low
barriers to entry. Canmax believes that additional competitors will be attracted
to the prepaid calling card market, including internet-based service providers
and other telecommunications companies. Telecommunications service companies
compete based upon price, additional competition may result in significant
pressures on pricing and the margins realized by the Company and its
telecommunications operations. The Company resells telecommunications services
acquired from other industry participants, and if the Company is unsuccessful in
negotiating favorable rates for its telecommunications services, then the
Company may not be able to effectively compete in the Telecommunications
Business. There can be no assurances that the Company will be able to compete
successfully in the future.
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CONSUMER DEMAND
The Company's products and services primarily compete, based upon pricing.
The price-sensitive nature of consumers in this market results in a relative
lack of customer loyalty to any particular prepaid card company. Therefore, to
be successful, the Company must be able to offer competitive pricing within the
industry. Although the Company believes it has a favorable arrangement with PT-1
for the provision of telecommunications products and services, there can be no
assurances that the rates and services provided to the Company through PT-1 will
remain competitive within the industry.
RELATIONSHIP WITH PT-1
Although the Company's arrangement with PT-1 requires PT-1 to offer the
Company its most favorable pricing structure, the PT-1 Agreement restricts the
Company's ability to acquire telecommunication services from third parties that
may provide more favorable prices for telecommunications products and services.
Pursuant to an amended and restated agreement and plan of merger dated August
20, 1998, PT-1 agreed to be acquired by StarTelecommunications, Inc., a publicly
held telecommunications company. Although the proposed acquisition of PT-1 by
Star Telecommunications should not affect the Company's legal rights under the
PT-1 Agreement, the Company is unable to predict the effect of the proposed
acquisition of PT-1 on the future relationship between the Company and PT-1.
DEPENDENCE ON AND NEED TO RECRUIT AND KEY MANAGEMENT AND TECHNICAL PERSONNEL
The Company success depends to a significant extent on its ability to
attract and retain key personnel. In particular, the Company is dependent on its
senior management team and personnel with experience in the telecommunications
industry. The Company's future success will depend, in part, upon its ability to
attract and retain key personnel.
MARKET FOR COMMON STOCK; VOLATILITY OF THE STOCK PRICE
Canmax cannot ensure that an active trading market for the common stock
exists or will exist in the future. However, even if the trading market for the
common stock exists, the price at which the shares of common stock trade is
likely to be subject to significant volatility. The market for the common stock
may be influenced by many factors, including the depth and liquidity of the
market for the Company's common stock, investor perceptions of the Company, and
general economic and similar conditions.
LISTING STATUS; PENNY STOCK RULES
The Company's common stock currently trades on the OTC Bulletin Board.
Therefore, no assurances can be given that a liquid trading market will exist as
the time any investor desires to dispose of any shares of Canmax common stock.
In addition, Canmax's common stock is subject to the so-called "penny stock"
rules that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors (generally defined as an investor with a net worth in excess of $1
million or annual income exceeding $200,000 or $300,000 together with a spouse).
For transactions covered by the penny stock rules, a broker-dealer must make a
suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale. Consequently, both
the ability of a broker-dealer to sell the Canmax common stock and the ability
of holders of Canmax common stock to sell their securities in the secondary
market may be adversely affected. The Securities and Exchange Commission has
adopted regulations that define a "penny stock" to be an equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
For any transaction involving a penny stock, unless exempt, the rules require
the delivery, prior to the transaction, of a disclosure schedule relating to the
penny stock market. The broker-dealer must disclose the commissions payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is to sell the securities as a market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
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information on the limited market in penny stocks. As a result of the additional
suitability requirements and disclosure requirements imposed by the "penny
stock" rules, an investor may find it more difficult to dispose of the Company's
common stock.
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends on its common
stock and does not presently intend to pay cash dividend on its common stock in
the foreseeable future. The Company intends to retain all cash received from the
Software Business Sale and from future earnings for reinvestment in its
Telecommunications Business.
SALES AND MARKETING
Canmax markets prepaid long distance products and services from its offices
in Irving, Texas. Canmax's revenues originate from sales of its prepaid phone
cards through four principal marketing channels, including wholesale and retail
sales through independent distributors, direct sales to retail stores,
telemarketing sales to retail stores, and promotional and specialty marketing
sales to businesses. Virtually all sales efforts are focused on the U.S. at this
time. However, Canmax may expand its international marketing efforts in the
future.
BACKLOG
Software and telecommunication products are generally delivered to customers
when ordered and therefore there is no backlog of orders.
IMPACT OF YEAR 2000
Canmax has completed an assessment of the impact of Year 2000 issues on its
internal systems and determined that the cost for any modifications or
replacements will be immaterial and not exceed $50,000. Canmax has initiated
communications with all of its significant suppliers and customers to determine
the extent to which Canmax's internal systems and developed software products
are vulnerable to those third parties failure. In connection with the Software
Business Sale, Canmax and ACS conducted a Year 2000 compliance audit of software
and systems developed by Canmax. Such audit did not reveal any material items of
noncompliance, and Canmax does not expect to incur any material expenses to
cause its developed software and systems to become Year 2000 compliant.
EMPLOYEES
As of January 19, 1999, Canmax had approximately 25 full time employees,
approximately ten of which perform administrative and financial functions and
approximately ten of which have experience in telecommunications and/or
telemarketing. All of Canmax's current employees are located in Irving, Texas.
No employees are represented by a labor union, and Canmax considers its employee
relations to be excellent.
RECENT EVENTS
SOFTWARE BUSINESS SALE
On December 7, 1998, Canmax consummated the sale of its Software Business to
ACS for an initial payment of $4.0 million and ACS' assumption of certain
liabilities associated with the Software Business. In addition, Canmax is
entitled to receive additional deferred payments of up to $3.625 million, based
upon the cumulative revenue attributable to the Software Business during the one
year period ending December 31, 1999. The deferred revenue payments will equal
the sum of (a) 75% of all such revenues greater than $4.0 million and less than
or equal to $7.0 million plus (b) 13.75% of all such revenues greater than $7.0
million and less than or equal to $17 million. As a result of the Software
Business Sale, Canmax will no longer be engaged in the retail automation
software business, and the results of operations of the Software Business will
be reported as discontinued operations in Canmax's financial statements.
8
APPROVAL OF REINCORPORATION MERGER
On December 7, 1998, Canmax's shareholders approved the merger of Canmax
with and into a wholly-owned subsidiary of Canmax organized under the laws of
the state of Delaware, to effect the change of Canmax's domicile from Wyoming to
Delaware. On December 30, 1998, Canmax formed ARDIS Telecom & Technologies, Inc.
("ARDIS"), a Delaware corporation and wholly-owned subsidiary, to effect the
reincorporation merger. Canmax expects the reincorporation merger to be
consummated in early February 1999. Upon consummation of the reincorporation
merger, Canmax will change its name to "ARDIS Telecommunications & Technologies,
Inc." and its corporate affairs will be governed by the laws of the state of
Delaware. Upon consummation of the reincorporation merger, the certificate of
incorporation and bylaws of ARDIS will constitute the governing instruments of
Canmax. The form of certificate of incorporation and bylaws for ARDIS were
approved by the Company's shareholders at the annual meeting of shareholders
held on December 7, 1998.
AMENDMENT TO FOUNDERS' LOAN AGREEMENT
On December 11, 1998, the Company and Founders Equity Group, Inc., on its
own behalf and as agent for various other lenders ("Founders"), executed
Amendment No. 1 to the Restated Convertible Loan Agreement dated March 31, 1998,
as amended by the letter agreement dated August 25, 1998 (as amended, the "Loan
Agreement"). As a result of the amendment, Canmax agreed to defer Founders'
conversion of the remaining indebtedness outstanding under the Loan Agreement in
exchange for (a) Founders' waiver of any registration obligations under the
Registration Rights Agreement dated May 1, 1997 or under the Loan Agreement,
until February 1, 1999 or Canmax's earlier delivery of a conversion notice, (b)
the adjustment of the conversion price for the remaining convertible
indebtedness outstanding under the Loan Agreement ($500,000) from $.50 per share
to the greater of $.50 per share or 75% of the average closing price of Canmax
common stock over the ten trading days preceding the delivery of a conversion
notice, and (c) Founders' agreement to convert the remaining outstanding
principal under the Loan Agreement ($500,000) upon written notice from the
Company at the adjusted conversion price described above. Further, the amendment
to the Loan Agreement reduced the interest rate payable on the outstanding
principal amount under the Loan Agreement from 12% to 9% per annum. The
amendment also terminated any additional funding obligations of Founders' under
the Loan Agreement. See "Market for Registrant's Common Equity and Related
Stockholder Matters--Recent Sales of Unregistered Securities."
ITEM 2. PROPERTIES
Canmax currently occupies 47,178 square feet of office space at 150 West
Carpenter Freeway, Irving, Texas, as a hold over tenant on a month-to-month
basis. The month-to-month tenancy will terminate on or about March 15, 1999. The
space is used for executive, administrative, sales, engineering personnel, help
desk and related services, as well as for inventory storage and demonstration
purposes. Canmax has entered into a five-year lease for approximately 13,163
square feet located 8100 Jetstar Drive in Irving, Texas, commencing on March 1,
1999.
ITEM 3. LEGAL PROCEEDINGS
Neither Canmax nor any of its subsidiaries are parties 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.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Canmax has only one class of shares, common stock without par value, which
is traded on the OTC Bulletin Board. 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 purpose for either
cancellation or surrender or provisions for sinking or purchase funds.
Canmax was listed on the Nasdaq SmallCap Market tier of The Nasdaq Stock
Market on February 10, 1994 through June 8, 1998. Canmax Common Stock is
currently traded on the OTC Bulletin Board under the symbol "CNMX."
Canmax's principal executive offices are located at 150 West Carpenter
Freeway, Irving, Texas 75039, and its telephone number is (972) 541-1600.
MARKET PRICES OF CANMAX COMMON STOCK
The following table sets forth for the fiscal periods indicated the high and
low closing sales price per share of Canmax Common Stock as quoted on the Nasdaq
SmallCap Market through June 8, 1998 and as reported on the OTC Bulletin Board
after such date. The market quotations presented reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily reflect
actual transactions.
CANMAX
COMMON STOCK
CLOSING PRICES
--------------------
HIGH LOW
--------- ---------
FISCAL 1997
First Quarter.......................................................... $ 2.50 $ 1.50
Second Quarter......................................................... $ 2.88 $ 1.50
Third Quarter.......................................................... $ 2.75 $ 1.88
Fourth Quarter......................................................... $ 2.50 $ 1.38
FISCAL 1998
First Quarter.......................................................... $ 1.50 $ 0.88
Second Quarter......................................................... $ 1.13 $ 0.63
Third Quarter.......................................................... $ 0.75 $ 0.28
Fourth Quarter......................................................... $ 0.65 $ 0.32
FISCAL 1999
First Quarter (through January 26, 1999)............................... $ 0.40 $ 0.28
The closing price for the Canmax Common Stock on January 26, 1999 as
reported on the OTC Bulletin Board was $0.30.
DIVIDENDS
Canmax has never declared or paid any cash dividends on the Canmax Common
Stock and does not presently intend to pay cash dividends on the Canmax Common
Stock in the foreseeable future. Canmax intends to retain future earnings for
reinvestment in its business. Additionally, dividends are restricted to
10
less than 5% of net operating income in accordance with the terms of the
convertible loan agreement effective December 15, 1997, as amended.
HOLDERS OF RECORDS
There were 448 stockholders of record as at September 28, 1998, and
approximately 2,790 beneficial stockholders.
RECENT SALES OF UNREGISTERED SECURITIES
On December 15, 1997, Canmax executed a convertible loan agreement (the
"Original Agreement") with Founders providing for financing of up $500,000 at an
interest rate of 10% per annum. Advances under the Original Agreement were
secured by a lien on all of Canmax's assets and indebtedness outstanding under
the Original Agreement was convertible, at the option of Founders, into shares
of Canmax common stock at a conversion price of $1.25 per share. Advances under
this loan totaling $500,000 were made from December of 1997, through February of
1998. On February 11, 1998, Canmax and Founders executed a loan commitment
letter (the "Loan Commitment") which provided for a multiple advance loan of up
to an additional $2.0 million upon terms similar to the Original Agreement;
however indebtedness outstanding under the Loan Commitment was convertible into
shares of Canmax common stock at a conversion price equal to the average closing
prices of the Canmax common stock over the five day trading period immediately
preceding the date of each advance. On February 24, 1998, Founders advanced
$150,000 under the Loan Commitment which was convertible into shares of Canmax
common stock at a conversion price equal to $1.025. The Company and Founders
(and certain of its affiliates) entered into the First Restated Loan Agreement
(the "Loan Agreement") effective as of March 31, 1998 which consolidated all
rights and obligations of Canmax to Founders under the Original Agreement and
the Loan Commitment and amended the terms of the then outstanding notes. Amounts
advanced or consolidated under the Loan Agreement bore interest at the rate of
12% per annum, were secured by a lien on all of Canmax's assets and were
convertible into shares of Canmax common stock at $.80 per share.
By letter dated August 25, 1998, Founders agreed to release its lien on all
of Canmax's assets upon the consummation of the Software Business Sale. As
consideration for the release, Canmax agreed to repay $1.0 million of the $1.5
million outstanding under the Loan Agreement and to allow Founders to convert
the remaining $500,000 plus accrued but unpaid interest outstanding under the
Loan Agreement into shares of Canmax common stock at a reduced conversion price
of $.50 per share. On December 11, 1998, Canmax and Founders executed Amendment
No. 1 to the Loan Agreement, pursuant to which Canmax agreed to defer Founder's
obligation to convert the remaining indebtedness outstanding under the Loan
Agreement ($500,000) in exchange for (a) Founders' waiver of any registration
obligations under the registration rights agreement dated May 1, 1997 or under
the Loan Agreement until February 1, 1999 or Canmax's earlier delivery of a
conversion notice, (b) the adjustment of the conversion price for the remaining
convertible indebtedness outstanding under the Loan Agreement from $.50 to the
greater of $.50 per share or 75% of the average closing price of the Canmax
common stock over the ten trading days preceding the delivery of a conversion
notice, and (c) Founders' agreement to convert the remaining outstanding
principal amount under the Loan Agreement ($500,000) upon written notice from
Canmax at the adjusted conversion price described above. The amendment also
reduced the interest rate on the outstanding principal amount under the Loan
Agreement from 12% to 9% per annum and terminated any additional funding
obligation of Founders under the Loan Agreement. All convertible notes issued
under the Original Agreement, the Loan Commitment and the Loan Agreement were
issued at face value in private transactions in reliance upon the exemption set
forth in Section 4(2) of the Securities Act of 1933, as amended. The proceeds
received by Canmax from the issuance of the convertible notes were used for
working capital purposes.
11
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED OCTOBER 31
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA(1):
Revenues.............................................................. $ 2,189 $ -- $ -- $ -- $ --
Cost of revenues...................................................... 2,155 -- -- -- --
Operating expenses.................................................... 1,399 -- -- -- --
Interest expense, net................................................. 101 -- -- -- --
Writedown of capitalized software..................................... -- -- -- -- --
Loss on Disposal of USC............................................... 1,155 -- -- -- --
Income (loss) from discontinued operations............................ (103) 87 143 (3,734) (6,042)
Net income (loss)..................................................... (2,724) 87 143 (3,734) (6,042)
Net income (loss) per share(2)........................................ $ (.38) $ 0.01 $ 0.02 $ (0.79) $ (1.54)
CONSOLIDATED BALANCE SHEET DATA(1):
Total assets..........................................................
Continuing operations............................................... 1,936 -- -- -- --
Discontinued operations............................................. 3,355 4,578 4,741 4,225 5,317
Working capital (deficiency)
Continuing operations............................................... (1,460) -- -- -- --
Discontinued operations............................................. 623 664 701 (946) 135
Non Current obligations
Continuing operations............................................... -- -- -- -- --
Discontinued operations............................................. 147 178 256 265 1,375
Shareholders' equity.................................................. 1,064 2,220 2,075 1,719 1,910
- ------------------------
(1) The results of operations of the Software Business have been presented in
the financial statements as discontinued operations. Results of operations
in prior years have been restated to reclassify the Software Business as
discontinued operations.
(2) All per share amounts have been retroactively adjusted to reflect a
one-for-five reverse stock split of Canmax 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, 1998, 1997 AND 1996
GENERAL
During the fiscal year ended October 31, 1998, Canmax operated two distinct
businesses, the Software Business and the Telecommunications Business. For the
fiscal year ended October 31, 1997, the Software Business accounted for all of
Canmax's revenues. On December 7, 1998, Canmax consummated the sale of the
Software Business to Affiliated Computer Services, Inc. As a result of the
Software Business Sale, Canmax will no longer engage in the Software Business,
and, its business will be focused solely on its Telecommunications Business.
Therefore, historic financial information attributable to the Software Business
will be reported as discontinued operations.
The following discussion and analysis of financial condition and results of
operations covers the years ended October 31, 1998, 1997 and 1996 and should be
read in conjunction with Canmax's Financial Statements and the Notes thereto
commencing at page F-1 hereof.
12
RESULTS OF OPERATIONS--1998 VERSUS 1997
In the later part of fiscal 1996, Canmax decided that it was critical that
it expand its market beyond one vertical market and one large customer. After
evaluating a number of alternative strategies, Canmax decided that the rapidly
expanding telecommunications market presented an opportunity to utilize some of
the technology and support capabilities that it had developed through its
Software Business. The Company chose to make its entry into the
telecommunications industry via the prepaid long distance market.
On January 30, 1998, Canmax acquired USCommunications. Effective May 27,
1998, Canmax and principals of USC agreed to rescind the USC acquisition and
that the economic benefits and burdens of any revenues received or expenses
incurred following May 27, 1998 would accrue to USC. The statement of operations
for the fiscal year ended October 31, 1998 includes the operations of
USCommunications since its acquisition through May 27, 1998.
Following its entry into the Telecommunications Business, Canmax formed
Canmax Telecom, Inc., its telecommunications operating company and a
wholly-owned subsidiary, and has established sales and marketing activities in
four principle marketing channels for its prepaid phone card program, including
(a) wholesale and retail sales through independent distributors, (b) direct
sales to retail stores, (c) telemarketing sales to retail stores, and (d)
promotional and specialty marketing sales to businesses. The initial product
used to introduce Canmax Telecom to the market was referred to as the Latino
Card, as it was targeted to the long distance market for calls originating
within the continental United States to certain Latin American countries.
Services required to offer this card were provided by USC, and Canmax Telecom
continued to purchase those services from USC following the rescission of the
acquisition.
The Company recently announced its establishment of a strategic relationship
with PT-1 Communications, Inc., the nation's largest prepaid card provider. This
relationship enables Canmax to pursue its rapid growth plan in the prepaid
market prior to the commitment of large facilities investments. The Company
began marketing prepaid phone cards with services provided by PT-1 in the latter
part of August, 1998, and at that time discontinued purchasing any services from
USC except those required to complete the operation of the already distributed
Latino Cards.
The Company plans to commit approximately $1.0 million in capital
investments for fiscal 1999 to its Telecommunications Business, and plans to be
able to internally fund additional infrastructure development through
operations. The Telecommunications Business was launched during the second
quarter of 1998. The Company's financial statements for the year ended October
31, 1998 and management's discussion and analysis of the results of operations
for 1998 reflect the results of operations of the Telecommunications Business
only. Because the Telecommunications Business was launched in the 1998 fiscal
year, the Company is not able to compare the results of operations for the
Telecommunications Business to prior periods. The results of operations of the
Software Business have been condensed into the line item caption "Discontinued
Operations" in the Company's financial statements and, because the Software
Business has been discontinued, management has not discussed the results of
operations for the Software Business in 1998 as compared to 1997.
REVENUE
For the year ended October 31, 1998, Canmax had revenues from continuing
operations of $2,190,000, $710,000 of which were attributable to revenues
derived through USC, and $1,480,000 of which were derived from revenues from
Canmax Telecom prepaid calling cards. The Company ceased recognizing revenues of
USC as of May 27, 1998.
Revenues from discontinued operations were $9,380,000 for the year ended
October 31, 1998, as compared to $12,736,000 for the comparable period in 1997.
13
EXPENSES
For the year ended October 31, 1998, Canmax had total costs of revenues
relating to revenue from continuing operations of $3,554,000, of which
$1,119,000 was attributable to operations of USC and $2,435,000 was attributable
to Canmax Telecom prepaid calling cards.
General and administrative costs attributable to continuing operations
excluding USC were $437,000 for the year ended October 31, 1998. These costs
were primarily comprised of management, accounting, legal and overhead expenses.
Sales and marketing costs attributable to continuing operations excluding
USC were $389,000.
Interest and financing expenses attributable to continuing operations were
$155,000 for the year ended October 31, 1998. These expenses were associated
with indebtedness outstanding under the Loan Agreement that was entered into
during the 1998 period.
On June 15, 1998, Canmax and USCommunications signed an agreement effective
May 27, 1998 to rescind the purchase of USCommunications. Revenues, phone card
cost of revenues, and other expenses for the period from acquisition through
disposition, May 27, 1998 amounted to $709,525, $565,151 and $554,253,
respectively. The Company recorded a loss on disposal of $1,155,385.
As a result of the foregoing, Canmax incurred a net loss from continuing
operations of $2,621,000 or $0.37 per share for the year ended October 31, 1998.
RESULTS OF OPERATIONS--1997 VERSUS 1996
In the second quarter of the year ended October 31, 1998, Canmax launched
its Telecommunications Business. On December 7, 1998, Canmax disposed of its
Software Business, which represented all of its operations for the fiscal year
ended October 31, 1997 and prior periods. Therefore, the results of operations
for the years ended October 31, 1997 and 1996 relates solely to operations that
have been discontinued by Canmax.
REVENUE
For the year ended October 31, 1997, Canmax had revenues of $12,736,223, an
increase of $472,363 or 3.9% over 1996. During 1997, The Southland Corporation
(Southland) and NCR Corporation (NCR) accounted for approximately 92% of
Canmax's total revenue as compared with approximately 83% for the comparable
period of 1996.
Software licenses and product revenue for the year ended October 31, 1997
increased by 1.2% from $1,901,302 in 1996 to $1,924,897 in 1997. This increase
is primarily due to increased software and hardware sales to Southland during
the first nine months of 1997 for the planned implementation by Southland of a
Windows NT solution that commenced in December, 1997 and the sale to Southland
in October, 1997 of the right to use, possess and modify the source code of the
software developed by Canmax for Southland, for a one-time license fee of $1.0
million. These increases were partially offset by a decline in sales of software
and hardware components to other customers and a decrease in software and
hardware sales to Southland resulting from the completion of one phase of a UNIX
store upgrade which commenced during 1995 and concluded during the first quarter
of 1996.
Development revenue for the year ended October 31, 1997 increased $763,823
or 9.6% from $7,940,515 in 1996 to $8,704,338 in 1997. Development revenue from
the base contract with Southland continued to decline from approximately
$1,564,000 in 1996 to approximately $799,000 during the same period in 1997, in
accordance with the terms of the contract. Additionally, during 1996, Canmax
recognized development revenues of approximately $2,165,000 for work associated
with a contract between Canmax and NCR to develop a preliminary (non scanning)
point of sale software application in UNIX for Southland. This project was
completed in July, 1996. Also during 1996, Canmax recognized approximately
14
$3,920,000 of development revenue for work performed under an agreement which
commenced in May, 1996 with NCR and Southland to develop a scanning point of
sale application for Southland and other associated inventory, merchandising,
and back office functions, running in a Windows NT environment (the "Southland
Windows NT development project"). Canmax recognized revenues of approximately
$7,560,000 during 1997 related to the Southland Windows NT development project.
Modifications to original project requirements increased total project revenues
from $9.5 million to $11.5 million. The Southland Windows NT development project
was completed in October, 1997. Additionally, during the fourth quarter of 1997,
Canmax provided development and other resources to Southland on an as-needed
basis. Canmax recognized approximately $254,000 of development revenue related
to this effort.
Development revenue increased $1,415,028 or 50.0% from $603,731 in the third
quarter of 1997 to $2,018,759 in the fourth quarter of 1997. During the third
quarter of 1997, Canmax undertook a significant work effort to support the
expanded testing of the Southland Windows NT development project for an interim
period up to pilot implementation. This expanded work effort was out of scope of
the original contract. Accordingly, at the end of the third quarter, Canmax
increased its cost estimates used to compute development project revenue under
the percentage-of-completion method and expensed all costs incurred related to
the additional work effort, including approximately $854,000 for work performed
during the third quarter of 1997. Canmax subsequently negotiated approximately
$981,000 of additional revenue related to this work effort. Therefore, as the
project was completed in October, 1997, Canmax recognized approximately $543,000
of remaining revenue under the percentage-of-completion method and approximately
$981,000 of the approved change control during the fourth quarter of 1997.
Service agreements revenue for the year ended October 31, 1997 decreased
$315,055 or 13.0% from $2,422,043 in 1996 to $2,106,988 in 1997. This decrease
resulted from a decline in the installation, training and site survey revenues
reflecting a lower number of new installations of Canmax's proprietary software
accompanied by a decrease in calls received from Southland locations by the 24
hour/7 day a week help desk, which caused a decline in revenue due to the
structure of the support contract with Southland.
GROSS MARGIN
Gross margin, as a percentage of software licenses and product revenue, was
59.9% for the year ended October 31, 1997 as compared with 30.5% for the same
period in 1996, prior to 1996 inventory writedowns of $217,623. Gross margin on
software sales for 1997 was 66.4% compared with 23.9% for the same period in
1996, excluding 1996 inventory writedowns. The increase is due to the effects of
the higher margin source code sale to Southland in October, 1997. This increase
in margin was partially offset by a decrease in margin resulting from increased
sales of lower margin purchased software during the reporting period coupled
with a decline in sales of Canmax's higher margin proprietary software. Gross
margin on hardware sales for 1997 was 37.6% compared with 32.8% for the same
period in 1996, excluding 1996 inventory writedowns. The increase in margin
resulted from a change in the mix of hardware components sold. Included in the
cost of revenues of software licenses and product revenue for 1996 is a one time
writedown of $105,763 for software inventory that Canmax determined was
necessary due to the limited likelihood of future sales of that item. Further,
also included in cost of revenues of software licenses and product revenue for
1996 is a one time writedown of inventory of $111,860 that Canmax determined was
required to reflect the inventory at net realizable value.
Gross margin on development revenues for 1997 was 47.6% for the year ended
October 31, 1997 as compared with 62.9% for the same period in 1996. This
decrease is partially due to lower anticipated profit margins on the Southland
Windows NT development project as compared to the NCR/Southland development
project in progress in 1996, the preliminary (non scanning) point of sale
software application in UNIX as well as changes in cost estimates of the
Southland Windows NT development project. The lower planned profit margin is a
result of the need to employ a significant number of highly skilled contractors
to complete certain phases of the Southland Windows NT development project
throughout the life of the
15
project which was completed in October, 1997. No such requirements were
necessary or incurred for the NCR/Southland UNIX based project which was
completed in July, 1996.
Gross margin on development revenue for the fourth quarter of 1997 was 67.5%
as compared to (51.9)% for the third quarter of 1997. This increase is primarily
related to changes in project cost estimates and accounting for the additional
work effort undertaken in the third quarter of 1997. As previously discussed,
during the third quarter of 1997, Canmax undertook a significant work effort to
support the extended testing of the Southland Windows NT development project for
an interim period up to pilot implementation. This expanded work effort was out
of the scope of the original contract. Accordingly, at the end of the third
quarter, Canmax increased its cost estimates used to compute development project
revenue under the percentage-of-completion method and expensed all costs
incurred related to the additional work effort, including approximately $854,000
for the work effort performed during the third quarter of 1997. Canmax
subsequently negotiated approximately $981,000 of additional revenue related to
this work effort. Therefore, as the Southland Windows NT development project was
completed in October, 1997, Canmax recognized approximately $543,000 of
remaining revenue under the percentage-of-completion method and approximately
$981,000 of the approved change control during the fourth quarter of 1997.
EXPENSES
Customer service costs for the year ended October 31, 1997 decreased by 2.9%
compared with the same period in 1996. The decline in costs is due to lower
operating costs for the service arising from increased efficiencies and lower
overall expenditure levels.
Product development costs declined $672,463 or 52.3% from $1,286,966 in 1996
to $614,503 in 1997. The reduction is due to a significant increase in funded
development projects which resulted in development expenditures being included
in cost of revenues. Additionally, there was an increase in software development
costs capitalized. During the first quarter of 1996, Canmax capitalized $128,874
of software development costs relating to a new credit card processing network
interface as compared with $209,202 of such costs capitalized in the fourth
quarter of 1997 relating to Canmax's next generation Windows based project which
is scheduled for release in the first calendar quarter of 1998.
General and administrative expenses increased $258,225 or 7.3% from
$3,555,042 in 1996 to $3,813,267 in 1997. This net increase is primarily due to
Canmax expensing approximately $360,000 of merger related costs during October,
1997 upon termination of the proposed merger with Auto Gas Systems, Inc. These
costs, comprised primarily of legal and other professional fees incurred during
the second and third quarter of 1997, were originally deferred and would have
been accounted for as additional purchase price or as a reduction in the fair
value of the securities issued upon consummation of the proposed merger
transaction. Additionally, Canmax experienced increases in expenditures related
to the establishment of a business development unit, responsible for identifying
new business opportunities and project management and increased expenditures for
investor relations. These increases were partially offset by a reduction in
development project premiums to ensure timely completion of projects and
performance bonuses.
Sales and marketing expenses increased by $167,864 or 38.1% from $440,581 in
1996 to $608,445 in 1997. These increases are due to increased headcount and
advertising and marketing expenditures aimed at generating interest in existing
products as well as Canmax's new Windows based product scheduled for release in
the first calendar quarter of 1998.
For the year ended October 31, 1997 Canmax recorded no tax provision as net
operating loss carryforwards of approximately $20.3 million would offset any tax
liability related to fiscal year 1997.
As a result of the foregoing, Canmax generated net income of $87,331, or
$0.01 per share, for the year ended October 31, 1997 as compared with net income
of $142,614, or $0.02 per share, for the year ended October 31, 1996.
16
LIQUIDITY AND SOURCES OF CAPITAL
Upon consummation of the Software Business Sale on December 7, 1998, Canmax
received its initial installment of $4.0 million from ACS, approximately $1.1
million of which has been used to repay amounts owed to Founders under the Loan
Agreement and $250,000 of which was used to pay transaction expenses. The
Company plans to commit approximately $1.0 million for capital investments in
the Telecommunications Business for fiscal 1999, and plans to internally fund
additional infrastructure development through operations of the
Telecommunications Business. The Company believes existing capital resources and
cash from operations will be sufficient to meet the Company's capital and
liquidity needs through 1999.
At October 31, 1998, Canmax had cash and cash equivalents of approximately
$208,000, up from $129,000 for the same period in 1997, an increase of $79,000.
Cash used by continuing operating activities totaled $556,000 for the year
ended October 31, 1998. Cash used was comprised of Canmax's net loss of
$2,724,000, adjusted for: loss from discontinued operations of $103,000; loss on
disposal of USCommunications of $1,568,000; depreciation and capitalized
software and intellectual property rights amortization of $19,000; and net
changes in operating assets and liabilities of $477,000.
Cash used in investing activities for continuing operations for the year
ended October 31, 1998 totaled $803,000 and was primarily comprised of funds
provided to USCommunications in the form of a note receivable of $725,000 and
purchase of property and equipment of $78,000.
Cash provided by financing activities for continuing operations for the year
ended October 31, 1998 totaled $1,500,000 provided through borrowings under the
Loan Agreement that was entered into during the 1998 period.
Current assets from continuing operations totaled $937,000 at the end of the
fourth quarter of 1998, resulting in negative net working capital from
continuing operations of $1,460,000. Accounts receivable totaled $292,000 and
represented 31% of current assets from continuing operations. Accounts
receivable include one significant account which comprised 77% of total trade
accounts receivable from continuing operations. The note receivable totaled
$576,000 at October 31, 1998 and represented funds provided to USC.
Net property and equipment from continuing operations totaled $59,000 at the
end of the fourth quarter of 1998. The majority of property and equipment is
comprised of furniture, fixtures and computer equipment.
Current liabilities from continuing operations totaled $2,396,000 at the end
of the fourth quarter of 1998. The majority of liabilities were comprised of
convertible debentures issued under the Loan Agreement, accounts payable and
accrued liabilities. $1,000,000 of the convertible debentures were repaid out of
proceeds resulting from the sale of the Software Business.
At October 31, 1997 and 1996 Canmax had a net working capital surplus
(deficiency) of $793,000 and $208,000, respectively. During the years ended
October 31, 1997 and 1996 Canmax provided (used) total cash from ($780,000) and
$431,000, respectively.
In connection with the rescission Canmax's acquisition of USC, USC executed
a note payable to Canmax in the amount of $724,660. The USC note matures on June
15, 2001, and is payable in monthly installments on the fifteenth day of each
month. Monthly payments for November and December of 1998 are $15,000 and
monthly payments thereafter through the maturity date are approximately $20,000.
The USC note is secured by a lien on all of USC's assets. As of January 29,
1999, approximately $553,000 remained outstanding under the USC note.
17
ACQUISITIONS
Canmax continues to review an acquisition strategy within its
Telecommunications Business. From time to time Canmax will review acquisition
candidates with products, technologies or other services that could enhance
Canmax product offerings or services. Any material acquisitions could result in
Canmax issuing or selling additional debt or equity securities, obtaining
additional debt or other lines of credit and may result in a decrease to Canmax
working capital depending on the amount, timing and nature of the consideration
to be paid. Canmax is not currently a party to any agreements, negotiations or
understandings regarding any material acquisitions.
SIGNIFICANT CUSTOMERS
Historically, The Southland Corporation ("Southland") has accounted for
approximately 85% of the revenue of Canmax in prior periods. The Software
Business and all rights under agreements with Southland were sold to ACS on
December 7, 1998, and therefore Southland is no longer a customer of Canmax.
Canmax currently distributes its prepaid long distance cards through a network
of independent distributors and none of its individual customers is considered
significant.
NASDAQ DELISTING
On June 8, 1998, Canmax Common Stock was delisted from the Nasdaq SmallCap
Market for a failure to meet the minimum net tangible asset requirement for
continued listing. Canmax Common Stock now trades on the OTC Bulletin Board. The
delisting of Canmax Common Stock may adversely affect the liquidity of the
Canmax Common Stock, the operations of Canmax and the ability of Canmax to raise
capital in the future.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes new guidance for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires that Canmax's
foreign currency translation adjustment be included in other comprehensive
income. The provisions of SFAS No. 130 have been applied to the prior period
presentation. The Company adopted these Statements as of November 1, 1998 and
does not expect the adoption of these standards to result in material changes to
previously reported amounts.
In July 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement expands certain reporting
and disclosure requirements for segments from current standards.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 97-2, "Software Revenue Recognition" (SOP 97-2), which supercedes Statement
of Position No. 91-1. SOP 97-2 will be effective for all transactions entered
into by Canmax subsequent to October 31, 1998. Canmax is currently evaluating
the impact that SOP 97-2 will have on software license revenue transactions
entered into subsequent to October 31, 1998.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1), which will be effective for all transactions entered
into by Canmax subsequent to October 31, 1999. The Company is currently
evaluating the impact that SOP 98-1 will have on software developed or obtained
for internal use subsequent to October 31, 1999.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 98-5
"Reporting on the Costs of Start-Up Activities" (SOP 98-5), which will be
effective for all transactions entered into by Canmax subsequent to October 31,
1999. Canmax does not currently expect this standard to impact its disclosures.
18
In June 1998, the Financial Accounting Standards Board issued Standard No.
133 "Accounting for Derivative Instruments and Hedging Activities." The Standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. The new
Standard is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company does not expect the adoption of the new
Standard to have a material impact on its financial position or results of
operations.
IMPACT OF YEAR 2000
Canmax has completed an assessment of the impact of Year 2000 issues on its
internal systems and determined that the cost for any modifications or
replacements will be immaterial and not exceed $50,000. Canmax has initiated
communications with all of its significant suppliers and customers to determine
the extent to which Canmax's internal systems and developed software products
are vulnerable to those third parties failure. In connection with the Software
Business Sale, Canmax and ACS conducted a Year 2000 compliance audit of software
and systems developed by Canmax. Such audit did not reveal any material items of
noncompliance, and Canmax does not expect to incur any material expenses to
cause its developed software and systems to become Year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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-25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by Item 9 of Form 10-K has been previously reported
(as defined in Rule 12b-2 of the Exchange Act) in the Company's Current Report
on Form 8-K dated July 13, 1998 and in the Company's definitive proxy materials
dated November 17, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item will be contained in the Company's
definitive proxy statement which the Company will file with the Commission no
later than March 1, 1999 (120 days after the Company's fiscal year end covered
by this Report) and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The information required by this item will be contained in the Company's
definitive proxy statement which the Company will file with the Commission no
later than March 1, 1999 (120 days after the Company'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 Company's
definitive proxy statement which the Company will file with the Commission no
later than March 1, 1999 (120 days after the Company'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 Company's
definitive proxy statement which the Company will file with the Commission no
later than March 1, 1999 (120 days after the Company's fiscal year end covered
by this Report) and is incorporated herein by reference.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 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 is a list of all exhibits filed with this Form 10-K, including
those incorporated by reference.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among Canmax Inc., CNMX MergerSub, Inc. and
USCommunications Services, Inc. (filed as Exhibit 2.1 to Form 8-K dated January 30, 1998 (the "USC
8-K"), and incorporated herein by reference)
2.2 Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and former principals of USC (filed as
Exhibit 10.1 to Form 8-K dated January 15, 1998 (the "USC Rescission 8-K"), and incorporated herein
by reference).
2.3 Asset Purchase Agreement by and among Affiliated Computed Services, Inc., Canmax and Canmax Retail
Systems, Inc. dated September 3, 1998 (filed as Exhibit 10.1 to Canmax's Form 8-K dated December 7,
1998 and incorporated herein by reference)
3.1 Articles of Incorporation of Canmax (filed as Exhibit 3.01 to Canmax's Registration Statement on Form
10, File No. 0-22636 (the "Form 10"), and incorporated herein by reference)
3.2* Amended and Restated Bylaws of Canmax
3.3* Certificate of Incorporation of ARDIS Telecom and Technologies, Inc.
3.4* Bylaws of ARDIS Telecom and Technologies, Inc.
4.1 Registration Rights Agreement between Canmax and the Dodge Jones Foundation (filed as Exhibit 4.02 to
Canmax's Quarterly Report on Form 10-Q for the period ended April 30, 1997 and incorporated herein
by reference)
4.2 Registration Rights Agreement between Canmax and Founders Equity Group, Inc. (filed as Exhibit 4.02 to
Canmax's Quarterly Report on Form 10-Q for the period ended April 30, 1997 and incorporated herein
by reference)
4.3* Amended Stock Option Plan
10.1 Master Agreement for Computer Software Development, License and Maintenance between CRSI and The
Southland Corporation (filed as Exhibit 10.05 to the Form 10 and incorporated herein by reference)
10.2** Software Development Agreement dated July 1, 1996 between NCR Corporation and CRSI (filed as Exhibit
10.09 to Canmax's Annual Report on Form 10-K for the period ended October 31, 1996)
10.3 Office Building Lease between Canmax and Commercial Properties Inc. (filed as Exhibit 10.3 to Canmax's
Registration Statement on Form S-3, File No. 333-33523 (the "Form S-3"), and incorporated herein by
reference)
10.4 Employment Agreement, dated June 30, 1997 between Canmax Retail Systems, Inc. and Roger Bryant (filed
as Exhibit 10.4 to the Form S-3 and incorporated herein by reference)
20
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
10.5 Employment Agreement, dated June 30, 1997 between Canmax Retail Systems, Inc. and Debra L. Burgess
(filed as Exhibit 10.6 to the Form S-3 and incorporated herein by reference)
10.6 Amendment No. 3 to Master Agreement for Computer Software Development, License and Maintenance dated
October 31, 1997 between Canmax Retail Systems, Inc. and The Southland Corporation (filed as Exhibit
10.7 to the Form S-3 and incorporated herein by reference)
10.7 Convertible Loan Agreement by and between Canmax Inc. and Canmax Retail Systems, Inc. as Co-Borrowers
and Founders Equity Group, Inc. and Founders Mezzanine Investors III, LLC as Lenders dated December
15, 1997 (filed as Exhibit 10.8 to Canmax's Annual Report on Form 10-K for the year ended October
31, 1997 (the "1997 Form 10-K") and incorporated herein by reference)
10.8 Security Agreement between Canmax Inc. and Canmax Retail Systems, Inc. as Co-Borrowers and Founders
Equity Group, Inc. and Founders Mezzanine Investors III, LLC as Lenders dated December 15, 1997
(filed as Exhibit 10.9 to the 1997 Form 10-K and incorporated herein by reference)
10.9 Canmax Inc. and Canmax Retail Systems, Inc. 10.00% Senior Secured Convertible Debenture No. 1 (filed
as Exhibit 10.10 to the 1997 Form 10-K and incorporated herein by reference)
10.10 Canmax Inc. and Canmax Retail Systems, Inc. 10.00% Senior Secured Convertible Debenture No. 2 (filed
as Exhibit 10.11 to the 1997 Form 10-K and incorporated herein by reference)
10.11 Loan commitment letter dated February 11, 1998, between Canmax Inc. and Canmax Retail Systems, Inc. as
Borrowers and Founders Equity Group, Inc. and Founders Mezzanine Investors III, LLC as Lenders
(filed as Exhibit 10.18 to the 1997 Form 10-K and incorporated herein by reference)
10.12 Amendment No. 1 to First Restated Convertible Loan Agreement dated December 11, 1998 among Canmax,
Canmax Telecom, Inc. and Founders Equity Group, Inc. as agent (filed as Exhibit 10.2 to Canmax Form
8-K dated December 7, 1998 and incorporated herein by reference).
10.13 Restated Promissory Note dated June 15, 1998 from USC to Canmax Telecom, Inc. (filed as Exhibit 10.2
to the USC Rescission Form 8-K and incorporated herein by reference)
10.14 Security Agreement dated June 15, 1998 from USC for the benefit of Canmax Telecom, Inc. (filed as
Exhibit 10.3 to the USC Rescission Form 8-K and incorporated herein by reference)
10.15 Guaranty dated June 15, 1998 executed by Delia O'Donnell for the benefit of Canmax Telecom, Inc.
(filed as Exhibit 10.4 to the USC Rescission Form 8-K and incorporated herein by reference)
10.16 Guaranty dated June 15, 1998 executed by Alan Anderson, trustee, for the benefit of Canmax Telecom,
Inc. (filed as Exhibit 10.5 to the USC Rescission Form 8-K and incorporated herein by reference)
10.17 Pledge Agreement executed by Delia O'Donnell and Alan Anderson, as trustee, for the benefit of Canmax
Telecom, Inc. (filed as Exhibit 10.6 to the USC Rescission Form 8-K and incorporated herein by
reference)
21
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
10.18 Guaranty date June 15, 1998 executed by James C. Bernet for the benefit of Canmax Telecom, Inc. (filed
as Exhibit 10.7 to the USC Rescission Form 8-K and incorporated herein by reference)
10.19*** Debit Telecommunications Services Agreement dated August 4, 1998 between PT-1 Communications, Inc.,
Canmax Telecom, Inc. and Canmax Inc.
10.20* Commercial Lease Agreement between Jackson--Shaw/Jetstar Tri-star Limited Partnership and Canmax.
11.1* Statement re: Computation of earnings per share
21.1* Subsidiaries of the Registrant
23.1* Consent of Independent Auditors (King Griffin & Adamson, P.C.)
23.2* Consent of Ernst & Young, LLP
27.1* Financial Data Schedule
27.2* Restated Financial Data Schedule
* Filed herewith.
** Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to Canmax's Application requesting
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended.
*** Filed herewith; however portions of this Exhibit have been omitted and filed
separately with the Secretary of the Commission pursuant to Canmax's
Application requesting confidential treatment under Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
October 31, 1998. However, on December 22, 1998, the Registrant filed a report
on Form 8-K regarding the consummation of the Software Business Sale.
22
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 in
its behalf by the undersigned thereunto duly authorized.
CANMAX INC.
By: /s/ ROGER D. BRYANT
-----------------------------------------
Roger D. Bryant
Date: January 29, 1999 PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ ROGER D. BRYANT Officer and Director
- ------------------------------ (principal executive January 29, 1999
Roger D. Bryant officer)
Executive Vice President,
Secretary, Chief
Financial Officer, Chief
/s/ DEBRA L. BURGESS Operating Officer and
- ------------------------------ Director (principal January 29, 1999
Debra L. Burgess financial officer and
principal accounting
officer)
/s/ ROBERT M. FIDLER
- ------------------------------ Director January 29, 1999
Robert M. Fidler
/s/ W. THOMAS RINEHART
- ------------------------------ Director January 29, 1999
W. Thomas Rinehart
- ------------------------------ Director January , 1999
Nick DeMare
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CANMAX INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
ITEM 14(A)(1) AND (2)
1. Consolidated Financial Statements
Reports of Independent Auditors................................................... F-2
Consolidated Balance Sheets at October 31, 1998 and October 31, 1997.............. F-4
Consolidated Statements of Operations for the fiscal years ended October 31, 1998,
October 31, 1997 and October 31, 1996........................................... F-5
Consolidated Statements of Shareholders' Equity for the fiscal years ended October
31, 1998, October 31, 1997 and October 31, 1996................................. F-6
Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1998,
October 31, 1997 and October 31, 1996........................................... F-7
Notes to Consolidated Financial Statements........................................ F-8
2. Financial Statement Schedules
Schedules are omitted because they are not applicable or because the required
information is shown in the consolidated financial statements or notes hereto.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Canmax Inc.
We have audited the accompanying consolidated balance sheet of Canmax Inc.
and subsidiaries as of October 31, 1998, and the related consolidated statements
of operations, shareholders' equity and cash flows for the year ended October
31, 1998. 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 audit.
We conducted our audit 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 audit provides 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, 1998, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
January 20, 1998
F-2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Canmax Inc.
We have audited the accompanying consolidated balance sheet of Canmax Inc.
and subsidiaries as of October 31, 1997, and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the two years in
the period ended October 31, 1997. 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, 1997, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
October 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
December 18, 1997
F-3
CANMAX INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
----------------------------
1998 1997
------------- -------------
ASSETS
CURRENT ASSETS
Cash.............................................................................. $ 207,609 $ 128,871
Trade accounts receivable......................................................... 292,086 --
Inventory......................................................................... 229,672 --
Prepaid expenses and other........................................................ 29,002 --
Current portion of long-term receivable........................................... 177,845 --
Current assets of discontinued operations......................................... 2,305,502 2,973,373
------------- -------------
Total current assets............................................................ 3,241,716 3,102,244
------------- -------------
PROPERTY AND EQUIPMENT, net......................................................... 59,135 --
PROPERTY AND EQUIPMENT OF DISCONTINUED OPERATIONS, net.............................. 524,849 962,175
LONG-TERM RECEIVABLE, net of current portion........................................ 397,851 --
OTHER ASSETS........................................................................ 17,387 --
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS......................................... 1,049,641 643,059
------------- -------------
TOTAL ASSETS........................................................................ $ 5,290,579 $ 4,707,478
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable............................................................ $ 622,836 $ --
Accrued liabilities............................................................... 227,578 --
Deferred revenue.................................................................. 46,033 --
Advances from shareholder......................................................... 1,500,000 --
Current liabilities of discontinued operations.................................... 1,683,591 2,309,437
------------- -------------
Total current liabilities....................................................... 4,080,038 2,309,437
------------- -------------
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS.................................... 146,693 178,107
COMMITMENTS--(Notes H and J)
SHAREHOLDERS' EQUITY
Common stock, no par value, 44,169,100 shares authorized; 6,611,005 shares issued
and outstanding in 1998 and 1997.................................................. 24,858,809 23,290,733
Accumulated deficit................................................................. (23,789,545) (21,065,383)
Foreign currency translation adjustment............................................. (5,416) (5,416)
------------- -------------
Total shareholders' equity.......................................................... 1,063,848 2,219,934
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $ 5,290,579 $ 4,707,478
------------- -------------
------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CANMAX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31,
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
REVENUES
Prepaid phone cards and other........................................ $ 1,479,588 $ -- $ --
Prepaid phone cards--USC............................................. 709,525 -- --
------------- ------------ ------------
Total revenues..................................................... 2,189,113 -- --
------------- ------------ ------------
COSTS AND EXPENSES
Prepaid phone cards and other........................................ 1,589,811 -- --
Prepaid phone cards--USC............................................. 565,151 -- --
Sales & marketing.................................................... 388,506 -- --
General & administrative............................................. 436,939 -- --
Selling general & administrative--USC................................ 554,253 -- --
Depreciation and amortization........................................ 19,356 -- --
------------- ------------ ------------
Total cost of revenues............................................. 3,554,016 -- --
------------- ------------ ------------
OTHER INCOME (EXPENSES)
Interest and financing costs......................................... (155,318) -- --
Interest income...................................................... 54,535 -- --
Loss on disposal of USC.............................................. (1,155,385) -- --
------------- ------------ ------------
Total other expense................................................ (1,256,168)
NET LOSS FROM CONTINUING OPERATIONS.................................... (2,621,071)
DISCONTINUED OPERATIONS
Income (loss) from operation of software business, net of income taxes
of $0................................................................ (103,091) 87,331 142,614
------------- ------------ ------------
NET INCOME (LOSS)...................................................... $ (2,724,162) $ 87,331 $ 142,614
------------- ------------ ------------
------------- ------------ ------------
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations.................................................. $ (0.37) $ -- $ --
Discontinued........................................................... (0.01) 0.01 0.03
------------- ------------ ------------
Net earnings (loss).................................................... $ (0.38) $ 0.01 $ 0.03
------------- ------------ ------------
------------- ------------ ------------
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations.................................................. $ (0.37) $ -- $ --
Discontinued operations................................................ (0.01) 0.01 0.02
------------- ------------ ------------
Net earnings (loss).................................................... $ (0.38) $ 0.01 $ 0.02
------------- ------------ ------------
------------- ------------ ------------
SHARES USED IN THE CALCULATION OF PER SHARE AMOUNTS:
Basic common shares.................................................... 7,095,937 5,827,262 4,983,011
Dilutive impact of stock options and warrants.......................... -- 827,703 1,868,137
------------- ------------ ------------
Diluted common shares.................................................. 7,095,937 6,654,965 6,851,148
------------- ------------ ------------
------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CANMAX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
OPTION TO FOREIGN
PURCHASE CURRENCY
COMMON COMMON COMMON ACCUMULATED TRANSLATION
SHARES STOCK AMOUNT STOCK DEFICIT ADJUSTMENT TOTAL
----------- ------------- ------------ -------------- ----------- -------------
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
Shares issued to EDS............... 1,598,136 4,861,659 (4,861,659) -- -- --
Warrants issued in settlement of
registration obligation.......... -- 56,500 -- -- -- 56,500
Net income......................... -- -- -- 87,331 -- 87,331
Translation adjustment............. -- -- -- -- 785 785
----------- ------------- ------------ -------------- ----------- -------------
Balance at October 31, 1997........ 6,611,005 23,290,733 -- (21,065,383) (5,416) 2,219,934
----------- ------------- ------------ -------------- ----------- -------------
Issuance of common stock and
warrants in connection with
acquisition of USC............... 1,500,000 2,647,398 -- -- -- 2,647,398
Effect of USC rescission........... (1,500,000) (1,079,322) -- -- -- (1,079,322)
Net loss........................... -- -- -- (2,724,162) -- (2,724,162)
----------- ------------- ------------ -------------- ----------- -------------
Balance at October 31, 1998........ 6,611,005 $ 24,858,809 -- $ (23,789,545) $ (5,416) $ 1,063,848
----------- ------------- ------------ -------------- ----------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CANMAX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31,
---------------------------------------
1998 1997 1996
------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................................... $ (2,724,162) $ 87,331 $ 142,614
Adjustments to reconcile net income (loss) to net cash provided (used) by
continuing operating activities:
Loss (income) from discontinued operations.............................. 103,091 (87,331) (142,614)
Loss on disposal of USC................................................. 1,568,076 -- --
Depreciation and amortization........................................... 19,356 -- --
(Increase) decrease in:
Trade accounts receivable............................................. (292,086) -- --
Inventory............................................................. (229,672) -- --
Prepaid expenses and other............................................ (29,002) -- --
Other assets.......................................................... (17,387) -- --
Increase (decrease) in:
Trade accounts payable................................................ 771,799 -- --
Accrued liabilities................................................... 227,578 -- --
Deferred revenue...................................................... 46,033 -- --
------------- ----------- -----------
Net cash used by operating activities from continuing operations.......... (556,376) -- --
------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................................ (78,493) -- --
Advances made under note receivable....................................... (724,660) -- --
------------- ----------- -----------
Net cash used in investing activities of continuing operations............ (803,153) -- --
------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible debenture--shareholder.......................... 1,500,000 -- --
------------- ----------- -----------
Net cash provided by financing activities of continuing operations........ 1,500,000 -- --
------------- ----------- -----------
Cash provided by (used in) discontinued operations........................ (61,733) (779,901) 431,408
------------- ----------- -----------
NET INCREASE (DECREASE) IN CASH........................................... 78,738 (779,901) 431,408
Cash at beginning of year................................................. 128,871 908,772 477,364
------------- ----------- -----------
Cash at end of year....................................................... $ 207,609 $ 128,871 $ 908,772
------------- ----------- -----------
------------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of USC through issuance of 1,500,000 common shares and
2,500,000 warrants for 1 common share each.............................. $ 2,647,398 $ -- $ --
USC rescission............................................................ $ (1,079,322) $ -- $ --
Offset of note receivable against trade accounts payable.................. $ 148,963 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--ORGANIZATION AND NATURE OF BUSINESS
Canmax Inc. ("Canmax") was incorporated on July 10, 1986 under the Company
Act of the Province of British Columbia, Canada, and subsequently changed its
name to "International Retail Systems Inc." On August 7, 1992, Canmax renounced
its original province of incorporation and elected to continue its domicile
under the laws of the State of Wyoming, and on November 30, 1994, its name was
changed to "Canmax Inc."
During 1998 Canmax began competing in the telecommunications market through
its wholly-owned subsidiary, Canmax Telecom, Inc. ("Telecom"). Telecom's
operations include mainly sales and distribution of prepaid domestic and
international calling cards to wholesale and retail customers. In connection
with Canmax's entry into this new business, on January 30, 1998, Canmax acquired
USCommunications Services, Inc. ("USC"). The acquisition was rescinded as of May
27, 1998. (See Note C) The accompanying statement of operations for the year
ended October 31, 1998 includes the operations of USC from its acquisition date
through May 27, 1998.
In August 1998, the Company entered into an agreement with PT-1
Communications, Inc. ("PT-1"). The agreement provides for PT-1 to supply long
distance telecom and debit services, for use in Canmax's marketing and
distribution of domestic and international prepaid long distance calling cards.
PT-1 is currently the sole source of these services to the Company.
Canmax through its wholly owned subsidiary Canmax Retail Systems, Inc.,
("CRSI") developed and provided enterprise wide technology solutions to the
convenience store and retail petroleum industries, its "Software Business".
Canmax offered fully integrated retail automation solutions, including
"C-Serve," which included point of sale ("POS") systems, credit/debit network
authorization systems, pump control systems, and other back office management
systems, and "Vista," its headquarters-based management system. Canmax's
products and services enabled retailers and operators to interact electronically
with customers, capture data at the point of sale, manage site operations and
logistics and communicate electronically with their sites, vendors and
credit/debit networks. Canmax also provided (a) software development,
customization and enhancements, (b) systems integration, installation and
training services, and (c) 24 hour a day, 365 day per year help desk services.
These additional services enabled Canmax to tailor the solutions to each
customer's specifications and provide successful system implementation,
installation, training and after sales support.
On December 7, 1998, Canmax obtained shareholder approval for the sale of,
and sold, the assets of its Software Business. The results of operations of the
Software Business have been presented in the financial statements as
discontinued operations. Results of operations in prior years have been restated
to reclassify the Software Business as discontinued operations. The measurement
date for the sale is December 7, 1998, the date the shareholders approved the
transaction.
LIQUIDITY
Upon consummation of the Software Business Sale on December 7, 1998, Canmax
received its initial installment of $4,000,000 from ACS, approximately
$1,100,000 of which has been used to repay amounts owed to Founders Equity
Group, Inc. ("Founders") and $250,000 of which was used to pay transaction
expenses. The Company plans to commit approximately $1.0 million for capital
investments in the Telecommunications Business for fiscal 1999, and plans to
internally fund additional infrastructure development through operations of the
Telecommunications Business. The Company believes existing
F-8
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
capital resources and cash from operations will be sufficient to meet the
Company's capital and liquidity needs through fiscal 1999.
NOTE B--SUMMARY OF SIGNIFICANT POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of Canmax and
its wholly-owned subsidiaries, Canmax Retail Systems Inc. (Texas), Canmax Retail
Systems Inc. (British Columbia) and Canmax Telecom, Inc. All significant
intercompany transactions have been eliminated.
REVENUE RECOGNITION
The following describes Canmax's revenue recognition policies by type of
activity:
DISCONTINUED OPERATIONS:
Software Licenses and Products--Revenue was recognized when the software or
products were delivered to the customer, collectibility was probable, and no
significant vendor obligations remained after delivery.
Software Development Contracts--Revenue was recognized as Canmax performed
the services in accordance with the contract terms. Revenue from long-term
contracts was recognized using the percentage-of-completion method. Progress
to completion was measured based upon the relationship that total costs
incurred to date bears to the total costs expected to be incurred on a
specified project. Losses on fixed price contracts were recorded when
estimable.
Service Agreements--Revenue from maintenance and support agreements was
generally recognized in one of the following ways:
- Billed annually in advance and recognized ratably over the ensuing year.
- Billed and recognized monthly based on a fixed fee per site.
- Billed and recognized monthly at a minimum base fee plus a variable fee
which was dependent on call volumes.
CONTINUING OPERATIONS:
Phone cards sold while Canmax owned USC--Revenue recognition originated from
customer usage of prepaid calling cards. The Company sold cards to retailers
and distributors at a fixed price. When the retailer or distributor was
invoiced, deferred revenue was recognized. The Company recognized revenue,
and reduced the deferred revenue account as the customer utilized calling
time and upon expiration of cards containing unused calling time.
Phone cards sold other than through USC--Revenue is recognized when the
prepaid phone cards are invoiced and shipped. The Company performs no other
services after the cards are shipped.
F-9
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
INVENTORY
Inventory is stated at the lower of cost (first in-first out) or market and
is primarily comprised of activated and unactivated calling cards.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets ranging from three to five years. Equipment held under
capital leases and leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or the estimated useful life of the related
asset.
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 in connection with the discontinued
operations were charged to expense when incurred until technological feasibility
for the product had been established, at which time the costs were capitalized
until the product was available for release. Canmax began amortizing capitalized
software costs upon general release of the software products to customers.
Canmax evaluated 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. Costs
were 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, all related to the discontinued operations, amounted to approximately
$231,000, $231,000, and $226,000, in 1998, 1997, and 1996, respectively.
NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FASB 128),
effective for both interim and annual periods ending after December 15, 1997.
Statement 128 requires companies to report basic and diluted earnings per share.
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during each period. Diluted earnings per share is
computed using the weighted average number of shares of common stock outstanding
during each period and common equivalent shares consisting of stock options and
warrants (using the treasury stock method) to the extent they are dilutive.
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.
F-10
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, Canmax considers all cash and
highly liquid short-term deposits to be cash equivalents. Total interest paid
during 1998, 1997, and 1996 amounted approximately to $24,000, $46,000, and
$50,000, respectively.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
DISCONTINUED OPERATIONS:
Canmax derived its sales primarily from customers in the retail petroleum
market. Canmax performed periodic credit evaluations of its customers and
generally did not require collateral. Billed receivables were generally due
within 30 days. Credit losses have historically been insignificant.
Canmax's revenues (See Note F) were concentrated in The Southland
Corporation ("Southland"), which accounted for approximately 87%, 92% and
83% of Canmax's total discontinued revenue for fiscal years 1998, 1997 and
1996, respectively. Canmax's revenues derived from its relationship with
Southland included products and services provided directly by Canmax to
Southland and indirectly through NCR Corporation ("NCR") to Southland
pursuant to NCR's contract with Southland. During those same periods,
Electronic Data Systems ("EDS") accounted for 0%, 2% and 7%, respectively,
of Canmax's revenues for such fiscal years. No other customer accounted for
over 10% of Canmax's total revenues. On April 29, 1997, Canmax and EDS
agreed to terminate substantially all of their business arrangements.
At October 31, 1998 and 1997, Southland accounted for 87% and 95%,
respectively of total discontinued accounts receivable (See Note F). Because
a significant portion of Canmax's revenues were derived from its
relationship with Southland, the timing of payments received from Southland
affected the percentage of current assets of Canmax classified as either
cash (or cash equivalents) or accounts receivable.
CONTINUING OPERATIONS:
One customer accounted for approximately 25% of revenues during 1998, and
approximately 77% of the trade accounts receivable balance at October 31,
1998. The Company does not generally require collateral. Canmax has a note
receivable from its prior subsidiary, USC, totaling $575,696. The note is
secured by a lien on all of USC's assets and bears interest at 12% with
principal due on maturity, June 15, 2001. Management provides an allowance
for doubtful accounts, which reflects its estimate of the uncollectible
receivables. In the event of non-performance the maximum exposure to the
Company is the recorded amount of the receivable at the balance sheet date.
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.
F-11
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash and cash equivalents, notes receivable, and
long-term debt is not materially different than fair market value because of the
short maturity of the instruments and/or their respective interest rate amounts.
STOCK-BASED COMPENSATION
Canmax 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."
CURRENT AND PENDING ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes new guidance for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires that the
Company's foreign currency translation adjustment be included in other
comprehensive income. Canmax is not required to adopt these Statements until
November 1, 1998, and does not expect the adoption of these standards to result
in material changes to previously reported amounts.
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement expands certain reporting
and disclosure requirements for segments from current Standards and will be
adopted November 1, 1998. As Canmax will be operating in one segment after the
disposition of its software business, Canmax does not currently expect this
standard to impact disclosures.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 97-2, "Software Revenue Recognition" (SOP 97-2), which supercedes Statement
of Position No. 91-1. SOP 97-2 will be effective for all transactions entered
into by Canmax subsequent to October 31, 1998. Canmax is currently evaluating
the impact that SOP 97-2 will have on software license revenue transactions
entered into subsequent to October 31, 1998.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1), which will be effective for all transactions entered
into by Canmax subsequent to October 31, 1999. Canmax is currently evaluating
the impact the SOP 98-1 will have on software developed or obtained for internal
use subsequent to October 31, 1999.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 98-5
"Reporting on the Costs of Start-Up Activities" (SOP 98-5), which will be
effective for all transactions entered into by Canmax subsequent to October 31,
1999. Canmax does not currently expect this standard to impact disclosures.
In June 1998, the Financial Accounting Standards Board issued Standard No.
133 "Accounting for Derivative Instruments and Hedging Activities." The Standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. The new
Standard is effective for all
F-12
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
fiscal quarters of all fiscal years beginning after June 15, 1999. Canmax does
not expect the adoption of the new Standard to have a material impact on its
financial position or results of operations.
NOTE C--ACQUISITIONS AND REVERSALS
USC ACQUISITION AND REVERSAL
On January 30, 1998, Canmax acquired USC in a transaction recorded under the
purchase method. The total purchase price of the acquisition was $2,647,398. The
purchase price consisted of the issuance of 1,500,000 common shares and warrants
to acquire 2,500,000 common shares. The Canmax shares were valued at the trading
price at the acquisition date with the warrants being valued using the
Black-Scholes pricing model. The following assumptions were used in the
Black-Scholes model at both the acquisition and disposition dates; dividend
yield of 0%, expected volalility of 112%, risk free interest rate of 6% over a 3
year period and a expected life of 3 years. In May of 1998, Canmax and
principals of USC agreed to rescind the USC acquisition and that the economic
benefits and burdens of any revenues received or expenses incurred following May
27, 1998 would accrue to USC. On June 15, 1998, the Company and USC executed
definitive documents to reflect the rescission of the acquisition of USC. Canmax
recovered 1,500,000 common shares, and canceled the warrants to acquire
2,500,000 common shares as a result of this reversal. Cash payments made on
behalf of USC are expected to be recovered through a note receivable in the
original principal amount of $724,660. Canmax has collected approximately
$175,000 on the note since the rescission. These collections have taken the form
of offsets against amounts owed by Canmax to USC for prepaid long distance
calling cards issued by Canmax which were run across USC's telephone calling
card platform. PT-1 Communications, Inc. ("PT-1") now provides the calling card
platform for Canmax's prepaid phone card customers and therefore Canmax does not
expect to continue to accrue amounts to offset against payments otherwise owed
by USC. The offset arrangement was not provided for at the time of the
rescission (or in the note) and the arrangement has been agreed to on a
month-to-month basis by Canmax and USC. In addition $23,446 in cash payments
have been collected on the note through the date of this report. The Company has
no reason to believe at this time that the USC note will not be collected. The
two board members who were elected as part of the acquisition agreement have
resigned.
Canmax recognized a loss on the disposition of $1,155,385. The loss on
disposal is calculated as the difference between the fair value of common stock
and warrants returned by USC and the net investment in USC, recognized by Canmax
through its disposition date.
ACQUISITION OF TALK TIME INC.
On June 16, 1998, Canmax acquired the assets of Talk Time, a wholesale
distributor of prepaid calling cards to convenience stores in the Rocky Mountain
and Oklahoma Regions. The asset purchase agreement provided for the acquisition
of certain assets and the assumption of obligations with a cash purchase price
approximating $54,000. In addition, the owner of Talk Time received warrants to
purchase 50,000 shares of the Company's common stock at $1 per share. The value
of these warrants using the Black-Scholes method approximates the fair value
assigned by management to the net assets acquired of $3,000. The following
assumptions were used in the Black-Scholes model; dividend yield of 0%, expected
volatility of 112%, risk free interest rate of 6% and an expected life of 2
years.
F-13
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--NASDAQ DELISTING
On August 25, 1997, the U.S. Securities and Exchange Commission, The
National Association of Securities Dealers, Inc. and the NASDAQ Stock Market
approved increases in the listing and maintenance standards governing the NASDAQ
SmallCap Market. On June 8, 1998 Canmax was delisted from the NASDAQ SmallCap
Market for failing to meet such new requirements, and is now traded on the OTC
Bulletin Board. The delisting of Canmax Common Stock may adversely affect the
liquidity of the Canmax Common Stock, the operations of Canmax and the ability
of Canmax to raise capital in the future.
NOTE E--ADVANCES FROM SHAREHOLDERS AND CONVERTIBLE DEBENTURES
ADVANCES FROM SHAREHOLDERS
On October 30, 1997, a shareholder, Founders Equity Group, Inc.
("Founders"), advanced Canmax $100,000. The advance was unsecured and had an
interest rate of 12%. On November 6, 1997, Canmax repaid principal and interest
of $100,230, which fully satisfied Canmax's obligation.
CONVERTIBLE DEBENTURES TO SHAREHOLDERS
On December 15, 1997, Canmax executed a convertible loan agreement (the
"Original Agreement") with a shareholder, Founders which provided financing of
up to $500,000. Funds obtained under the loan agreement are collateralized by
all assets of Canmax and bear interest at 10%. Required payments are for
interest only and are due monthly beginning February 1, 1998. Borrowings under
the loan agreement originally matured January 1, 1999, unless otherwise redeemed
or converted. Under the terms of the loan agreement, Founders may exercise its
right at any time to convert all, or in multiples of $25,000, any part of the
borrowed funds into Canmax Common Stock at a conversion price of $1.25 per
share. The conversion price is subject to adjustment for certain events and
transactions as specified in the loan agreements. Additionally, the outstanding
principal amount is redeemable at the option of Canmax at 110% of par.
On February 11, 1998, Canmax and Founders executed a loan commitment letter
(the "Loan Commitment") which provided for multiple advance loans of up to $2
million upon terms similar to the Original Agreement; however, indebtedness
outstanding under the Loan Commitment was convertible into shares of Canmax
Common Stock at a conversion price equal to the average closing prices of the
Canmax Common Stock over the five-day trading period immediately preceding the
date of each advance. As consideration for the Loan Commitment, Canmax paid a
commitment fee of $10,000.
As of March 31, 1998, Founders (and certain of its affiliates) entered into
the First Restated Loan Agreement (the "Loan Agreement") which consolidated all
rights and obligations of Canmax to Founders under the Original Agreement and
the Loan Commitment. Amounts advanced under the Loan Agreement bear interest at
the rate of 12% per annum, are secured by a lien on all other Company's assets
and are convertible into shares of Canmax Common Stock, at the option of
Founders, at $0.80 per share. On August 25, 1998, Founders agreed to release its
lien on all of Canmax's assets upon the consummation of the sale of the Software
Business (See Note M). As consideration for the release, Canmax agreed, upon the
consummation of the sale, to repay $1.0 million of the $1.5 million currently
outstanding under the Loan Agreement, and to allow Founders to convert, at the
Company's option, the remaining $0.5 million plus accrued but unpaid interest
outstanding under the Loan Agreement into shares of Canmax Common Stock at a
conversion price of $.50 per share.
On February 5, 1998, Founders and Canmax entered into a financial consulting
agreement pursuant to which Founders agreed to provide financial advisory and
consulting services to the Company, and Canmax
F-14
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E--ADVANCES FROM SHAREHOLDERS AND CONVERTIBLE DEBENTURES (CONTINUED)
agreed to pay to Founders a fee equal to 3% of the value of the consideration
received in any sale or merger of any division or subsidiary of the Company. As
a result of this agreement, Founders will receive $120,000 of the initial
proceeds of the sale of the Software Business. Founders' agreed to forego any
further payments that may be attributable to Canmax's receipt of deferred
payments in connection with the sale.
Interest expense in connection with Founders debt was $103,352 for the year
ended October 31, 1998.
At October 31, 1998, shareholder advances from Founders totaled $1,500,000.
See also Note M.
NOTE F--DISCONTINUED OPERATIONS
On December 7, 1998, the Company obtained shareholder approval to sell the
assets of the Software Business to Affiliated Computer Services, Inc. a Delaware
corporation ("ACS"). The Asset Purchase Agreement dated as of September 3, 1998
provides for the sale of the computer equipment, purchased software, and
internally developed software for $4,000,000 in cash and additional deferred
payments (See note M).
The estimated gain on disposal of the assets of the Software Business is
$2,400,000. The gain will be recognized as of the disposal date.
Summarized operating results of discontinued Software Business operations
are as follows:
1998 1997 1996
------------ ------------- -------------
Revenues......................................... $ 9,380,064 $ 12,736,223 $ 12,263,860
Costs and expenses............................... 9,483,155 12,648,892 12,121,246
------------ ------------- -------------
Net income (loss)................................ $ (103,091) $ 87,331 $ 142,614
------------ ------------- -------------
------------ ------------- -------------
F-15
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At October 31, 1998, assets and liabilities of the discontinued Software
Businesses operations are as follows:
1998 1997
------------ ------------
Current assets:
Cash................................................................................ $ -- $ --
Accounts receivable................................................................. 2,135,862 2,751,264
Inventories......................................................................... 33,990 46,615
Prepaid expenses.................................................................... 135,650 175,494
------------ ------------
$ 2,305,502 $ 2,973,373
------------ ------------
Furniture and fixtures................................................................ $ 699,552 $ 929,060
Computer equipment.................................................................... 910,442 1,464,809
Computer software..................................................................... 354,868 465,321
Leasehold improvements................................................................ -- 87,635
Equipment held under capital lease obligations........................................ 370,235 239,207
Leasehold improvements under leasehold obligations.................................... 536,880 508,892
------------ ------------
2,871,977 3,694,924
Less accumulated depreciation and amortization........................................ (2,347,128) (2,732,749)
------------ ------------
$ 524,849 $ 962,175
------------ ------------
Noncurrent assets:
Capitalized software costs, net of accumulated amortization of $1,070,686 in 1998 and
$839,271 in 1997.................................................................... $ 993,180 $ 494,786
Intellectual property rights, net of accumulated amortization of $656,284 in 1998 and
$639,617 in 1997.................................................................... -- 30,556
Other assets.......................................................................... 56,461 117,717
------------ ------------
$ 1,049,641 $ 643,059
------------ ------------
Current liabilities:
Trade accounts payable.............................................................. $ 1,032,300 $ 878,241
Accrued liabilities................................................................. 297,113 867,233
Deferred revenue.................................................................... 210,342 269,404
Current portion of lease obligations................................................ 108,641 159,364
Current portion of long-term debt................................................... 35,195 35,195
Advances from shareholders.......................................................... -- 100,000
------------ ------------
$ 1,683,591 $ 2,309,437
------------ ------------
Long-term obligations, net of current maturities:
Lease obligations................................................................... $ 130,676 $ 127,051
Long-term debt...................................................................... 16,017 51,056
------------ ------------
$ 146,693 $ 178,107
------------ ------------
------------ ------------
F-16
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHLAND AGREEMENTS
In December, 1993, Canmax signed a five year agreement with Southland to
provide software licenses, development services, and provide hardware and help
desk services (the "Master Agreement"). Southland chose Canmax's proprietary
convenience store automation software, C-Serve, as the basis for its automation
of store functions and operations at its corporate and franchise operated
7-Eleven convenience stores in the United States. Software licensing, product
and service revenue under this agreement during the fiscal years ended October
31, 1998, 1997 and 1996 totaled approximately $3,160,000, $2,051,000 and
$2,581,000, respectively, while development revenues recorded under the Master
Agreement during these same periods totaled approximately $859,000, $799,000 and
$1,564,000, respectively. This agreement expired on December 7, 1998.
On October 31, 1997, Canmax and Southland entered into Amendment No. 3 to
the Master Agreement (the "Southland Amendment"). Pursuant to the terms of the
Southland Amendment, Canmax allowed Southland to exercise its right as specified
in the Master Agreement to use, possess and modify the source code for the
software developed by Canmax for Southland for a one-time license fee of $1.0
million. Payment of the license fee was due in two installments of $500,000. The
first installment was received in November, 1997 and the second installment was
received in January, 1998.
Total revenue recognized from Southland pursuant to all agreements totaled
approximately $8,197,000 during the year ended October 31, 1998.
During fiscal 1996, Canmax reached an agreement with NCR to develop for
Southland a next generation Windows NT based version of the Canmax C-Serve
convenience store software for $9.5 million. NCR was chosen by Southland to
provide project management and other professional services for the project.
Modifications to project requirements increased total project revenues from $9.5
million to $11.5 million. Since this project was completed in 1997, no
development revenues under such agreement were recognized by Canmax in fiscal
1998, as compared to $7,560,000 and $3,920,000 in fiscal years 1997 and 1996,
respectively.
EDS AGREEMENTS AND TRANSACTION
Canmax 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 marketed Canmax's software, services and hardware technology to
the retail petroleum marketplace exclusively, and Canmax offered EDS the right
to participate with its customers and prospective customers. Additionally,
Canmax granted EDS the right to acquire up to 25% of Canmax's Common Stock
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 $4,861,659, which would be reduced by royalties or similar
payments received by EDS from any licensing of Canmax's product other than
through EDS.
On April 29, 1997, EDS exercised its option to acquire up to 25% of Canmax's
Common Stock, resulting in Canmax issuing an additional 1,598,136 shares. Canmax
accounted for this transaction by reclassifying the amount associated with the
option to Common Stock. EDS then immediately sold its total interest in Canmax,
representing 1,863,364 shares, in a private transaction to Founders Equity
Group, Inc. and the Dodge Jones Foundation, two Texas-based institutional
investors. In conjunction with this transaction, Canmax entered into
registration rights agreements with the two institutional investors.
Additionally, EDS and Canmax agreed to amend a license and grant of rights
agreement which specifies rights and obligations of both parties as to 788 of
Canmax's site licenses sold to EDS in fiscal
F-17
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1994, and to terminate all formal agreements including the aforementioned stock
option agreement, as well as their joint marketing and other supporting business
agreements.
A summary of transactions with EDS for the last three fiscal years is set
forth below:
OPTION TO
TOTAL PURCHASE
AMOUNT OF COMMON COMMON REVENUE
YEAR/TRANSACTION DESCRIPTION TRANSACTION STOCK STOCK (EXPENSE)
- ---------------------------------------------------------- ------------ ------------- ------------ ----------
1996
Other services purchased from EDS....................... $ 84,327 $ -- $ -- $ (84,327)
Development revenue..................................... 143,415 -- -- 143,415
product & services revenue.............................. 690,751 -- -- 690,751
1997
Exercise of EDS options................................. 4,861,659 (4,861,659) 4,861,659 --
1998 -- -- -- --
NOTE G--PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31:
1998 1997
---------- ---------
Furniture and fixtures..................................................... $ 72,282 $ --
Computer equipment......................................................... 5,199 --
Computer software.......................................................... 1,010 --
---------- ---
78,491 --
Less accumulated depreciation and amortization............................. (19,356) --
---------- ---
$ 59,135 $ --
---------- ---
---------- ---
Depreciation and amortization expense from continuing operations amounted to
$19,356, $0 and $0 in 1998, 1997, and 1996, respectively.
F-18
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY
WARRANT ISSUANCES
FOUNDERS EQUITY GROUP, INC.
On May 9, 1997, Founders Equity Group, Inc. exercised its right to demand
that Canmax file a registration statement with regard to all its shares
(863,364) of Canmax Common Stock. Such shares were acquired from EDS on
April 29, 1997 (see Note F-EDS Agreements and Transaction). Under applicable
securities laws, Canmax was unable to file such registration statement until
after the filing of the registration statement relating to the resale of
shares of Canmax Common Stock in the proposed Merger of Canmax and Auto-Gas
Systems, Inc. Pursuant to the terms of the registration rights agreement
with Founders Equity Group, Inc., Canmax was to have filed a registration
statement on or about July 23, 1997 or incur a registration penalty of
50,000 shares per month. Founders Equity Group, Inc. agreed to extend the
registration obligation until August 26, 1997 in exchange for its receipt of
a warrant to purchase 50,000 shares of Canmax Common Stock at an exercise
price of $2.00 per share. Such warrants are exerciseable and expire on
August 1, 2000. The registration obligation was satisfied by the filing of a
registration statement on Form S-3 on August 13, 1997.
Canmax recorded expense of $56,500 in August, 1997 related to these
Warrants. This amount represents Canmax's estimate of the fair value of
these warrants at the date of grant using a Black-Scholes pricing model with
the following assumptions: applicable risk-free interest rate based on the
current treasury-bill interest rate at the grant date of 5.9%; dividend
yields of 0%; volatility factors of the expected market price of Canmax
common stock of .85; and an expected life of the warrant of 1.5 years.
PERFORMANCE WARRANTS
In September 1997, Canmax executed employment agreements with certain
executives which provided for the issuance of warrants ("Performance
Warrants") to each executive as additional compensation. These agreements
were effective July 1, 1997. The aggregate number of shares to be issued
upon exercise of such Performance Warrants is 475,000. Each Performance
Warrant expires 10 years from the date of issuance, and is exercisable at a
price of $2.25 per share, the closing price of the Canmax Common Stock on
July 17, 1997, the date that the compensation committee approved the
issuance of such warrants. The Performance Warrants vest 50% upon the
"Trigger Date" and 50% on the one-year anniversary of the Trigger Date. As
used in each employment agreement, the Trigger Date means the date of the
earlier of the following events: (i) the earnings per share of Canmax (after
tax) equals or exceeds $0.30 per share during any fiscal year (ii) the
closing price of the Canmax Common Stock equals or exceeds $8.00 per share
for sixty-five consecutive trading days. The Performance Warrants also vest
100% upon a Change of Control.
The employment agreements define a "Change of Control" as existing upon any
of the following: (i) any person or entity is or becomes the beneficial
owner of more than thirty percent (30%) of the combined voting power of the
outstanding securities of CRSI or Canmax; (ii) at any time during the
twenty-four month period following a merger, tender offer, consolidation,
sale of assets or contested election, or any combination of such
transactions, at least a majority of the Board of Directors of CRSI or
Canmax shall cease to be "continuing directors" (meaning a director of CRSI
or Canmax prior to such transaction or who subsequently became directors and
whose election or nomination for election by the stockholders of CRSI or
Canmax, was approved by a vote of at least two-thirds of the
F-19
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
directors then still in office prior to such transaction); or (iii) the
stockholders approve an agreement of sale or disposition by CRSI or Canmax
of all or substantially all of the assets of CRSI or Canmax.
In accordance with APB No. 25, and its related interpretations, Canmax has
recorded no compensation expense.
Effective on January 30, 1998, 475,000 of the Performance Warrants vested
concurrent with the issuance of common stock in connection with the
acquisition of USC. During fiscal 1998, 100,000 of these warrants were
cancelled. The exercise price of $2.25 was in excess of the trading price at
the vesting date, and accordingly no compensation pursuant to APB No. 25 has
been recorded by Canmax during 1998. The fair value of these warrants has
been calculated pursuant to SFAS 123 "Accounting for Stock Based
Compensation". The fair value of the warrants using the Black-Scholes
pricing model was $650,011 with the following assumptions: applicable
risk-free interest rates based on the current treasury-bill interest rate at
the grant date of 6.0%; dividend yields of 0%; volatility factors of the
expected market price of the Canmax common stock of .99; and an expected
life of the Performance Warrants of 5 years. See pro forma and other
disclosures further.
Effective July 20, 1998, the Performance warrants were repriced to 0.53 per
share, the closing price of the Canmax Common Stock on that date. The
repricing was made because management believes that the higher priced
options were no longer a motivating factor. The options repriced are
reflected in the cancellation and grant activity for 1998.
Effective July 20, 1998, additional performance warrants were issued to
certain executives ("1998 Performance Warrants"). Each 1998 Performance
Warrant expires 10 years after the date of issuance and is exercisable at a
price of $0.53 per share, the closing price of the Canmax Stock on July 20,
1998. The 1998 Performance Warrants vest upon achieving either $50 million
in revenue in any period of twelve consecutive months with positive earnings
during such months, or upon a change of control of Canmax. In accordance
with APB No. 25, and its related interpretations, Canmax has recorded no
compensation expense to date. Compensation expense may be recognized when it
becomes probable that an event which will trigger vesting will occur.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 "Accounting for Stock-Based Compensation", and has
been determined as if Canmax had accounted for the Performance Warrants
under the fair value method of that statement. The fair value of the 1998
Performance Warrants was estimated to be approximately $205,000 at the date
of grant using a Black-Scholes pricing model with the following assumptions:
applicable risk-free interest rates based on the current treasury-bill
interest rate at the grant date of 5.4%; dividend yields of 0%; volatility
factors of the expected market price of the Canmax common stock of 1.01; and
an expected life of the Performance Warrants of 5 years.
The weighted-average fair value of warrants granted during the year is $1.08
and the weighted-average remaining contracted life of warrants outstanding
at October 31, 1998 is 9.2 years.
STOCK OPTIONS
In 1990, Canmax 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 Canmax. No options will be granted to any
individual director or employee which will, when exercised, exceed 5% of
F-20
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
the issued and outstanding shares of Canmax. 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. 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. The exercise price of any options granted under the Stock
Option Plan is the fair market value at the date of grant. As of October 31,
1997, the Board had granted certain options under the Stock Option Plan in
excess of shares authorized under the plan. On February 26, 1998, the Board of
Directors increased the number of shares issuable under Canmax's stock option
plan (the "Stock Option Plan") from 1.2 million shares to 2.3 million shares.
Activity under the Stock Option Plan for the three years ended October 31, 1998
was as follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------- --------------
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
Options granted.................................................................... 266,000 1.50 - 2.50
Options canceled................................................................... (299,350) 1.88 - 5.00
---------- --------------
Options outstanding at October 31, 1997.............................................. 1,017,700 1.50 - 5.00
Options granted.................................................................... 199,050 0.38 - 1.41
Options exercised.................................................................. -- --
Options canceled................................................................... (122,600) 1.41 - 5.00
---------- --------------
Options outstanding at October 31, 1998.............................................. 1,094,150 0.38 - 5.00
---------- --------------
---------- --------------
Effective December 29, 1995, employee options to purchase 87,100 shares of
Canmax's Common stock were repriced to the then current market price. The
options repriced are reflected in the cancellation and grant activity for 1996.
Effective December 11, 1998, employee options to purchase 1,094,150 shares were
repriced to $.40 per share, the closing price of Canmax stock on that date. The
repricing was made because the Board of Directors believed that the higher
priced options were no longer a motivating factor for key employees and
officers.
F-21
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
A summary of Canmax's stock option activity and related information for the
years ended October 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
----------------------- ----------------------- -----------------------
WEIGHTED - WEIGHTED - WEIGHTED -
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
Outstanding--Beginning of year............. 1,017,700 $ 2.23 1,051,050 $ 3.04 490,550 $ 4.10
Granted.................................... 199,050 0.94 266,000 1.91 729,600 2.19
Exercised.................................. -- -- -- -- (77,600) 2.69
Canceled................................... (122,600) 2.17 (299,350) 4.35 (91,500) 4.86
---------- ---------- ----------
Outstanding-End of year.................... 1,094,150 1.95 1,017,700 $ 2.23 1,051,050 3.04
---------- ---------- ----------
---------- ---------- ----------
Exercisable at end of year................. 732,850 2.20 691,535 $ 2.29 623,300 3.67
Weighted-average fair value of options
granted during the year.................. $ 0.49 $ 1.33 $ 2.18
The weighted-average remaining contractual life of options outstanding at
October 31, 1998, 1997 and 1996 is 4.37 years, 4.37 years and 5.37 years,
respectively.
At October 31, 1998, there are 1,969,150 shares issuable upon the exercise
or conversion of outstanding warrants and options.
Under APB 25, because the exercise price of Canmax's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if Canmax had accounted for
its employee stock options under the fair value method of that statement. The
fair value for options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions: applicable risk-free
interest rates based on the current treasury-bill interest rate at the grant
date, which ranged from 5.4% to 6% in 1998, 5.8% to 6.2% in 1997 and 5.2% to
5.6% in 1996; dividend yields of 0% in 1998, 0% in 1997 and 1996; volatility
factors of the expected market price of Canmax common stock of between .94 and
1.0 in 1998; between .89 and .95 in 1997 and between 0.8 and 0.9 in 1996; and an
expected life of the option of between 2 and 6 years in 1998, 1.6 and 6 years in
1997 and between 2 and 7 years in 1996.
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 Canmax 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 and warrants is amortized to expense over the vesting period of the
related option or warrant. The effects of applying SFAS No. 123 in computing the
pro forma disclosures presented below are not indicative of future amounts as
only options and warrants granted subsequent to October 31, 1995 have been
included in the
F-22
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (CONTINUED)
pro forma computations. Canmax's pro forma information for the years ended
October 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
------------- ----------- -----------
Net income (loss) as reported............................................ $ (2,724,162) $ 87,331 $ 142,614
SFAS No. 123 Pro forma adjustments:
Stock options.......................................................... (261,726) (465,476) (585,718)
Founders Equity Group, Inc. warrants................................... -- -- --
Performance warrants................................................... $ (650,011) -- --
------------- ----------- -----------
Pro forma net loss....................................................... $ (3,635,899) $ (378,145) $ (443,104)
------------- ----------- -----------
------------- ----------- -----------
Pro forma loss per share................................................. $ (0.51) $ (0.06) $ (0.06)
------------- ----------- -----------
------------- ----------- -----------
STOCK OPTION PLAN
As of October 31, 1998, 1,121,990 shares of Canmax Common Stock have been
issued under the Stock Option Plan, 1,094,150 shares remain subject to
outstanding options under the Stock Option Plan, and 83,860 shares were
available for future grants under the Stock Option Plan.
NOTE I--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. There are no significant
deferred tax liabilities and assets related to the continuing operations as of
October 31, 1998 other than the net operating loss benefit of approximately
$7,360,000 which had a full valuation allowance recorded against it. Significant
deferred tax assets related to discontinued operations at October 31, 1997 were
composed of property and equipment, and net operating losses, all of which were
offset by a valuation allowance. The valuation allowance increased $415,000
during the year ended October 31, 1998.
The reconciliation of income tax provision at the statutory United States
federal income tax rates to income tax provision is:
1998 1997 1996
----------- ---------- ----------
Income tax provision (benefit) at statutory rate............................. $ (923,263) $ 29,693 $ 48,489
Benefit of net operating loss not recognized................................. 390,118 -- --
Difference related to USC rescission......................................... 533,145 -- --
Other........................................................................ -- (29,693) (48,489)
----------- ---------- ----------
$ -- $ -- $ --
----------- ---------- ----------
----------- ---------- ----------
At October 31, 1998, Canmax has net operating loss carryforwards for federal
income tax purposes of approximately $21,650,000 which expire in 2006 through
2013. 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.
F-23
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES (CONTINUED)
At October 31, 1998, the net operating losses carryforwards of Canmax and its
subsidiaries were not subject to any material annual limitation.
NOTE J--COMMITMENTS
The lease on Canmax's office space expired August 31, 1998 and is month to
month. The space is used for executive, administrative, sales, engineering
personnel, help desk and related services, as well as for inventory storage and
demonstration purposes. Canmax has entered into a new five-year lease commencing
on March 1, 1999, at $10,250 per month. Future minimum lease payments under this
lease for the years ended October 31, 1999 through 2003 and thereafter are as
follows: $82,000, $123,000, $123,000, $123,000 and $164,000.
Neither Canmax nor any of its subsidiaries are party to any material legal
proceedings.
NOTE K--BENEFIT PLAN
Effective January 1, 1994, Canmax 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). Canmax may
match employee contributions to a discretionary percentage of the employees
contribution. Canmax'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. Canmax made no matching contributions during the
years ended October 31, 1998, 1997 and 1996.
NOTE L--YEAR 2000
Canmax has completed an assessment of the impact of Year 2000 issues on its
internal systems and determined that the cost for any modifications or
replacements will be immaterial and not exceed $50,000. Canmax has initiated
communications with all of its significant suppliers and customers to determine
the extent to which Canmax's internal systems and developed software products
are vulnerable to those third parties failure. In connection with the sale of
the Software Business, Canmax and ACS conducted a Year 2000 compliance audit of
software and systems developed by Canmax. Such audit did not reveal any material
items of noncompliance, and Canmax does not expect to incur any material
expenses to cause its developed software and systems to become Year 2000
compliant.
NOTE M--SUBSEQUENT EVENTS
DISPOSITION OF SOFTWARE BUSINESS
On December 7, 1998, Canmax Inc. sold substantially all of the assets of
CRSI. Pursuant to the terms of the Purchase Agreement, ACS purchased the assets
and paid to CRSI $4,000,000 at closing and assumed certain liabilities arising
from the Software Business. Canmax is entitled to receive additional deferred
payments of up to an additional $3,625,000 calculated as described below.
In addition, on or before January 21, 1999, ACS and Canmax are to calculate
the net working capital (generally current assets other than cash minus current
liabilities) as of the closing date, and the Company is entitled to receive from
(or required to pay to) ACS an amount equal to the positive (negative)
difference between the net working capital as of the closing minus $530,019.
F-24
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M--SUBSEQUENT EVENTS (CONTINUED)
The deferred payments will be calculated at the end of each calendar quarter
during the twelve month period commencing on January 1, 1999. Each deferred
payment is calculated based upon the cumulative level of revenue attributable to
the Software Business from January 1, 1999 through the end of each three month
period through December 31, 1999, and equals (a) the sum of (i) 75% of all such
revenues greater than $4 million and less than or equal to $7 million plus (ii)
13.75% of all such revenues greater than $7 million or less than or equal to $17
million, minus (b) the sum of any deferred payments previously made by ACS. If
CRSI disputes any calculation of the amount of any deferred payment and such
dispute cannot be resolved among the parties, then the independent public
accountants for each party are to mutually designate a third independent public
accountant to resolve such dispute and the determination of such designated
party will be conclusive and binding on all parties.
CONVERTIBLE LOAN AGREEMENTS
On December 11, 1998, the Company and Founders, on its own behalf and as
agent for various lenders ("Founders"), executed Amendment No. 1 to the Restated
Convertible Loan Agreement dated March 31, 1998, as amended by the Letter
Agreement dated August 25, 1998 (as amended, the "Loan Agreement"). As a result
of the Amendment, Canmax agreed to defer the Founders' conversion of the
remaining indebtedness outstanding under the Loan Agreement in exchange for (a)
Founders' waiver of any registration obligations under the Registration Rights
Agreement dated May 1, 1997 or under the Loan Agreement, until February 1, 1999
or Canmax's earlier delivery of a Conversion Notice, (b) the adjustment of the
conversion price for the remaining convertible indebtedness outstanding under
the Loan Agreement ($500,000) from $.50 per share to the greater of $.50 per
share of 75% of the average closing price of the Canmax common stock over the
ten trading days preceding the delivery of a conversion notice, and (c)
Founders' agreement to convert the remaining outstanding principal amount under
the Loan Agreement ($500,000) upon written notice from the Company at the
adjusted conversion price described above. Further, the amendment to the Loan
Agreement reduced the interest rate payable on the outstanding principal amount
on the Loan Agreement from 12% to 9% per annum. The amendment also terminated
any additional funding obligations or Founders under the Loan Agreement. (See
note E)
F-25