<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1996
-----------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ____________________
Commission File Number 0-15362
--------------------------------------------
COMPUFLIGHT, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 11-2883366
- ------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S.Employer Identification
incorporation or organization) Number)
99 Seaview Boulevard, Port Washington, NY 11050
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, 516-625-0202
--------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None
- -------------------------------- ------------------------------------
- -------------------------------- ------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year (1996): $ 3,574,589
-----------
The aggregate market value of the voting stock held by non-affiliates based
upon the average bid and asked prices of such stock as of December 31, 1996 was
$ 332,712.
- ---------
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of common stock as of December 31, 1996
was 1,701,980 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Stockholders (Part III)
<PAGE>
COMPUFLIGHT, INC.
1996 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
Item 1. Description of Business.............................................4
Item 2. Description of Property............................................14
Item 3. Legal Proceedings..................................................15
Item 4. Submission of Matters to a Vote of Security Holders................16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...........17
Item 6. Management's Discussion and Analysis or Plan of Operation..........18
Item 7. Financial Statements...............................................24
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure...............................................25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act..................26
Item 10. Executive Compensation.............................................28
Item 11. Security Ownership of Certain Beneficial Owners and Management.....29
Item 12. Certain Relationships and Related Transactions.....................30
PART IV
Item 13. Exhibits, List and Reports on Form 8-K
INDEX TO EXHIBITS..................................................31
INDEX TO FINANCIAL STATEMENTS (F-1)................................33
SIGNATURES.........................................................53
Page 2
<PAGE>
GLOSSARY OF TERMS
Definitions of certain terms used in this Form 10-KSB are as follows:
Fix
- ---
The radio beacon which defines the location of an airport or an enroute position
in latitude and longitude.
Flight Plan
- -----------
Routing, alternate routing, altitude and fuel consumption information provided
to aircraft operators, and calculations which are based on, among other things,
the aircraft manufacturer's performance data, aircraft specifications,
forecasted upper air winds and estimated payload.
IATA
- ----
International Air Transport Association
ICAO
- ----
International Civil Aviation Organization
Navigational Data
- -----------------
Worldwide navigational flight information data which provides name and location
of navigational aids. The data is updated every 28 days and checked against data
provider charts every 56 days.
NOTAMs
- ------
NOTAMs consist of significant notices to airmen and special notices which can
affect a pilot's decision to enter and use areas of domestic or international
airspace.
Optimum Random Tracks
- ---------------------
Where permitted by Air Traffic Control ("ATC"), aircraft may fly a route between
fixes which has not been previously defined.
Payload
- -------
The weight of passenger and cargo carried on the aircraft.
PIREPs
- ------
Pilot reports denoting flight conditions. PIREPs serve as a source of valuable
weather information.
Reclear Option
- --------------
Use of a reclear option permits a reduction of Federal Air Regulations ("FAR")
10% fuel reserve requirements on international flights, thereby allowing for
increased payload, reduced fuel reserves or both.
RPK
- ---
Revenue passenger-kilometers. An RPK is defined as one revenue paying passenger
transported one kilometer in revenue service. Revenue passenger-kilometers are
computed by adding the products of the revenue aircraft kilometers flown on each
inter-airport hop multiplied by the number of revenue passengers carried on that
hop.
Page 3
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
Compuflight, Inc. (the "Company"), directly or indirectly through its
wholly-owned Canadian subsidiaries, Navtech Systems Support Inc. ("Support") and
Efficient Aviation Systems Inc. ("EAS"), is engaged in the business of
developing, marketing, licensing, and supporting computerized flight planning
and aircraft performance engineering services for the aviation industry.
During fiscal 1996, the Company's Port Washington facility concentrated its
efforts on the development of the COMRAD runway analysis product and the
provision of its V1PLUS performance engineering subscription service to its
commercial aviation customer base, as more fully described below:
*The COMRAD product utilizes a portable computer for use in the aircraft
cockpit. This product provides the commercial airline customer with runway
analysis data previously delivered solely by ground-based runway analysis
and weight and balance systems.
*The V1PLUS Performance Engineering Service is offered to airlines that do
not maintain in-house engineering departments or that wish to augment
existing capabilities.
Support's facility, based in Waterloo, Ontario, focused its resources on the
development, delivery, and support of the Company's flight planning software
products and services during fiscal 1996, as more fully described below:
*A service bureau product offering marketed under the COMPASS(TM)
trade-mark, which provides the flight operations department of commercial
and corporate airlines with an easy to use 'single screen' format for the
timely dispatching of flights.
*A service bureau solution for total flight operations management marketed
under the FOMS trade-name which, in addition to the functionality of
COMPASS(TM), provides the Flight Operations department of carriers with an
overall analysis of the flight plan and supplies extensive information on
crew, weather, NOTAMs, and other factors impacting decision-making. FOMS
also offers the airline client the option of utilizing the system on an
in-house basis. This approach provides an airline with the advantage of
transitioning from service bureau usage to an in-house capability with
minimal impact on staff or operational procedures. The ability to provide
this option gives the Company a competitive advantage when marketing its
products and services to an airline that is growing in terms of number of
aircraft and complexity of route structure (international or transoceanic
routings). In addition to system functionality, FOMS, which is a UNIX-based
client server software application, offers the client a migration strategy
for replacing costly legacy systems built during the 1970s.
The Company's product and service solutions are based on proprietary software
developed by the Company.
In seeking to maintain a competitive advantage in the marketplace, the Company
also maintains a full-time Research and Development Group at the Waterloo
Page 4
<PAGE>
location, which designs and develops new software technology.
The Company's products and services are used by over 50 airline customers
worldwide. These customers represent all facets of the aviation industry,
including national and international airlines, regional airlines, freight
carriers, and corporate aircraft operators. Included in this broad array of
industry representation are Delta Airlines, Emery Worldwide, Allied Signal, and
American Transair.
The Company was originally incorporated in the State of New York in 1981. In
1987, the Company reincorporated in the State of Delaware. The Company's
principal executive offices are located at 99 Seaview Boulevard, Port
Washington, New York.
ACQUISITION OF EFFICIENT AVIATION SYSTEMS INC. AND NAVTECH SYSTEMS SUPPORT INC.
On December 1, 1993, the Company and its former Chairman consummated a Stock
Purchase Agreement, dated as of October 31, 1993, with Ray English and
Associates Inc. ("RE&A"), formerly Navtech Systems Consulting Inc., among
others. Pursuant to the agreement, the Company issued 1,239,644 shares of the
Company's common stock (valued at $0.56 per share) and assumed an $800,000
obligation of RE&A to the Company's former Chairman for all of the outstanding
common stock of EAS (a wholly-owned subsidiary of RE&A) and Support (a company
controlled by RE&A and its principal shareholders).
Contemporaneously with the Stock Purchase Agreement, the Company's former
Chairman and his immediate family sold their 238,872 shares of the Company's
common stock to RE&A in exchange for an $800,000 note payable to the Company's
former Chairman. In connection with the Company's acquisition of EAS, the
Company assumed RE&A's note payable to the Company's former Chairman and, as a
result, the former Chairman's indebtedness to the Company was reduced to
$804,000. Such indebtedness is payable in equal monthly installments over the
ten year period ending October 2003, together with interest at 4 1/2% per annum.
Further, the Company entered into a ten year Consulting Agreement with its
former Chairman providing for fees payable substantially upon the same terms as
the indebtedness repayment.
INDUSTRY BACKGROUND
The commercial airline industry continued to realize positive results throughout
1996, having increased traffic and sales levels over 1995. The principal impetus
for this turnaround is the ongoing restructuring that airlines were forced to
undertake in 1993 due to a severe recession that lasted from 1990 to 1993. IATA-
registered carriers sustained reported cumulative losses of approximately $15.6
billion on international scheduled services in that period. It was not until
1994 that the industry began to experience a gradual increase in fare levels.
These fare levels, together with planned restructuring, led most airlines to
more efficient operations and increased capacity. In 1995, these factors
resulted in record-setting sales revenues for a majority of the major US
airlines.
According to IATA, 1996 set new profitability records for the world airline
industry, with forecasted net profit for members rising to $5.5 billion, an
Page 5
<PAGE>
increase of $300 million over 1995. ICAO, the civil aviation governing body, is
forecasting a buoyant outlook for the global airline industry in 1997 with
anticipated increases in revenue of 9.7% for the world's airlines, despite their
concerns regarding infrastructure charges, taxes, and higher fuel prices.
GEOGRAPHIC TRENDS
Political and economic forces are expected to continue driving consolidation to
a point where major airline alliances occur, such as the code share agreement
between British Airways and American Airlines. These alliances will face
competition from a large number of niche airlines that differentiate themselves
by geography or market segmentation. Smaller regional groupings of carriers
seeking to protect or expand their share of particular geographical markets or
business segments will be forced to compete with these global alliances.
The following table, produced by Boeing Aircraft Corporation's Commercial
Airplane Group, forecasts projected international air traffic passenger growth
by geographic region for the years 1994-2013:
Projected Air Travel Growth 1994 - 2013
- ----------------------------------- ------------------------------------------
Geographic Region Projected Average Annual Percentage
Change
- ----------------------------------- ------------------------------------------
Asia-Europe 7.2%
Intra Asia Pacific 6.8%
Trans Pacific 6.8%
Intra Latin America 5.6%
North and Latin America 5.5%
Europe-Latin America 4.8%
North Atlantic 4.4%
Intra Europe 4.4%
Europe-Africa 4.3%
North America 4.0%
- ----------------------------------- --------------------------------------------
(Source: Boeing Commercial Airplane Group)
In addition to Boeing's projections, IATA's short term forecast anticipates an
annual average growth rate of 6.6% in international scheduled passenger traffic
between 1994 and 1998. This trend will result in 437.3 million passengers per
year at the end of that period.
NORTH AMERICA
Airlines in the United States enjoyed a year of positive financial results with
the 10 major U.S. passenger carriers posting combined operating profits of $5.1
billion, despite only moderate increases in traffic levels. U.S. airline RPKs
rose only 4% during 1995, of which domestic travel only increased by about 3%.
The increase in operating revenue is indicative of an industry trend toward
properly managed costs that increase yields and decrease operational overheads.
The two major carriers in Canada did not experience this same positive traffic
growth and increased revenue. Although the U.S./Canadian Open Skies agreement
led to significant increases in capacity, traffic growth remained flat. The
Canadian carriers are facing significant competition from their American
counterparts, and must therefore direct their focus to improving operational
efficiency.
In 1996, the provision of air flight services by low-cost regional airlines was
viewed as a potential viable alternative to the higher fare full-service
airlines. However, this projected market shift did not materialize as a result
Page 6
<PAGE>
of the crash of a ValuJet aircraft in the Florida Everglades in the summer of
1996. Consequently, safety concerns dominated the FAA's (Federal Aviation
Administration) report determining that the cost savings realized by low-fare
carriers were in some part related to the reduction in compliance with respect
to air safety regulations. It is anticipated that the potential impact of new
safety regulations expected to be introduced by the FAA in 1997 may have an
adverse impact on the profitability of low-cost carriers.
EUROPE
Financial results in Europe benefited those airlines that implemented a
restructuring approach similar to their U.S. counterparts. This is evident in
the contrast between the positive financial results posted by British Airways,
KLM, Lufthansa, and SAS relative to the poor results reported by such airlines
as Air France, Iberia, Alitalia, Olympic, and TAP-Air Portugal, who are now
seeking public funds to finance their operations. If international traffic in
Europe continues to grow (growth rate of 7%-9% in 1996), European carriers will
be forced to continue forming alliances with North American carriers in order to
remain competitive. The trend toward alliances will also result in a reduction
in levels of government ownership and subsidies. Though these efforts will allow
for some airlines to return to profitability, others will continue to experience
severe financial difficulties.
ASIA/PACIFIC
Asia/Pacific is the fastest growing region in the aviation world; however,
financial performance is on a decline. Airline members of the Oriental Airlines
Association (OAA), are beginning to experience the effects of "maturity"
(labor/management relations; air/ground congestion; safety/security issues;
etc.) that have afflicted airlines in the United States and Europe. Management
skills can no longer provide the assurance of success in the areas of growth or
high yield. New economic realities in Japan dictate that consumers, who
traditionally paid full fares, are currently looking for bargains.
FLIGHT OPERATIONS SOFTWARE MARKET OUTLOOK
With commercial airlines scrutinizing operating expenditures, including once
sacrosanct costs such as travel agency fees, the ability to fly a route faster
and burn less fuel without altering aircraft equipment configurations is
spurring the industry to focus its efforts in the area of flight operations.
According to an extensive study undertaken by Collins, the avionics division of
Rockwell International, the U.S. airline industry lost nearly $300 million in
1993 alone due to delays, en route losses, and cruise inefficiencies.
While there are significant savings to be achieved by the major U.S. carriers
within domestic flight operations, the most dramatic savings in fuel and flight
time are to be realized on international routes. With the shifts in air traffic
management, particularly the easing of overflight restrictions in China and the
former Soviet republics, international air carriers can literally chart new
territory, saving upwards of two hours per flight. This improvement is a result
of integrating the international development referred to as FANS (Future Air
Navigation System), which provides an air traffic management infrastructure that
Page 7
<PAGE>
relies largely on the use of GPS (Global Positioning System) satellite-based
navigation, with the carrier's flight operations system.
To address the requirements of FANS, airlines are now seeking new technology
solutions to assist in the development of cost effective flight operations,
including flight planning, weather management, crew scheduling, runway analysis,
and chart management.
Air Transport World, a recognized trade publication in the commercial aviation
industry, reported in May 1995 that, based on a study of flight operations
software vendors and commercial airline requirements, they expected the flight
operations software market to have a growth rate of between 15% and 25% per
annum for the remainder of the decade.
PRODUCTS AND SERVICES
The Company provides four comprehensive software and service solutions,
COMPASS(TM), FOMS, COMRAD and V1PLUS, for managing the flight operations
department of an airline and specifically, in the case of COMPASS(TM) and FOMS,
for the creation and filing of a flight plan.
Under FAA regulations, all aircraft operators, whether private, corporate or
commercial, are required to file flight plans with air traffic control centers
prior to each flight. Flight plans consist of information relating to the
planned flight, including routing, alternate routing, altitude and fuel
consumption information. The calculations needed to determine this information
are based on, among other things, aircraft performance data, forecasted upper
air wind data, the route of flight and the take off weight of the aircraft. For
safety reasons, government regulations mandate the preparation and filing of
basic flight plans. Computerized flight plans provide more accurate and detailed
information to enable aircraft operators to determine the optimum payload and
routing for maximum fuel conservation and reduction of other related expenses.
COMPASS(TM). The Company's COMPASS(TM) flight planning software, which is
provided on a service bureau basis, is designed to improve operational
efficiency by providing the flight operations department of a commercial airline
with an easy-to-use 'single screen' format for timely dispatching of flights.
Further, the system provides commercial and corporate aircraft pilots and
dispatchers with information regarding upper air wind variations enroute,
revised airway availability, late changes in payload, aircraft performance data
and use of a "reclear option" on international flights. The Company's database
contains information with respect to more than 4,300 airports, 30,000 routes,
50,000 fixes, 100,000 airway segments, and 190 aircraft types.
The system operates in a user friendly format and has the ability to respond
quickly to changing situations so that fuel, flight time, alternate routing, and
payload information can be readily modified.
FLIGHT OPERATIONS MANAGEMENT SYSTEM ("FOMS"). FOMS, a flight
operations/management system provided on a service bureau basis, is designed to
allow dispatchers to perform a large number of tasks simultaneously with ease of
use and speed of response. FOMS specifically targets the areas of flight
planning, route management, fuel management, winds and weather, NOTAMs,
communications, and operations/management reporting. In addition to providing
Page 8
<PAGE>
the airline dispatcher with flight planning functionality, FOMS also provides
the flight operations department of an airline with an overall analysis of the
flight plan by supplying extensive information on crew, weather, NOTAMs, and
other factors that impact the decision-making ability of the flight operations
department.
FOMS can also be implemented on an in-house basis. As an in-house system, FOMS
is marketed to larger airlines that have a need for a system to support high
volume flight plan processing and can also be customized to integrate with
specific operational requirements, such as reservations, crew scheduling, and
operations control.
COMRAD (Compuflight's Runway Analysis Delivery System). Comrad is a Microsoft
Windows(TM) based software product that delivers runway analysis data to the
flight crew via a portable personal computer. This approach provides the crew
with an ability to optimize aircraft performance based on aircraft
manufacturer's data, current aircraft configuration, runway data, and current
environmental conditions in real time as compared to the previous paper-based
manual method of look-up tables. COMRAD also allows the pilot to maximize
payload, thereby providing potential economic returns to the airline. During
1997, the Company's software development department is planning to increase the
aircraft types currently available in the system and to integrate the
information with the FOMS and COMPASS systems.
V1PLUS PERFORMANCE ENGINEERING SERVICE. V1PLUS is an aircraft performance
engineering subscription service that is offered to airlines that do not
maintain in-house engineering departments or that wish to augment their existing
in-house database.
The V1PLUS Manual provides the airline customer with customized take-off and
landing data specific to various aircraft/engine combinations, flap settings and
runways. Commercial pilots are required by law to have in their possession a
current runway analysis for each flap setting of their aircraft for each end of
each runway for each airport from/to which they depart/land.
CLIENT SUPPORT SERVICES
The Company offers comprehensive software support throughout the United States,
Canada, Mexico, Africa, and Europe which is designed to maximize the benefits
and utility of the software at the customer's location. These services include
training and installation support, software updates, including new systems
functionality and ongoing enhancements, and telephone hot-line support. Due to
the significant value of the customer's investment in the licensing of the
Company's software, the Company believes that quality support services are a
critical component of the customer's satisfaction level.
The Company's Flight Operations Support group is located in its Waterloo,
Ontario facility, operating 24 hours per day, 7 days per week. The Support Group
is staffed by qualified aviation and systems professionals who provide full
operations and technical support to the customer.
The software update and maintenance service consists of periodic releases of new
systems functionality and ongoing enhancements to current functionality. These
Page 9
<PAGE>
services are provided to customers through an annual agreement.
DESIGN AND PROGRAMMING SERVICES
Design and programming services are provided to customers that require specific
custom solutions to their flight operations requirements. Fees are based on time
and material usage as determined through customer specifications and quotations.
The Company perceives that there is an increased demand in the commercial
aviation market for systems integration services which link the Company's
software with third party vendors' applications such as Crew Scheduling,
Maintenance, Flight Following, and Reservations. The Company also provides
consulting services to assist customers in optimizing the use of the product
functionality within their flight operations process.
In 1997, the Company will seek to introduce new integration solutions to meet
the aviation industry's need to operate with maximum efficiency in the FANS
environment.
MARKETING AND SALES
The Company maintained its global marketing strategy throughout 1996, either
through its own sales force or through agency agreements. The intended target
markets were airlines seeking service bureau options and carriers seeking to
internalize their flight operations function by utilizing the Company's
software.
Due to resource constraints, the Company continued to focus its primary
marketing effort in North America, with additional success being achieved in
South and Central American markets. The marketing and sales program, as managed
by the Vice-President of Business Development, seeks to present all available
product and service options to current and potential customers.
Historically, the Company's marketing and sales program has involved product
demonstrations to the flight operations department of a specific airline. In an
effort to improve resource efficiency and gain maximum client exposure to its
products and services, the Company has introduced a symposium series designed to
target North American carriers on a regional basis. This may result in increased
expenses which could have an adverse impact on the results of operations.
The Company's resource constraints have also limited its ability to successfully
market itself outside the Americas. In order to remain visible in foreign
markets, the Company has pursued and obtained agency agreements to distribute
COMPASS(TM) and V1PLUS services. These agreements have resulted in an initial
penetration of the European and African marketplaces.
Although the full potential of the North American market has yet to be realized,
the Company believes that future operational results will depend in part on its
ability to increase sales in the international marketplace, specifically Europe,
Africa, and Asia/Pacific. The Company's marketing plans therefore include a
strategy to supplement its agency agreements with direct marketing efforts,
although such a strategy may result in increased expense which could have an
adverse effect on the results of operations.
Page 10
<PAGE>
COMPETITION
The applications software market for airline operations management systems is
intensely competitive and subject to rapid change. The principal competitive
factors in this market include product functionality and quality, total cost of
solution, support infrastructure, underlying technology, product architecture,
and the financial stability of the vendor. The Company believes that it competes
effectively with respect to these factors, although it may be at a competitive
disadvantage against companies with greater financial and marketing resources.
The two primary competitors to the Company's FOMS product in the commercial
airline in-house systems market are Jeppesen Sanderson ("Jeppesen") and Sabre
Decision Technologies Inc. ("Sabre").
*Jeppesen, based in Denver, Colorado, is the recognized leader in aviation
related charts and maps, as well as computerized flight planning and
aviation weather mapping services. Jeppesen also provides an in-depth line
of pilot and instructor training courses and videos. It has been a dominant
information provider in the aviation industry since the combination of
Jeppesen & Company with Sanderson Films in 1974. As a subsidiary of the
Times Mirror Corporation, it clearly has organizational and financial
resources superior to those of the Company.
*Sabre acquired the PC-based flight planning technology developed by David
Bornemann & Associates, a leading provider of crew scheduling software
solutions to airlines. Sabre is porting the Bornemann technology to UNIX in
an effort to address the complex multi-tasking and multi-user requirements
of large in-house installations at major air carriers.
The primary competitors for COMPASS(TM) and FOMS in the service bureau
marketplace are Jeppesen, EDS Services("EDS"), and SITA.
*Jeppesen's service bureau offering, Dataplan, was acquired from Lockheed
Corporation, which had originally designed the system for the United States
Air Force. Jeppesen bundles the flight plan services with its other
products, such as navigational charts and performance engineering services,
and markets it on a price competitive basis.
*EDS has particular strengths with the integration of its flight planning
services with a reservations system originally developed by Continental
Airlines.
*SITA, which has the largest market share in Europe and Africa, provides
flight planning services as part of a suite of programs including weather
and reservations. The key feature of SITA's systems is its worldwide
aviation communications network which provides an advantage over other
competitors who, in the developing nations, must utilize SITA or ARINC due
to the poor quality of their telecommunications systems. This advantage is
quickly eroding due to the advent of low cost, high quality communications
alternatives in both Eastern Europe, Russia, and the developing countries
in Asia and Africa.
The three competitors listed above have greater financial, technical, and
marketing resources than the Company and, as a result, may be able to respond
Page 11
<PAGE>
more effectively to changes in customer requirements or to devote greater
resources to technological development.
RESEARCH AND DEVELOPMENT
The Company invested significant resources during fiscal 1996 to develop new
software functionality and to enhance its existing software. Research and
development expenses were $412,524 and $223,224 for the years ending October 31,
1996 and 1995, respectively. See Item 6 hereof.
The Company plans to continue enhancing its existing software products in an
effort to respond to the increasing demands of its customers and to improve the
ease of use of the software. The Company's 1997 Development Plan includes the
creation of a four dimensional flight path computation module, capable of
integrating all operating costs and producing a flight path solution that meets
a wide range of an airline's mission requirements. The solution will analyze the
costs of maintenance, crew staffing needs, fuel requirements, etc., to produce
flight plans that achieve a desired or required flying time for the lowest
possible operating cost. A major part of creating this capability centers on the
incorporation of a Variable Cost Index (VCI) into the profile computation. The
VCI Plan technology is a proprietary product developed by Applied Aeronautical
Systems Inc. and provided to the Company under a marketing agreement.
In addition to the work undertaken on the integration of VCI Plan, the Company,
under contract with Unisys Corporation, implemented an integrated flight
planning and graphical situation display during the fourth quarter of 1996. FOMS
aircraft position data is interfaced with real time map data from Skyvision(TM)
(a proprietary product developed by Unisys Corporation) which is then overlaid
with a weather composite picture. This combined system will provide the
dispatcher with the ability to visualize the effect of weather on a flight, or
to forecast the delays at an airport hours before they occur. With the
completion of the initial phase, the Company is now in the process of defining a
business relationship with Unisys with respect to further development and
marketing of this product.
INTELLECTUAL PROPERTY RIGHTS
The Company regards all of its software products as proprietary. The Company's
software products are generally licensed to end-users on a "right to use" basis
pursuant to a perpetual non-transferable license that generally restricts the
use of the software to the customer's operations or third parties affiliated
with the customer. The Company relies on a combination of copyright, trademark,
and trade secret laws, as well as non-disclosure agreements, to establish and
maintain its proprietary rights. The Company has not filed for patents due to
the lack of effective patent protection for software. In the past, the Company
and Support have licensed certain versions of source code to a limited number of
customers for specific uses. Also, there can be no assurance that the Company's
competitors will not independently develop software that is equivalent to the
Company's. Further, no assurance can be given that the Company will have the
financial resources to engage in litigation against parties who may infringe its
intellectual property rights. While the Company realizes that its competitive
position may be affected by its ability to legally protect its software, the
Company believes the impact of this protection is less significant to its
Page 12
<PAGE>
commercial success than factors such as the level of experience of the Company's
personnel, name recognition, and increased investment in research and
development of new products.
EMPLOYEES
As of December 31, 1996, the Company had a total of 40 employees including 14 in
operations and client services, 13 in research and product development, 2 in
sales and marketing, and 11 in finance and administration. None of the Company's
employees are represented by a labor union and the Company believes that its
employee relations are good. The Company believes that its success will depend,
to a large degree, upon its ability to attract and retain highly skilled
technical, managerial and sales and marketing personnel, and to retain personnel
with flight operations expertise. The Company has experienced intense
competition for technical staff thereby encountering difficulties in hiring a
sufficient number to meet custom software design and programming order backlog.
There can be no assurance that the Company will be successful in attracting and
retaining the personnel required to develop, market, service, and support its
products and conduct its operations successfully.
Page 13
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains offices in Port Washington, New York; Waterloo, Ontario;
and Ottawa, Ontario.
Compuflight leases approximately 2,700 square feet of office space at 99 Seaview
Boulevard, Port Washington, New York, for its executive offices and for product
marketing and aircraft performance engineering. The monthly rent expense as of
December 31, 1996 was $4,160 and increased to $4,326 effective January 1, 1997
1997. The lease terminates on December 31, 1998.
Support leases approximately 9,300 square feet of office space at 175 Columbia
Street West, Waterloo, Ontario, which is used for flight operations, software
development, customer support, and administration. This lease became effective
November 1, 1996 and terminates October 31, 2006. The monthly rent expense,
inclusive of common area rent, is approximately $8,900 Canadian. The lease calls
for additional increases on each anniversary.
Prior to October 31, 1996, Support leased approximately 4,200 square feet of
office space at 550 Parkside Drive, Waterloo, Ontario which was used for flight
operations, software development, customer support, and administration. The
monthly rent expense, inclusive of common area rent, was $3,352 Canadian. This
lease terminated December 14, 1996. The rent for the period of November 1 to
December 14 was assumed by the landlord of the new premises.
Support's leased premises in Ottawa, Ontario function as the marketing office
for Federal Systems Sales efforts. The space encompasses approximately 1,000
square feet at 50 O'Connor Street, Ottawa, Ontario with a monthly rent expense,
inclusive of common area rent, of $1,355 Canadian as of December 31, 1996. The
lease is terminable by either party with 60 days notice.
The Company's total rent expense was approximately $94,000 in fiscal 1996. The
Company believes that its facilities are adequate for its current needs and that
suitable additional space will be available as required.
Page 14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
Page 15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended October 31, 1996.
Page 16
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market under the
symbol "CMFL". The high and low bid prices of the common stock, as furnished by
the National Quotation Bureau, Incorporated, are shown for the fiscal periods
indicated. Such prices represent prices between dealers, do not include retail
markup, markdown or commission and do not represent actual transactions.
Fiscal Year Ended Bid Price
October 31, 1996 High Low
- ------------------ ------ ------
First Quarter $5/8 $5/8
Second Quarter 1 1/2
Third Quarter 1/2 1/2
Fourth Quarter 1/2 1/2
Fiscal Year Ended
October 31, 1995
- -------------------
First Quarter $1/2 $1/4
Second Quarter 5/8 1/4
Third Quarter 5/8 1/2
Fourth Quarter 5/8 1/2
(b) APPROXIMATE NUMBER OF RECORD HOLDERS
Management has been advised by its transfer agent (North American Transfer Co.)
that the approximate number of record holders of the Company's common stock at
December 31, 1996 was 845.
(c) PAYMENT OF CASH DIVIDENDS
No cash dividends have been paid by the Company on its common stock and no cash
dividends are anticipated in the foreseeable future.
Page 17
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue represented by
certain items in the Company's consolidated statement of earnings for the years
indicated:
Percentage of Total Revenue
Year ended October 31
1996 1995
---------------------------
Revenue
Service fees 86% 98%
Hardware, software and license sales 14 2
------------- ------------
Total revenue 100 100
------------- ------------
Costs and expenses
Operating 57 63
Research and development 12 7
Selling, general and administrative 31 28
Depreciation and amortization 4 4
------------- ------------
Total operating expenses 104 102
------------- ------------
Loss from operations (4) (2)
Other income 8 7
------------- ------------
Net earnings 4% 5%
============= ============
REVENUE
The Company's revenue is derived from two major sources: (i) service fees
derived from the provision of flight planning services, runway analysis
services, and ongoing customer support and (ii) sales of hardware and licenses
of software. Revenue from license fees is recognized at the later of delivery of
the software master copy or, if applicable, fulfillment of all other significant
obligations under terms of a license agreement. For those agreements where there
is uncertainty as to ultimate collection, revenue is recognized as cash is
received. The face value of a long term licensing agreement is discounted to
give an effective rate of return of 15% over the life of the contract to cover
financing costs. Systems consulting and implementation fees and hardware
commissions are recognized upon rendering of services. Custom software
development, communication charges, and aviation database income and service
bureau and support revenue are recognized ratably over applicable contractual
periods or as services are performed.
Total revenue increased to approximately $3.6 million in 1996 from approximately
$3.2 million in 1995.
GEOGRAPHIC ANALYSIS
Total Revenue (in $'000) % of Total Revenue
- --------------------------------------------------------------------------------
For the year ended October 31
1996 1995 1996 1995
-------- -------- -------- --------
United States $ 2,970 $ 2,620 83% 83%
Canada 369 371 10% 12%
Other Jurisdictions 236 174 7% 5%
-------- -------- -------- --------
$ 3,575 $ 3,165 100% 100%
======== ======== ======== ========
Page 18
<PAGE>
The Company's products and services are used by airline carriers primarily in
the United States and Canada, although its customers are also located in Europe,
Mexico, Africa, and South America. In fiscal 1996, the Company derived
approximately $3.0 million from sales in the United States as compared to
approximately $2.6 million in fiscal 1995. This increase is due primarily to the
inclusion of a one-time settlement from Harris Corporation ("Harris") related to
a software development contract in a prior year, for which the Company had not
previously included any income as the ultimate settlement was not measurable.
Sales in Canada accounted for approximately $369,000 in fiscal 1996 as compared
to approximately $371,000 in fiscal 1995. This small decline is due primarily to
a reduction in Canadian customer billings and customer base. Sales in other
jurisdictions amounted to approximately $236,000 in fiscal 1996 as compared to
approximately $174,000 in fiscal 1995. This increase is due primarily to the
Company's continued efforts to expand its markets.
SERVICE FEES
Revenue from service fees was approximately $3.08 million in 1996 compared with
approximately $3.10 million in 1995, a decrease of 1% or approximately $25,000.
The decrease in service fees is attributed primarily to declines in ongoing
customer billings. The majority of the decline relates to the expiration of a
joint software development contract with a large airline customer.
HARDWARE, SOFTWARE, AND LICENSE SALES
Revenue from hardware, software, and license sales increased approximately
$435,000, from approximately $62,000 in 1995 to approximately $497,000 in 1996.
This increase is primarily attributable to the inclusion of the Harris
settlement of $450,000.
COSTS AND EXPENSES
OPERATING EXPENSES
Operating expenses consist mainly of personnel and other expenses related to
providing product support, service bureau operation and custom development. Also
included in the operating expenses are the communication costs associated with
the provision of in-house flight planning services and customer support.
Operating expenses were approximately $2.05 million in 1996 compared with
approximately $2.00 million in 1995, an increase of approximately $48,000, or
2%. This increase is primarily attributable to an increase in salaries and
benefits of approximately $245,000 from the addition of several senior staff in
sales, as well as additional operations and support staff. Furthermore, an
increase in computer maintenance and lease costs of approximately $21,000, an
increase in long distance charges of approximately $19,000, and an increase in
subcontractor charges of approximately $22,000 added to the overall increase in
operating expenses. These increases were offset by a decline in communication
costs of approximately $265,000.
Page 19
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
The Company's Research and Development activities are undertaken in Canada.
Support qualifies for certain Scientific Research and Experimental Development
(SR&ED) investment tax credits under the Income Tax Act (Canada) on eligible
research and development expenditures. Refundable tax credits have been recorded
at a rate of 35% and non-refundable tax credits, which can be used to offset
Canadian federal income taxes otherwise payable, will be recognized at 20% when
such taxes become payable.
Research and Development expenses increased from approximately $223,000 in 1995
to approximately $413,000 in 1996, representing an increase of approximately
$190,000, or 85%. This increase is primarily attributable to increased
activities in the research and development of new products. While the Company
maintains its commitment to utilizing in-house personnel and expertise, the
Company retained contract services for the delivery of two development projects
due to aggressive delivery schedules. Approximately $53,000 of the net increase
above is due to the inclusion of these contract services.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased by approximately
$227,000, or 25%, from approximately $900,000 in 1995 to approximately $1.1
million in 1996. This increase can be attributed primarily to increases in bad
debt expense of approximately $59,000 and in consulting fees of approximately
$55,000 due mainly to the Company's entering into a Key Advisor Agreement with
Kenneth M. Snyder, a director of the Company. This Agreement will terminate in
September, 1997 unless extended by the Company. Furthermore, travel expenses
increased approximately $105,000 as a result of frequent movement of management
between the two locations as well as the Company's increase in marketing and
sales activities targeted at increasing revenues from current customers.
Specific expenses related to a product release introducing COMRAD to the U.S.
market resulted in a net increase of approximately $7,000 in marketing and sales
expenses. These increases, coupled with an increase in other administrative
expenses of approximately $110,000 (including $27,000 in costs related to the
first time filing of the Company's regulatory submissions using the Edgar
electronic filing system), were offset by a decrease in professional fees of
approximately $113,000.
OTHER INCOME (EXPENSE)
Other income (expense) consists of interest income and expense, realized foreign
exchange gains and losses and certain other items as more fully discussed below.
Interest expense decreased approximately $30,000, or 26%, from approximately
$117,000 in 1995 to approximately $87,000 in 1996 due to a reduction in balances
due to certain creditors and a decline in interest rates over the period.
Scientific research and experimental development investment tax credits
increased approximately $131,000, or 82%, from approximately $159,000 in 1995 to
approximately $290,000 in 1996. This increase corresponds to the increase in
eligible expenditures shown above.
Page 20
<PAGE>
EARNINGS OF MINORITY INTEREST
Earnings of minority interest, for 1995 only, reflect the share of earnings
attributable to the 12% minority shareholder of the Company's subsidiary,
Support.
During fiscal 1996, the remaining minority shareholder in Support exercised its
option to exchange its 500,000 shares of common stock in Support for 125,000
shares of common stock of Compuflight. Accordingly, as of the date of this
exchange, the Company became the owner of all of the outstanding common stock of
Support.
NET EARNINGS
The financial statements reflect net earnings of $149,666 for fiscal 1996, as
compared to $154,207 for fiscal 1995. This represents a decline of $4,541.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the Company financed a considerable part of its operations through the
early payment of a license fee receivable, a modest increase in revenue and
effective cost cutting measures that maintained certain expenses at levels
similar to 1995. The principal use of these funds has been the retirement of the
amount due to Sandata, Inc. ("Sandata"), a former affiliate of the Company, and
the financing of the Company's software development activities.
The Company's financial position in 1996 declined somewhat as cash decreased by
$60,550. However the deficiency in working capital decreased by approximately
$222,355 from $463,003 in 1995 to $240,648 in 1996. The financial position of
the Company is expected to improve substantially following the eventual
completion of the Revenue Canada audit of the Company's scientific research and
experimental development investment tax credit claims, which is scheduled to be
performed by the end of March 1997, and the subsequent collection of these
amounts.
Cash flows from operations decreased approximately $345,000 to approximately
$104,000 in 1996 primarily due to the increase in receivables from Harris of
$375,000 at year end, which amount was paid in its entirety after the year end.
Cash flows from investing activities amounted to a net outflow of approximately
$10,000 as compared to a net outflow of approximately $56,000 in 1995. The
change is primarily attributable to decreased purchases of fixed assets. Cash
flows from financing activities amounted to a net outflow of approximately
$455,000 in 1995, as compared to a net outflow of approximately $155,000 in
1996. This outflow is attributable primarily to the repayment of amounts due to
Sandata. As a result of these activities and the resulting effect of foreign
currency transactions, the Company recorded a net cash outflow of $60,550 in
1996 as compared to a net cash outflow of $42,039 in 1995.
Page 21
<PAGE>
The Company currently has no significant capital commitments but may, from time
to time, consider acquisitions of complementary businesses, products or
technologies; it has no present understandings, commitments or agreements with
respect to any such acquisitions.
As of October 31, 1996, the Company's available funds consisted of $37,362 in
cash.
COMMITMENTS AND CONTINGENCIES
SUPPORT CLASS B SPECIAL SHAREHOLDERS REDEMPTION
In 1987 and 1989, Support issued a total of 3,600 Class B special shares for
$358,200 Canadian. These shares are non-voting, entitled to non-cumulative
dividends of $8 Canadian per share and are redeemable at the option of Support
for an aggregate amount of $540,000 Canadian. As at October 31, 1996, no
dividends had been paid or declared on these shares.
EMPLOYMENT AND CONSULTING AGREEMENTS
Reference is made to Note I-2 to the Company's consolidated financial statements
included herein as Item 7 for a discussion of certain employment and consulting
agreements entered into by the Company or Support and certain minimum
compensation obligations thereunder.
PLAN OF OPERATION
The Company's liquidity at October 31, 1996 was insufficient to meet operating
requirements. The Company has therefore undertaken the following initiatives and
actions to reduce its working capital deficiency and alleviate cash flow
demands:
TRADE CREDITORS
In the past, the Company has successfully negotiated extended repayment terms
with several large trade creditors. Although the Company's objective is to be
current with all its creditors, these extensions have ensured the continued
viability of the Company. The Company is continuing to actively pursue
additional extensions with its creditors.
INCREASE REVENUES FROM EXISTING CUSTOMERS
The Company's products and services are used by more than 50 customers
worldwide. The Company is seeking to expand its current customer revenues by
providing additional products and services, by licensing additional users and by
upgrading customers from its COMPASS(TM) service bureau to its FOMS service
bureau offering. To assist in this effort, the Company has reorganized its
development group into teams and tasked these teams with the development of new
functionality based on customer-based market research.
Page 22
<PAGE>
EXPAND SALES EFFORTS
In 1996, the Company introduced COMRAD to the marketplace and had successfully
sold this offering to two airlines prior to October 31, 1996. The Company also
realized the need for more representation in the North American market. It is
the Company's intention to seek such representation in the near future and to
provide for continued effective management of the sales and marketing group.
MANAGEMENT STRUCTURE
The Company, through recruitment, has continued to strengthen the capabilities
of the management team. Specifically, the appointment of a Chief Operating
Officer during the year (see Item 9 hereof) has resulted in a more cohesive
operating plan for the Port Washington and Waterloo offices for 1997.
SUMMARY
Management is committed to implementing and enhancing the above noted plan on an
ongoing basis. While these plans have resulted in some immediate benefits, the
Company will require additional funding to achieve its objectives and intends to
seek such from various sources, including debt or equity offerings when and if
such financing is available to the Company. No assurances can be given that any
required financing will be available on commercially reasonable terms or
otherwise. In addition, no assurances can be given that the Company's Plan of
Operation as set forth above will be successful (whether due to a lack of
required financing or otherwise).
In carrying out its future growth strategy, the Company will also continue to
investigate possible business combinations aimed at improving the operating
efficiencies of the Company and enhancing stockholder value. These business
combinations may include mergers and acquisitions as well as strategic
technology and marketing alliances.
Page 23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements, under Item 13 hereof, begin on Page F-1 following the
main body of this document.
Page 24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Page 25
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the positions and offices presently held with the
Company and Support by each executive officer who is not a Director of the
Company, as well as by each significant employee of the Company and Support, and
his or her age as of December 31, 1996:
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
----------------------------------------
Positions and Offices Presently Held
Name Age With the Company and Support
- --------------------------------- --------- ------------------------------------
Duncan Macdonald 37 Chief Executive Officer and
Chief Financial Officer
William Bowra 36 Chief Operating Officer and
Vice President of Business
Development
================================================================================
SIGNIFICANT EMPLOYEES
---------------------
Positions and Offices Presently Held
Name Age With the Company and Support
- ---------------------------------- -------- ------------------------------------
Kahal de Haan 33 Director of Functional
Architecture for Support
Robert Dowding 29 Director of Systems Development
for Support
Eric Johnson 54 Vice President Technical of
Support
Robert Sosnowski 31 Director of Technical
Architecture for Support
Michael Taylor 55 Director of Flight Operations
for Support
Rainer Vietze 30 Director of Finance
================================================================================
Page 26
<PAGE>
DUNCAN MACDONALD has served as Chief Executive Officer of the Company since
March 1996 and Chief Financial Officer of the Company since July 1995 (see Item
12 hereof). From July 1994 to July 1995, Mr. Macdonald provided management
consulting services to the Company and Support in a non-officer capacity. Since
January 1992, Mr. Macdonald has also served as managing partner of Decision
Strategies Inc., a management consulting firm based in Ottawa, Ontario.
WILLIAM BOWRA has served as Vice President of Business Development for
Support since March 1996. Furthermore, he has served as Vice President of
Business Development and Chief Operating Officer of the Company since October
1996. From 1993 to 1996, Mr. Bowra served as the Regional Sales Manager for AT&T
Canada, a Canadian telecommunications service provider. From 1988 to 1993, Mr.
Bowra served as a Corporate Account Manager for AT&T/NCR.
KAHAL DE HAAN has served as the Director of Functional Architecture for
Support since September 1995. Prior thereto and from 1990, Mr. de Haan served as
a software engineer for Support.
ROBERT DOWDING has served as the Director of Systems Development for
Support since September 1995. Prior thereto and from 1992, Mr. Dowding served as
a software engineer for Support. From 1990 to 1992, Mr. Dowding was a software
engineer with Navtel, Inc., a Canadian telecommunications firm.
ERIC JOHNSON has held the position of Vice President Technical of Support
since 1987. From 1982 to 1987, Mr. Johnson owned Hangar Books, a publishing
company that specialized in the aviation field. Mr. Johnson also has fifteen
years experience as a navigator in the Royal Canadian Air Force.
ROBERT SOSNOWSKI has served as the Director of Technical Architecture for
Support since September 1995. Prior thereto and from 1989, Mr. Sosnowski served
as a software engineer for Support.
MICHAEL TAYLOR has served as the Director of Flight Operations for Support
since 1991. Prior to joining Support, Mr. Taylor spent seven years with
Worldways Canada where he served as training captain and check pilot. Mr. Taylor
was also a pilot for the Royal Canadian Air Force for 28 years.
RAINER VIETZE, C.A., joined the Company in November 1995 as the Director of
Finance. Prior to joining the Company, Mr. Vietze worked as a manager for Doane
Raymond Chartered Accountants (the Canadian member firm of Grant Thornton
International) for the period from 1990 to 1995.
Each executive officer will hold office until the next regular meeting of
the Board of Directors following the next Annual Meeting of Stockholders or
until his or her successor is elected or appointed and qualified.
Certain other information called for hereunder has been omitted pursuant to
Paragraph E(3) of the General Instructions inasmuch as the Company intends to
file definitive proxy materials containing such information with the Securities
and Exchange Commission not later than 120 days after the end of the Company's
fiscal year ended October 31, 1996.
Page 27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information called for hereunder has been omitted pursuant to Paragraph E(3)
of the General Instructions inasmuch as the Company intends to file definitive
proxy materials containing such information with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal year
ended October 31, 1996.
Page 28
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for hereunder has been omitted pursuant to Paragraph E(3)
of the General Instructions inasmuch as the Company intends to file definitive
proxy materials containing such information with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal year
ended October 31, 1996.
Page 29
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for hereunder has been omitted pursuant to Paragraph E(3)
of the General Instructions inasmuch as the Company intends to file definitive
proxy materials containing such information with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal year
ended October 31, 1996.
Page 30
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2(A) Stock Purchase Agreement dated as of October 31, 1993 among Bert E.
Brodsky, Muriel Brodsky, Navtech Systems Consulting Inc. (now called Ray English
and Associates Inc.), Ray English and Dorothy English (1)
2(B) Stock Purchase Agreement dated as of October 31, 1993 among
Compuflight, Inc., Bert E. Brodsky, Navtech Systems Consulting Inc.(now called
Ray English and Associates Inc.), Ray English and Dorothy English (1)
3(A) Certificate of Incorporation and amendments thereto including
Certificate of Ownership and Merger (5)
3(B) By-Laws (3)
9 Voting Trust Agreement dated as of July 15, 1995 among Ray English and
Associates Inc., Dorothy A. English and Dorothy A. English, as voting trustee
(5)
10(A) Employment Agreement dated as of December 1, 1993 between the Company
and Russell K. Thal (4) Amendment #1 thereto dated March 14, 1996 (5), and
amendment thereto dated January 8, 1997
10(B) Incentive Stock Option Plan (3)
10(C) Non-Qualified Stock Option Plan (2)
10(D) Consulting Agreement dated as of November 1, 1993 between
Compuflight, Inc. and Bert E. Brodsky, together with amendment thereto dated
December 2, 1993 (1)
10(E) Promissory Note dated as of November 1, 1993 payable by Bert E.
Brodsky to the order of Compuflight, Inc. in the principal amount of $804,000
(1)
10(F) Letter agreement dated November 1, 1993 between Sandata, Inc. and
Compuflight, Inc. (5)
10(G) Lease dated March 31, 1994 between Seagull Associates Inc. and
Compuflight, Inc., as amended, with respect to Port Washington, New York
premises (5)
10(H) Lease dated October 8, 1996 between Ferdi Investments Company Limited
and Navtech Systems Support Inc. with respect to Waterloo, Ontario premises
10(I) 1995 Key Employees and Advisors Stock Option Plan as amended (5)
10(J) Consulting and Marketing Agreement dated as of January 1, 1995
between Navtech Systems Support Inc. and Ray English and Associates Inc. (5)
Page 31
<PAGE>
10(K) Promissory Note dated as of July 15, 1995 payable by Ray English and
Associates Inc. in the principal amount of $750,000 (5)
10(L) Amendment to the Promissory Note payable by Ray English and
Associates Inc. in the principal amount of $750,000 dated as of June 12, 1996
(6)
10(M) Key Advisor Agreement dated as of October 1, 1995 between
Compuflight, Inc. and Kenneth M. Snyder (5)
10(N) Amended and Restated Stock Option Agreement dated as of August 9,
1995 between Compuflight, Inc. and Kenneth M. Snyder (5)
10(O) Stock Option Agreement dated as of August 9, 1995 between
Compuflight, Inc. and Duncan Macdonald (5)
10(P) Key Advisor Agreement dated as of June 1, 1996 between Navtech
Systems Support Inc. and Duncan Macdonald (6)
21 Subsidiaries(4)
27 Financial Data Schedules
(1) The Company hereby incorporates the footnoted Exhibit by reference in
accordance with Rule 12b-32, as such Exhibit was originally filed as an Exhibit
to the Company's Current Report on Form 8-K for an event dated December 1, 1993.
(2) The Company hereby incorporates the footnoted Exhibit by reference in
accordance with Rule 12b-32, as such Exhibit was originally filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the fiscal year ended October
31, 1992.
(3) The Company hereby incorporates the footnoted Exhibit by reference in
accordance with Rule 12b-32, as such Exhibit was originally filed as an Exhibit
to the Company's Registration Statement on Form S-18 as Registration No.
2-93714-NY.
(4) The Company hereby incorporates the footnoted Exhibit by reference in
accordance with Rule 12b-32, as such Exhibit was originally filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the fiscal year ended October
31, 1993.
(5) The Company hereby incorporates the footnoted Exhibit by reference in
accordance with Rule 12b-32, as such Exhibit was originally filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the fiscal year ended October
31, 1994.
(6) The Company hereby incorporates the footnoted Exhibit by reference in
accordance with Rule 12b-32, as such Exhibit was originally filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the fiscal year ended October
31, 1995.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the quarter
ended October 31, 1996.
Page 32
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheet as of October 31, 1996 F-3
Consolidated Statements of Earnings for the Years Ended
October 31, 1996 and 1995 F-4
Consolidated Statement of Shareholders' Equity for
the Years Ended October 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-20
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Compuflight, Inc.
We have audited the accompanying consolidated balance sheet of Compuflight, Inc.
and Subsidiaries (the "Company") as of October 31, 1996 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the two years then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Compuflight, Inc. and Subsidiaries as of October 31, 1996, and the results of
its consolidated operations and its cash flows for each of the two years then
ended, in conformity with generally accepted accounting principles.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has a deficiency in working capital of $240,648. This factor, among
others, as described in Note B to the consolidated financial statements, raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note B. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Grant Thornton LLP
GRANT THORNTON LLP
Melville, New York
January 21, 1997
F-2
<PAGE>
Compuflight, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
October 31, 1996
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 37,362
Accounts receivable, net of allowance for doubtful accounts
of $72,700 601,075
License fee receivable 108,750
Prepaid expenses and other 22,500
----------
Total current assets 769,687
INVESTMENT TAX CREDITS RECEIVABLE 762,331
FIXED ASSETS, NET 253,044
OTHER ASSETS 29,836
----------
$1,814,898
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 765,162
Deferred salaries 8,155
Due to related parties - current portion 237,018
----------
1,010,335
DUE TO RELATED PARTIES 39,750
MINORITY INTERESTS 258,790
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, par value $.001 per share; authorized
2,500,000 shares; issued and outstanding,
1,701,980 shares 1,702
Additional paid-in capital 1,545,745
Notes receivable - former chairmen (962,508)
Cumulative foreign exchange adjustment 65,159
Accumulated deficit (144,075)
----------
506,023
----------
$1,814,898
----------
----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-3
<PAGE>
Compuflight, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended October 31,
1996 1995
----------- ----------
Revenue
Service fees $3,078,084 $3,102,667
Hardware, software and license sales 496,505 62,101
---------- ----------
3,574,589 3,164,768
---------- ----------
Costs and expenses
Operating 2,048,957 2,001,449
Research and development 412,524 223,224
Selling, general and administrative 1,123,920 896,759
Depreciation and amortization 133,072 132,874
---------- ----------
3,718,473 3,254,306
---------- ----------
Operating loss (143,884) (89,538)
Other income (expense)
Interest income 59,825 42,983
Interest expense - related parties (40,351) (75,858)
Interest expense - other (46,587) (41,520)
Realized foreign exchange loss (645) (20,919)
Scientific research and experimental
development credits 290,347 159,395
Waiver of deferred salaries 5,499 174,759
Other 25,462 13,140
---------- ----------
Earnings before minority interests 149,666 162,442
Earnings of minority interests (8,235)
---------- ----------
NET EARNINGS $ 149,666 $ 154,207
========== ==========
Net earnings per share $0.09 $0.10
==== ====
Weighted average number of common shares
outstanding 1,691,563 1,576,980
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
Compuflight, Inc. and Subsidiaries
STATEMENT OF SHAREHOLDERS' EQUITY
Years ended October 31, 1996 and 1995
Notes Cumulative
Additional receivable - foreign
Common stock paid -in former translation Accumulated
Shares Amount capital chairmen adjustment deficit Total
---------- --------- ----------- ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1994 1,576,980 $ 1,577 $ 1,444,308 $ (1,149,780) $ 37,528 $ (447,948) $(114,315)
Amortization of notes receivable -
former chairman 68,136 68,136
Repayments from RE&A - net 31,111 31,111
Foreign translation adjustment 16,506 16,506
Net earnings 154,207 154,207
--------- --------- ----------- ------------ ----------- ------------- ---------
Balance at October 31, 1995 1,576,980 1,577 1,444,308 (1,050,533) 54,034 (293,741) 155,645
Issuance of common stock 125,000 125 101,437 101,562
Amortization of notes receivable -
former chairman 71,266 71,266
Repayments from RE&A - net 16,759 16,759
Foreign translation adjustment 11,125 11,125
Net earnings 149,666 149,666
----------- --------- ----------- ----------- ----------- ------------- ---------
Balance at October 31, 1996 1,701,980 $ 1,702 $ 1,545,745 $ (962,508) $ 65,159 $ (144,075) $ 506,023
=========== ========= =========== =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-5
<PAGE>
<TABLE>
<CAPTION>
Compuflight, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended October 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 149,666 $ 154,207
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation and amortization 133,072 132,874
Provision for uncollectible accounts 68,685 9,892
Minority interests 8,235
Consulting fees, net 71,266 68,136
(Increase) decrease in operating assets
Accounts receivable (266,390) (54,047)
Scientific research and experimental development credits (290,559) (160,106)
License fees receivable 235,110 296,727
Prepaid expenses and other 3,247 (607)
Increase (decrease) in operating liabilities
Accounts payable and accrued liabilities 5,763 271,140
Deferred salaries (5,499) (174,759)
Due to related parties (102,815)
--------- ---------
Net cash provided by operating activities 104,361 448,877
--------- ---------
Cash flows from investing activities
Purchase of fixed assets (27,247) (87,284)
Payments from RE&A 16,759 31,111
--------- ---------
Net cash used in investing activities (10,488) (56,173)
--------- ---------
Cash flows from financing activities
Payment of notes - former affiliate (197,337) (240,000)
Payment of demand loan (203,789)
Proceeds from notes 44,753 17,578
Payment of notes (2,943) (29,063)
--------- ---------
Net cash used in financing activities (155,527) (455,274)
--------- ---------
Effect of foreign translations on cash (1,104) 20,531
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (60,550) (42,039)
Cash and cash equivalents at beginning of year 97,912 139,951
--------- ---------
Cash and cash equivalents at end of year $ 37,362 $ 97,912
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1996 and 1995
NOTE A - DESCRIPTION OF BUSINESS AND ORGANIZATION
Compuflight, Inc. ("Compuflight") and Subsidiaries, Navtech Systems Support
Inc. ("Support") and Efficient Aviation Systems Inc. ("EAS") (herein
referred to collectively as the "Company") are engaged in the business of
(1) providing computerized flight planning service to all segments of the
aviation industry, but principally to commercial airlines and corporate
aircraft users and (2) selling customized versions of their proprietary
software to end users mainly throughout the United States and Canada.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the consolidated financial statements follows:
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. However, as of October
31, 1996, the Company has a deficiency in working capital of $240,648
and has incurred losses from operations. This raises substantial doubt
about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that
may result should the Company be unable to continue in existence.
The Company and its senior management group have focused on three
specific areas to address both the strategic direction required and the
daily operational issues to position the Company for profitability.
First, the Company has continued to increase its marketing endeavours
to obtain new customers and will be introducing a number of
complementary products to address marketplace demands. Secondly, the
Company has been building an effective management structure. Thirdly,
the Company has continued its pursuit of financing. The Company's
operation is dependent upon its ability to obtain new customers, to
maintain profitable levels of service, and to maintain existing
financial arrangements or obtain new financing. However, no assurances
can be given that the Company will be able to obtain additional
financing or that the above plans will enable the Company to continue
in existence.
F-7
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE B (continued)
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Compuflight and its 100%-owned subsidiaries, Support and EAS. All
material intercompany balances and transactions have been eliminated.
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translations," assets and liabilities of foreign
operations are translated at current rates of exchange, while results
of operations are translated at average rates in effect for the period.
Unrealized translation gains or losses are shown as a separate
component of stockholder's equity.
3. FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is provided using the
straight-line and declining balance methods over the estimated useful
lives of the related assets.
4. GOODWILL
Goodwill is recorded at cost and is included as a component of other
assets. Amortization is computed on the straight-line method over ten
years.
5. SOFTWARE COSTS
The Company capitalizes expenditures incurred for the development of
existing software which has already reached technological feasibility
and expenses all other costs. Amortization is computed by the
straight-line method over the estimated useful life of the software.
6. MINORITY INTERESTS
Effective November 24, 1995, the Company issued 125,000 shares of its
common stock in exchange for 500,000 shares of Support, which
represented the common shares of Support held by the one remaining
common shareholder of Support, Innovation Ontario Corporation, a
provincial government agency, and, accordingly, the Company now owns
100% of the outstanding common shares of Support. The excess of the
fair market value of the Company's common stock on the date of the
exchange ($101,563) over the Company's minority interest ($78,411) has
been recorded as goodwill (included in other assets) in the
accompanying consolidated balance sheet.
F-8
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE B (continued)
Minority interests at October 31, 1996 consist of 3,600 shares of Class
B, nonvoting shares of Support. Such shares, issued for $358,200
Canadian ($258,790 U.S. at October 31, 1996), are entitled to
noncumulative dividends of $8 per share and are redeemable at the
option of the Company for $540,000 Canadian ($405,000 U.S.). To date,
no dividends have been declared or paid with respect to such shares.
7. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
8. INCOME TAXES
Deferred income taxes are recognized for the tax consequences of
temporary differences by employing enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance has been established to offset the deferred tax
assets as it is more likely than not that such deferred tax assets will
not be realized.
9. NET EARNINGS PER SHARE
Net earnings per share of common stock are based upon the weighted
average number of shares outstanding during each year. Common stock
equivalents consist of additional shares that would be outstanding
assuming the exercise of dilutive outstanding stock options and stock
warrants. No common stock equivalents were included in the earnings per
share calculation during fiscal 1996 and 1995 as their inclusion would
not be materially dilutive.
F-9
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE B (continued)
10. REVENUE RECOGNITION
Revenue from license fees is recognized at the later of delivery of
software master copy or, if applicable, fulfillment of all other
significant obligations under terms of license agreements. The Company
has no significant expenditures relating either to warranties or
post-contract customer support bundled with the initial sale of the
license and, therefore, no provision is included in the consolidated
financial statements. For those agreements where there is uncertainty
as to ultimate collection, revenue is recognized only as cash is
received (see Note J). Systems consulting and implementation fees and
hardware commissions are recognized upon rendering of services. Custom
programming, communication and database income, and service bureau and
support revenue are recognized ratably over applicable contractual
periods or as services are performed. Amounts billed but not yet earned
and payments received prior to the earnings of the revenue are recorded
as deferred revenue.
11. CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents. The Company paid interest
of approximately $47,600 for the year ended October 31, 1996 and
approximately $69,300 for the year ended October 31, 1995.
12. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Statement of Financial Accounting Standards No.123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," is required to be
implemented in fiscal 1997 and introduces a choice in the method of
accounting used for employee stock-based compensation. Entities may
use the "intrinsic value" method currently based on Accounting
Principles Board No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees" or the new "fair value" method contained in SFAS No.123.
The Company intends to implement SFAS No. 123 in fiscal 1997 by
continuing to account for employee stock-based compensation under APB
No. 25. As required by SFAS No. 123, the pro forma effects on net
income and earnings per share will be determined as if the
fair-value-based method had been applied and disclosed in the notes to
the consolidated financial statements. The Company will apply the
provisions of SFAS No. 123 in accounting for stock options issued to
nonemployees.
F-10
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE C - LICENSE FEE RECEIVABLE
The Company has entered into license agreements granting end user licensees
a nonexclusive perpetual right to use the Company's flight-planning
software. Historically, the Company has offered its licensees extended
payment terms. In those instances, the related license fees have been
discounted to reflect financing costs of 15% per annum. Revenue from such
agreements is recorded upon the later of the delivery of the software
master copy or, if applicable, fulfillment of all other significant
obligations under the contract. For agreements where there is uncertainty
as to ultimate collection, revenue is recognized only as cash is received.
The license fee receivable at October 31, 1996 is due from one licensee.
NOTE D - INVESTMENT TAX CREDITS RECEIVABLE
The Company has filed claims for Canadian investment tax credits
aggregating $762,331 for fiscal years ended October 31, 1992 through
October 31, 1996. These scientific research and experimental development
investment tax credits are available to certain entities located in Canada
for qualified scientific research expenditures. The rate of credit for
qualified research and development expenditures varies according to the
status of the company and, in certain instances, the company's taxable
income for the prior year.
In order for a company to receive their refunds, the claims must undergo
both a financial audit and a scientific audit by Revenue Canada, the
Canadian taxing authority. Due to administrative delays by Revenue Canada,
the scientific research and experimental development investment tax credits
audit process has been slowed. As a result, all claims made by the Company
remain outstanding. The Company's claims filed for fiscal 1996 must undergo
both a financial and a scientific audit. A financial audit of all other
claims filed by the Company has been completed. These other claims remain
subject to the scientific audit, which is expected to be completed during
March 1997. The actual amount and ultimate collection of these investment
tax credits is dependent upon the results of the Revenue Canada audit
process and, accordingly, actual collections may be materially different
from the amounts provided for by the Company.
F-11
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE E - FIXED ASSETS
Fixed assets consist of the following:
Useful
life 1996
---------- ----------
Computer software 5-10 years $ 411,319
Computer equipment 5-10 years 307,408
Furniture and fixtures 5-20 years 26,218
Leasehold improvements 5 years 9,778
---------
754,723
Less accumulated depreciation and amortization
501,679
$ 253,044
=========
Amortization expense for capitalized software totaled approximately $75,000
and $85,000 in 1996 and 1995, respectively. Accumulated amortization
approximated $299,000 and $224,000 at October 31, 1996 and 1995,
respectively.
NOTE F - TRANSACTIONS WITH RELATED PARTIES
NOTES RECEIVABLE - FORMER CHAIRMEN
1. The Company's former Chairman's (through December 1, 1993) total
indebtedness (the "Note") to the Company of $804,000 as of November 1,
1993 is payable in equal monthly installments over a ten-year period
together with interest at 4-1/2% per annum. Further, the Company
entered into a ten-year consulting agreement, as of November 1, 1993,
with the former Chairman providing for fees payable substantially upon
the same terms of the indebtedness repayment. As the balance of the
Note will be recovered by the Company through the utilization of the
former Chairman's consulting services, the Note has been presented as a
separate component of shareholders' equity.
F-12
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE F (continued)
2. In 1993, Support charged its parent company, Ray English & Associates
("RE&A"), a management and marketing fee in connection with the
management of certain software owned by EAS, formerly a subsidiary of
RE&A. Support also advanced funds to RE&A in order to assist RE&A in
meeting its obligations. RE&A is owned by a former chairman of the
Company (for the period from December 1, 1993 through October 31,
1994) who resigned from that position on October 31, 1994. Effective
July 15, 1995, RE&A executed and delivered to Support a promissory
note in the principal amount of $750,000 Canadian (the "RE&A Note") to
evidence certain obligations to Support as of such date. The RE&A Note
is payable on July 15, 2005 (or sooner, as described below) and
provides for interest at the rate of 5% per annum payable annually.
Further, pursuant to a consulting and marketing agreement between RE&A
and Support, RE&A will provide software marketing services to the
Company. Support shall have the right to offset $3,500 Canadian per
month ($2,625 U.S. at October 31, 1996) against compensation otherwise
payable to RE&A thereunder as a payment of amounts due under the RE&A
Note. The consulting and marketing agreement also provides for finder's
fees and commissions of 2% and 10%, respectively, for the introduction
of potential clients and for the licensing of software. The Company has
the right to apply 10% to 25%, as defined, of the finder's fees and
commissions against amounts outstanding on the RE&A Note.
Concurrent with the signing of the RE&A Note, RE&A also transferred all
of its common stock of the Company to a Voting Trust ("Trust") under
the sole administration of Dorothy A. English. Mrs. English is an
Executive Vice President of the Company and the spouse of Raymond F.
English, chairman and chief financial officer of RE&A. RE&A may recover
its stock from the Trust upon the full payment of the RE&A Note and all
accrued interest. Furthermore, while the RE&A Note remains outstanding,
all dividends, if any, accruing to RE&A's common stock held in the
Trust will be applied against the balance owing on the RE&A Note.
The Company has provided for an allowance of $300,000 Canadian as of
October 31, 1996 ($225,000 U.S. as of October 31, 1996) to reflect
management's estimate of the amount ultimately collectible from RE&A.
Such estimate is based principally on the estimated net worth of RE&A,
which, in turn, is substantially based upon the estimated fair value of
the common shares of the Company beneficially owned by RE&A.
F-13
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE F (continued)
Since the amount due from RE&A is in all likelihood recoverable only
from amounts payable by the Company to RE&A or from the proceeds
derived from RE&A's sale of the Company's common stock, the amount due
from RE&A, net of allowance, has been classified as a separate
component of shareholders' equity.
DUE TO RELATED PARTIES
Due to related parties at October 31, 1996 consists of the following:
Accounts payable - former affiliate $ 26,002
Support shareholder demand loans (i) 55,829
Accrued interest (i) 59,158
Loans payable - related parties (ii) 90,000
Note payable - related party (iii) 45,779
-------
$ 276,768
=======
(i) Support shareholder demand loans bear interest at 15% per annum.
Interest in the amount of $59,158 is in arrears and is included in
accrued interest.
(ii) Loans payable - related parties includes a chattel mortgage on
specific computer equipment in the amount of $120,000 Canadian
($90,000 U.S. at October 31, 1996) due to a company owned by the
brother of a shareholder of the Company. The mortgage is due May 10,
1997 and bears interest at 15% per annum payable monthly.
(iii) Note payable - related party consists of a note payable to a
company related to a director of the Company.
WAIVER OF DEFERRED SALARIES
During fiscal 1996 and 1995, certain employees waived salaries accrued in
prior years, and, accordingly, the Company has presented the effect of such
waivers as a component of other income in the accompanying consolidated
statements of earnings.
F-14
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE G - INCOME TAXES
The Company's fiscal 1996 and 1995 effective income tax rate differs from
the statutory U.S. Federal income tax rate as a result of the following:
1996 1995
-------- -------
Statutory U.S. Federal tax rate 34.0% 34.0%
Utilization of NOL carryforward (34.0) (34.0)
------- -------
- % - %
======= =======
The temporary differences which give rise to deferred tax assets and
liabilities at October 31, 1996 are summarized as follows:
Deferred tax assets
Net operating loss carryforwards $ 306,000
Deferred salaries 6,000
Allowance for doubtful accounts 127,000
Fixed assets 16,000
--------
Total deferred tax assets 455,000
--------
Deferred tax liabilities
License fees receivable $ (48,000)
Scientific research and experimental development
credits, net (260,000)
--------
Total deferred tax liabilities (308,000)
--------
Net deferred tax assets $ 147,000
=========
Valuation allowance $ (147,000)
=========
During fiscal 1996, the Company increased its valuation allowance by
$23,000 principally due to the recognition of additional U.S. net
operating loss carryforwards.
F-15
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE G (continued)
The Company, for United States purposes, has available to offset future
taxable income net operating loss carryforwards approximating $1,309,000 at
October 31, 1996, which expire through 2010. However, due to the change in
the Company's ownership, utilization of the Company's net operating loss
carryforwards is limited, pursuant to Internal Revenue Code Section 382, to
an annual amount of approximately $13,000. Therefore, of the $1,309,000 in
net operating loss carryforwards, the Company will only be able to utilize
approximately $349,000 of these net operating loss carryforwards to offset
future taxable income. Further, for Canadian tax purposes, the Company has
available net operating loss carryforwards and scientific research and
experimental development credits of $631,000 Canadian ($470,000 U.S.) and
$77,000 Canadian ($57,226 U.S.), respectively, expiring through 2000 and
2004, respectively. The Company has established a valuation allowance with
respect to its net deferred tax assets, as it cannot presently assess the
utilization of such deferred tax assets as more likely than not.
NOTE H - STOCK OPTIONS
The Company has adopted an incentive stock option plan which, as amended,
reserved 125,000 unissued shares of common stock for the plan. The plan
requires that all options be granted at exercise prices not less than the
fair market value of the stock on the date of grant. In September 1987, the
Company adopted a nonqualified stock option plan which reserved 62,500
unissued shares of common stock for the plan. The Company's subsidiary,
Support, has outstanding options to purchase 300,000 shares of its common
stock at exercise prices ranging from $.20 to $.50 Canadian per share.
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan")
which was subject to shareholder approval within a one-year period from its
adoption by the Board of Directors. As no such approval was obtained, the
1995 Plan, and the options previously granted thereunder, have been
terminated.
Further, in 1995, the Company adopted the 1995 Key Advisor Stock Option
Plan (the "1995 Advisor Plan"), which provides for the granting to key
employees and advisors of the Company of nonqualified stock options for the
purchase of a maximum, as amended in 1996, of 700,000 shares of the
Company's common stock. Under the terms of the plan, the options, which
expire no later than ten years after grant, are exercisable at a price
determined by the Board of Directors, and become exercisable in accordance
with terms established at the time of the grant.
F-16
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE H (continued)
Summary information with respect to the stock option plans follows:
Range of Outstanding Outstanding
exercise options options
Balance at November 1, 1994 prices granted exercisable
------------- ----------- -----------
Granted $1.00 - $3.24 78,377 77,627
Became exercisable
0.625 1,150,000
0.625 - 3.24 350,250
--------- -------
Balance at October 31, 1995 0.625 - 3.24 1,228,377 427,877
Terminated 0.625 (600,000)
Granted 0.625 25,000
Became exercisable 0.625 - 3.24 225,250
--------- -------
Balance at October 31, 1996 0.625 - 3.24 653,377 653,127
========= =======
NOTE I - COMMITMENTS
1. OPERATING LEASE COMMITMENTS
The Company leases equipment and office space pursuant to various
lease agreements which expire through fiscal 1999. The annual rent of
office space consists of minimum rent, real estate taxes, maintenance
and other expenses. The Company also leases certain computer equipment
from a company controlled by the spouse of an Officer and Director of
the Company pursuant to an agreement which expires in fiscal 1998.
F-17
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE I (continued)
Future minimum annual rental payments pursuant to these leasing agreements
as of October 31, 1996 are summarized as follows:
Related
Office party
space Equipment equipment Total
-------- --------- --------- ---------
1997 $ 77,866 $ 32,332 $ 41,005 $ 151,203
1998 99,131 28,611 28,215 155,957
1999 61,480 23,532 85,012
2000 59,479 14,349 73,828
2001 66,476 1,073 67,549
------- ------- ------- -------
$364,432 $ 99,897 $ 69,220 $ 533,549
======= ======= ======= =======
Rental costs for fiscal 1996 and 1995 were $162,468 and $173,543,
respectively. Rental cost incurred in 1996 and 1995 in connection with the
equipment lease with the related party was $11,448 and $32,485,
respectively.
2. EMPLOYMENT AND CONSULTING CONTRACTS
The Company has entered into employment and consulting agreements with
its chairman, chief executive officer, former chairmen and a director
of the Company, which provide for minimum monthly compensation. The
Company's obligations under such agreements expire at various times
during the period from September 1997 through March 31, 2004. Further,
the employment agreement with the Company's chairman, as amended,
provides for the obtaining of an annuity and/or insurance policy under
which 60 consecutive monthly payments of $10,000 would be payable upon
termination of his employment and $600,000 would be payable upon his
death through March 31, 2004 (which amount decreases to the extent of
the $10,000 payments).
F-18
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE I (continued)
Approximate aggregate minimum compensation obligations under all agreements
at October 31, 1996 are summarized as follows:
Year Amount
1997 $ 416,500
1998 313,300
1999 231,500
2000 219,000
2001 136,500
Thereafter 290,000
---------
$1,606,800
=========
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS AND BUSINESS CONCENTRATIONS
The carrying amounts of cash, accounts receivable, and investment tax
credits receivable are estimated to approximate their fair values. The
Company believes that it is not practicable to estimate the fair value of
its liabilities due to its current financial condition.
During fiscal 1996, the Company settled a contract claim against a former
customer for additional work performed by the Company through fiscal 1993.
Under the terms of the final settlement, the Company received $450,000, of
which $375,000 is included in accounts receivable at October 31, 1996, and
has included the settlement proceeds as a component of hardware, software
and license sales revenue for the fiscal year ended October 31, 1996.
In fiscal 1996, three customers, including the former customer discussed
above, accounted for 13%, 11% and 10%, respectively, of the Company's
consolidated revenues, and, in 1995, two customers accounted for 15% and
14%, respectively, of the Company's consolidated revenues.
F-19
<PAGE>
Compuflight, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
October 31, 1996 and 1995
NOTE J (continued)
The Company has a significant concentration in credit risk with respect to
its license fee receivable, in that the remaining unpaid fee receivable is
due from a single customer in the commercial air transportation business.
Generally, the Company does not obtain other collateral in addition to its
software license.
NOTE K - INDUSTRY SEGMENT INFORMATION AND GEOGRAPHIC AREA OPERATIONS
The Company operates in one business segment, providing computerized flight
planning services and software to commercial airlines and corporate
aircraft users in the aviation industry.
A summary of the Company's operations by geographic area for the fiscal
years ended October 31, 1996 and 1995 is as follows:
1996 1995
---------- ---------
Net sales
United States $ 2,970,308 $ 2,620,421
Canada 368,743 370,766
Other 235,538 173,581
--------- ---------
Total net sales $ 3,574,589 $ 3,164,768
========= =========
Operating profit (loss)
United States $ 178,834 $ 91,461
Canada (322,718) (180,999)
--------- ---------
Total operating profit (loss) $ (143,884) $ (89,538)
========= =========
Identifiable assets
United States $ 1,570,299 $ 1,261,846
Canada 1,095,580 1,186,761
Eliminations (850,981) (749,568)
--------- ---------
Total identifiable assets $ 1,814,898 $ 1,699,039
========= =========
F-20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 11, 1997 COMPUFLIGHT, INC.
By: /s/ RUSSELL K. THAL
-----------------------
Russell K. Thal, Chairman
of the Board of Directors
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
SIGNATURES CAPACITY DATE
Chairman of the Board
of Directors, Executive
Vice President and
/s/ Russell K. Thal Director February 11, 1997
- --------------------------
Russell K. Thal
Chief Executive Officer
and Chief Financial
Officer (Principal
Executive Officer and
Principal Financial
/s/ Duncan Macdonald Officer) February 11, 1997
- --------------------------
Duncan Macdonald
Executive Vice President
/s/ Dorothy A. English and Director February 11, 1997
- --------------------------
Dorothy A. English
/s/ Denis L. Metherell Secretary and Director February 11, 1997
- --------------------------
Denis L. Metherell
/s/ Kenneth M. Snyder Director February 11, 1997
- --------------------------
Kenneth M. Snyder
Director of Finance
(Principal Accounting
/s/ Rainer Vietze Officer) February 11, 1997
- --------------------------
Rainer Vietze
Page 53
January 8, 1997
Russell K. Thal
26 Ridge Drive
Port Washington, NY
11050
Dear Mr. Thal:
Reference is made to that certain Employment Agreement dated as of December 1,
1993 between Compuflight, Inc. ("Compuflight") and Russell K. Thal ("Thal") (the
"Employment Agreement") and the amendment thereto dated as of March 14, 1996
("Amendment # 1").
Compuflight and Thal hereby agree that the provisions of Section 8 of the
Employment Agreement, as modified by Amendment #1, dated March 14, 1996 and
effective as of March 1, 1996, and specifically with regard to the date
Compuflight was required to obtain an annuity, is null and void as of March 1,
1996 and has been replaced, effective as of January 1, 1997, with a new
Paragraph 8 of the Employment Agreement as follows:
'8. Retirement:
The Company agrees to acquire on or before March 1, 1997 an annuity and/or
universal life insurance policy (the "Policy") taken out with an insurance
company licensed to do business in the State of New York and having a
BEST/MOODYS/STANDARD&POORS rating of not less than "A", which will provide for
the following: (a) the Employee being the beneficiary thereof; (b) commencing
one (1) month following the later of (i) the end of the Employment Period or
(ii) the cessation date of the Employee's employment with the Company, the
payment to the Employee of sixty (60) equal monthly installments of Ten Thousand
Dollars ($10,000.00) (such payments not to extend beyond the Employee's death,
except that, if the cessation date of the Employee's employment with the Company
is after March 31, 1999, and the Employee dies after March 31, 2004, the
Employee shall be entitled to receive all sixty (60) monthly payments provided
for hereunder); and, (c) a death benefit in the amount of Six Hundred Thousand
Dollars ($600,000.00) covering the Employee's death through March 31, 2004,
which amount shall decrease to the extent of any payments pursuant to (b) above.
The Policy shall be paid for in equal monthly installments over the period
ending March 31, 1999. Notwithstanding the foregoing, the Employee shall not be
entitled to any of the payments set forth in (b) above if, prior to the end of
the Employment Period, the Employee voluntarily terminates his employment with
the Company. Notwithstanding the foregoing, in the event a "change in control"
of Compuflight or "business combination" shall occur, such terms defined below,
the annuity must be in place prior to the finalization of either of these
occurrences.
As used in the Section 8, a "change in control" shall only be deemed to have
occurred if any "person" (as such term is defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act")) hereafter becomes
the "beneficial owner" (as such term is defined in Section 13d-3, promulgated
under the 1934 Act) of securities of the Company representing more than fifty
percent (50%) of the Company's then outstanding securities having the right to
vote on the election of directors (calculated in accordance with the provisions
of Rule 13d-3) ("Voting Securities"), except that changes in direct or indirect
<PAGE>
ownership of Company securities resulting from or relating to the following
shall not be considered to or result in a "change in control":
(i) transfers by Ray English and Associates ("RE&A") or Dorothy A. English
(collectively, the "Beneficial Owners") to Dorothy A. English, as Voting
Trustee under that certain Voting Trust Agreement dated July 15, 1995 (the
"Voting Trustee"), or from the Voting Trustee to either or both of the
Beneficial Owners;
(ii) transfers by the Voting Trustee to any successor voting trustee; or
(iii) transfers by RE&A to any "affiliate" thereof (as such term is defined
in Rule 405, promulgated under the Securities Act of 1933, as amended).
As used in this Section 8, the term "business combination" shall mean any sale
by the Company of all or substantially all of its assets or any merger or
consolidation to which the Company is a party (other than one consummated for
the purpose of changing the Company's domicile or one of the following
stockholders of the Company retain or obtain at least fifty percent (50%) of the
Voting Securities of the surviving or consolidated entity or the parent
thereof).
Except as amended hereby, the provisions of the Employment Agreement, as amended
by Amendment # 1, shall continue in full force and effect in accordance with its
terms.
This agreement shall be binding upon and shall inure to the benefit of the
successors, assigns and legal representatives of Compuflight and Thal.
The Employment Agreement and Amendment # 1, as amended hereby, may be amended
only by a writing executed by Compuflight and Thal.
If the foregoing is acceptable, please indicate your agreement thereto by
signing in the space provided below and returning and executed copy to the
undersigned.
Yours very truly
Compuflight, Inc.
/s/ Duncan Macdonald
--------------------
Agreed to:
Russell K. Thal
/s/ Russell K. Thal
- -------------------
THIS LEASE dated the 8th DAY OF OCTOBER, 1996
IN PURSUANCE OF THE SHORT FORMS OF LEASES ACT
BETWEEN:
FERDI INVESTMENTS COMPANY LIMITED, a Corporation
c/o The Cora Group Inc.
Mezzanine Level
40 Weber Street East
Waterloo, Ontario
N2H 6R3
(hereinafter called the "Landlord")
OF THE FIRST PART
- and -
NAVTECH SYSTEMS SUPPORT INC.
(hereinafter called the "Tenant")
OF THE SECOND PART
WITNESSETH that in consideration of the rents, covenants, conditions
and agreements hereinafter reserved and contained, the Landlord and the Tenant
covenant and agree as follows:
1. For the purposes of this Lease:
(a) "ADDITIONAL RENT" means all amounts payable by the Tenant under the terms of
this Lease, whether payable to the Landlord or otherwise, over and above Basic
Rent, and the Landlord shall have the same rights and remedies for recovery
thereof as it has in respect of Basic Rent reserved hereunder.
(b) "BASIC RENT" means those amounts set out as Basic Rent in Section 4 of
this Lease.
(c) "BUILDING" means the structure(s) and premises erected on the Lands of which
the Premises form part, in the City of Waterloo, municipally known as 175
Columbia Street West, including (where applicable) all outside areas, landscaped
areas, roadways and driveways, cul-de-sacs, tunnels and ramps, outside and
covered parking areas, existing or to be constructed from time to time in, under
or upon the Lands, and any additions, reductions, deletions, alterations,
substitutions and improvements made thereon or thereto from time to time.
(d) "LANDLORD'S ARCHITECT" means a qualified architect, engineer or Ontario Land
Surveyor from time to time chosen by the Landlord.
(e) "LANDS" means those lands and premises described in the legal description
annexed hereto as Schedule "A" on which the Building is located.
(f) "LEASE" means this lease and any amendments and alterations from time to
time made to this lease in accordance with the provisions herein set out.
(g) "NORMAL BUSINESS HOURS" means 8:30 a.m. to 6:00 p.m. Monday through
Friday (but excluding Saturdays, Sundays and holidays), as such hours may be
varied by the Landlord from time to time.
(h) "OPERATING COSTS" means the aggregate of all costs, expenses or amounts
incurred, whether by the Landlord or others on behalf of the Landlord, in
<PAGE>
connection with the complete maintenance, operation, insurance, management and
repair of the Lands and the Building and all components thereof and all
improvements of the Landlord thereon or therein including, without limiting the
foregoing and without duplication: the costs of all repairs required for such
operation and maintenance; all costs in respect of any heating, ventilating and
air conditioning and fuel, energy and other costs of providing heat, ventilating
and air conditioning; all capital expenditures made by the Landlord in an effort
to promote energy conservation as set out in Section 8(x) of this Lease; the
cost of operating and maintaining elevators and escalators (if any); the cost of
providing hot and cold water; the cost of electricity including lighting not
otherwise charged to tenants; the cost of snow, ice and refuse clearance and
removal; landscape maintenance and window cleaning; the cost of all insurance
with respect to the Building, including "all risks" (including flood and
earthquake), boiler and machinery, liability and other casualties and loss of
rental income insurance, accounting costs incurred in connection with
preparation of statements and for tenants; the cost of providing security
services; the cost of all rental equipment and building supplies used by the
Landlord for all such operations and maintenance or any other purpose; amounts
paid on service contracts with respect to the Building; the amount of all
salaries, wages and benefits paid to or on behalf of persons engaged in
cleaning, supervision, maintenance, operation, management, and repair of the
Building; any business taxes which may be imposed on the Landlord by reason of
its operation of the Lands and Building or parts thereof, but not including any
business taxes for Rentable Area of the Building; any goods and services or
value-added taxes, charges or levied which may be imposed on or in connection
with any of the costs expenses or amounts set out in this subparagraph; and
management fees or charges of managing agents or Landlord's reasonable charges
in lieu thereof if the Landlord undertakes management of the Lands or Building,
which fees or charges in any Year shall not exceed five percent (5%) of the Base
Rent payable for such Year.
Operating Costs shall not include (i) interest on Landlord's debt, capital
retirement of debt, amounts directly chargeable to capital account, (ii)
commissions paid to agents or brokers in connection with the leasing of premises
in the Building, (iii) the cost of any structural repairs and replacements,
improvements, additions or alterations to the Building, (iv) Tenant's
improvements, (v) taxes where the Landlord is reimbursed, such as goods and
services tax, and (vi) any costs or any future costs associated with complying
with government regulations or any government laws including, without limiting
the generality of the foregoing, requiring handicapped accessibility and for
adherence to environmental standards including air quality requirements,
hazardous material or toxic substances.
(i) "PREMISES" means those portions of the Building as shown outlined in red on
the floor plans annexed hereto as Schedule "B", and being further designated as
containing APPROXIMATELY Eight Thousand (8,000) square feet (subject to exact
measurement as provided in Section 2), as outlined in Schedule "B" including any
heating, ventilating, air-conditioning and mechanical, sprinkler and electrical
equipment, machinery and installations, and water, gas, sewage, telephone and
other communications facilities and electric power services and utilities
comprised therein for the exclusive use thereof, but excluding the roof of,
structural sub-floor of and exterior walls and for greater certainty (excluding
doors, windows and interior services) of, such premises.
(j) "PROPORTIONATE SHARE" means that fraction having as its numerator the
Rentable Area of the Premises, and having its denominator the Rentable Area of
the Building, subject to the following adjustments. No deductions shall be made
for columns necessary to the Building.
(k) "RENTABLE AREA OF THE BUILDING" means the total of the Rentable Areas of all
premises leased or set aside from time to time by the Landlord for leasing in
the Building (including the Premises), calculated in the same manner as that
stipulated in subparagraph 1(d); such areas being as certified from time to time
by the Landlord's Architect.
(l) "RENTABLE AREA OF THE PREMISES" means the area of the Premises expressed in
square feet or square meters in a certificate prepared by the Landlord's
Architect, which certificate shall be conclusive and binding subject as herein
provided and shall be delivered to the Tenant on or after the commencement of
the Term, at which time any adjustment to the area that is required thereby
shall be made. The Rentable Area of the Premises shall be measured and
<PAGE>
determined in accordance with the BOMA standards and provided the following is
not inconsistent therewith:
i) In the case of Premises occupying a whole floor, the Rentable Area of the
Premises shall be computed by measuring to the inside finish of permanent outer
building walls, or from the glass line where at least 50% of the outer building
wall is glass, but shall not include stairs, elevator shafts, stacks, pipe
shafts and vertical ducts with their enclosing walls. Washrooms, air
conditioning rooms, fan rooms, janitors' closets and electrical closets within
and exclusively primarily serving only that floor shall be included in the
Rentable Area of the Premises. No deductions shall be made for columns and
projections necessary to the Building.
ii) In the case of Premises occupying part of a floor, the Rentable Area of the
Premises shall be computed by measuring to the inside finish of permanent outer
building walls, or from the glassline where at least 50% of the outer building
wall is glass, to the office side of corridors and/or other permanent
partitions, and to the centre of partitions that separate the Premises from
adjoining rentable areas. No deductions shall be made for columns necessary to
the Building.
(m) "RULES AND REGULATIONS" means those rules and regulations set out in
Schedule "C" to this Lease, and any additional or other rules and regulations
made from time to time in accordance with Article 8(f) of this Lease.
(n) "TAXES" means all taxes, rates, duties, levies and assessments whatsoever
whether municipal, parliamentary or otherwise, levied, charged or assessed upon
the Lands and Building, or upon any part or parts thereof, and all improvements
now or hereafter erected or placed on the Lands, or charged against the Landlord
on account thereof, including local improvement charges but excluding (i) the
amount by which separate school taxes (if any should be payable) exceed the
amount which would have been payable for school taxes if no assessment for
public school taxes had been made, (ii) any taxes such as corporate, income,
profit and excess profit taxes assessed upon the income of the Landlord and tax
on the Landlord's capital and (iii) any penalties or interest charges arising
from the Landlord failing to pay any such charges on their due date. In addition
to the foregoing, Taxes shall include any and all taxes, charges, levies or
assessments which may in the future be levied, charged or assessed in lieu
thereof or in addition thereto. Provided that the Landlord has a reasonable
expectation for believing that a reduction in such Taxes can be achieved, taxes
shall also include all reasonable costs and expenses incurred by the Landlord in
obtaining or attempting to obtain a reduction or prevent an increase in the
amount of such Taxes.
(o) "TERM" means that Term set out in Article 3 of this Lease or as such term
may be altered, extended or reduced in accordance with the provisions of this
Lease.
(p) "YEAR" means each calender year, the whole or part of which is included
within the Term.
2. PREMISES
The Landlord hereby leases to the Tenant the Premises. The exact measurement
shall be determined by an independent third party in accordance with the BOMA
standards for a multi-tenant floor. There shall be no gross up factor charged to
the Tenant at any time during the Term or any Renewals.
3. TERM
(a) To have and to hold the Premises for and during the Term of Ten (10) Years
commencing on the 1st day of November, 1996 and ending on the 31st day of
October, 2006.
(b) Subject to the provisions of this Lease and provided the Tenant is not at
any time in default of any covenants in this Lease, the Tenant shall be entitled
to renew this Lease for an additional term of Five (5) years from November 1,
2006, on written notice to the Landlord given not less than six (6) months prior
<PAGE>
to the expiry of the preceding term, of its intention to negotiate a renewal.
(c) Notwithstanding, the Tenant shall have the right to renew the Lease for an
additional five (5) years under the same terms and conditions contained in this
Lease, save and except for the Free Rent, Leasehold Improvement Allowance, and
Basic Rent which shall be at the current market rate, but not including the
value of any improvements that may have been made by the Tenant to the Premises
during the Term, having also considered the value of any new additional
improvements to be made in the event of the Tenant exercising this Option to
Renew, for a similar building, in a similar location. Should the Tenant renew,
the Landlord shall repaint and recarpet the entire Premises at the Landlord's
sole cost.
4. BASIC RENT.
(a) Yielding and paying therefore yearly and every year during the Term unto the
Landlord as Basic Rent for the Premises without any set-offs, deductions or
defalcations whatsoever, the following amounts per square foot of Rentable Area
of the Premises on a per annum basis:
November 1, 1996 - April 30, 1997 - Zero ($0.00)
May 1, 1997 - October 31, 1997 - Five Dollars and Fifty Cents ($5.50)
November 1, 1997 - October 31, 1998 - Six Dollars and Fifty Cents ($6.50)
November 1, 1998 - October 31, 1999 - Seven Dollars and Fifty Cents ($7.50)
November 1, 1999 - October 31, 2000 - Eight Dollars and Fifty Cents ($8.50)
November 1, 2000 - October 31, 2003 - Nine Dollars and Fifty Cents ($9.50)
November 1, 2003 - October 31, 2006 - Ten Dollars and Fifty Cents ($10.50)
plus the Goods and Services Tax of lawful money in Canada to be paid in advance
in equal monthly instalments on the first day of each and every month during the
Term to the Landlord at 40 Weber Street East, Mezzanine Level, Kitchener,
Ontario N2H 6R3, or at such other place or places as the Landlord shall
designate from time to time in writing, the first of such payments to be made on
the first day of May, 1997 subject as provided in Article 4(b). If the Term
commences on any other day than the first day of the month, or ends on any day
other than the last day of a month, Basic Rent and Additional Rent for the
fractions of a month at the commencement and at the end of the Term shall be
adjusted pro rata on a per diem basis.
5. TAXES
(a) The Tenant covenants to pay the Tenant's Proportionate Share of Taxes for
each Year of the Term, to the Landlord as Additional Rent within thirty (30)
days following receipt by the Tenant of written notice of the amount of such
Tenant's Proportionate Share of Taxes for such Year, notwithstanding that the
Year in question or the Term may have ended. If after initial determination by
the Landlord of the Tenant's Proportionate Share of Taxes for a Year there is an
increase in Taxes with respect to such Year by reason of the issue of
supplemental assessment notices or Taxes or both, or a variation in the basis
upon which the Taxes are calculated, or for any other just reason, the Landlord
shall, as often as necessary, recalculate the Tenant's Proportionate Share of
Taxes for that Year, and if the Tenant's Proportionate Share of Taxes for that
Year is greater than originally calculated, the Tenant covenants to pay any
excess amount to the Landlord (together with the original calculated amount of
the Tenant's Proportionate Share of Taxes for that Year if not already paid) as
Additional Rent in the manner aforesaid.
(b) If the Taxes shall be increased by reason of any installations made in or
upon or any alterations made in or to the Premises by the Tenant or by the
Landlord on behalf of the Tenant, with the Tenant's prior written approval, the
Tenant shall pay the amount of such increase forthwith to the Landlord upon
receipt of written notice thereof. The Tenant shall also pay every tax and
license fee in respect of any business carried on upon the Premises. Whenever,
by reason of the act, election, or religion of the Tenant, or any subtenant,
<PAGE>
licensee or occupant of the Premises, or any part thereof, the Premises are
assessed for the support of separate schools, the Tenant covenants to pay to the
Landlord, as Additional Rent, the amount by which the Taxes so payable by the
Tenant exceed those which would have been payable if the Premises had been
assessed for the support of public schools.
(c) The Landlord shall be entitled at any time or times in any Year, upon at
least thirty (30) days' written notice to the Tenant, to require the Tenant to
pay to the Landlord monthly, on the dates for payment of monthly Basic Rent
instalments, as Additional Rent, an amount equal to one-twelfth (1/12th) of the
amount estimated by the Landlord to be the amount of the Tenant's Proportionate
Share of Taxes for such Year. The Landlord shall be entitled subsequently from
time to time during such Year, upon at least thirty (30) days written notice to
the Tenant, to revise its estimate of the amount of the Tenant's Proportionate
Share of Taxes and the said monthly instalments shall be revised accordingly.
All amounts received under this provision in any Year on account of the
estimated amount of the Tenant's Proportionate Share of Taxes shall be applied
in reduction of the actual amount of the Tenant's Proportionate Share of Taxes
for such Year. If the amount received is less than the actual amount of Tenant's
Proportionate Share of Taxes for such Year, the Tenant shall pay any deficiency
to the Landlord as Additional Rent within thirty (30) days following receipt by
the Tenant of written notice of the amount of such deficiency. If the amount
received is greater than the actual amount of Tenant's Proportionate Share of
Taxes for such Year, the Landlord shall either refund the excess to the Tenant
as soon as possible after the end of the Year in respect of which such payments
were made or at the Landlord's option shall apply such excess against any
amounts owing or becoming due to the Landlord by the Tenant.
(d) If the Term of this Lease commences or ends on any day other than the first
or last day, respectively, of a Year, the Tenant shall be liable only for the
portion of the Tenant's Proportionate Share of Taxes for such Year as falls
within the Term, determined on a per diem basis.
(e) The taxes and all other payments referred to in Article 5(b) above to be
paid directly by the Tenant will be paid and discharged by the Tenant as soon as
they become due and payable, and the Tenant will, upon the written request of
the Landlord, promptly deliver to the Landlord receipts evidencing such payment
where applicable.
(f) The Tenant shall, as Additional Rent, pay to the Landlord, or as the
Landlord directs, all rental, goods and services or value-added taxes, charges
or levies imposed by governmental authorities on or in connection with the Basic
Rent and Additional Rent payable hereunder.
6. OPERATING COSTS
(a) The Tenant covenants to pay the Tenant's Proportionate Share of Operating
Costs for the Year, if any, during each Year of the Term, to the Landlord as
Additional Rent within thirty (30) days following receipt by the Tenant of
written notice of the amount of such Tenant's Proportionate Share of Operating
Costs for such Year, notwithstanding that the Year in question or the Term may
have ended. Any amounts payable pursuant to this subsection (a) shall be
determined and certified to be true by a senior officer of the Landlord
following the end of the Year for which such amounts are payable. If only part
of a Year is included within the Term, such amount payable shall be pro-rated
accordingly and, during the last year of the Term, shall be paid on the last day
of the Term. Any balance remaining unpaid or any excess paid shall,
notwithstanding such termination, be adjusted between the Landlord and Tenant
within a reasonable period thereafter.
(b) The Landlord shall be entitled at any time in any Year, upon at least thirty
(30) days written notice to the Tenant, to require the Tenant to pay to the
Landlord monthly, on the date for payment of monthly Basic Rent instalments, as
Additional Rent, an amount equal to one-twelfth (1/12th) of the amount estimated
by the Landlord to be the amount of the Tenant's Proportionate Share of
Operating Costs for such Year. The Landlord shall be entitled subsequently from
time to time during such Year upon at least thirty (30) days written notice to
the Tenant to revise its estimate of the amount of the Tenant's Proportionate
Share of Operating Costs and the said monthly instalments shall be revised
accordingly. All amounts received under this provision in any Year on account of
<PAGE>
the estimated amount of the Tenant's Proportionate Share of Operating Costs
shall be applied in reduction of the actual amount of the Tenant's Proportionate
Share of Operating Costs for such Year. If the amount received is less than the
actual Tenant's Proportionate Share of Operating Costs for such Year, the Tenant
shall pay such deficiency to the Landlord as Additional Rent within thirty (30)
days following receipt by the Tenant of written notice of the amount of such
deficiency. If the amount received is greater than the actual Tenant's
Proportionate Share of Operating Costs, the Landlord shall either refund the
excess to the Tenant as soon as possible after the end of the Year in respect of
which such payments were made or at the Landlord's option shall apply such
excess against any amounts owing or becoming due to the Landlord by the Tenant.
(c) Every item referred to in the Lease as Additional Rent, except for the
realty taxes and utilities shall be capped at an annual increase of not more
than five (5%) percent for the applicable year, for the first five (5) years of
the Term of the Lease. Said Additional Rent estimated at $8.20 for 1996.
Landlord shall provide annual financial statements as prepared in accordance
with generally accepted accounting principles verifying the Additional Rent and
certified to be true by a senior officer of the Landlord. The Tenant shall have
the right to examine the expense claims of the Landlord that constitute
Additional Rent. The Tenant shall have the right to request audited annual
statements at a reasonable cost to the Tenants.
7. RECOVERY OF ADJUSTMENTS
The Landlord (in addition to any other right or remedy of the Landlord) shall
have the same rights and remedies in the event of the default by the Tenant in
payment of any amounts payable pursuant to Articles 5 and 6 as the Landlord
would have in the case of default in payment of rent.
8. TENANT'S COVENANTS
The Tenant covenants with the Landlord:
(A) PAY RENT
To pay rent, the Tenant's Proportionate Share of Taxes and the Tenant's
Proportionate Share of Operating Costs and all other amounts payable by the
Tenant to the Landlord under this Lease as Additional Rent;
(B) UTILITY CHARGES
To pay all charges for telephone, electric current and all other utilities
separately billed for the Premises and supplied to or used in connection with
the Premises, and the cost, of any replacement of electric bulbs, tubes,
starters and ballasts in the Premises. If there are no separate meters for
measuring the consumption of such utilities, the Tenant shall pay to the
Landlord, in advance by monthly instalments as Additional Rent, such amount as
may be reasonably estimated by the Landlord from time to time as the cost of
such utilities for the Premises. The Tenant shall advise the Landlord forthwith
from time to time of any installations, appliances or business machines used by
the Tenant consuming or likely to consume large amounts of electricity or other
utilities and further on request shall promptly provide the Landlord with a list
of all installations, appliances and business machines used in the Premises, and
the Landlord shall have the right to install a separate meter at the Landlord's
expense, provided that, in such event, the Landlord shall have the right to bill
the Tenant, as additional rent, the monthly amount based upon the amortization
of the cost of the separate meter based upon a straight line amortization for
the period being the reasonably expected life of the meter.
(C) MAINTAIN & REPAIR
To repair and maintain the Premises and every part thereof as a result of damage
caused by the Tenant, reasonable wear and tear excepted, unless the same is
covered by insurance maintained by the Landlord, in a clean, presentable and
<PAGE>
sanitary condition and that the Landlord may enter and view the state of repair;
and that the Tenant will repair in accordance with notice in writing as
aforesaid; and that the Tenant will leave the Premises in good repair as
aforesaid; provided that if the Tenant neglects to so maintain or to make such
repairs promptly after reasonable notice, the Landlord may, at its option, do
such maintenance or make such repairs at the expense of the Tenant, and in any
and every such case the Tenant covenants with the Landlord to pay to the
Landlord forthwith as Additional Rent all sums which the Landlord may have
expended in doing such maintenance and making such repairs; provided further
that the doing of such maintenance or the making of any repairs by the Landlord
shall not relieve the Tenant from the obligation to repair;
(D) REPAIR WHERE TENANT AT FAULT
If the Lands or Building, including the Premises; or any part thereof, including
the elevators, boilers, engines, pipes and other apparatus (or any of them) used
for the purposes of heating, ventilating or air conditioning the Building or
operating the elevators, or if the water pipes, drainage pipes, electric
lighting or other equipment of the Lands and Building, or the landscaping,
trees, shrubs and flowers, or the roof or outside walls of the Building, get out
of repair or become damaged or destroyed through the wilful act, negligence,
carelessness or misuse of the Tenant, its servants, agents, employees, or anyone
permitted by the Tenant to be on the Lands or Building or through it or them,
the expense of the necessary repairs, replacements or alterations shall be borne
by the Tenant who shall pay the same to the Landlord forthwith upon demand;
(E) ASSIGNING OR SUBLETTING
Not to assign or mortgage or encumber this Lease or sublet or franchise,
license, grant concessions in, or otherwise part with or share possession of the
Premises, or any part thereof, without the prior written consent of the
Landlord; at the time the Tenant requests such consent the Tenant shall deliver
to the Landlord such information in writing (the "required information") as the
Landlord may reasonably require, including a copy of the proposed offer or
agreement, if any, to assign or sublet or otherwise, and the name, address,
nature of business and evidence as to the financial strength of the proposed
assignee or subtenant; upon receipt of such request and all required
information, the Landlord shall respond within five (5) days after such receipt.
The Landlord's consent shall not be unreasonably withheld.
In no event shall any assignment or subletting to which the Landlord has
consented release the Tenant from its obligations fully to perform all the
terms, conditions and covenants of this Lease. The Tenant shall pay on demand
the Landlord's reasonable costs incurred in connection with the Tenant's request
for such consent. The Landlord's consent may be conditional upon the subtenant
or assignee entering into a covenant with the Landlord in form satisfactory to
the Landlord to observe and perform all tenant's covenants in the Lease.
The Tenant shall not advertise or allow the Premises or a portion thereof to be
advertised as being available for assignment, sublease or otherwise without the
prior written approval of the Landlord to the form and content of such
advertisement, which approval shall not be unreasonably withheld, provided that
no such advertising shall contain any reference to the rental or the rental rate
of the Premises.
The following conditions apply to transfers and to consents given by the
Landlord:
[1] the Landlord's consent is not a waiver of the requirement for consent to
subsequent transfers; [2] the Transferor will remain liable for the Tenant's
obligations and indemnify the Landlord against the Transferee's failure to
perform the Tenant's obligations after the Transfer; [3] the Transferee will
execute an agreement directly with the Landlord agreeing to be bound by the
Standard Lease as Tenant (and the Tenant will pay all of the Landlord's
reasonable costs in connection with all documentation); [4] the Landlord may
apply amounts collected from the Transferee to any unpaid rent; and [5] once the
Landlord's consent is given, the Transfer must take place within thirty (30)
days or the consent will expire and the Transfer may not take place.
<PAGE>
Notwithstanding the foregoing, the Tenant shall have the right to assign or
sublease any portion, or the entire Premises to any party resulting from a
merger or consolidation or to any subsidiary or affiliate, consent not to be
unreasonably withheld, of the Tenant without the consent of the Landlord. The
Tenant shall have the right to otherwise assign or sublease any portion of the
Premises to any party with the prior written consent of the Landlord, such
consent not to be unreasonably withheld. The Tenant shall notify the Landlord of
such Assignment or Sublease. No Assignment or Subleasing shall relieve the
Tenant of its obligations under the Lease.
(f) Rules and Regulations
That the Tenant and its employees and all persons visiting or doing business
with them on the Premises shall be bound by and shall observe and perform the
Rules and Regulations and any further and other reasonable rules and regulations
made hereafter by the Landlord of which notice in writing shall be given to the
Tenant and all such Rules and Regulations shall be deemed to be incorporated
into and form part of this Lease, as shown on Schedule "C";
(G) USE OF PREMISES
Not to use the Premises nor allow the Premises to be used for any purpose other
than an office; and that if the costs of insurance on the Building shall be
increased by reason of the use made of the Premises or by reason of anything
done or omitted or permitted by the Tenant or by anyone permitted by the Tenant
to be upon the Premises, the Tenant shall pay to the Landlord on demand as
Additional Rent the amount of such increase; and if any insurance policy upon
the Building shall be cancelled by the insurer by reason of the use or
occupation of the Premises or any part thereof by the Tenant or any assignee or
subtenant of the Tenant or by anyone permitted by the Tenant to be upon the
Premises, in addition to any other rights the Landlord may have, the Landlord
may at its option terminate this Lease forthwith by giving to the Tenant notice
in writing in accordance with Article 34 of its intention to do so and thereupon
the Tenant shall immediately deliver up possession of the Premises to the
Landlord who may re-enter and take possession of same; notwithstanding any such
termination, the Landlord may subsequently recover from the Tenant damages for
loss of rent suffered by reason of this Lease having been prematurely
determined.
(H) OBSERVANCE OF LAW
In its use and occupation of the Premises, to comply promptly with and conform
to the requirements of all applicable statutes, laws, by-laws, regulations,
requirements, ordinances and orders of any federal, provincial or municipal
government and any applicable department, commission, board or officer thereof,
from time to time or any time in force affecting any change of use or occupation
of the Premises by the Tenant and with every applicable regulation, order and
requirement of the Canadian Fire Underwriter's Association or any body having
similar functions or of any liability or fire insurance company by which the
Landlord and the Tenant or either of them may be insured at any time during the
Term. In any event of default of the Tenant, the Landlord may upon providing
written notice to the Tenant itself comply with any such requirement as
aforesaid and (the Tenant will forthwith) pay all reasonable costs and expenses
incurred by the Landlord in this regard as Additional Rent.
(I) WASTE AND NUISANCE
Not to do or suffer any waste, damage, disfiguration or injury to the Premises
or the fixtures and equipment thereof or permit or suffer any overloading of the
floors thereof; and not to use or permit to be used any part of the Premises for
any dangerous, noxious or offensive trade or business and not to cause or
maintain any nuisance in, at or on the Premises or cause any annoyance, nuisance
or disturbance to the occupiers or owners of any adjoining lands and/or
premises.
<PAGE>
(J) ENTRY BY LANDLORD
To permit the Landlord and its servants or agents to enter upon the Premises at
any time and from time to time upon reasonable notice for the purpose of
inspecting and making repairs, alterations or improvements to the Premises or to
the Lands or Building, and the Tenant shall not be entitled to any compensation
for any inconvenience, nuisance or discomfort occasioned thereby;
If the Tenant or its representative shall not be personally present to open and
permit an entry into the Premises at any time when for any reason an entry
therein shall be necessary or permissible under this Lease, the Landlord or the
Landlord's agent may enter the same, or in an emergency may forcibly enter the
same, without rendering the Landlord or such agent liable therefore, and without
in any manner affecting the covenants, obligations and agreement of the Tenant
under the Lease.
(K) INDEMNITY
To promptly indemnify and save harmless the Landlord from any and all
liabilities, fines, damages, costs, claims, demands, suits or actions of any
nature or kind arising out of any breach, violation or non-observance by the
Tenant of any of its covenants and obligations under this Lease; in case the
Landlord shall, without fault on its part, be made a party to any litigation
commenced by or against the Tenant, then the Tenant shall protect and hold the
Landlord harmless and shall pay all costs, expenses and reasonable legal fees
incurred or paid by the Landlord in connection with such litigation; and this
indemnity shall survive the expiry or earlier termination of this Lease, in
respect of any of the foregoing circumstances arising during the Term.
(L) EXHIBITING PREMISES
To permit the Landlord or its agents to exhibit the Premises to prospective
tenants during the last six (6) months of the Term or any renewal thereof during
normal business hours and upon reasonable notice. The Landlord at any time
during the Tenant's usual business hours and upon reasonable notice may exhibit
the Premises to prospective purchasers or mortgagees provided that it shall not
unreasonably interfere with the Tenant's business.
(M) ALTERATIONS
That the Tenant will not, without the prior written consent of the Landlord,
which shall not be unreasonably withheld or delayed, make or erect in or to the
Premises any installations, alterations, additions, partitions, repairs or
improvements, or do anything which might affect the proper operation of the
electrical, lighting, heating, ventilating, air conditioning, sprinkler, fire
protection or other systems; the Tenant's request for such consent shall be in
writing and accompanied by an adequate description of the contemplated work and,
where appropriate, working drawings and specifications therefor; the Landlord's
costs of having its architects, engineers or others examine such drawings and
specifications shall be payable by the Tenant upon demand as Additional Rent;
the Landlord may require that any or all work to be done hereunder be done by
contractors or workmen engaged by the Tenant but first approved by the Landlord,
provided that the Landlord may require that the Landlord's contractors or
workmen do any work which will or might reasonably be expected to affect the
structural or architectural integrity of the Building, or affect the proper
operation of the electrical, lighting, heating, ventilating, air conditioning,
sprinkler, fire protection or other systems of the Building, and all work shall
be subject to inspection by and the reasonable supervision of the Landlord and
shall be performed in accordance with all laws and any reasonable conditions
(including, where the Landlord's supervision is required due to the nature of
the work, reasonable out-of-pocket expenses of the Landlord to be paid by the
Tenant) or regulations imposed by the Landlord and completed in a good and
workmanlike manner and with reasonable diligence in accordance with the
<PAGE>
approvals given by the Landlord; any connections of apparatus to the electrical
system, plumbing lines, or heating, ventilating or air conditioning systems
shall be deemed to be an alteration within the meaning of this paragraph; the
Tenant shall, at its own cost and before commencement of any work, obtain all
necessary building or other permits and keep same in force and the Tenant shall
promptly pay all charges incurred by it for any work, materials or services and
shall forthwith discharge any liens; if the Tenant fails to so discharge any
liens, the Landlord may (but shall be under no obligation to) pay into court the
amount required, or otherwise obtain a discharge of the lien in the name of the
Tenant and any amount so paid together with all costs incurred in respect of
such discharge shall be payable by the Tenant to the Landlord forthwith upon
demand plus interest on all such amounts at the rate hereafter set out in this
Lease; the Tenant shall not create any mortgage, conditional sale agreement, or
other encumbrance in respect of its leasehold improvements or trade fixtures nor
shall the Tenant lease the same from any third party, nor permit any such
encumbrance to attach to the Premises or to the Lands or Building.
Notwithstanding the foregoing, upon termination of the Lease, the Tenant will
not be responsible to remove the alterations as permitted pursuant to this
Section 8(m), however, the Tenant shall leave the Premises in a clean condition,
normal wear and tear accepted, and shall repair any material damage caused by
the removal of its trade fixtures.
(N) INTERIOR WALLS
That the Tenant will not deface or mark any part of the Premises, Lands or
Building and will not permit any hole to be drilled or made or nails, screws,
hooks or spikes to be driven into stone or brick work of the Building or any
appurtenances thereof without the prior written consent of the Landlord. The
Tenant shall not require the consent of the Landlord to drill holes or use
nails, hooks or other devices to hang pictures, bookshelves and other things
normally found in office premises all without the consent of the Landlord.
Further, upon termination of the Lease, the Tenant shall not be responsible to
repair any reasonable damage arising from such drilling, nails, screws, hooks or
other hanging devices.
(O) SIGNS
That the Tenant will not paint, place, affix, inscribe or display on any of the
windows of the Premises or the Building or on any part of the outside or inside
thereof, any sign, picture, direction, lettering, advertisement or notice, other
than as specifically set forth in this Lease, without the prior written consent
of the Landlord, such consent not to be unreasonably withheld or delayed; and
the Landlord shall have the right to prescribe the size, material, colour,
method of attachment, pattern and location of identification signs for the
Tenant; on the Tenant ceasing to be a tenant of the Premises, the Landlord will
cause any sign to be removed or obliterated at the Tenant's expense and any
damage occasioned to the Premises shall be repaired at the Tenant's expense; the
Tenant shall be entitled to have one name shown upon the directory board or
boards of the Building and any additional name or subsequent changes shall be
paid for by the Tenant, but the Landlord shall in its sole discretion design the
style of such identification and allocate the space on the directory board or
boards therefore.
Notwithstanding, the Tenant has the right to install exterior Building signage,
at its expense during the Term or any Renewals, subject to Landlord approval
which shall not be unreasonably or arbitrarily withheld. The Landlord shall
install Building standard Tenant identification in the main lobby directory, and
suite entry door, all signage to be installed at the beginning of the Term will
be at the Landlord's expense.
(P) NAME OF BUILDING
Not to refer to the Lands and Building by any name or names other than such name
or names as may be designated from time to time by the Landlord, nor to use such
name or names for any purpose other than that of the business address of the
Tenant;
(Q) GLASS
The Landlord shall replace and the Tenant shall pay to the Landlord on demand as
Additional Rent the cost of replacement with as good quality any glass on or
within or in the walls or doors (exterior or interior) abutting or forming part
<PAGE>
of the Premises, which is broken during the Term or any renewals thereof, unless
such breakage is solely the result of the negligence of the Landlord and is not
the result of matters required to be insured against by the Tenant hereunder;
(R) CERTIFICATES
The Tenant will at any time and from time to time, at no cost to the Landlord,
within fifteen (15) days' of request therefor by the Landlord, execute and
deliver to the Landlord, in a form to be provided by the Landlord, that this
Lease is unmodified and in full force and effect (or if modified, stating the
modifications and that the Lease is in full force and effect as modified), the
amount of the annual rental then being paid hereunder, the dates to which the
same, by instalment or otherwise, and other charges hereunder have been paid,
whether or not there is any existing default on the part of the Landlord of
which the Tenant has notice, and any other information reasonably required;
(S) EVIDENCE OF PAYMENTS
To produce to the Landlord upon request, satisfactory evidence of the due
payment by the Tenant of all payments required to be made by the Tenant under
this Lease;
(T) NOTICE OF ACCIDENTS
To notify the Landlord promptly and in writing of any accident or damage to or
defect in the Premises, the Lands, the Building, or any part thereof including
the heating, ventilating, and air conditioning apparatus, water and gas pipes,
telephone lines, electrical apparatus or other building services;
(U) TENANT INSURANCE
At its expense to maintain in force during the Term and any renewals thereof:
i) comprehensive general liability insurance against claims for personal injury,
death or property damage arising out of all operations of the Tenant (including
Tenant's legal liability, personal liability, property damage and contractual
liability to cover all indemnities and repair obligations) with respect to the
business carried on in and from the Premises, in an amount of Two Million
Dollars ($2,000,000) per occurrence;
ii) all risks direct damage insurance covering all chattels and fixtures and all
leasehold improvements, installations, additions and partitions made by the
Tenant or by the Landlord at the Tenant's expense, in an amount equal to the
full replacement value thereof; and,
iii) such other forms of insurance as may be reasonably required by the
Landlord and any mortgagee from time to time;
All such insurance shall be with insurers and upon such terms and conditions as
the Landlord reasonably approves, and copies of all policies or certificates of
insurance shall be delivered to the Landlord prior to the commencement of the
Term and thereafter not less than fifteen (15) days prior to the expiration date
of any policy; all such policies shall include the Landlord and any mortgagees
as named insured as their interests may appear, and shall contain, where
applicable, a waiver of subrogation in favour of the Landlord and a
cross-liability clause protecting the Landlord in respect of claims by the
Tenant as if the Landlord were separately insured; all such policies shall also
contain a provision requiring the insurer to give the Landlord thirty (30) days
prior written notice of any material change, cancellation or termination
thereof; if the Tenant fails to take out and maintain in force such insurance,
the Landlord may do so and pay the premiums and the Tenant shall pay the
Landlord the amount of such premiums forthwith upon demand; if both the Landlord
and the Tenant have claims to be indemnified under any such insurance, the
indemnity shall be applied first to the settlement of the Landlord's claim and
the balance, if any, to the settlement of the Tenant's claim.
<PAGE>
(V) SURRENDER ON TERMINATION
At the expiration or sooner termination of the Term, to deliver up possession of
the Premises to the Landlord, together with all fixtures or improvements which
the Tenant is required or permitted to leave therein or thereon, free of all
rubbish and in a clean and tidy condition, and to deliver to the Landlord all
keys and security devices. For greater certainty, notwithstanding any other
provision of this Lease, the Tenant shall have the right to remove all fixtures
of the Tenant.
If at the end of the Term, the Tenant vacates the Premises and leaves any goods
or fixtures or any of its property whatsoever on or in the Premises, the
Landlord shall have no obligation to account for such goods, fixtures or
property and may sell or destroy the same or have them removed and/or stored at
the expense of the Tenant or dispose of the same in any other manner whatsoever
as may be determined by the Landlord in its sole discretion.
(W) FIRE AND SAFETY
The Tenant acknowledges that it may be or become desirable or necessary for the
Landlord to organize and co-ordinate arrangements within the Building for the
safety of all tenants and occupants in the event of fire or similar event, and
the Tenant, its employees, servants, agents and invitees shall co-operate and
participate in any fire drills, evacuation drills and similar exercises as may
be arranged or organized by the Landlord from time to time, and, save for any
negligence or wilful misconduct by the Landlord or its employees, subcontractors
or agents, to hold the Landlord harmless from any personal or material loss,
damage or injury arising therefrom incurred by the Tenant.
(X) ENERGY CONSERVATION
To co-operate with the Landlord in conserving energy of all types in the
Building, including complying at the Tenant's own cost with all reasonable
requests and demands of the Landlord made with the view to energy conservation;
provided that the Landlord demonstrates a reasonable expectation to achieve
energy conservation, any reasonable capital expenditures made by the Landlord in
an effort to promote energy conservation shall be added to Operating Costs in
each Year to the extent of the amortized costs therefor for each such Year based
upon life expectancy of the capital equipment.
(Y) NET LEASE
The Tenant acknowledges that it is intended and agrees that this Lease is a
completely carefree net lease for the Landlord and that the Landlord is not
responsible during the Term or any renewal thereof for any costs, charges,
expenses or outlays of any nature relating to the Premises, or the contents
thereof, except as specifically set forth in this Lease, and that the Tenant
will pay all charges, taxes, impositions, costs and expenses of every kind
relative to the Premises and the Tenant covenants with the Landlord accordingly.
(Z) TAXES
i) The Tenant is responsible for all Business Taxes in respect thereof, to
pay or cause to be paid, and the payment of which are not the responsibility of
the Landlord's under this Lease.
ii) The Tenant is liable to pay unto the Landlord a Goods and Service Tax or any
other such tax levied or imposed upon commercial rental payments, whether levied
or imposed by any level of government, whether it be municipal, provincial or
federal.
9. QUIET ENJOYMENT
The Landlord covenants with the Tenant for quiet enjoyment.
<PAGE>
10. LANDLORD'S COVENANTS
The Landlord further covenants with the Tenant as follows:
(A) HEATING AND AIR CONDITIONING
Subject to any payment referred to in Article 6 above required to be made by the
Tenant in respect thereof, to provide heating of the Premises and to operate the
air conditioning and ventilating equipment to an extent sufficient to maintain a
reasonable temperature therein during the Term and any Renewals on a 24 hours
per day, 7 days a week basis, without exception, except during the making of
repairs; but should the Landlord default in so doing, the Landlord shall not be
liable for indirect or consequential damages of any kind or damages for personal
discomfort or illness by reason of the operation or non-operation of such
equipment or otherwise;
The Tenant will not be responsible to pay any additional charges to the Landlord
for this service over and above Additional Rent as outlined in Section (h)
Operating Costs, of the Lease.
(B) TAXES
Subject to any payment referred to in Article 5 above required to be made by the
Tenant in respect thereof, to pay or cause to be paid Taxes, the payment of
which are not the responsibility of the Tenant under this Lease;
(C) ELEVATOR
To furnish, except when repairs are being made, passenger elevator service
during Normal Business Hours and limited elevator service at other times;
operatorless and automatic elevator service if made available shall be deemed
elevator service; and to permit the Tenant and its employees to have free use of
such elevator service in common with others;
(D) ACCESS
To permit the Tenant and its employees and all persons lawfully requiring
communication with them, in common with others entitled thereto, to have the use
at all times of the entrances, stairways, corridors and halls in the Building
required for access to the Premises.
(E) WASHROOMS
To permit the Tenant and its employees in common with others entitled thereto to
use the washrooms in the Building which may be designated for the Premises;
(F) CLEANING AND JANITOR SERVICES
To cause the Premises to be cleaned and to maintain and clean the public areas
in accordance with a first class office building standard. Such work will be
performed at the Landlord's direction without interference from the Tenant or
its employees; the Tenant will permit window cleaning to be performed during
Normal Business Hours; and
(g) LANDLORD'S INSURANCE
During the term the Landlord shall maintain liability insurance, fire insurance
with extended coverage, boiler and pressure vessel insurance, and other
insurance on the Building and all property and interest of the Landlord in the
Building, with coverage in amounts not less than those which are from time to
time acceptable to a prudent owner in the area in which the Building is located.
Policies for such insurance shall waive, to the extent available from the
<PAGE>
Landlord's carrier(s), without additional charge, any right of subrogation
against the Tenant.
(h) INDEMNIFICATION OF TENANT
To properly indemnify and save harmless the Tenant from any and all liabilities,
fines, damages, costs, claims, demands, suits, or actions or any nature or kind
arising out of any breach, violation or non-observance by the Landlord of any of
its covenants and obligations under this Lease; in case the Tenant shall,
without fault on its part, be made a party to any litigation against the
Landlord, then the Landlord shall protect and hold the Tenant harmless and shall
pay all costs, expenses and reasonable legal fees incurred or paid by the Tenant
in connection with such litigation; and this indemnity shall survive the
expiration or earlier termination of this Lease in respect of any of the
foregoing circumstances arising during the Term.
11. FIXTURES
Provided that the Tenant may remove its fixtures and chattels if and only if all
rent and other charges due or to become due are fully paid; provided further,
however, that all leasehold improvements, installations, additions, partitions
and fixtures (other than trade or tenants' fixtures in or upon the Premises,
which term shall in no case include any heating, ventilating and air
conditioning equipment or other building services or carpeting) whether placed
there by the Tenant or the Landlord, shall be the Landlord's property upon the
termination of this Lease without compensation therefore to the Tenant and shall
not be removed from the Premises at any time either during or after the Term.
Notwithstanding anything herein contained, the Landlord shall be under no
obligation to replace, repair or maintain such leasehold improvements,
installations, additions, partitions and fixtures and the Landlord shall have
the right upon the termination of this Lease by effluxion of time or otherwise
or within thirty (30) days thereafter to require the Tenant to remove any or all
of its fixtures and to make good any damage caused to the Premises by such
installation or removal.
12. DAMAGE OR DESTRUCTION
(a) If the Premises or any portion thereof are damaged or destroyed by fire or
by another casualty, rent shall abate from the date of such destruction in
proportion to the area of that portion of the Premises which, in the reasonable
opinion of the Landlord, is thereby rendered unfit for the purposes of the
Tenant until the Premises are repaired and rebuilt and the Landlord agrees that
it will with reasonable diligence repair and rebuild the Premises. The
Landlord's obligation to rebuild and restore the Premises shall not include the
obligation to rebuild, restore, replace or repair any chattel, fixture,
leasehold improvement, installation, addition or partition in respect of which
the Tenant is to maintain insurance under Article 8(u), or any other thing that
is the property of the Tenant (in this clause collectively called "Tenant's
Improvements"); the Premises shall be deemed restored and rebuilt and fit for
the Tenant's purposes when the Landlord's Architect certifies that they have
been substantially restored and rebuilt to the point where the Tenant could
occupy them for the purpose of rebuilding, restoring, replacing or repairing the
Tenant's Improvements; the issuance of the certificate shall not relieve the
Landlord of its obligation to complete the rebuilding and restoration as
aforesaid, but the Tenant shall forthwith after issuance of the certificate
proceed to rebuild, restore, replace and repair the Tenant's Improvements, and
the provisions of Article 8(m) shall apply to such work, mutatis mutandis.
(b) Notwithstanding Article 12(a), if the Premises or any portion thereof are
damaged or destroyed by any cause whatsoever and cannot in the reasonable
opinion of the Landlord be rebuilt or made fit for the purposes of the Tenant as
aforesaid within ninety (90) days of the damage or destruction, instead of the
Landlord rebuilding or making the Premises fit for the Tenant, the Landlord and
the Tenant shall each have the option to terminate this Lease by giving to the
other within thirty (30) days after such damage or destruction notice of
termination and thereupon rent and any other payments for which the Tenant is
liable under this Lease shall be apportioned and paid to the date of such damage
and the Tenant shall immediately deliver up possession of the Premises to the
Landlord.
(c) Irrespective of whether the Premises or any portion thereof are damaged or
destroyed as aforesaid, in the event that twenty-five percent (25%) or more, as
<PAGE>
determined by the Landlord, of the Building is damaged or destroyed by any cause
whatsoever, and if, in the reasonable opinion of the Landlord, such area cannot
be rebuilt or made fit for the purposes of the tenants thereof within ninety
(90) days of such damage or destruction, the Landlord and the Tenant shall each
have the option to terminate this Lease by giving to the other within thirty
(30) days after such damage notice of termination requiring vacant possession of
the Premises sixty (60) days after delivery of the notice of termination and
thereupon, subject to any abatement to which the Tenant may have been entitled
under Article 12(a), rent and any other payments for which the Tenant is liable
under this Lease shall be apportioned and paid liable under this Lease shall be
apportioned and paid to the date on which vacant possession is given and the
Tenant shall deliver up possession of the Premises to the Landlord in accordance
with such notice of termination.
13. INJURIES, LOSS AND DAMAGE
The Landlord shall not be responsible in any way for any injury to any person
(including death) or for any loss of or damage to any property belonging to the
Tenant or to other occupants of the Premises or to their respective invitees,
licensees, agents, servants or other persons from time to time attending at the
Premises while such person or property is in the Premises, unless caused by the
negligence or wilful misconduct of the Landlord or its employees, agents,
servants or subcontractors.
14. IMPOSSIBILITY, UNAVOIDABLE DELAYS
Whenever and to the extent the Landlord is unable to fulfil or shall be delayed
or restricted in the fulfilment of any obligation hereunder by reason of being
unable to obtain the material, goods, equipment, service, utility or labour
required to enable it to fulfil such obligation or by reason of any statute,
law, regulation, by-law or order or by reason of any other cause beyond its
reasonable control, whether of the same nature as the foregoing or not, the
Landlord shall be relieved from the fulfilment of such obligation and the Tenant
shall not be entitled to compensation for any inconvenience, nuisance or
discomfort thereby occasioned. There shall be no deduction from the rent or
other monies payable hereunder by reason of any such failure or cause other than
if the Tenant is not able to use the Premises for the purpose intended and then
in such event the rent shall abate accordingly.
15. RE-ENTRY
PROVISO for re-entry by the said Landlord on non-payment of rent or
non-performance of covenants.
16. BANKRUPTCY, ETC.
Provided further that in case without the written consent of the Landlord, the
Premises shall be used by any other person than the Tenant or for any other
purpose than that for which the same were let or in case the Premises shall be
vacated or remain unoccupied for fifteen (15) days, or in case the Term or any
of the goods and chattels of the Tenant shall be at any time seized in execution
or attachment by any creditor of the Tenant or the Tenant shall make any
assignment for the benefit of creditors or any bulk sale or become bankrupt or
insolvent or take the benefit of any Act now or hereafter in force for bankrupt
or insolvent debtors, or, if the Tenant is a corporation and any order shall be
made for the winding-up of the Tenant, or other termination of the corporate
existence of the Tenant, then in any such case this Lease shall, at the option
of the Landlord, cease and determine and the Term shall immediately become
forfeited and void and the then current month's rent and the next ensuing three
(3) months' rent (including in both cases all other amounts payable as
Additional Rent) shall immediately become due and be paid and the Landlord
without prejudice to any claim for damages for any antecedent breach of covenant
or loss of rent suffered by reason of this Lease having been prematurely
determined, may re-enter and take possession of the Premises as though the
Tenant or other occupant or occupants of the Premises was or were holding over
after the expiration of the Term without any right whatever.
<PAGE>
17. DISTRESS
The Landlord shall have the right, as provided at the common law and statute, to
distrain for arrears of rent.
18. ENTRY AS AGENT
The Tenant further covenants and agrees that on the Landlord becoming entitled
to re-enter upon the Premises under any of the provisions of this Lease upon
default of the Tenant which is not cured within an applicable grace period, the
Landlord, in addition to all other rights, shall have the right to enter the
Premises as the agent of the Tenant, either by force or otherwise, without being
liable for any prosecution therefore and to re-let the Premises as the agent of
the Tenant and to receive the rent therefore and as the agent of the Tenant to
take possession of any furniture or other property on the Premises and to sell
the same at public sale without notice and to apply the proceeds of such sale
and any rent derived from re-letting the Premises upon account of the rent under
this Lease and the Tenant shall be liable to the Landlord for the deficiency, if
any, for the remainder of the Term as if such re-entry had not been made less
the actual amount received by the Landlord after such re-entry in respect of any
re-letting applicable to the remainder of the Term. The Tenant shall also
reimburse the Landlord for all reasonable legal and other costs incurred as a
result of such re-entry and re-letting.
19. RIGHT OF TERMINATION
The Tenant further covenants and agrees that on the Landlord becoming entitled
to re-enter upon the Premises under any of the provisions of this Lease, the
Landlord, in addition to all other rights (including without limitation, the
right to recover damages for breach of covenant and loss of rent suffered by
reason of this Lease having been prematurely determined) shall have the right to
determine forthwith this Lease and Term by leaving upon the Premises notice in
writing of its intention so to do and thereupon rent and any other payments for
which the Tenant is liable under the Lease shall be computed, apportioned and
paid in full to the date of such determination of this Lease and the Tenant
shall immediately deliver up possession of the Premises to the Landlord, and the
Landlord may re-enter and take possession of the same. In the event that the
Tenant is in default of any of the terms or conditions of this Lease, the
Landlord shall give written notice thereof to the Tenant and the Tenant shall
have not less than thirty (30) days following receipt of such notice to cure
such default prior to the Landlord having any right to terminate this Lease as
set forth herein.
20. NON-WAIVER
No condoning, excusing or overlooking by the Landlord of any default, breach or
non-observance by the Tenant at any time or times in respect of any covenant,
proviso or condition herein contained shall operate as a waiver of the
Landlord's rights hereunder in respect of any continuing or subsequent default,
breach or non-observance, or so as to defeat or affect in any way the rights of
the Landlord herein in respect of any such continuing or subsequent default or
breach, and no waiver shall be inferred from or implied by anything done or
omitted by the Landlord save only express waiver in writing. All rights and
remedies of the Landlord in this Lease contained shall be cumulative and not
alternative.
21. OVERHOLDING
If the Tenant shall continue to occupy all or part of the Premises after the
expiration of this Lease with the consent of the Landlord and without any
further written agreement, the Tenant shall be a monthly tenant at a basic
monthly rental equal to the current market rental rate for premises in the
Building, which for the purposes of this Article 21 shall be that rental rate
agreed to be paid by a tenant under a lease, agreement to lease or accepted and
binding lease proposal most recently, at the time of determination of the
overholding rental, entered into by the Landlord and a tenant dealing at arm's
<PAGE>
length from the Landlord, and otherwise on the terms and conditions herein set
out except as to length of tenancy, provided, however, that such rental amount
shall not be more than 1.5 times the Tenant's current basic monthly rental
payment.
22. LANDLORD PERFORMING TENANT'S COVENANTS
If the Tenant fails to perform or cause to be performed any of the covenants or
obligations of the Tenant herein following written notice given by the Landlord
to the Tenant and not cured within the applicable grace period, the Landlord
shall have the right (but shall not be obligated) to perform or cause to be
performed and to do or cause to be done such things as may be necessary or
incidental hereto (including, without limiting the foregoing, the right to make
repairs, installations and erections and expend monies) and all payments,
expenses, charges, fees and disbursement incurred or paid by or on behalf of the
Landlord in respect thereof, together with an administration fee of 15% thereon,
shall be paid by the Tenant to the Landlord forthwith upon demand.
23. PAYMENTS TO LANDLORD
All payments to be made by the Tenant under this Lease shall be made at such
place or places as the Landlord may designate in writing, and to the Landlord or
to such agent of the Landlord as the Landlord shall from time to time direct.
The Tenant shall pay the Landlord interest on all overdue rentals including
Basic Rent and Additional Rent or other amounts, all such interest to be
calculated and compounded monthly from the date upon which the amount is first
due or demanded until actual payment thereof and at a rate per annum equal to
the greater of: (a) eighteen percent (18%), and (b) Royal Bank's prime
commercial lending rate of interest in effect in Canada from time to time plus
six percent (6%). The Landlord may at its option, apply all sums received from
the Tenant to any rent or other amounts payable hereunder in such order as the
Landlord sees fit.
24. RECOVERY OF ADJUSTMENTS
The Landlord shall have (in addition to any other right or remedy of the
Landlord) the same rights and remedies in the event of default by the Tenant in
payment of any amount payable by the Tenant hereunder as the Landlord would have
in the case of default in payment of rent. If the Landlord shall commence an
action for collection of any rent or other sums payable under this Lease or if
the same shall be collected upon the demand of a solicitor or if the Landlord
shall commence an action to compel performance of any of the terms, conditions,
covenants or provisions under this Lease or for damages for failure of the
Tenant to perform the same or if the same shall be performed upon the demand of
a solicitor then, unless the Landlord shall lose such action, the Landlord shall
collect from the Tenant and the Tenant shall pay to the Landlord all reasonable
solicitor's fees in respect thereof on a solicitor and his client basis.
25. REGISTRATION
The Tenant covenants and agrees with the Landlord that the Tenant will not
register this Lease, or a notice thereof disclosing the amount of rent payable,
in any registry office or land titles office. The Tenant shall have the right to
register a notice of this Lease that does not disclose the amount of rental
payable hereunder.
26. MORTGAGES
At the option of the Landlord, this Lease shall be subject and subordinate to
any and all mortgages, charges and deeds of trust, which may now or at any time
hereafter affect the Premises in whole or in part, or the Lands or the Building
in whole or in part, whether or not any such mortgage, charge or deed of trust
affects only the Premises or the Lands or the Building or affects other premises
as well, provided that, in each such case, any party being the beneficiary of
any such encumbrance, grants to the Tenant a non-disturbance agreement agreeing
that the interest of the Tenant pursuant to this Lease shall not be disturbed so
long as the Tenant performs the covenants set forth in this Lease. The Tenant
<PAGE>
may register any such non-disturbance agreement or notice thereof. On request at
any time and from time to time of the Landlord or of the mortgagee, chargee or
trustee under any such mortgage, charge or deed of trust, the Tenant shall
promptly, at no cost to the Landlord or mortgagee, chargee or trustee:
(a) attorn to such mortgagee, chargee or trustee and become its tenant of the
Premises or the tenant of the Premises of any purchaser from such mortgagee,
chargee or trustee in the event of an exercise of any permitted power of sale
contained in any such mortgage, charge or deed of trust for the then unexpired
residue of the Term on the terms herein contained, and/or
(b) subject to the proviso set forth above, postpone and subordinate this Lease
to such mortgage, charge or deed of trust to the intent that this Lease and all
right, title and interest of the Tenant in the Premises shall be subject to the
rights of such mortgagee, chargee or trustee as fully as if such mortgage charge
or deed of trust had been executed and registered and the money thereby secured
had been advanced before the execution of this Lease (and notwithstanding any
authority or consent of such mortgagee, chargee or trustee, express or implied,
to the making of this Lease).
Provided that this Lease and the Tenant's rights hereunder shall continue
undisturbed while the Tenant is not in default despite default under any such
mortgage, charge or deed of trust. Any such attornment or postponement and
subordination shall extend to all renewals, modifications, consolidations,
replacements and extensions of any such mortgage, charge or deed of trust and
every instrument supplemental or ancillary thereto or in implementation thereof.
The Tenant shall forthwith execute any instruments of attornment or postponement
and subordination which may be so requested to give effect to this Article.
27. ASSIGNMENT BY LANDLORD
If the Landlord sells or leases the Lands, or its interest therein, or the
Building or any part thereof, or assigns this Lease, and to the extent that the
purchaser, lessee or assignee is responsible for compliance with the covenants
and obligations of the Landlord hereunder, the Landlord without further written
agreement will be discharged and relieved of liability under the said covenants
and obligations. In the event that the Landlord assigns this Lease to a party
that is a competitor of the Tenant, being a company engaged in the business of
commercial aviation, then, in such event, the Tenant shall have the right to
terminate this Lease with not less than ninety (90) days written notice.
28. CAPTIONS
The captions appearing in this Lease have been inserted as a matter of
convenience and for reference only and in no way define, limit or enlarge the
scope of meaning of this Lease or any of the provisions hereof.
29. EFFECT OF LEASE
This indenture and everything herein contained shall extend to and bind and may
be taken advantage of by the respective heirs, executors, administrators,
successors and assigns, as the case may be, of each and every of the parties
hereto, subject to the granting of consent by the Landlord as provided herein to
any assignment or sub-lease, and where there is more than one tenant or there is
an individual party or a corporation, the provisions hereof shall be read with
all grammatical changes thereby rendered necessary and all covenants shall be
deemed joint and several.
This Lease is the sole agreement between the parties with respect to the subject
matter of this Lease. There is no representation, warranty, collateral agreement
or condition affecting the Lands, the Building, the Premises or this Lease, or
supported by this Lease other than as expressed in this Lease. The schedules and
appendices to this Lease form part of this Lease.
This Lease may not be modified or amended except by instrument in writing signed
by the Landlord and the Tenant.
<PAGE>
30. INTERPRETATION OF LEASE
All of the provisions contained in this Lease are to be construed as covenants
and agreements and if any provision is illegal or unenforceable, it shall be
considered separate and severable from the remaining provisions, which shall
remain in force and be binding upon the Landlord and the Tenant.
31. TIME OF ESSENCE
Time shall be of the essence of this Lease.
32. LAW
This Lease shall be governed by and construed in accordance with the laws of the
Province of Ontario.
33. NOTICE
Any notice required or contemplated by any provision of this Lease shall be
given in writing enclosed in a sealed envelope addressed, in the case of notice
to the Landlord, to 175 Columbia St., West, Waterloo, Attention: M. Conrad, and
in the case of notice to the Tenant, to it at the Premises, and mailed in the
Province of Ontario, registered and postage prepaid provided that there is no
actual or contemplated disruption of mail services at the time of such mailing.
The time of giving of such notice shall be conclusively deemed to be the fifth
(5th) business day after the day of such mailing provided that there is no
disruption of mail services at the time of such mailing. Such notice shall also
be sufficiently given if and when the same shall be delivered, in the case of
notice to the Landlord, to an executive officer of the Landlord, and in the case
of notice to the Tenant, to him personally or to an officer or employee of the
Tenant, if the Tenant is a corporation or by leaving such notice addressed to
the Tenant at the address of the Tenant set forth above. Such notice, if
delivered, shall be conclusively deemed to have been given and received at the
time of such delivery. If in this Lease two or more persons are named as Tenant,
such notice shall also be sufficiently given if and when the same shall be
delivered personally to any one of such persons. Provided that the Landlord may,
by notice to the Tenant, from time to time designate another address in Canada
to which notices mailed to the Landlord more than ten (10) days thereafter shall
be addressed.
34. EXPANSION, ALTERATION
The Landlord shall have the right to enter into the Premises and to bring its
workmen and materials thereon to make additions, alterations, improvements,
installations and repairs to the Lands, the Building, and the common areas and
services thereof as such may exist from time to time. The Landlord may upon
reasonable notice to the Tenant, save for an emergency when no notice shall be
required, cause such reasonable obstructions and interference with the use and
enjoyment of the Lands, the Building, and the Premises as may be necessary for
the purposes aforesaid and may, upon twenty-four (24) hours prior written
notice, interrupt or suspend the supply of electricity, water or other utilities
or services when necessary and until the additions, alterations, improvements,
installations or repairs have been completed, and there shall be no abatement in
rent nor shall the Landlord be liable by reason thereof, provided all such work
is done as expeditiously as reasonably possible. The Landlord shall have the
right to use, install, maintain and repair pipes, wires, ducts, shafts, or other
installations in, under or through the Premises for or in connection with the
supply of any services to the Premises or any other premises in the Building.
Without limiting the foregoing, the Landlord hereby reserves the right at any
time and from time to time to make changes or revisions in its plans for the
Lands or the Building, including additions to, subtractions from, or
rearrangements of the building areas, walkways, parking areas or driveways,
tunnels, roadways and covered parking garages, and particularly the right to
construct other buildings and improvements on the Lands. The Landlord shall have
the right to enter into the Premises for such purposes, even during Normal
<PAGE>
Business Hours and upon reasonable notice, without abatement of rent or any
compensation to the Tenant. The Landlord shall have the right for all purposes
to specify the date on which any such changes to the Lands or the Building
become part of the Lands or the Building, as the case may be.
35. CALCULATION OF AREAS
Wherever in this Lease reference is made to the size of any area or areas and no
other manner of measurement is stipulated, or the amount of any payment is
required to be determined in reference to the size of any area or areas, such
reference in the case of any enclosed area or areas shall be deemed to mean the
size of such area or areas measured from the outside surface of the exterior
walls, doors and windows thereof and from the centre line of all interior walls
separating such premises from the adjacent premises. Where any wall, door or
window of any premises is recessed from the leasing line of such premises the
area of such recess shall be included in the area of such premises.
A certificate of the Landlord's Architect as to the size of any area or areas,
or as the extent of any injury, or the portion of the Premises capable of being
used for the purpose for which they are leased, or the period within any injury
may be repaired, or the date on which any repairs have been completed, shall be
conclusive and binding on the parties.
36. FAILURE OF LANDLORD TO DELIVER POSSESSION
Anything in this Lease to the contrary notwithstanding, and in supplement to the
provision of Article 14, the Landlord shall not be deemed in default if the
Landlord is unable to give possession of the Premises on the commencement date
of the Term by reason of the holding over or the retention of possession by any
lessee or occupant or by reason of the fact that repairs, improvements or
decorations of the Premises or of the Building which the Landlord has agreed to
perform are not completed or for any other reason not due to the wilful act or
neglect of the Landlord. In such circumstances the rent shall not commence until
the date on which possession of the Premises is actually given to the Tenant and
no such failure to give possession of the Premises on the commencement date of
the Term shall in any way affect the validity of this Lease or the terms or
conditions of this Lease, nor shall the same be construed in any way to extend
the Term.
37. SECURITY DEPOSIT
Not applicable.
38. TURNKEY
The Landlord shall deliver to the Tenant the Premises on a turnkey basis whereby
the Landlord will complete the Tenant's Leasehold Improvements, the terms and
specifications of which will be identified and agreed to by the Landlord and
Tenant, which include, but are not limited to, the terms and conditions set
forth in Schedule "F" provided that in no event, unless otherwise agreed in
writing by the Landlord, shall the contribution of the Landlord for the Tenant's
Leasehold Improvements exceed the amount set forth in Scehedule "F". The quality
of the Leasehold Improvements to be made by the Landlord for the Premises will
be equivalent to the improvements made by or for the Landlord for the space
occupied by Mortice Kern Systems Inc. in UniPark III.
The Tenant's specifications for the Leasehold Improvements for the Premises will
be delivered to the Landlord within seven (7) business days following the
execution of this Lease.
39. LANDLORD'S WORK
The Landlord shall complete the Landlord's Work as outlined in Schedule "E" at
the Landlord's cost, by September 15th, 1996 to enable commencement of the
Turnkey to permit the Landlord to undertake and complete the Leasehold
Improvements as provided in Section 38 above.
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Lease.
FERDI INVESTMENTS COMPANY LIMITED
Per:/s/
------------------------------------
Title: President
-----------------------------------
I have authority to bind the Corporation.
NAVTECH SYSTEMS SUPPORT INC.
Per:/s/ Dorothy A. English
------------------------------------
Title: Managing Director
-----------------------------------
<PAGE>
SCHEDULE "A"
Part Lot 3, Municipal Compiled Plan of Part of Lots 13,
G.C.T., City of Waterloo, being Part 1 Plan 58R-5914.
<PAGE>
SCHEDULE "B"
FLOOR PLAN OF PREMISES
<PAGE>
SCHEDULE "C"
RULES AND REGULATIONS FORMING PART OF THE WITHIN LEASE
1. The sidewalk, entry passages, elevators, fire escapes and common stairways
of the Building shall not be obstructed by any of the tenants or used by them
for any purpose other than for ingress and egress to and from their respective
premises. Tenants will not place or allow to be placed in the building corridors
or public stairways any waste paper, dust, garbage, refuse or anything whatever
that would tend to make them unclean or untidy.
2. The skylights and windows that reflect or admit light into passageways and
common areas of the Building shall not be covered or obstructed by any of the
tenants, and no awnings shall be put up, without the prior written consent of
the Landlord.
3. The water-closets and other water apparatus shall not be used for any
purpose other than those for which they were constructed, and no sweepings,
rubbish, rags, ashes or other substances shall be thrown therein. Any damage
resulting by misuse shall be borne by the tenant by whom or by whose agents,
servants or employees the same is caused. Tenants shall not let the water run
unless in actual use, nor shall they deface any part of the Building.
4. No tenant shall do or permit anything to be done in the Premises or bring or
keep anything therein which will in any way increase the risk of fire, or
obstruct or interfere with the rights of other tenants, or violate or act at
variance with the laws relating to fires or with the regulations of the Fire
Department or the Board of Health.
5. Tenants, their clerks or servants, shall not make or commit any improper
noises on the Lands and Building, lounge about doors or corridors or interfere
in any way with other tenants or those having business with them.
6. Nothing shall be thrown by the tenants, their clerks or servants, out of
windows or doors, or down the passages, elevator shafts or skylights of the
Building.
7. No birds or animals shall be kept in or about the Premises nor shall the
tenants operate or permit to be operated any musical or sound producing
instrument or device inside or outside the Premises which may be heard outside
the Premises.
8. No one shall use the Premises for sleeping apartments or residential
purposes, or for the storage of personal effects or articles other than those
required for business purposes.
9. The Landlord shall have the right:
(a) to require all persons entering or leaving the Building after Normal
Business Hours as the Landlord may reasonably require, to identify themselves to
a watchman by the registration or otherwise to establish their right to enter or
leave; and
(b) to exclude or expel any peddler or beggar at any time from the
Premises, the Lands, or the Building.
10. Not applicable.
11. It shall be the duty of the respective tenants to assist and co-operate
with the Landlord in preventing injury to the Premises demised to them
respectively.
12. No inflammable oils or other inflammable, radioactive, dangerous or
explosive materials shall be kept or permitted to be kept in the Premises,
except in such quantities as may be required for normal office purposes and
provided that the Tenant shall take all necessary precautions in the use and
storage of such quantities. Nothing shall be placed on the outside of window
sills or projections.
13. Except in the normal course of business, furniture, effects and supplies
shall not be taken into or removed from the Building or the Premises, except at
such time and in such manner as may be previously approved by the Landlord
acting reasonably, which approval shall include permission to use entrances,
doorways and freight elevators at certain times for such purposes, and upon such
<PAGE>
terms (including payment of any usual charges for the use of freight elevators)
as the Landlord shall impose.
14. No bicycles or other vehicles shall be brought within the Building or Lands
except in the parking garage, and then only in compliance with the rules and
regulations as established and in force from time to time for the use of said
parking garage. In the event that the outdoor bike rack is full, then bicycles
may be brought into the Building, provided they shall not gain access through
the Building common corridors.
15. Business machines, filing cabinets, heavy merchandise, or other articles
liable to overload, injure or destroy any part of the Building shall not be
taken into it without the prior written consent of the Landlord which shall not
be unreasonably withheld and the Landlord acting reasonably shall in all cases
retain the right to prescribe the weight and proper position of all such
articles and the times and routes for moving them into or out of the Building;
the cost of repairing any damage done to the Building by such moving or by
keeping any such articles on the Premises shall be paid by the Tenant.
16. The Tenant shall not change any locks nor place any additional lock upon any
door of the Premises without the prior written consent of the Landlord acting
reasonably. The Tenant shall be responsible for all locks and all keys to such
locks and shall return all keys to the Landlord upon termination of the Lease.
17. The Tenant shall give the Landlord prompt notice of any accident to or any
defect in the plumbing, heating, air conditioning, mechanical or electrical
apparatus or any other part of the Building.
18. Not applicable.
19. The parking of vehicles in the parking areas on the Lands shall not be
subject to any charge or regulation of the Landlord during the Term, including
any Renewal Term. The Landlord shall not be responsible for loss of or damage to
said vehicles or anything contained therein.
20. The Tenant will not deface or mark any part of the Premises, Lands or
Building and will not permit any hole to be drilled or made or nails, screws,
hooks or spikes to be driven into stone or brick work of the Building or any
appurtenances thereof without the prior written consent of the Landlord.
21. The lining of all window drapes facing the interior surface of all windows
shall be subject to the prior written approval of the Landlord as to colour and
material and the Tenant shall not hang and will remove all draperies which in
the Landlord's opinion do not conform to any uniform scheme of window coverings
established for the Building.
22. The Tenant shall at the end of each business day leave the Premises in a
reasonably tidy condition for the purpose of allowing the performance of the
Landlord's cleaning services.
23. The Landlord shall have the right to make such other and further reasonable
rules and regulations as in its judgment may from time to time be needed for the
safety, care, cleanliness and appearance of the Premises and the Building, and
for the preservation of good order therein, and the same shall be kept and
observed by the tenants, their clerks and servants.
24. No public or private auction or other similar type of sale of any
goods, wares or merchandise shall be conducted in or from the Premises.
25. No external telephonic, telegraphic, electronic, wire service or other
connections or electric wiring shall be made in places other than those
designated by the Landlord or without the authority of the Landlord, which
authority shall not be unreasonably withheld, and which will direct the
electricians or other workmen as to where and how any wires or equipment are to
be introduced and without any such directions, no boring or cutting or otherwise
will be permitted.
<PAGE>
SCHEDULE " D"
SPECIAL PROVISIONS
EARLY OCCUPANCY:
The tenant has the right to occupy the leased premises prior to october 1st (or
earlier if the tenant improvements are completed) provided the lease has been
executed by both parties, to install its trade fixtures and personal property,
to establish a normal working environment, and may commence normal business out
of the leased premises. The tenant shall not pay any basic rent, or additional
rent, during the early occupancy period, but all other terms and conditions of
the lease shall be held in effect.
LEASE ASSUMPTION:
The existing lease at 550 parkside drive, unit a1 for 4,233 rentable square feet
will be assigned to ferdi investments company limited effective November 1, 1996
for the balance of the term (expiring December 14, 1996). Should this Lease
Assignment not transpire for any reason, the Landlord will pay to Navtech
Systems Support Inc. on the first day of each month, the monthly value of the
lease being Three Thousand four Hundred and Forty ($3,440.00 dollars plus GST
until lease termination. The Total value of this lease as of November 1, 1996
until December 14th, 1996 will be Five Thousand, One Hundred ans Sixty dollars
($5,160.00) plus GST.
EARLY TERMINATION:
The Tenant shall have the right at the end of the fifth year to terminate the
Lease with six (6) months prior written notice. This right will continue on an
annual basis until the end of the term. The Tenant will have the right to Early
Termination at any time before the fifth (5th) year should the Landlord be
unable to accommodate the Tenant's future growth in contiguous space within the
Unipark Buildings known as of this date as the University Office Park. Should
the Tenant terminate, the penalty will be the unamortized portion remaining of
the Tenant's Leasehold Improvements based on the unamortized portion of the
remaining Turnkey being not more than fifteen ($15.00) Dollars per square feet,
the unamortized portion of the Lease Assumption being Five Thousand, One Hundred
and Sixty Dollars ($5,260.00), the unamortized portion of the leasing commission
being approximately Sixteen Thousand and Eighty-Six ($16,086.00) dollars, and
the Rent being Eight Dollars and Forty-Eight Cents ($8.48) over the Term. The
amortization period for the above will be ten (10) years at Nine (9%) percent.
an example of the Early Termination penalty after the fifty (5th) year would be
as follows:
Tenant Improvement Allowance $120,000.00
Lease Assumption 5,160.00
Leasing Commission 16,086.00
--------- (end of
$141,246.00/10 years /9%=$86,895.00 5th year)
Rent
Year 1 $2.25 (blended rent) - $8.48 = $6.23
Year 2 $6.50 - $8.48 = $1.98
Year 3 $7.50 - $8.48 = $0.98
Year 4 $8.50 - $8.48 = $0.02+
Year 5 $9.50 - 8.48 =$1.02+
-------
=$8.15 X 8,000 S.F. = $65,200.00
+$86,895.00
----------
TOTAL OWING $152,095.00
<PAGE>
ELECTRICAL REQUIREMENTS:
The Landlord represents, warrants and guarantees to the Tenant that the Premises
will have available, without additional cost to the Tenant, the power of
120/208V and a 347/600V 3 phase, 4 wire service to circuit breaker panels of
sufficient capacity to allow a connected load of 2 watts per square foot for
lighting and 4 watts per square foot of power. There shall also be an allowance
of a further 2 watts per square foot for future requirements, for a total of 8
watts per square foot. At no time during the Term shall the Landlord disrupt the
power source in any way whatsoever, unless with reasonable prior notice to
enable the Tenant to access the generator's power supply.
ROOF COMMUNICATIONS:
The Tenant shall have the right to install a satellite dish (or any other roof
communications subject to Landlord approval which shall not be unreasonably
withheld) on the roof of the Building, for the Term of the Lease or any Renewals
at no additional rental charges whatsoever. Upon termination, the Tenant shall
be required to remove, and make good and repair any alteration or damages to the
roof as a result of the installation of the equipment. The Tenant warrants that
its installation of roof-top communications equipment will not damage the roof
structure and that any damage as a result of its installation will be repaired
immediately at its own expense.
TELEPHONE REQUIREMENTS:
The Landlord represents, warrants and guarantees to the Tenant that the Premises
will have available within the Building, without additional cost to the Tenant,
the capacity to install a minimum capacity of 30 voice/data lines, and up to a
maximum of 60 voice/data lines. The Tenant shall have the right to install
access lines to the Building and the Premises and the Tenant shall pay the cost
of such installations. The Tenant shall have no obligation to pay to the
Landlord any additional amount with respect to the services referred to in this
paragraph.
FIRST RIGHT OF REFUSAL:
The Tenant has the First Right of Refusal to lease the adjacent contiguous space
during the Term or the Renewal Term of the Lease, subject only to the provisions
of Mortice Kern Systems Lease re: notice of additional space available in the
building. Should the Tenant expand into this space within twenty-four (24)
months of the Lease Commencement, this space will be leased under all the same
terms and conditions as outlined in the Lease. After this twenty-four (24) month
period from Commencement Date this additional space will be leased under the
same terms and conditions as outlined in the Lease, except for the Free Rent,
Leasehold Improvement Allowance, and Basic Rent, which shall be at the then
current market Rent for similar space in a similar building in a similar
location. Should the Landlord receive a bona fide Offer to Lease from a third
party for the said space, then the Tenant shall have ten (10) business days,
from receipt of such notice from Landlord to exercise in writing this First
Right of Refusal. If the Tenant gives up this right, and the space once again
becomes available during the existing Term, then the First Right of Refusal
shall remain in effect.
PARKING:
The Landlord will provide unlimited free on-site surface parking for business
use for the vehicles of employees and visitors during the entire Term and
Renewal Term of the Lease.
KEYS:
The Landlord shall supply the Tenant with the keys for the main front entry door
and suite entry for all employees at no cost to the Tenant.
<PAGE>
COMMISSIONS:
A Commission of two and one half percent (2.5%) of the total value of the net
rent on a ten(10) year Term will be paid to David Land Real Estate Ltd. Upon the
Tenant having occupied the Premises and the Lease having been fully executed by
the Tenant.
SPACE PLAN ALLOWANCE:
The Landlord shall contribute One Thousand and Five Hundred ($1,500.00) to
Jeannie Judge towards the space planning expenses as provided for in the Offer
to Lease forthwith upon execution of this Lease if not already paid prior to the
execution hereof. The Landlord shall also pay for the work completed at UniPark
III for the initial space plan which will not be included in the above Space
Plan Allowance.
<PAGE>
SCHEDULE "E"
LANDLORD'S WORK
The following Landlord's Work will be completed by September 15th, 1996, or
earlier at the sole cost to the Landlord, and will not be included as part of
the Turnkey as outlined in Schedule "F".
1) Any necessary demolition to bring the space back to base building. The Tenant
has the right to reuse any existing items on the first floor including, but not
limited to, improvements or fixtures at no extra cost to the tenant. The
Landlord will repair any damage to the base building surfaces as a result of
such demolition to receive new finished as per the Tenant's specifications.
2) Any burnt out lights and ballasts will be replaced.
3) All ceiling tiles will be removed prior to construction and replaced after
completion. Any damaged or discoloured ceiling tiles will be replaced. Any
damaged ceiling grid will be replaced.
4) Landlord shall provide interior double glass suite entry doors as per the
Tenant's specifications, and any necessary building standard egress door. Should
the Landlord not agree to the interior door, then the Landlord shall be required
to install exterior glass entry doors, and an interior vestibule as per the
Tenant's specifications.
5) The floor shall be brought back to smooth concrete, and sealed ready to
receive floor covering as per Tenant's specifications.
6) Demising walls, (to slab and insulated) to be erected as per the Tenants
specifications, exterior and interior will be finished in drywall, taped, primed
and painted as per Tenant's specifications. All the existing demising walls must
also be insulated and to slab, and repaired if necessary.
7) Building standard window covering will be installed by the Landlord.
8) Power distribution. The Landlord will be responsible to bring the
necessary power distribution from the designated electrical panel to the
Tenant's Premises.
9) Telephone distribution. The Landlord will be responsible to bring any
necessary Telephone distribution to the Telephone closet located on the ground
floor.
10) The Landlord will provide sprinklers in the Premises to comply with all fire
regulations, should it be required by governmental authorities.
11) The Landlord will install standard base building mechanical distribution.
The Tenant will be responsible to reconfigure the distribution as per plans.
12) Landlord will relocate any fire hose cabinets if so required.
13) Landlord will replace or repair all windows within the Premises and will
guarantee that any future repairs or replacements will be at the expense of the
Landlord, for the first (1st) year of the Term.
14) The Landlord will recarpet and recover the walls of the first floor
corridors. The Landlord will make best efforts to consult where ever possible
with the Tenant on the colour selections being used.
<PAGE>
SCHEDULE "F"
TURNKEY FOR THE TENANT'S LEASEHOLD IMPROVEMENTS
The following Tenant's Leasehold Improvements will be performed by the Landlord
on behalf of the Tenant as a Turnkey, up to a maximum amount of Twenty Dollars
($20.00) per square foot. The Landlord shall act as general contractor and will
work with the Tenant to establish a budget and to assist with the expedition of
the Turnkey within the proposed budget. Following completion of the Turnkey the
Landlord will provide the Tenant with a reconciliation of the Leasehold
Improvement portion of the Turnkey (excluding the Generator).
1) All necessary working drawings, and related design fees (excluding the
Space Plan).
2) The distribution of all power, plumbing and cabling within the Premises.
3) All floor covering within the Premises.
4) All interior partitioning and mill work as per plans.
5) Paint with finish coat the interior of the demising wall of the Premises.
6) Installation of any light fixtures above the normal light fixtures
provided by the Landlord.
7) Generator: As part of the Twenty Dollar ($20.00) Turnkey Allowance, the
Landlord shall allocate up to a maximum amount of Five Dollars ($5.00) per
square foot to a Uninterrupted Power Supply needed for the computer equipment
which will also include the installation and purchase of the generator. This
generator will be independent of the building's main power supply and will be
exclusively used the Tenant during the Term or any Renewals. It shall have a
capacity of 25KW.
5) Paint with finish coat the interior of the demising wall
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 37,362
<SECURITIES> 0
<RECEIVABLES> 673,739
<ALLOWANCES> 72,644
<INVENTORY> 0
<CURRENT-ASSETS> 769,687
<PP&E> 754,723
<DEPRECIATION> 501,679
<TOTAL-ASSETS> 1,814,898
<CURRENT-LIABILITIES> 1,010,335
<BONDS> 0
0
0
<COMMON> 1,702
<OTHER-SE> 504,321
<TOTAL-LIABILITY-AND-EQUITY> 1,814,898
<SALES> 0
<TOTAL-REVENUES> 3,574,589
<CGS> 0
<TOTAL-COSTS> 3,718,473
<OTHER-EXPENSES> (380,488)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,938
<INCOME-PRETAX> 149,666
<INCOME-TAX> 0
<INCOME-CONTINUING> 149,666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149,666
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
</TABLE>
