United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Period Ended July 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Transition Period From
_______________ to_______________
Commission file number 0-22636
CANMAX INC.
______________________________________________________________________
(Exact name of registrant as specified in its charter)
Wyoming 75-2461665
__________________________________ _______________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 W. Carpenter Freeway
Irving, Texas 75039
________________________________________ _____________________________
(Address of principal executive offices) (Zip Code)
(972) 541-1600
______________________________________________________________________
(Registrant's telephone number, including area code)
Not applicable
______________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods 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______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, No Par Value----6,611,005 shares as of September 12,
1997.
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CANMAX INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
July 31 October 31
1997 1996
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 778,031 $ 908,772
Accounts receivable, net (Note B) 575,496 2,027,288
Inventory (Note C) 42,860 388,800
Prepaid expenses and other 153,427 202,513
Total current assets 1,549,814 3,527,373
Property and equipment at cost less
accumulated depreciation and
amortization of $2,556,600 in 1997
and $2,126,891 in 1996 1,124,587 1,411,567
Capitalized software costs, net of
accumulated amortization of $781,418
in 1997 and $607,857 in 1996 343,438 516,999
Intellectual property rights, net of
accumulated amortization of $635,451
in 1997 and $620,173 in 1996 34,722 50,000
Other assets (Note D) 380,845 144,194
$ 3,433,406 $ 5,650,133
See accompanying notes.
</TABLE>
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<TABLE>
CANMAX INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, continued
(Unaudited)
July 31 October 31
1997 1996
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 687,015 $ 1,724,195
Accrued liabilities 786,849 778,521
Deferred revenue 268,046 558,122
Current portion of lease obligation 174,495 128,282
Current portion of long-term debt 34,889 34,022
Advance from shareholder (Note E) - 95,765
Total current liabilities 1,951,294 3,318,907
Lease obligations 158,182 169,794
Long - term debt 59,920 86,114
Shareholders' equity;
Common stock, no par value,
44,169,100 shares authorized;
6,611,005 and 5,012,869 shares
issued and outstanding in 1997
and 1996, respectively 23,234,233 18,372,574
Option to purchase common stock
(Note F) - 4,861,659
Accumulated deficit (21,970,223) (21,158,915)
Total shareholders' equity 1,264,010 2,075,318
$ 3,433,406 $ 5,650,133
See accompanying notes.
</TABLE>
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<TABLE>
CANMAX INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months For the nine months
ended July 31 ended July 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Software licenses and
product revenue $ 214,006 $ 353,440 $ 868,767 $ 1,778,263
Development 603,731 2,218,962 6,685,579 4,911,539
Service agreements 536,709 844,342 1,534,274 1,885,830
1,354,446 3,416,744 9,088,620 8,575,632
Costs and expenses:
Costs of software licenses
and product revenue 224,714 211,600 699,067 1,417,610
Cost of development revenues 917,168 828,555 3,908,941 1,844,931
Customer service 599,189 603,998 1,753,982 1,734,445
Product development 152,425 447,403 466,940 997,490
General and administrative 747,115 864,786 2,625,586 2,425,178
Sales and marketing 178,519 106,933 432,272 338,025
Interest and financing 6,010 8,443 13,260 27,075
2,825,140 3,071,718 9,900,048 8,784,754
Net income (loss) (1,470,694) 345,026 (811,428) (209,122)
Net income (loss) per common
and common equivalent share $ (.22) $ .05 $ (.15) $ (.04)
Weighted average common and
common equivalent shares
outstanding 6,611,005 6,346,115 5,563,143 4,972,985
See accompanying notes.
</TABLE>
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<TABLE>
CANMAX INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the nine months
ended July 31
1997 1996
<S> <C> <C>
Operating activities:
Net loss $ (811,428) $ (209,122)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 703,476 656,458
Loss on disposal of assets 8,793 9,452
Writedown of inventory - 217,623
Writedown of investment - 43,675
Changes in assets and liabilities:
Accounts receivable 1,451,792 612,154
Inventory 345,940 (79,325)
Prepaid expenses and other 49,086 (89,932)
Accounts payable (1,037,180) (182,320)
Accrued liabilities 8,328 114,007
Deferred revenue (290,076) (132,040)
Net cash provided by operating activities 428,731 960,630
Investing activities:
Purchase of property and equipment (103,294) (203,426)
Capitalized software costs - (128,874)
Increase in other assets (236,651) (54,251)
Net cash used in investing activities (339,945) (386,551)
Financing activities:
Net proceeds from issuance of
common stock - 208,940
Decrease in lease obligation (98,556) (18,540)
Decrease in development obligation - (65,000)
Repayment of shareholder advance (95,765) (69,519)
Proceeds from borrowing - 63,157
Repayment on borrowing (25,327) -
Net cash (used in) provided by financing
activities (219,648) 119,038
Effect of exchange rate changes on cash 121 3,962
Net (decrease) increase in cash (130,741) 697,079
Cash at beginning of period 908,772 477,364
Cash at end of period $ 778,031 $ 1,174,443
See accompanying notes.
</TABLE>
<PAGE>
CANMAX INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period and
nine month period ended July 31, 1997 are not necessarily indicative
of the results that may be expected for the year ended October 31,
1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual
report on Form 10K for the year ended October 31, 1996. Certain
amounts in the 1996 condensed consolidated statement of operations
have been reclassified to conform with the 1997 presentation.
NOTE B - ACCOUNTS RECEIVABLE AND DEVELOPMENT PROJECT REVENUE
RECOGNITION
At July 31, 1997, accounts receivable included approximately $226,000
of work performed for which billings have not been presented to the
customer or for which amounts are not contractually billable.
Approximately $130,000 of this amount was billed in August, 1997 and
collected in September, 1997. The remaining amounts are scheduled to
be billed and collected in September, 1997.
During the third quarter of 1997, the Company undertook a significant
work effort to support the expanded testing of the NCR Corporation /
The Southland Corporation (SLC) project for an interim period up to
pilot implementation which is now scheduled for September 15, 1997.
This expanded work effort was out of the scope of the original contract.
The Company anticipated and is currently negotiating additional billings
for this added work effort, but have been unable to resolve the
outcome of this issue at this time. Accordingly, the Company has
increased its cost estimates used to compute development project
revenue under the percentage-of-completion method and has expensed all
costs incurred related to this additional work effort including
approximately $854,000 for work performed during the third quarter of
1997. Additional payments, if any, to be received by the Company from
SLC for this expanded work effort will be recognized as revenue when
realization of such payments is probable.
NOTE C - INVENTORY
Inventory consists primarily of computer hardware and purchased
software.
<PAGE>
NOTE D - OTHER ASSETS
Included in other assets at July 31, 1997 is $254,986 of expenses
related to the pending merger with Auto-Gas Systems, Inc. (see Note G
- Pending Acquisition). Costs totaling $208,739, comprised primarily
of legal and professional fees incurred through July 31, 1997, will be
accounted for as additional purchase price upon consummation of the
merger transaction. The remaining costs totaling $46,247 represent
costs incurred through July 31, 1997 to register the securities to be
issued relating to the merger transaction and will be recorded as a
reduction of the fair value of the securities issued upon consummation
of the merger transaction.
NOTE E - ADVANCES FROM SHAREHOLDERS
During the first quarter of 1995, a director, W. Thomas Rinehart,
advanced the Company $250,000. The advance was unsecured and had an
interest rate of 10%. The principal balance was due on demand.
Principal payments of $ 95,765 were repaid during the six month period
ended April 30, 1997, which fully satisfied the Company's obligation.
NOTE F - EDS AGREEMENTS AND TRANSACTION
The Company signed agreements with Electronic Data Systems Corporation
("EDS") in April 1993 which were amended in October 1994. Under the
terms of the amended agreements, EDS marketed the Company's software,
services and hardware technology to the retail petroleum marketplace
exclusively, and the Company offered EDS the right to participate with
its customers and prospective customers. Additionally, the Company
granted EDS the right to acquire up to 25% of the Company's common
stock calculated on a fully diluted basis at the time of exercise, at
an exercise price of not less than 75% of the market value of the
common stock at the time of exercise, minus $4,861,659, which would be
reduced by royalties or similar payments received by EDS from any
licensing of the Company's product other than through EDS.
On April 29, 1997, EDS exercised its option to acquire up to 25% of
the Company's common stock, resulting in the Company issuing an
additional 1,598,136 shares. The Company accounted for this
transaction by reclassifying the amount associated with the option to
common stock. EDS then immediately sold its total interest in the
Company, representing 1,863,364 shares, in a private transaction to
Founders Equity Group, Inc. and the Dodge Jones Foundation, two Texas-
based institutional investors. In conjunction with this transaction,
the Company entered into registration rights agreements with the two
institutional investors.
Additionally, EDS and the Company agreed to amend a license and grant
of rights agreement which specifies rights and obligations of both
parties as to 788 of the Company's site licenses currently owned by
EDS, and to terminate all formal agreements including the
aforementioned stock option agreement, as well as their joint
marketing and other supporting business agreements.
<PAGE>
NOTE G - PENDING ACQUISITION
On June 16, 1997, the Company signed a definitive agreement to merge
Auto-Gas Systems, Inc. ("AutoGas"), headquartered in Abilene, Texas,
with and into a wholly owned subsidiary of the Company, Canmax Retail
Systems, Inc. The closing of the AutoGas merger is subject to
shareholder approval and is also subject to the satisfactory
completion of other conditions. Under the merger agreement, AutoGas
shareholders are expected to receive approximately 5.2 million shares
of Canmax common stock. The new shares will be issued at closing. An
additional 1.5 million shares of Canmax common stock will be reserved
for issuance upon the exercise of options and warrants held by AutoGas
shareholders and employees. On August 13, 1997, the Company filed a
preliminary registration statement on Form S-4 for the merger with
Auto-Gas Systems, Inc.
NOTE H - WARRANT ISSUE
On May 9, 1997, Founders Equity Group, Inc. exercised its right to
demand that Canmax file a registration statement with regard to all
its shares (863,364) of Canmax Common Stock. Such shares were
acquired from EDS on April 29, 1997 (see Note F - EDS Agreements and
Transaction). Under applicable securities laws, Canmax was unable to
file such registration statement until after the filing of the
registration statement relating to the resale of shares of Canmax
Common Stock in the Merger of Canmax and Auto-Gas Systems, Inc.
Pursuant to the terms of the registration rights agreement with
Founders Equity Group, Inc., Canmax was to have filed a registration
statement on or about July 23, 1997 or incur a registration penalty of
50,000 shares per month. Founders Equity Group, Inc. agreed to extend
the registration obligation until August 26, 1997 in exchange for its
receipt of a warrant to purchase 50,000 shares of Canmax Common Stock
at an exercise price of $2.00 per share. The registration obligation
has been satisfied by the filing of a registration statement on Form
S-3 on August 13, 1997.
NOTE I - NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share is based upon
the weighted average number of common shares outstanding, and when
dilutive, common equivalent shares outstanding during the period.
Common equivalent shares consist of stock options (using the treasury
stock method) and the EDS Option (see Note F - EDS Agreements and
Transaction).
NOTE J - NASDAQ NEW LISTING REQUIREMENTS
On January 28, 1997, the National Association of Securities Dealers,
Inc. and The Nasdaq Stock Market approved increases in the listing and
maintenance standards governing The Nasdaq SmallCap Market. The
Securities and Exchange Commission approved the changes on August 22,
1997. The new standards were declared effective by the Nasdaq Stock
Market on August 25, 1997.
<PAGE>
As at July 31, 1997, Canmax failed to meet the new continued listing
requirements relating to minimum net tangible assets of $2 million.
Nasdaq has advised that companies failing to satisfy the new continued
listing requirements will be allowed six months to meet the new
requirements. Canmax expects to meet the new continued listing
requirements following consummation of its recently announced merger
with Auto-Gas Systems, Inc. (see Note G - Pending Acquisition).
Consummation of this transaction is expected prior to the expiration
of the six month transition period provided by Nasdaq.
NOTE K - NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be
adopted for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under
the new requirements, primary earnings per share will be replaced by a
simpler calculation called "basic" earnings per share. This
calculation will exclude all common stock equivalents and other
dilutive securities (i.e. options, warrants and convertible
instruments). Under the new requirements, "diluted" earnings per
share will replace the existing fully diluted earnings per share
calculation. The new diluted earnings per share will include the
effect of all dilutive instruments if they meet certain requirements.
Under the new standards, earnings (loss) per share would be as
follows:
For the three months For the nine months
ended July 31 ended July 31
1997 1996 1997 1996
Basic $ (0.22) $ 0.07 $ (0.15) $ (0.04)
Diluted $ (0.22) $ 0.05 $ (0.15) $ (0.04)
NOTE L - SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING
ACTIVITIES
In June 1997, a capital lease obligation of $133,157 was incurred when
the Company entered into a lease for new computer equipment.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Revenue
During the third quarter of 1997, the Company had revenues of
$1,354,446, a decrease of $2,062,298 or 60.4% from the third quarter
of 1996. During the third quarter of 1997, The Southland Corporation
(SLC) and NCR Corporation (NCR) accounted for approximately 81.4% of
the Company's total revenue as compared with approximately 84.4% for
the comparable period of 1996. For the nine months ended July 31,
1997 the Company had revenues of $9,088,620, an increase of $512,988
or 6.0% over the comparable period in 1996. For the nine months ended
July 31, 1997, SLC and NCR accounted for approximately 92.1% of the
Company's total revenue as compared to approximately 80.0% for the
comparable period of 1996.
Software licenses and product revenue for the third quarter of 1997
was $214,006, a decrease of $139,434 or 39.5% from the third quarter
of 1996. The decrease is due to a reduction in software sales to SLC,
a decrease in revenue from the sale of software and hardware
components to other customers, partially offset by an increase in
hardware components sold to SLC related to the planned rollout by SLC
of the Company's Windows NT solution scheduled to commence in
September 1997. Software licenses and product revenue decreased
$210,834 or 49.6% from the second quarter of 1997 primarily due to a
reduction in software sales to SLC partially offset by an increase in
hardware components sold to SLC related to the aforementioned rollout
by SLC of the Company's Windows NT solution.
For the nine months ended July 31, 1997 the Company had software
licenses and product revenue of $868,767, a decrease of $909,496 or
51.1% from the comparable period in 1996. The decrease is primarily
due to the decline in sales of software and hardware components to
other customers and a decrease in software and hardware sales to SLC.
The delivery of these items to SLC for one phase of a UNIX store
upgrade commenced during 1995 and concluded during the first quarter
of 1996. These decreases were partially offset by software and
hardware sales to SLC during the nine months ended July 31, 1997 for
the planned implementation by SLC of a Windows NT solution scheduled
to commence in September, 1997.
Development revenue for the third quarter of 1997 was $603,731, a
decrease of $1,615,231 or 72.8% from the third quarter of 1996.
Development revenue from the base contract with SLC continued to
decline from approximately $590,000 during the third quarter of 1996
to approximately $183,000 during the same period in 1997, in
accordance with the terms of the contract. Additionally, during the
third quarter of 1996, the Company recognized development revenue of
approximately $235,000 for work associated with a contract between the
Company and NCR to develop a preliminary (non scanning) point of sale
software application in UNIX for SLC. This project was completed in
July 1996. Also during the third quarter of 1996, the Company
recognized approximately $1,219,000 of development revenues for work
<PAGE>
performed under an agreement which commenced in May, 1996 with NCR and
SLC to develop a scanning point of sale application for SLC and other
associated inventory, merchandising and back office functions, running
in a Windows NT environment. The Company recognized revenues of
approximately $386,000 during the third quarter of 1997 related to the
Windows NT project.
Current projects, primarily the Windows NT project, under the existing
agreement with NCR and SLC are scheduled to conclude upon pilot
implementation on September 15, 1997. The Company is currently
negotiating additional contracts with NCR and SLC to provide
development services for the period following the pilot
implementation. Development revenue declined approximately $2,227,000
or 78.7% from the second quarter of 1997 primarily due to a decline in
revenue from the work associated with the current agreement between
NCR and SLC as the Windows NT project neared completion and changes
in project estimates with resulting delays in the commencement of the
next planned phase of the NCR/SLC project.
For the nine months ended July 31, 1997 the Company had development
revenue of $6,685,579, an increase of $1,774,040 or 36.1% over the
comparable period in 1996. Development revenue from the base contract
with SLC continued to decline from approximately $1,354,000 during the
nine months ended July 31, 1996, to approximately $610,000 during the
same period in 1997, in accordance with the terms of the contract.
Additionally, during the nine months ended July 31, 1996, the Company
recognized development revenue of approximately $1,804,000 for work
associated with developing a preliminary (nonscanning) point of sale
software application in UNIX for SLC, as noted above. These
reductions in development revenue were more than offset by an increase
in development revenue of approximately $4,542,000 for work related to
the Windows NT development project noted above.
Service agreements revenue for the third quarter of 1997 was $536,709,
a decrease of $307,633 or 36.4% from the third quarter of 1996. This
decrease resulted from a decline in the installation, training and
site survey revenues reflecting a lower number of new installations of
the Company's proprietary software accompanied by a decrease in calls
received from SLC locations by the 24 hour / 7 day a week help desk,
which caused a decline in revenues due to the structure of the support
contract with SLC.
For the nine months ended July 31, 1997, the Company recorded service
agreement revenue of $1,534,274, a decrease of $351,556 or 18.6% from
the comparable period in 1996. This decrease results from the factors
noted above and is offset by an increase in revenue from the help desk
due to an increased number of sites supported from approximately 5,850
at July 31, 1996 to approximately 5,975 at July 31, 1997.
Gross Margin
Gross margin, as a percentage of software licenses and product revenue
was (5.0)% for the third quarter of 1997 compared with 40.1% for the
same period in 1996. For the nine months ended July 31, 1997, gross
margin, as a percentage of software licenses and product revenue was
19.5%, as compared with 32.5% for the same period in 1996, prior to
1996 inventory writedowns of $217,623. The net decreases in gross
margin are due to the following.
<PAGE>
Gross margin on software sales was (222.2)% for the third quarter of
1997 compared with 44.0% for the same period in 1996. The decline is
due to minimal sales of software during the third quarter of 1997,
which could not fully absorb the allocation of approximately $57,850
of amortization of capitalized software during the reporting period.
Gross margin on hardware sales was 15.6% for the third quarter of 1997
compared with 27.8% for the third quarter of 1996. The decrease in
margin resulted from a change in the mix of hardware components sold.
For the nine months ended July 31, 1997 the gross margin on software
sales was 10.2% compared with 35.1% for the same period in 1996,
excluding inventory writedowns. The decline is due to increased sales
of lower margin purchased software during the reporting period,
coupled with a decline in sales of the Company's higher margin
proprietary software. For the nine months ended July 31, 1997 the
gross margin on hardware sales remained stable at 30.9% compared with
31.7% for the same period in 1996, excluding inventory writedowns.
Included in cost of revenues for software licenses and product revenue
for the nine months ended July 31, 1996, is a one time writedown of
$105,763 for software inventory that the Company determined was
necessary due to the limited likelihood of future sales of that item.
Further, also included in cost of revenues for software licenses and
product revenue for the nine months ended July 31, 1996, is a one time
writedown of inventory to net realizable value of $111,860 that the
Company determined was required. These charges totaling $217,623
negatively impacted gross margins on software licenses and product
revenue in the nine months ended July 31, 1996.
Gross margin on development revenues for the third quarter of 1997 was
(51.9)% compared with 62.7% for the same period in 1996. For the nine
months ended July 31, 1997 gross margin on development was 41.5%
compared with 62.4% for the same period in 1996. These decreases are
partially due to lower planned profit margins on the current NCR and
SLC development project, the scanning point of sale application with
associated inventory, merchandising and back office functions which
operates in a Windows NT environment, as compared to the development
project in progress in 1996, the preliminary (non scanning) point of
sale software application in UNIX. The lower planned profit margin is
a result of the need to employ a significant number of highly skilled
contractors to complete certain phases of the NCR/SLC Windows NT based
project throughout the life of the project including the first three
quarters of 1997. No such requirements were necessary or incurred
during the first two quarters of 1996. Third quarter and year to date
1997 results also reflect changes in project cost estimates related to
the NCR/SLC project. Additionally, during the third quarter of 1997,
the Company undertook a significant work effort to support the
expanded testing of the NCR/SLC project for an interim period up to
pilot implementation which is now scheduled for September 15, 1997.
This expanded work effort was out of the scope of the original contract.
The Company anticipated and is currently negotiating additional billings
for this added work effort, but have been unable to resolve the
outcome of this issue at this time. Accordingly, the Company has
increased its cost estimates used to compute development project
revenue under the percentage-of-completion method and has expensed all
costs incurred related to this additional work effort, including
approximately $854,000 for work performed during the third quarter of
1997. Additional payments, if any, to be received by the Company from
SLC for this expanded work effort will be recognized as revenue when
realization of such payments is probable.
<PAGE>
Gross margin on development revenue for the third quarter of 1997 was
(51.9)% as compared to 46.4% for the second quarter of 1997. This
decrease is primarily related to changes in project cost estimates and
accounting for the additional work effort undertaken in the third
quarter 1997 as noted above.
Expenses
Customer service costs for the third quarter of 1997 slightly
decreased by 0.8% compared with the same period in 1996. The decline
in costs is due to lower operating costs for the service arising from
increased efficiencies and lower overall expenditure levels. For the
nine months ended July 31, 1997, customer service costs slightly
increased by 1.1% compared with the same period in 1996. This was due
to efficiencies and lower overall expenditure levels as noted above
offset by costs associated with servicing an increased number of sites
from approximately 5,850 at July 31, 1996 to approximately 5,975 at
July 31, 1997.
Product development costs declined from $447,403 for the third quarter
of 1996 to $152,425 for the third quarter of 1997, a decrease of
65.9%. The reduction is due to a significant increase in funded
development projects which resulted in development expenditures being
included in cost of revenues. Product development costs increased
approximately $115,000 or 305.2% from second quarter 1997 due to
increased allocation of the Company's development resources to the
completion of the Company's next generation Windows based product
scheduled for release in the fourth calendar quarter of 1997.
For the nine months ended July 31, 1997 product development costs
declined from $997,490 for the same period in 1996 to $466,940, a
reduction of 53.2%. The reduction is due to the reasons noted above
partially offset by capitalization of software development costs
amounting to $128,874 relating to a new credit card processing network
interface the Company developed during the first quarter of 1996.
General and administrative expenses decreased $117,671 or 13.6% for
the third quarter of 1997 compared with the third quarter of 1996.
This decrease is primarily as a result of development project premiums
recorded in the third quarter of 1996 to ensure timely completion of
projects and timing of annual shareholders' meeting expenses,
partially offset by increases in expenditures related to the
establishment of a business development unit, responsible for
identifying new business opportunities and project management and
increased expenditures for investor relations. General and
administrative expenses in the third quarter of 1997 decreased
approximately $174,500 or 18.9% from second quarter 1997 due to timing
of expenditures for the annual shareholders' meeting, annual report
costs and investor relations coupled with overall favorable spending
patterns.
General and administrative expenses increased $200,408 or 8.3% for the
nine months ended July 31, 1997 compared with the same period in 1996.
This increase is predominantly as a result of the establishment of
the aforementioned business development unit and increased
expenditures in 1997 for investor relations. These increases were
partially offset by a decrease in development project bonuses paid or
accrued.
<PAGE>
Sales and marketing expenses increased by $71,586 or 66.9% for the
third quarter of 1997 compared with the third quarter of 1996 and
increased $94,247 or 27.9% for the nine months ended July 31, 1997
compared with the same period in 1996. These increases are due to
increased headcount and advertising and marketing expenditures aimed
at generating market interest in existing products as well as the
Company's new Windows based product scheduled for release in the
fourth calendar quarter of 1997.
For the third quarter of 1997 and the nine month period ended July 31,
1997, the Company recorded no tax provision as net operating loss
carryforwards of approximately $19.1 million would offset any
liability related to fiscal year 1997.
As a result of the foregoing, the Company incurred a net loss of
$1,470,694, or $0.22 per share for the third quarter of 1997, as
compared to a net income of $345,026 or $0.05 per share for the third
quarter of 1996.
For the nine months ended July 31, 1997, the Company incurred a net
loss of $811,428 or $0.15 per share, as compared to a net loss of
$209,122, or $0.04 per share for the comparable period in 1996.
EDS Option Exercise
On April 29, 1997, EDS exercised its option to acquire up to 25% of
the Company's common stock, resulting in the Company issuing an
additional 1,598,136 shares. The Company accounted for this
transaction by reclassifying the amount associated with the option to
common stock. EDS then immediately sold its total interest in the
Company, representing 1,863,364 shares, in a private transaction to
two Texas-based institutional investors. In conjunction with this
transaction, the Company entered into registration rights agreements
with the two institutional investors.
Additionally, EDS and the Company agreed to amend a license and grant
of rights agreement which specifies rights and obligations of both
parties as to 788 of the Company's site licenses currently owned by
EDS, and to terminate all formal agreements including the
aforementioned stock option agreement, as well as their joint
marketing and other supporting business agreements.
The Company believes the transaction is beneficial as marketing
efforts of the Company's retail petroleum store systems can be
directed toward a much larger customer base and the Company's
marketing efforts will be more focused on its target market.
Additionally, the Company believes the EDS exit will facilitate the
Company's future growth strategies as the dilutive effect of the EDS
option has been eliminated.
Liquidity and Sources of Capital
At July 31, 1997, the Company had a working capital deficiency of
$401,480. For the nine months ended July 31, 1997, the Company had net
cash provided by operating activities of $428,731. Cash was provided
by operations primarily as a result of increased collection of
receivables on development contracts and sales during the reporting
period of inventory on hand at fiscal year end 1996, offset by a
reduction in accounts payable as a result of the timing of payments to
<PAGE>
vendors. To maintain liquidity during fiscal 1997, the Company must
increase revenue through the successful completion of on-going
development contracts with customers, the introduction of new products
to the marketplace, increasing the market share for existing products
and services, and negotiating new development contracts with
customers.
The Company continues to utilize the majority of its development
resources to complete the NCR/SLC Windows NT based project currently
in progress. This project was originally scheduled to be completed by
April 30, 1997. However, due to external factors and changes in
project schedules and requirements outside the control of the Company,
the completion date for the Company's development activities was
extended to June 30, 1997, with testing and implementation to extend
through September 15. 1997. Modifications to project requirements
will increase total project revenues from $9.5 million to $10.4
million. Through July 31, 1997, approximately $9.9 million in revenues
have been recognized under this contract. Additionally, during the
third quarter of 1997, the Company undertook a significant work effort
to support the expanded testing of the NCR/SLC project for an interim
period up to pilot implementation which is now scheduled for September
15, 1997. This expanded work effort was out of the scope of the
original contract. The Company anticipated and is currently
negotiating additional billings for this added work effort, but have been
unable to resolve the outcome of this issue at this time. The Company
currently has projects under negotiation that may absorb existing
development resources at the completion of the NCR/SLC project and may
generate additional development revenues.
The Company continues to develop a version of its C-Serve software
that runs under the Microsoft Windows family of operating systems.
This product is expected to be completed in the fourth calendar
quarter of 1997. The new product is being developed in conjunction
with the NCR/SLC project noted above and is expected to include state
of the art technology and best industry practices for the management
of retail gas stations and convenience stores. Completion of the new
product is dependent, among other things, on the successful and timely
conclusion of key components of the development project currently in
process for NCR/SLC.
To complete development of the next generation Windows based product,
the Company will need to perform additional development effort that is
not funded by work currently being performed for SLC. Costs necessary
to perform the additional development, to bring the new product to
market and to provide for infrastructure improvements are estimated to
range from $1.5 million to $2.0 million. The Company has increased
its sales and marketing efforts in order to generate market interest
in existing systems as well as new products under development.
The Company believes that it may be necessary to raise additional
capital to complete development of its next generation product within
the critical window of opportunity and to provide vital marketing and
other support services. If cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the
Company may be required to sell additional debt or equity securities
or obtain lines of credit, delay new product development or
restructure operations to reduce costs. If the AutoGas merger is not
consummated or if the cash resources of AutoGas at the consummation
<PAGE>
are insufficient to meet Canmax's current liquidity needs, Canmax may
immediately seek other sources of capital, which may include public or
private debt and/or equity financing or obtaining lines of credit. No
assurance can be given that such resources would be available to
Canmax on acceptable terms, if at all. Such financings could have a
dilutive effect on the stockholders of Canmax.
Acquisition Strategy
The Company is reviewing an acquisition strategy within its current
industry and other closely related vertical markets. From time to
time the Company will review acquisition candidates with products,
technologies or other services that could enhance the Company's
product offerings or services. Any material acquisitions could result
in the Company issuing or selling additional debt or equity
securities, obtaining additional debt or other lines of credit and may
result in a decrease to the Company's working capital depending on the
amount, timing and nature of the consideration to be paid.
Pending Acquisition
On June 16, 1997, the Company signed a definitive agreement to merge
Auto-Gas Systems, Inc. ("AutoGas"), headquartered in Abilene, Texas,
with and into a wholly owned subsidiary of the Company, Canmax Retail
Systems, Inc. The closing of the AutoGas merger is subject to
shareholder approval and is also subject to the satisfactory
completion of other conditions. Under the merger agreement, AutoGas
shareholders are expected to receive approximately 5.2 million shares
of Canmax common stock. The new shares will be issued at closing. An
additional 1.5 million shares of Canmax common stock will be reserved
for issuance upon the exercise of options and warrants held by AutoGas
shareholders and employees. On August 13, 1997, the Company filed a
preliminary registration statement on Form S-4 for the merger with
AutoGas.
Warrant Issue
On May 9, 1997, Founders Equity Group, Inc. exercised its right to
demand that Canmax file a registration statement with regard to all
its shares (863,364) of Canmax Common Stock. Such shares were
acquired from EDS on April 29, 1997. Under applicable securities
laws, Canmax was unable to file such registration statement until
after the filing of the registration statement relating to the resale
of shares of Canmax Common Stock in the Merger of Canmax and Auto-Gas
Systems, Inc. Pursuant to the terms of the registration rights
agreement with Founders Equity Group, Inc., Canmax was to have filed a
registration statement on or about July 23, 1997 or incur a
registration penalty of 50,000 shares per month. Founders Equity
Group, Inc. agreed to extend the registration obligation until August
26, 1997 in exchange for its receipt of a warrant to purchase 50,000
shares of Canmax Common Stock at an exercise price of $2.00 per share.
The registration obligation has been satisfied by the filing of a
registration statement on Form S-3 on August 13, 1997.
<PAGE>
Nasdaq New Listing Requirements
On January 28, 1997, the National Association of Securities Dealers,
Inc. and The Nasdaq Stock Market approved increases in the listing and
maintenance standards governing The Nasdaq SmallCap Market. The
Securities and Exchange Commission approved the changes on August 22,
1997. The new standards were declared effective by the Nasdaq Stock
Market on August 25, 1997.
As at July 31, 1997, Canmax failed to meet the new continued listing
requirements relating to minimum net tangible assets of $2 million.
Nasdaq has advised that companies failing to satisfy the new continued
listing requirements will be allowed six months to meet the new
requirements. Canmax expects to meet the new continued listing
requirements following consummation of its recently announced merger
with Auto-Gas Systems, Inc. Consummation of this transaction is
expected prior to the expiration of the six month transition period
provided by Nasdaq.
Should Canmax not consummate its transaction with Auto-Gas Systems,
Inc. or fail to take any other action to meet the new continued
listing requirements, Canmax could be subject to being delisted from
the Nasdaq SmallCap Market. The delisting of Canmax could materially
adversely affect the liquidity of the Canmax Common Stock and could
materially adversely effect the operations of the Company.
The foregoing "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section contains various
forward-looking statements within the meaning of the Securities Act of
1933 and the Securities Exchange Act of 1934, which represent the
Company's expectations or beliefs concerning, among other things,
future operating results and various components thereof and the
adequacy of future operations to provide sufficient liquidity. The
Company cautions that such matters necessarily involve significant
risks and uncertainties that could cause actual operating results and
liquidity needs to differ materially from such statements, including,
without limitation: (i) user acceptance of Windows NT as an operating
system, (ii) concentration of revenues between two customers and
Canmax's relationship with such customers, (iii) the ability of
Canmax to manage its growth, (iv) Canmax's need for additional
financing to fund product development, marketing and related support
services, (v) future technological developments and product
acceptance, (vi) intense price and product competition within the
industry, (vii) consummation of the AutoGas merger and acquisition
integration and (viii) other risks indicated herein and in filings
with the Commission.
<PAGE>
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended July 31, 1997.
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibits
2.01 Amended and Restated Agreement and Plan of Merger dated June
16, 1997 by and among Canmax Inc., Canmax Retail Systems, Inc.
and Auto-Gas Systems, Inc. (filed as Exhibit 2.1 to Form S-4,
File No. 333-33511 and incorporated herein by reference.)
10.01 ARCO Products Company Help Desk Services Agreement
11.01 Statement re: Computation of earnings per share
27 Financial Data Schedule
(b) Reports on Form 8 - K
On May 5, 1997, the registrant filed a report on Form 8-K, regarding
termination of all formal agreements with EDS effective April 29, 1997
and EDS's exercise of its stock option and subsequent sale of its
interest in the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Canmax Inc.
(Registrant)
DATE: September 15, 1997 /s/ Roger D. Bryant
_______________________________
Roger D. Bryant
President & CEO
DATE: September 15, 1997 /s/ Philip M. Parsons
_______________________________
Philip M. Parsons
Chief Financial Officer
and Authorized Signatory
EXHIBIT 10.01
APC PRODUCTS COMPANY HELP DESK SERVICES AGREEMENT
This agreement ("Agreement")is between CANMAX Retail Systems Inc., a
Wyoming corporation having a place of business at 150 West Carpenter
Freeway, Irving, Texas, 75039 ("CANMAX") and ARCO Products Company,
a division of Atlantic Richfield Company, a Delaware corporation, and
Prestige Stations Inc., a Delaware corporation and a wholly owned
subsidiary of Atlantic Richfield Company, a Delaware corporation, both
having a place of business at, 4 Centerpointe Drive, La Palma, CA
90623-1066 (collectively herein known as "APC").
CANMAX will provide the following services described in this
Agreement.
1. Services. CANMAX shall provide the resources and services as set
forth in the attached Schedule A ("Help Desk Services"). Help
Desk Services will be performed at APC locations as noted in
Exhibit A ("Site Profiles Report").
2. Performance Standards. The obligations of the parties with regard
to the delivery of Help Desk Services shall be in accordance with
the terms set forth in the attached Schedule B ("Performance
Standards and Acceptance Criteria").
3. Payment and Taxes. APC agrees to pay CANMAX for the Help Desk
Services in the amounts and at the times set forth in attached
Schedule C ("Payments and Taxes").
4. Other Terms and Conditions. Other terms and conditions which apply
to this Agreement are set forth in attached Schedule D.
Effective Date: June 6, 1997.
Term: December 31, 1999
The parties have executed this Agreement on this 6th day of June,
1997.
ARCO Products Company CANMAX Retail Systems, Inc.
A Division of Atlantic Richfield a Wyoming corporation
By: /s/ Jim Davis By: /s/ W. C. Doolittle
Name: Jim Davis Name: W. C. Doolittle
Title: Procurement Mgr. Title: VP Sales & Marketing
Date: June 2, 1997 Date: June 6, 1997
Prestige Stations, Inc.,
a Delaware corporation
By: /s/ Jim Davis
Name: Jim Davis
Title: Procurement Mgr.
Date: June 2, 1997
<PAGE>
SCHEDULE A
SERVICES
1. Help Desk Services. CANMAX will provide first-line Help Desk
Services as set forth below to the APC owned and franchisee owned
stores identified in Exhibit A. Each store is considered an
individual "Site"; collective "Sites" are designated in Exhibit
A - "Site Profiles Report" for the following software / hardware
products:
Point of Sale (POS) System Hardware/Software
. NCR 2760 Hardware
. NCR 7054 Hardware
. NCR MRX Operating System
. NCR DOS Operating System
In-Store Processor (ISP) Hardware/Software
. ISP Hardware
. SCO Xenix Operating System (Version 02.03.04)
. CANMAX C-Serve Software (Version 01.05.03C)
Miscellaneous Hardware/Software associated with POS System:
. Modems
. Mlink Communications Software (Version 6.07)
. Suntronics Island Card Readers
Disk Space Monitoring:
CANMAX shall access stores remotely via Mlink to check hard disk
usage to ensure hard disk space is available to enable daily
operations and prevent the hard disk from reaching capacity. Disk
space will be cleared to ensure ongoing uninterrupted operation.
Reset Day Numbers:
CANMAX shall access stores remotely via Mlink to check system
status on day 255. If the store is close to day 255 (greater than
day 250), the CANMAX Help Desk will coordinate with the site to
schedule to reset the Site to day 1.
CANMAX will use commercially reasonable effort to perform the Help
Desk Services. Some problems may be related to systems and/or
equipment not supported by CANMAX under this Agreement. In such
situations, however, CANMAX will, to the extent practicable and
reasonable, assist APC in the diagnosis of the problem.
2. Other Services.
. Help Desk Services include, but are not limited to, general
assistance and guidance that may from time to time be required in
reference to the operation of the software applications. This
service will include reasonable assistance in restarting the system
after a power failure resulting from conditions other than those
created by APC or by any hardware failures.
<PAGE>
. At APC's request, CANMAX will train APC personnel in operational
matters or assist in data file recreation under mutually agreed
upon terms and conditions to be set forth in a written supplement
to this Agreement, or as set forth in Exhibit D or as set forth on
specific APC Purchase Order.
. APC may, at its option and under mutually agreed upon terms and
conditions, request assistance from CANMAX with problem resolution
at specific APC sites.
. At APC's request, CANMAX will evaluate Requests for Enhancement to
the C-Serve software which may be necessary for APC business
operations. Such development effort will be subject to an initial
Technology Review to determine if such changes are technically
feasible with the current configuration for hardware, software and
operating system. Such development effort will be set forth in a
written supplement to this Agreement or on an APC Purchase Order.
CANMAX will provide full and complete quotes on rates to complete
necessary work.
. CANMAX shall maintain a current database of hardware, software, and
pertinent Site information as provided by APC for all Sites listed
on Exhibit A to this Schedule A.
. CANMAX shall maintain a Help Desk Operational Procedure Manual,
(the "Manual"), as attached in Exhibit B to this Schedule A,
detailing Help Desk procedures, including but not limited to,
general information about Help Desk Services provided; contact
names; hours of operation; contingency planning; Site information;
guidelines for logging, dispatching, and escalating calls; and
system monitoring and monthly performance reporting. The initial
Manual must be approved by APC and CANMAX prior to adoption for
use. Upon mutual consent of APC and CANMAX, the initial Manual
may be modified or revised through the Change Control Process set
forth in Exhibit C to this Schedule A.
SCHEDULE B
PERFORMANCE STANDARDS AND ACCEPTANCE CRITERIA
Help Desk Services will be performed according to the standards and
operational processes and procedures set forth in the Manual, which
shall be maintained by the CANMAX Help Desk Manager. The parties
agree that the current Manual attached in Schedule A, Exhibit 2, will
provide the standards for the delivery of, and the obligations of the
parties with respect to, Help Desk Services.
<PAGE>
SCHEDULE C
PAYMENTS & TAXES
Payment.
In accordance with the Agreement, APC will pay CANMAX and CANMAX shall
accept payment as full compensation for Help Desk Services delivered
to APC.
For each Site, documented as active on the first day of each month,
CANMAX will charge APC:
Charge Active Sites
$129.33 per month per Site 409+ Sites - 250 Sites
$196.33 per month per Site 249 Sites - 100 Sites
In the event the total number of Sites supported by CANMAX become
fewer than 100, a maximum of $259.33 per month per Site, may be
charged.
Invoicing.
During the term of this Agreement, CANMAX agrees to collect payment
from APC with quarterly invoices that will be billed on the third work
day of each month.
Invoices should detail, by Site, all charges and fees. Original
invoice should be sent to the following address:
ARCO Products Company
Attn: Accounts Payable
4 Centerpointe Drive
LaPalma, CA 90623-1066
A duplicate Invoice should be sent to:
Richard Ring
4 Centerpointe Drive
LaPalma, CA 90623-1066
for review and approval at least 15 days prior to expected payment
date.
Site System Installations.
APC will notify CANMAX, either via fax or electronic correspondence
when a Site is no longer (active) operating the POS System or if a new
Site is added to be serviced. CANMAX shall only charge for Sites that
were active on the first day of each month. However, if a Site
continues to request services, after CANMAX has been notified by APC
that the Site should no longer be active, the Site may continue to be
charged for each month in which a service was requested. CANMAX will
notify APC, either via fax or electronic correspondence, each time a
request for service comes from a Site that is not considered active.
Taxes.
APC shall pay any sales or use taxes applicable to services rendered
under this Agreement.
<PAGE>
SCHEDULE D
OTHER TERMS AND CONDITIONS
Term and termination
Either party may terminate this Agreement without cause with
written notice of 120 days.
General:
Invoices are payable net 15 days. Past due payments shall bear
interest at the rate of 10% per annum until paid.
CANMAX shall bill APC at a rate of $100.00 per hour for training
personnel on operational matters or assisting with data file
recreation. A written estimate and approval for such work must be
obtained in advance from APC prior to such work being charged on
an invoice.
CANMAX shall charge APC CANMAX's cost for priority communications
including mail, courier or other specific expediting procedures
that may be requested by APC.
In contacting the CANMAX Help Desk, APC will use the CANMAX
Emergency Hotline (1-800-945-7500). CANMAX will contact APC
through the APC Regional Help Desk at 1-800-ARCO-FIX.
Help Desk Services that are required as a result of sole
negligence on the part of APC, its officers, employees, third
parties or other authorized personnel having access to the system,
whether due to non-conformance to operating procedure, damages
resulting from other than CANMAX application software or external
causes, will be at the expense and responsibility of APC.
APC agrees that CANMAX shall not in any event be responsible for
incidental, special or consequential damages including, without
limitation, lack of anticipated profits arising out of the
transactions covered by this Agreement. In no event shall CANMAX
have any liability to APC arising from the acts or omissions of
third parties.
This Agreement shall not be assignable by either party hereto
without prior written consent of the other party, except that
APC may assign this Agreement to any affiliated company or to any
successor to APC of that portion of its business in which the
supported software is utilized. For purposes of this section, the
parties agree that a change in the equity ownership of either
party shall not constitute an assignment of this Agreement.
This Agreement shall be governed by and construed according to the
laws of the state of Texas, USA, without regard to applicable
conflicts of laws principles.
<TABLE>
Exhibit 11.01
Canmax Inc.
Computation of Earnings per Share
Three Months Ended Nine Months Ended
July 31, 1997 July 31, 1996 July 31, 1997 July 31, 1996
<S> <C> <C> <C> <C>
Primary earnings (loss) per share:
Net income (loss) $ (1,470,694) $ 345,026 $ (811,428) $ (209,122)
Weighted average common shares 6,611,005 5,012,869 5,563,143 4,972,985
Shares issued upon assumed
exercise of stock options and
warrants - 1,840,752 - -
Shares assumed repurchased - (507,506) - -
Weighted average common and
common equivalent shares 6,611,005 6,346,115 5,563,143 4,972,985
Earnings (loss) per common and
common equivalent share $ (.22) $ .05 $ (.15) $ (.04)
Fully diluted earnings (loss)
per share:
Net income (loss) $ (1,470,694) $ 345,026 $ (811,428) $ (209,122)
Weighted average common shares 6,611,005 5,012,869 5,563,143 4,972,985
Shares issued upon assumed exercise
of stock options and warrants - 1,840,752 - -
Shares assumed repurchased - (507,506) - -
Weighted average common and
common equivalent shares 6,611,005 6,346,115 5,563,143 4,972,985
Earnings (loss) per common and
common equivalent shares $ (.22) $ .05 $ (.15) $ (.04)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 778
<SECURITIES> 0
<RECEIVABLES> 614
<ALLOWANCES> 39
<INVENTORY> 43
<CURRENT-ASSETS> 1,550
<PP&E> 3,682
<DEPRECIATION> 2,557
<TOTAL-ASSETS> 3,433
<CURRENT-LIABILITIES> 1,951
<BONDS> 0
0
0
<COMMON> 23,234
<OTHER-SE> (21,970)
<TOTAL-LIABILITY-AND-EQUITY> 3,433
<SALES> 9,089
<TOTAL-REVENUES> 9,089
<CGS> 4,608
<TOTAL-COSTS> 9,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> (811)
<INCOME-TAX> 0
<INCOME-CONTINUING> (811)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (811)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
