<PAGE>
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 April 30, 1998
--------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From _______________ to_______________
Commission file number 0-22636
-------
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----8,111,005 shares as of June 15, 1998.
<PAGE>
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1998 1997
---------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 114,083 $ 128,871
Accounts receivable, net 2,134,052 2,751,264
Inventory (Note B) 72,460 46,615
Prepaid expenses and other 201,960 175,494
---------- ----------
Total current assets 2,522,555 3,102,244
Property and equipment at cost less
accumulated depreciation and amortization
of $3,128,098 in 1998 and $2,732,749
in 1997 1,156,081 962,175
Capitalized software costs, net of
accumulated amortization of $954,979
in 1998 and $839,721 in 1997 695,290 494,786
Intellectual property rights, net of
accumulated amortization of $647,951
in 1998 and $639,617 in 1997 22,222 30,556
Goodwill, net accumulated amortization 3,254,455 -
of $171,287 in 1998
Other assets 91,217 117,717
---------- ----------
$ 7,741,820 $ 4,707,478
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
2
<PAGE>
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1998 1997
-------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes Payable (Note C) $ 152,754 $ -
Convertible Debentures - Shareholder
(Note C) 1,200,000 -
Accounts payable 743,750 878,241
Accrued liabilities 1,444,236 867,233
Deferred revenue 210,958 269,404
Current portion of lease obligation 83,739 159,364
Current portion of long-term debt 35,195 35,195
Advance from shareholder (Note C) - 100,000
---------- ----------
Total current liabilities 3,870,632 2,309,437
Lease obligations 171,259 127,051
Long - term debt 33,688 51,056
Shareholders' equity:
Common stock, no par value,
44,169,100 shares authorized;
8,111,005 and 6,611,005 shares
issued and outstanding in 1998
and 1997, respectively 25,938,131 23,290,733
Accumulated deficit (22,271,890) (21,070,799)
---------- ----------
Total shareholders' equity 3,666,241 2,219,934
---------- ----------
$ 7,741,820 $ 4,707,478
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
3
<PAGE>
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
------------------------------ ----------------------------
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Software licenses and product revenue $ 70,872 $ 424,841 $ 286,097 $ 654,761
Development 947,398 2,830,489 1,788,143 6,081,848
Service agreements 768,743 508,635 1,316,723 997,565
Prepaid phone cards, Internet kiosks, long
distance reselling, and other 1,430,857 - 1,430,857 -
----------- ----------- ---------- ----------
3,217,870 3,763,965 4,821,820 7,734,174
----------- ----------- ---------- ----------
Costs and expenses:
Costs of software licenses and product
revenue 60,504 252,651 230,413 474,353
Cost of development revenues 481,702 1,516,335 882,784 2,991,773
Cost of prepaid phone cards, Internet
kiosks, long distance reselling and others 1,655,494 - 1,655,494 -
Customer service 548,718 587,501 1,025,331 1,154,793
Product development 35,841 37,615 206,785 314,515
Sales and marketing 158,660 143,834 309,998 253,753
General & administrative 873,551 921,582 1,656,908 1,878,471
Interest and financing, net 45,959 3,540 55,199 7,250
----------- ----------- ---------- ----------
3,860,429 3,463,058 6,022,912 7,074,908
----------- ----------- ---------- ----------
Net income (loss) $ (642,559) $ 300,907 $ (1,201,092) $ 659,266
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Basic earnings (loss) per share (Note F) $ (.08) $ .06 $ (.16) $ .13
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Diluted earnings (loss) per share (Note F) $ (.08) $ .05 $ (.16) $ .10
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
See accompanying notes.
4
<PAGE>
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED APRIL 30,
------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $ (1,201,092) $ 659,266
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 690,676 470,935
Loss on disposal of assets - 8,958
Changes in assets and liabilities:
Accounts receivable 833,339 (698,808)
Inventory (21,451) 338,218
Prepaid expenses and other (5,893) 50,798
Accounts payable (612,685) (896,992)
Accrued liabilities 236,160 (281,955)
Deferred revenue (141,518) (286,251)
--------- ---------
Net cash used in operating activities (222,464) (635,831)
Investing activities:
Purchase of property and equipment (46,265) (36,496)
Capitalized software costs (316,211) -
Purchase of business, net of cash (378,982) -
acquired
Decrease in other assets 26,500 9,865
--------- ---------
Net cash used in investing activities (714,958) (26,631)
Financing activities:
Proceeds from converible debentures -
shareholders 1,200,000 -
Payments made on lease obligation (96,340) (62,178)
Repayment of shareholder advance (100,000) (95,765)
Repayment on borrowing (81,026) (16,833)
--------- ---------
Net cash (used in) provided by financing
activities 922,634 (174,776)
Effect of exchange rate changes on cash - 39
--------- ---------
Net decrease in cash (14,788) (837,199)
Cash at beginning of period 128,871 908,772
--------- ---------
Cash at end of period $ 114,083 $ 71,573
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
5
<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 and six month period
ended April 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Canmax's annual report on Form 10-K for the year ended October 31, 1997.
Certain amounts in the 1997 condensed consolidated statement of operations have
been reclassified to conform with the 1998 presentation.
.
NOTE B - INVENTORY
Inventory consists primarily of computer hardware and purchased software.
NOTE C - NOTES PAYABLE AND ADVANCES FROM SHAREHOLDERS
NOTES PAYABLE
USC maintains a $500,000 revolving line of credit with PayNet Communications,
Inc., which is secured by the interests in Location Agreements and equipment
obtained by USC when installing its Internet Kiosk product, TravelNet. The note
bears interest at the Prime Rate plus one percent, and has a term of three
years. See note - "Subsequent Events - USCommunications Acquisition Reversal."
Prior to consummation of the acquisition of USC, certain beneficial owners of
shares of USC loaned USC $70,000. Funds obtained from these holders bear
interest at 16%. All principal and interest were due on April 1, 1998. During
April 1998, $40,000 of these loans were repaid and the remaining $30,000 was
repaid in May 1998.
ADVANCES FROM SHAREHOLDERS
On October 30, 1997, a shareholder, Founders Equity Group, Inc. ("Founders"),
advanced Canmax $100,000. The advance was unsecured and had an interest rate of
12%. On November 6, 1997, Canmax repaid principal and interest of $100,230,
which fully satisfied Canmax's obligation.
CONVERTIBLE DEBENTURES TO SHAREHOLDERS
On December 15, 1997, Canmax entered into a Convertible Loan Agreement with a
Shareholder, Founders Equity Group, Inc., ("Founders") providing for a loan
of up to $500,000. On February 11, 1998, Canmax and Founders executed a Loan
Commitment Letter providing for a multiple advance loan of up to an
additional $2.0 million. The outstanding loans under the convertible loan
agreement and the commitment letter was consolidated into the First Restated
Convertible Loan Agreement dated as of March 31, 1998 (the "Convertible Loan
Agreement"). Pursuant to the terms of the Convertible Loan Agreement, the
indebtedness outstanding thereunder bears interest at the rate of twelve
percent (12%) per annum and is collateralized by a blanket lien on all of the
assets of Canmax. Interest under the Convertible Loan Agreement is payable
monthly, and borrowings thereunder mature on April 1, 1999. Each extension of
credit under the Convertible Loan Agreement is evidenced by a debenture which
is convertible into shares of common stock of Canmax at a conversion price of
$.80 per share. Additionally, the outstanding principal amount of each
debenture is redeemable at the option of Canmax at the principal amount
outstanding thereunder plus any accrued but unpaid interest. As consideration
for the loan commitment, Canmax paid a commitment fee of $10,000. As of
April 30, 1998, $1.5 million has been advanced to Canmax under the
Convertible Loan Agreement.
6
<PAGE>
NOTE D - ACQUISITIONS
On January 30, 1998, Canmax acquired USC in a transaction recorded under the
purchase method. The total purchase price of the acquisition was $2,952,204.
See Note H - Subsequent Events USCommunications Acquisition Reversal
NOTE E - SHAREHOLDERS' EQUITY
On February 26, 1998, the Board of Directors increased the number of shares
issuable under Canmax's stock option plan (the "Stock Option Plan") from 1.2
million shares to 2.3 million shares so that stock options previously granted by
the Board in excess of those permitted by the Stock Option Plan could be covered
by the Plan. As of February 27, 1998, 1,121,990 shares of Canmax Common Stock
have been issued under the Stock Option Plan, 1,063,100 shares remain subject to
outstanding options under the Stock Option Plan, and 114,910 shares were
available for future grants under the Stock Option Plan.
NOTE F - EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FASB 128),
effective for both interim and annual periods ending after December 15, 1997.
Statement 128 requires companies to report basic and diluted earnings per share.
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during each period. Diluted earnings per share is
computed using the weighted average number of shares of common stock outstanding
during each period and common equivalent shares consisting of stock options and
warrants (using the treasury stock method). All earnings per share amounts
reported have been restated to conform to the new standard.
7
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share as calculated in accordance with FASB 128.
<TABLE>
<CAPTION> FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
APRIL 30, APRIL 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and
diluted earnings per share -
Net income (loss) $ (642,559) $ 300,907 $(1,201,092) $ 659,266
Denominator:
Denominator for basic earnings
per share - weighted average shares 8,111,005 5,048,782 7,356,861 5,030,528
Effect of dilutive securities:
Stock Options - 1,576,704 - 1,587,819
Warrants - - - -
10% convertible debentures - - - -
---------- ---------- ---------- ----------
Dilutive potential common shares - 1,576,704 - 1,587,819
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 8,111,005 6,625,486 7,356,861 6,618,347
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share $ (.08) $ .06 $ (.16) $ .13
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share $ (.08) $ .05 $ (.16) $ .10
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
NOTE G - NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FASB 131), which supercedes existing
accounting standards related to disclosures of operating segment information.
The provisions of FASB 131 are effective for Canmax beginning the year ended
October 31, 1999. Historically, Canmax has operated in one industry segment.
However Canmax is evaluating the impact of FASB 131 on its reporting
requirements as it increases its operations in the telecommunications industry.
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 97-2,
"Software Revenue Recognition" (SOP 97-2), which supercedes Statement of
Position No. 91-1. SOP 97-2 will be effective for all transactions entered into
by Canmax subsequent to October 31, 1998. Canmax is currently evaluating the
impact that SOP 97-2 will have on software license revenue transactions entered
into subsequent to October 31, 1998.
NOTE H - SUBSEQUENT EVENTS
NASDAQ DELISTING
On June 8, 1998, Canmax was delisted from the Nasdaq SmallCap Market, and is
now traded on the OTC Bulletin Board. In management's opinion the delisting
will not
8
<PAGE>
materially affect the ability of Canmax to raise capital for the levels required
for current expansion plans, nor will it affect the liquidity of Canmax
operations.
NEWLY FORMED SUBSIDIARY
On June 5, 1998, Canmax established a wholly owned subsidiary, Canmax Telecom,
Inc., to focus on the telecommunications marketplace.
USCOMMUNICATIONS ACQUISITION REVERSAL
On June 15, 1998, Canmax and USCommunications signed an agreement to reverse the
purchase of USCommunications. Canmax will recover 1.5 million shares, and
warrants to purchase an additional 4.5 million share as a result of this
reversal. Cash payments made on behalf of USCommunications will be recovered
through a note payable. The two board members who were elected as part of the
acquisition agreement have resigned.
ACQUISITION OF TALK TIME, INC.
On June 16, 1998, Canmax acquired Talk Time, Inc. of Littleton, Colorado, a
leading wholesale distributor of prepaid calling cards to convenience stores in
the Rocky Mountain and Oklahoma Regions through its newly formed subsidiary,
CANMAX Telecom, Inc. Talk Time is expected to contribute approximately $1
million in revenues this year through direct card sales at more than 100
convenience stores and petroleum retailers.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
REVENUE
During the second quarter of 1998, Canmax had revenues of $3,217,870, a decrease
of $ 546,095 or 14.5% over the second quarter of 1997. During the second
quarter of 1998, The Southland Corporation (Southland) and NCR Corporation (NCR)
accounted for approximately 47.5% of the Company's total revenue as compared
with approximately 94% for the comparable period of 1997. For the six months
ended April 30, 1998 Canmax had revenues of $4,821,820, a decrease of
$2,912,354 or 37.7% over the comparable period in 1997. For the six months
ended April 30, 1998, Southland and NCR accounted for approximately 59.8% of the
Company's total revenue as compared to approximately 94% for the comparable
period of 1997. The decline in revenue is due to a decrease in development
sales to Southland which was partially offset by revenue generated by the
recently acquired telecommunications business. Revenues from pre-paid phone
cards and other telecommunication products for the three month period ending
April 30, 1998 was approximately $1,430,857.
Revenues from prepaid phone cards, internet kiosks, long distance reselling,
and other telecommunications products and services for each of the three and
six month periods ended April 30, 1998 increased $1,430,857 or 100% due to
the acquistion of USCommunication Services, Inc. (USC) on January 30, 1998.
Software licenses and product revenue for the three month period ended April
30, 1998 and 1997 decreased $ 353,969 or 83.3% from $ 424,841 to $ 70,872,
respectively. This decrease is primarily due to purchased software sales to
Southland in the second quarter of 1997 that did not occur during the
comparable period in 1998.
For the six months ended April 30, 1998 and 1997 software licenses and
product revenue decreased $ 368,664 or 56.8% from $654,761 in 1997 to
$286,097 in 1998. The decrease is primarily due to the decline in sales of
hardware components to other customers and a decrease in software and
hardware sales to SLC.
Development revenue for the three month periods ended April 30, 1997 and 1998
decreased $1,883,091 or 66.5% from $2,830,489 to $947,398, respectively. During
the second quarter of 1997, Canmax recognized approximately $2,578,000 of
development revenue for work performed under an agreement which commenced in
May, 1996 with NCR and Southland to develop a scanning point of sale application
for Southland and other associated inventory, merchandising, and back office
functions, running in a Windows NT environment (the "Southland Windows NT
development project"). This decrease was partially offset by an increase in
revenues from development and other resources provided to Southland
9
<PAGE>
on an as-needed basis under an agreement which commenced in January, 1998 and
extends through December, 1998. During the second quarter of 1998, Canmax
recognized approximately $728,000 of development revenue related to these
efforts.
For the six months ended April 30, 1998 and 1997 development revenue
decreased $4,293,705 or 70.6%, from $6,081,848 in 1997 to $1,788,143 in 1998.
During the six month period ended April 30, 1997, Canmax recognized
approximately $5,636,000 of development revenue for work performed on the
Southland Windows NT development project noted above. This decrease was
partially offset by an increase in development revenue from the base contract
with Southland which increased from approximately $427,000 in 1997 to
approximately $431,000 during the same period of 1998 and an increase in
revenues from development and other resources provided to Southland on an
as-needed basis under an agreement which commenced in January, 1998 and
extends through December, 1998. During the second quarter of 1998, Canmax
recognized approximately $1,365,000 of development revenue related to these
efforts.
Service agreements revenue for the three months ended April 30, 1998 and 1997
increased $260,108 or 51.1% from $508,635 to $768,743, respectively. For the six
months ended April 30, 1998, service agreement revenue increased $319,158 or
32.0% from $997,565 in 1997 to $1,316,723 in 1998. This increase resulted from
the net result of rate increases, and decrease in calls received.
See discussion in "Liquidity and Sources of Capital" for future trends and
status of contracts.
GROSS MARGIN
Gross margin, as a percentage of software licenses and product revenue, was -
14.63% for the three months ended April 30, 1998 as compared with 54.2% for the
same period in 1997. Gross margin on hardware sales for the second quarter of
1998 was 47.8% compared to 30.1% for the same period in 1997. The percentage
increase in margin resulted from a change in the mix of hardware components
sold. This percentage increase in hardware margins accompanied by margin
increases from increased sales of hardware components to Southland during the
first quarter of 1998 over the comparable period of 1997 more than offset a
decrease in margins on software sales. The decrease in margins on software
sales was due to purchased software sales to Southland in the first quarter of
1997 that did not occur during the comparable period of 1998. Gross margin on
development revenues for the three months ended April 30, 1998 was 65.8% as
compared with 49% for the same period in 1997.
Gross margin on prepaid phone cards and other telecommunication products was
15.70% for the three months ended April 30, 1998.
EXPENSES
Customer service costs for the three months ended April 30, 1998 decreased by
$38,783 or 6.6% compared with the same period in 1997. For the six months ended
April 30, 1998, customer service costs decreased $129,462 or 11.2% from
$1,154,793 in 1997 to $1,025,331 in 1998. The decline in costs is due to lower
operating costs for the service arising from increased efficiencies and lower
overall expenditure levels.
Product development costs decreased $1,774 or 4.72% from $37,615 for the
three months ended April 30, 1997 to $35,841 for the comparable period in
1998 and decreased $107,730 or 34.25% for the six months ended April 30, 1998
from $314,515 for the same period in 1997 to $206,785.
General and administrative expenses decreased $48,031 or 5.21 from $921,582
for the second quarter of 1997 to $873,551 for the second quarter of 1998 and
$221,563 or 11.79% from $1,878,471 for the six months ended April 30, 1997 to
$1,656,908 for the comparable period of 1998.
10
<PAGE>
Sales and marketing expenses increased by $14,826 or 10.31% from $143,834 for
the second quarter of 1997 to $158,660 for the second quarter of 1998 and
from $253,753 for the six months ended April 30, 1997 to $309,998 for the
comparable period of 1998, an increase of $56,245 or 22.17%. These increases
are due to marketing expenditures aimed at generating interest in existing
products as well as Canmax's new Windows based product scheduled for release
in the third calendar quarter of 1998.
For the three month and six month periods ended April 30, 1997 Canmax recorded
no tax provision as net operating loss carryforwards of approximately $19.1
million would offset any tax liability. No tax provision was recorded for the
three month and six month periods ended April 30, 1998 as Canmax generated both
a book and taxable loss during that period.
As a result of the foregoing, Canmax incurred a net loss of ($642,559) or
($0.08) per share, for the three months ended April 30, 1998 as compared with
net income of $300,907 or $0.06 per share (basic), for the three months ended
April 30, 1997.
For the six months ended April 30, 1998, Canmax incurred a net loss of
($1,201,092) or ($0.16) per share as compared with net income of $659,266 or
$0.13 per share, for the same period in 1997.
LIQUIDITY AND SOURCES OF CAPITAL
To maintain liquidity during fiscal 1998, Canmax must (i) 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 and/or (ii) increase revenue with low cost/rapid entry
into the telecommunications market and/or (iii) utilize existing loan agreements
or obtain additional lines of credit. See "Convertible Loan Agreements."
Canmax believes that it will meet its liquidity needs in 1998 through cash
generated from the operations of its existing software business, its entree into
the telecommunications business, and, if necessary, through utilization of its
existing loan and loan commitment agreements.
PRODUCT DEVELOPMENT
To complete development of the next generation Windows based product, Canmax is
performing additional development effort that is not funded by work currently
being performed for Southland Corporation. Costs necessary to perform the
additional development and to bring the new product to market are estimated to
range from $250,000 to $500,000. Canmax increased its sales and marketing
efforts in 1997 in order to generate market interest in existing systems as well
as new products under development.
ACQUISITIONS
Canmax continues to review an acquisition strategy within its current industry
and other related markets. From time to time Canmax will review acquisition
candidates with products, technologies or other services that could enhance
Canmax product offerings or services. Any material acquisitions could result in
Canmax issuing or selling additional debt or equity securities, obtaining
additional debt or other lines of credit and may result in a decrease to Canmax
working capital depending on the amount, timing and nature of the consideration
to be paid.
SIGNIFICANT CUSTOMERS
Southland Corporation has accounted for 95% of the Revenue of Canmax in prior
periods, and is in discussions with Canmax regarding the renegotiating of its
contract, which currently expires in December of 1998.
NEW ACCOUNTING STANDARDS
11
<PAGE>
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 97-2,
"Software Revenue Recognition" (SOP 97-2), which supercedes Statement of
Position No. 91-1. SOP 97-2 will be effective for all transactions entered into
by Canmax subsequent to October 31, 1998. Canmax is currently evaluating the
impact that SOP 97-2 will have on software license revenue transactions entered
into subsequent to October 31, 1998.
The foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Canmax" section contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act which represent Canmax'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.
Canmax 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
in one customer and Canmax's relationship with such customer, (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, and
acquisitions, (v) future technological developments and product acceptance, (vi)
intense price and product competition within the industry, (vii) future
operating results and continued growth of USC's business and (viii) other risks
indicated herein and in filings with the commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
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
April 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10-1 Rescission Agreement dated as of June 15, 1998 (filed herewith)
27 Financial Data Schedule
(b) Reports on Form 8-K
On December 23, 1997, the Registrant filed a report on Form 8-K regarding the
signing of a letter of intent to acquire USCommunication Services, Inc. ("USC").
Additionally, on February 9, 1998, the Registrant filed a report on Form 8-K
regarding the consummation of the USC acquisition and on February 13, 1998 the
Registrant filed a report on Form 8-K regarding the possible change of control
of the Registrant at a subsequent date.
12
<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: June 19, 1997 /s/ Roger D. Bryant
---------------------------- ----------------------------
Roger D. Bryant
President & CEO
13
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RESCISSION AGREEMENT
This Rescission Agreement (this "Agreement") is entered into by and among
Canmax, Inc., a Wyoming corporation ("Canmax"), Canmax Telecom, Inc., a Texas
corporation ("CTI"), USCommunication Services, Inc., James C. Bernet ("Bernet"),
Delia O'Donnell ("O'Donnell"), Alan Anderson, in his capacity as the Trustee of
the Nationwide Transportation Products, Inc. (subsequently known as
USCommunication Services, Inc.) voting trust created under the Trust Agreement
dated May 1, 1997 and amended as of December 1, 1997 and January 30, 1998 (the
"Trustee") is executed as of this 15th day of June, 1998 to be effective as of
January 30, 1998.
R E C I T A L S
A. Trustee and O'Donnell (the "Shareholders") are the former shareholders
of USCommunication Services, Inc., a Delaware corporation ("Old USC"), which was
merged into CNMX MergerSub, Inc., a Delaware corporation and a wholly owned
subsidiary of Canmax ("USC"), which continued the historic business operations
of USC under the name "USCommunication Services, Inc."
B. Pursuant to the terms of the Agreement and Plan of Merger dated
January 30, 1998 among Canmax, Old USC and USC (the "Merger Agreement"), Old USC
was merged (the "Merger") with and into USC and the historic shareholders of Old
USC received (a) 1.5 million shares (the "Merger Shares") of common stock, no
par value per share, of Canmax (the "Canmax Common Stock"), (b) warrants to
acquire 1.5 million shares of Canmax Common Stock at an exercise price of $1.25
per share expiring January 31, 2003 (the "Class A Warrants") and (c) warrants to
acquire 1.0 million shares of Canmax Common Stock at an exercise price of $2.00
per share expiring January 31, 2005 (the "Class B Warrants"). Collectively, the
Merger Shares, the Class A Warrants and the Class B Warrants are referred to as
the "Merger Consideration."
C. Upon consummation of the Merger Agreement, Canmax, USC and Bernet
executed an Employment Contract dated January 30, 1998 (the "Employment
Contract"), pursuant to which Bernet was employed by USC and was granted a
warrant to acquire 1.0 million shares of Canmax Common Stock at $2.00 per share
and an additional 1.0 million shares of Canmax Common Stock at $3.00 per share,
in each case subject to certain vesting requirements (collectively, the
"Employment Warrants").
D. Upon consummation of the Merger Agreement, Canmax, USC and Bernet
executed a Noncompetition Agreement dated January 30, 1998 (the "Noncompetition
Agreement"), pursuant to which Bernet agreed not to compete with Canmax or USC
for a period of five years.
E. In connection with the Merger Agreement, Canmax, USC, O'Donnell and
Montreal Trust Company of Canada executed an Escrow Agreement dated as of
January 30, 1998 (the "Escrow Agreement"), pursuant to which 0.3 million of the
Merger Shares (the "Escrow Shares") were placed into an escrow secure certain
indemnification obligations of Old USC (the "Escrow Agreement").
F. Prior to the date hereof, Canmax has loaned to USC in multiple
advances approximately $724,660 (the "Reimbursable Amount") pursuant to the
terms of a series of notes, all of which are secured by a blanket lien on all of
the assets of USC created pursuant to the terms of a security agreement dated as
of January 30, 1998, which notes and security agreement the parties desire to
consolidate and restate as of the date hereof.
G. Canmax and the Shareholders desire to rescind the Merger Agreement and
all actions taken pursuant to the Merger Agreement, with the desire that all of
the parties be restored to their positions immediately preceding the date of
Merger Agreement and that the rescission of the Merger be nontaxable events to
either party and treated for tax and all other purposes as if the Merger and all
agreements executed in connection therewith had never occurred or existed.
<PAGE>
H. Consistent with the parties' intent to return each party to their
original position preceding the Merger, the Reimbursable Amount shall be
repayable by USC to Canmax (the repayment of which shall be secured by liens on
the assets of USC), and Bernet, O'Donnell and the Trustee have agreed to
guarantee the repayment of such reimbursable amount to Canmax, as further
provided in separate Guaranties to be executed by each party.
NOW, THEREFORE, in consideration for the mutual promises and other
considerations set forth herein, the parties hereto agree as follows:
1. RESCISSION OF MERGER AGREEMENT. Canmax, Shareholders and USC hereby
rescind the Merger Agreement and, in furtherance thereof:
(a) DELIVERY OF USC SHARES. Canmax and CTI hereby agree to cause to
be delivered to O'Donnell and Trustee a stock certificate (with stock
powers duly endorsed in blank) representing all of the outstanding shares
of USC (the "USC Shares"), which USC Shares shall be allocated among
O'Donnell and the Trustee in the same proportion as the Merger
Consideration held by such parties and held by Canmax pursuant to the terms
of the Pledge Agreement (defined below). Canmax and CTI hereby jointly and
severally represent and warrant to O'Donnell and the Trustee that CTI is
the sole owner and holder of such shares and that CTI has the full power
and authority to transfer the USC Shares to O'Donnell and Trustee, free of
all liens, claims and encumbrances.
(b) TRANSFER OF MERGER CONSIDERATION. O'Donnell and Trustee hereby
agree to deliver to Canmax the stock certificate(s) representing the Merger
Shares, along with the original copies of Series A Warrant and the Series B
Warrant issued pursuant to Merger Agreement, in each case with stock powers
duly endorsed in blank. O'Donnell and the Trustee hereby represent and
warrant to Canmax that they are the sole owner and holder of the Merger
Shares, Series A Warrant and Series B Warrant held by them and have the
full power and authority to transfer all of such securities to Canmax, and
that such transfer shall be made free of all liens, claims and
encumbrances.
2. TERMINATION OF ESCROW AGREEMENT. Canmax and O'Donnell hereby agree to
execute the joint instructions attached hereto as EXHIBIT A terminating the
Escrow Agreement and directing the Escrow Agent to return all of the Escrow
Shares to Canmax for cancellation. Canmax shall bear all escrow fees and
expenses associated with the termination of the Escrow Agreement.
3. RESCISSION OF EMPLOYMENT CONTRACT AND EMPLOYMENT WARRANTS. Bernet,
USC and Canmax hereby agree to rescind the Employment Contract and Employment
Warrants and any and all rights or obligations accruing thereunder, and Bernet
shall deliver to Canmax the original copies of each of the Employment Warrants.
Bernet represents and warrants to Canmax that he is the sole owner and holder of
the Employment Warrants and has the full power and authority to transfer to the
Employment Warrants to Canmax, and that such transfer shall be made free and
clear of all liens, claims and encumbrances.
4. RESCISSION OF NONCOMPETITION AGREEMENT. Canmax, USC and Bernet hereby
agree to rescind the Noncompetition Agreement and any and all rights and
obligations accruing thereunder.
5. RETURN OF REIMBURSABLE AMOUNT; OPERATING AGREEMENT; DELIVERY AND
RELEASE OF PROPERTY; INDEMNITIES.
(a) O'Donnell, the Trustee and Bernet acknowledge that the loans made
to USC by Canmax and/or CTI have been consolidated and are represented by
the Restated Promissory Note (the "Note") in the principal amount of
$724,660 a copy of which is attached hereto as EXHIBIT B, and that the
repayment of the Note is secured pursuant to the terms of the Restated
Security Agreement (the "Security Agreement") that has been executed by
USC, a copy of which is attached hereto as EXHIBIT C. The Parties agree as
to the means pursuant to which the principal amount of the Note was
determined based upon information available at the time, and further
covenant and agree that if additional or corrected information or
documentation becomes available, which, based upon the agreed means of
determination, would result in a
2
<PAGE>
mutually acceptable increase or decrease in the principal amount of the
Note, that (i) the parties agree to amend the Note in good faith, (ii) such
amendment will be effective as of the date of the Note, and (iii) any
adjustments to the principal amount (and any accrued interest associated
therewith) will be reflected as an adjustment to the final payment(s) under
the Note. O'Donnell and the Trustee hereby agree to guaranty the repayment
of the Promissory Note, as provided in the separate Guaranties attached
hereto as EXHIBIT D and EXHIBIT E, respectively; provided that the recourse
of Canmax or CTI pursuant to the Guaranty of the Trustee shall be limited
to the shares of USC issued to and held by the Trustee as contemplated
pursuant to the terms of this Agreement. Further, O'Donnell and the
Trustee hereby agree to execute the Pledge Agreement in the form attached
hereto as EXHIBIT F to secure their obligations under their respective
Guaranties. As additional consideration for the rescission transactions
contemplated herein and Bernet's anticipated receipt of benefits to be
derived from his employment relationship with USC, Bernet hereby agrees to
execute a Guaranty in favor of CTI in the form attached hereto as
EXHIBIT G.
(b) During the sixty (60) day period following the date hereof, USC
agrees to permit Canmax, CTI or any other entity controlled by Canmax
(collectively, the "User") to use the long distance "switch" operated by
USC (the "Switch") at USC's actual cost for the same (without mark-up), and
User shall make payments for the services utilized within thirty (30) days
of its receipt of an invoice from USC for same; provided that if the amount
due by User to USC under this Section 5(b) exceeds at any time $90,000,
User shall pay any amount in excess of $90,000 by wire transfer within one
(1) business day of its receipt of written demand therefor; provided
further that if User fails to make the payment of such excess amount within
one (1) business day, USC may block or prohibit any further use of Switch
by User until such time as payment is received, without any notice or
liability therefor. Canmax and USC acknowledge and agree that although
Canmax has distributed a "Latin American" card bearing the USC trade name,
Canmax or its designated User shall be entitled to receive all revenues,
and shall bear all expenses, attributable to such long distance phone card.
(c) Promptly following the execution of this Agreement, (i) Canmax
and CTI shall deliver to USC all property of USC which is in their
possession, including, without limitation, all revenues received on account
of the business of USC since May 27, 1998 (along with an appropriately
detailed accounting thereof) and (ii) USC shall deliver to Canmax any
property of Canmax which is in its possession. If USC timely makes the
payment due under the Note on July 15, 1998 and is not otherwise in default
under the documents executed in connection therewith, Canmax and CTI agree
to give all consents necessary to release to USC any equipment leased by
USC from InterLott and to permit the immediate use of such equipment by
USC.
(d) USC hereby indemnifies and agrees to defend Canmax and CTI
harmless from and against all losses, claims, damages or liabilities
arising from any claims by any person or entity supplying goods, services,
inventory or equipment, or otherwise extending credit, to USC for which
Canmax or CTI has, or is alleged to have, guaranteed or otherwise assumed
responsibility for payment, or otherwise arising from the business
operations of USC.
(e) Canmax and CTI hereby indemnify USC from and against any costs
attributable to the use of the Switch by any User and any other liabilities
or damages arising therefrom and attributable to the negligent acts or
omissions of any User.
(f) Canmax and CTI agree that they shall not assert any breach
hereunder or documents executed herewith attributable to liabilities or
liens existing as of the date hereof and disclosed to Canmax.
6. RESIGNATION OF BERNET. Concurrent with the execution of this
Agreement, Bernet and John Melideo shall resign from the Board of Directors of
Canmax.
7. CONFIDENTIALITY. Except as otherwise required by law, and in such
instance, strictly limited to the minimum disclosure requirements thereof, the
parties hereto agree to keep in strict confidence any confidential or
proprietary matters of the other until June 15, 2000. Other than the "Latin
American" cards that have been
3
<PAGE>
distributed prior to the date hereof as described in Section 5(b) above, from
and after the date hereof, no party shall use or otherwise exploit the
tradenames, trademarks, company names, fictitious names or trade dress of any
other party.
8. MUTUAL RELEASE. In consideration of the mutual covenants set forth
herein, the payment of the Reimbursable Amount and the execution of the
documents contemplated hereby, Canmax and CTI (collectively, the "Canmax
Parties"), as one party, and Bernet, USC, O'Donnell and the Trustee
(collectively, the "Bernet Parties"), as the other party, for themselves, their
successors and assigns do hereby release, acquit and forever discharge each and
the other, their officers, directors, stockholders, agents, representatives,
attorneys, successors and assigns from all claims, causes of action, demands,
suits, damages and warranties, known or unknown, existing or threatened, of
whatever kind or nature, whether heretofore, or hereafter accruing, whether now
known or not known to the parties for or because of any matter or thing done,
omitted, or failed to be done by such parties prior to and including the date
hereof, in any way directly or indirectly arising out of any transactions
between the parties occurring prior to the date of this Agreement; provided that
the release contained herein shall not (a) affect any of the rights or
obligations of (i) the Canmax Parties or the Bernet Parties created hereunder or
under any of the agreements that are executed in connection herewith, or
(ii) the Bernet Parties for any obligations or liabilities of the Canmax Parties
arising from the business operations of USC (including, without limitation any
claims by any person or entity supplying goods, services, credit, equipment or
inventory to USC for which Canmax or CTI has, or is alleged to have, guaranteed
or otherwise assumed responsibility for payment), or (b) release any party from
any damages or liability for fraud (other than arising from any representations
or warranties contained in or made at the time of the Merger Agreement, any
liabilities for which are hereby released). Each party represents that it owns
the claims which it is releasing and has not assigned any of its rights to any
other person or entity, that it is represented by legal counsel and has had the
opportunity to review the provisions of this Section 8 with legal counsel, that
they fully understand the terms and conditions of this Section 8, and that the
persons signing this agreement have the authority to execute this Agreement on
behalf of the party represented. Further, the parties hereby agree to execute
any additional documents necessary to effectuate the terms of this Section 8.
9. SECTION 1542 WAIVER. Notwithstanding Section 1542 of the California
Civil Code, if applicable, to any party hereto, which provides that "A general
release does not extend to claims which a creditor does not know or suspect to
exist in his favor at the time of executing the release, which if know by him
must have materially affected his settlement with the debtor," the general
release set forth above shall constitute a full release in accordance with its
terms. Each party knowingly and voluntarily waives the provisions of Section
1542, and acknowledges and agrees that this waiver is an essential and material
term of this Agreement.
10. FURTHER ASSURANCES. It is expressly agreed that this Agreement to
rescind the transactions described above is to be construed as a complete and
full rescission of all rights and obligations under such transactions. The
parties agree that upon the request of any of the parties, they will execute and
deliver such further documents and undertake such further actions as may be
reasonably required to effect any of the agreements contained herein.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas. Each party hereby agrees that
venue for any action arising out of this Agreement shall be proper in Dallas
County, Texas.
12. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which, taken together, shall constitute one and the same
document.
13. EXHIBITS. All exhibits attached hereto are incorporated herein by
this reference.
14. AMENDMENTS. This Agreement may not be amended except by the written
agreement of all parties affected by such amendment.
4
<PAGE>
EXECUTED as of this 15th day of June, to be effective as of January 30, 1998.
CANMAX INC.
By:/s/ Roger D. Bryant
----------------------------
Roger D. Bryant, President
CANMAX TELECOM, INC.
By: /s/ Roger D. Bryant
----------------------------
Roger D. Bryant, President
USCOMMUNICATION SERVICES, INC.
By: /s/ James C. Bernet
----------------------------
James C. Bernet, President
/s/ Alan Anderson
-------------------------------
Alan Anderson, Trustee
/s/ James C. Bernet
-------------------------------
James C. Bernet
/s/ Delia O'Donnell
-------------------------------
Delia O'Donnell
5
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<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
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<RECEIVABLES> 2,134
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<PP&E> 4,284
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0
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