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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED OCTOBER 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
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CANMAX INC.
(Exact name of Registrant as specified in its Charter)
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WYOMING 75-2461665
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
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150 W. CARPENTER FRWY., IRVING, TEXAS 75039
(Address of principal executive offices and zip code)
(972) 541-1600
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, without par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of February 10, 1998, 8,111,005 shares of common stock of Canmax Inc.
were outstanding and the aggregate market value of such common stock held by
nonaffiliates (based on the last reported close of the common stock on the
Nasdaq SmallCap Market tier of The Nasdaq Stock Market on such date), was
$7,942,367.
Part III of this Annual Report incorporates by reference information in the
Proxy Statement for the Annual Meeting of Stockholders of Canmax Inc.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Canmax Inc. ("Canmax") was incorporated on July 10, 1986 under the Company
Act of the Province of British Columbia, Canada, and subsequently changed its
name to "International Retail Systems Inc." On August 7, 1992, Canmax renounced
its original province of incorporation and elected to continue its domicile
under the laws of the State of Wyoming, and on November 30, 1994 its name was
changed to "Canmax Inc." Canmax was listed on the Nasdaq SmallCap Market tier of
The Nasdaq Stock Market on February 10, 1994, and trades under the symbol
"CNMX."
Canmax's principal executive offices are located at 150 West Carpenter
Freeway, Irving, Texas 75039, and its telephone number is (972) 541-1600.
SOFTWARE BUSINESS
Canmax, through its wholly owned subsidiary Canmax Retail Systems, Inc.,
develops and provides enterprise wide technology solutions to the convenience
store and retail petroleum industries. Canmax offers fully integrated retail
automation solutions, including its principle product "C-Serve," which includes
point of sale ("POS") systems, credit/debit network authorization systems, pump
control systems, and other back office management systems, and "Vista," its
headquarters-based management system. Canmax's products and services enable
retailers and operators to interact electronically with customers, capture data
at the point of sale, manage site operations and logistics and communicate
electronically with their sites, vendors and credit/debit networks. Canmax also
provides (a) software development, customization and enhancements, (b) systems
integration, installation and training services, and (c) 24 hour a day, 365 day
per year help desk services. These additional services enable Canmax to tailor
the solutions to each customer's specifications and provide successful system
implementation, installation, training and after sales support.
Canmax's objective is to be a leading provider of enterprise wide technology
solutions to the convenience store and retail petroleum market. In October, 1997
Canmax completed an enhanced version of its C-Serve product to run on the
Windows NT operating system in conjunction with a development project with NCR
Corporation ("NCR") and The Southland Corporation ("Southland"). Canmax
continues to develop a generic version of its C-Serve software that runs under
the Microsoft Windows family of operating systems. This product is expected to
be completed during the first calendar quarter of 1998. As of October 31, 1997,
Canmax's products have been installed in over 5,900 locations. Canmax's
customers include Southland, ARCO and the Army and Air Force Exchange.
TELECOMMUNICATIONS BUSINESS
GENERAL. On January 30, 1998, Canmax acquired USCommunication Services,
Inc. ("USC") through a private stock transaction which will be accounted for
under the purchase method. USC's shareholders received an aggregate of 1.5
million shares of Canmax common stock and warrants to acquire 2.5 million shares
of Canmax common stock with exercise prices of $1.25 and $2.00 per share. See
Notes to the Consolidated Financial Statements regarding subsequent events.
USC provides a number of telecommunication and internet products and
services to its customers, most of which are in the transportation industry.
USC's products and services include prepaid calling cards, one plus long
distance services, public internet access kiosks, pay telephones, and pallet
exchange services.
USC primarily markets its products and services to individuals and
businesses in the transportation industry through national and regional
truckstops and trucking fleets. Currently, USC's products are sold
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or are contracted to sell at selected locations throughout the U.S., such as
locations operated by Pilot Travel Centers, Petro Stopping Centers, and All
American Travel Centers. USC also markets its services directly through prepaid
calling card recharge sales and, in the future, anticipates marketing its
products and services through internet advertising.
INTEGRATION RISKS. The consummation of the USC acquisition is expected to
result in a significant growth of Canmax's operations. To manage this growth
effectively, Canmax will be required to improve its operating and financial
systems. There can be no assurances that the management and systems currently in
place or any steps taken to improve such management and systems will be adequate
in the future.
Achieving the benefits that Canmax believes will result from the USC
acquisition will depend in part upon the integration of the businesses of Canmax
and USC in an efficient and effective manner, and there can be no assurance that
this will occur. The transition to a combined company will require substantial
attention from management, particularly with regard to the allocation of capital
resources. The process of combining the two organizations may cause the
interruption of, or the disruption in, the activities of either or both the
companies' businesses, which could have an adverse effect on their combined
operations.
REGULATORY ENVIRONMENT. Businesses offering prepaid calling cards and "one
plus" long distance services are subject to federal and state governmental
regulations applicable to providers of long distance telephone services. At the
federal level, the industry is regulated by the Federal Communications
Commission (the "FCC"), while at the state level, telecommunication service
providers are subject to regulation by various state agencies. Federal
regulations require that long distance telephone service providers maintain both
domestic interstate and international tariffs that contain the then effective
rates, terms and conditions of service. Intrastate long distance
telecommunication service providers and pay telephone operators are also subject
to various state regulations, which typically require prior state certification,
notification and/or registration and tariff approval. Generally, companies
offering such services must obtain and maintain certificates of public
convenience and necessity from state regulatory authorities in each state which
they offer service and file tariffs and obtain tariff approval prior to
providing intrastate telecommunication and pay phone services. USC is in the
process of applying for its state and federal regulatory approvals, but has not
obtained any such approvals to date. USC is unable to predict whether it will
receive all necessary federal and state approvals, although USC anticipates
expending at least $75,000 in fees and expenses in seeking such approvals in the
21 states in which it currently operates. USC may be subject to fines or other
penalties for failing to obtain state approvals prior to commencing operations
in a state, which penalties may require the refund of all amounts received by
USC from intrastate traffic in states where prior state approvals were not
obtained. The imposition of any such fines or the inability of USC to obtain
such federal and state approvals would have a material adverse impact on the
business operations of USC.
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996 (the "Telecommunications Act"), which granted the
FCC the authority to deregulate certain aspects of the telecommunications
industry. This legislation is anticipated to result in increased competition in
the telecommunications industry from substantially larger regulated entities
(such as Regional Bell Operating Companies) that may compete with USC. Section
276 of the Telecommunications Act required the FCC to promulgate rules to
establish a per call compensation plan to ensure that all pay telephone
providers are fairly compensated for each completed intrastate and interstate
pay telephone initiated call, including calls for which pay telephone providers
had not previously received compensation (such as operator assisted and prepaid
calling card calls placed to toll free numbers or calls placed through network
access codes). In September 1996, the FCC promulgated rules to implement Section
276 of the Telecommunications Act which established a three-phase compensation
plan for pay telephone providers. Under the first phase, interexchange carriers
with annual toll revenues of more than $100 million were required to pay a total
of $45.85 per pay telephone per month for all toll free and access code calls
for the first year, commensurate with their portion of total interexchange
revenues. All switch-based and facilities-based interexchange carriers were
required to pay $0.35 per call to each pay telephone provider during the second
year
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(although payments could subsequently be recovered from resellers by the
carriers), after which per call compensation rates were to be left based upon
market-driven rates to be negotiated between pay telephone providers and
interexchange carriers. On July 1, 1997, the D.C. Circuit Court of Appeals
vacated a significant portion of the FCC's rules, including the $0.35 per call
rate which was found to be arbitrary and capricious, and remanded the matter to
the FCC for reconsideration. In September 1997, the FCC established a two (2)
year "default" compensation rate of $0.284 per pay telephone originated toll
free or access code call. At the end of the two (2) year interim period, the per
call pay telephone compensation rate will be the deregulated market-based local
coin rate less $0.066. This amount is payable by all "switch-based"
interexchange carriers (but again, may be passed through to the non-facilities
based resellers). The revised FCC rules became effective on October 7, 1997, but
continue to be subject to regulatory and legal challenges. USC is unable to
predict whether this regulation or other potential changes in the regulatory
environment will have a material adverse effect on USC.
BUSINESS STRATEGY
SOFTWARE BUSINESS
In the United States, there are approximately 200,000 locations which derive
revenues from the operations of convenience stores and/or retail gasoline sites.
Canmax believes that the industry is under automated and under invested in
automation and technology solutions. The National Association of Convenience
Stores (NACS) 1997 State of the Industry Report confirms that the convenience
store environment requires information derived from automation solutions to
compete efficiently and effectively. That study indicates that convenience
stores lag the rest of the retail industry in store automation, citing, for
example, that approximately 24% of all convenience stores utilize scanning
technology, while grocery stores have implemented scanning technology in
approximately 90% of their locations. Canmax believes that the industry is
prepared to increase its investment in automation and technology solutions and
consequently that there will be demand in the marketplace for the Canmax's
products, solutions and services. Canmax considers that international markets
also represent substantial marketing opportunities for its solutions.
Canmax's marketing strategy includes (i) providing solutions based products
and services for the automation and management of convenience stores and
gasoline stations, (ii) maintaining a high level of customer service through its
help desk services and account managers, (iii) seeking strategic partnerships to
provide Canmax visibility to buying audiences worldwide, and (iv) continuing to
invest in product development initiatives.
Canmax identifies potential customers by size and geographic location and
directs its marketing efforts along these segments. In general, Canmax allocates
its sales and marketing efforts to "corporate accounts" with global operations,
"national accounts" with operations primarily in the U.S. and "regional
accounts" with operations on a local or regional basis. Canmax utilizes
concurrent efforts by both sales representatives and account managers in
analyzing, selecting and implementing an automation system.
TELECOMMUNICATIONS BUSINESS
USC intends to be the dominant provider of telecommunications services to
the transportation industry. To implement this strategy, USC has initially
offered prepaid phone cards, one plus long distance services, and internet
access kiosks to its customers within the industry. USC intends to expand its
business by offering additional products and services to the transportation
industry and by targeting other retail markets.
ACQUISITIONS
Canmax continues to review an acquisition strategy within its current
industries and other related markets. Any material acquisitions may result in
significant changes in Canmax's business.
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PRODUCTS AND SERVICES
SOFTWARE BUSINESS
GENERAL. Canmax utilizes a process called "Pathmation" to analyze a
customer's needs, assess a customer's options, and implement the best resources
available to build a path leading a customer to its ultimate goal. The
Pathmation process includes (i) defining business goals, (ii) defining business
processes to support the business goals; (iii) determining technology
requirements to support defined business processes; (iv) developing an
implementation plan that encompasses business processes, technology training and
continuing support; (v) deploying modified business processes, technology and
support infrastructure; and (vi) continuously validating results with business
goals and changes in business practices.
C-SERVE. The Canmax C-Serve software is a comprehensive site-based store
automation software solution that provides, as its key features, debit/credit
card processing, pump control, POS and scanning capabilities, and significant
back office functions. Canmax's solutions are designed to allow retailers to
process transactions, manage pumps and credit/debit card processing and capture
data at the point of sale, as well as manage other front office and back office
operations. The key purpose of the system is to provide the store operator with
information and tools to enable improved store operations and profitability.
C-Serve includes features such as touch screen, PC keyboard or integrated third
party POS terminals which provide user friendly applications and flexible
configurations to accommodate the operational needs and differences of each
site. Further, C-Serve has the capability of supporting communications and data
transfers to and from remote corporate headquarters.
C-Serve was designed exclusively for the retail petroleum and convenience
store marketplace. C-Serve's features include:
- point-of-sale transaction processing, incorporating touch screens, PC POS
keyboards, or integrated POS terminals
- fueling transactions,
- dispenser controls,
- settlement transactions for credit/debit cards,
- shift and day reporting,
- store maintenance,
- file maintenance,
- inventory controls,
- fuel inventory management,
- reporting capabilities,
- accounts receivable controls,
- island payment terminals,
- credit/debit card authorizations,
- communications to or from head office,
- security controls,
- shelf label generation,
- interface to handheld terminals and scanners,
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- time and attendance records, and
- car wash interface.
Presently, C-Serve operates in a DOS/UNIX environment. In October, 1997
Canmax completed an enhanced version of its C-Serve product to run on the
Windows NT operating system in conjunction with a development project with NCR
and Southland. Canmax continues to develop a generic version of its
C-Serve software that runs under the Microsoft Windows family of operating
systems. This product is expected to be completed during the first calendar
quarter of 1998. See "Product Development."
VISTA. The Canmax "Vista" software provides a flexible automation system
that is able to conform to changing business needs. Vista is a decision support,
communications and remote store management system that operates from corporate
headquarters. Through a communications network, Vista provides for the
transmission of data messages from headquarters to the remote store and from the
store to headquarters. Vista's features include fuel and retail pricebook
maintenance, tax book maintenance, vendor pricebook maintenance, and exception
reporting for stores. Other features of Vista include:
- batch or on-line communications
- remote on-line support
- sales analysis from store to store, zone to zone and region to region
- addition of new parameters at any time
- decision support, and
- report writer
OTHER SERVICES AND PRODUCTS. In addition to revenues generated from the
licensing of C-Serve and Vista software and sale of proprietary communication
boards, revenues are generated from the following other services:
- modification and custom development contracts,
- installation and training services,
- annual maintenance and support services contracts, and
- the provision of third-party software and hardware.
Canmax's products are designed to provide a flexible generic system that can
be easily modified to meet most customer's individual needs and preferences.
Most customers, such as major oil companies, typically require a certain degree
of product customization and the development of unique interfaces to communicate
with their existing proprietary networks and host systems. Canmax typically
charges for customization and development costs. Because Canmax retains
ownership of the source code for such products (which is essential to effect
program changes), Canmax typically realizes service revenues from such products
throughout the duration of a relationship with the customer. However, Canmax
recently licensed the source code for its C-Serve software to Southland, which
may result in decreased revenue from that customer in the future. See "Major
Contracts--Southland Agreements."
To assist retailers and store operators in optimizing their use of Canmax's
software, Canmax also offers consulting, installation, training and help desk
support services. Canmax provides installation and training services at each
installed site, and back-up and technical support services from a central
location. Canmax has developed a proprietary help desk support system known as
"Sites." Sites provides efficient call handling, automatic problem escalation,
and customer reporting 24 hours a day, 7 days a week. Trained support
technicians handle everything from "how do I . . . " questions to dispatching
field service for hardware problems. Support services also include free software
and user guide updates as well as ensuring that technicians respond to all
problems in a timely manner. Sites management reports help identify and
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resolve recurring issues, such as the need for additional training at the store
or potential hardware failures. Sites also supports remote dial in capability to
the Canmax help desk Sites database, which provides customers managing a number
of locations access to data and reporting functions to better manage their
operations.
Canmax does not usually directly sell hardware, such as personal computers
and POS terminals, although it does provide a small amount of related equipment
which may not be readily available from the principal hardware vendor. The
majority of hardware products supplied to customers is provided by hardware
vendors such as NCR, Ultimate Technologies and Compaq Computers. Third party
software and hardware products such as operating systems, local and wide area
network software and modems are also packaged with Canmax's software and
firmware products and sold in accordance with distribution agreements entered
into with such suppliers.
MAJOR CONTRACTS.
Southland Agreements. In December, 1993, Canmax signed a five year agreement
with Southland to provide software licenses, development services, and provide
hardware and help desk services (the "Master Agreement"). Southland chose
Canmax's proprietary convenience store automation software, C-Serve, as the
basis for its automation of store functions and operations at its corporate and
franchise operated 7-Eleven convenience stores in the United States. Software
licensing, product and service revenue under this agreement during the fiscal
years ended October 31, 1997, 1996, and 1995 totaled approximately $2,051,000,
$2,581,000 and $3,733,000, respectively, while development revenues recorded
under the Master Agreement during these same periods totaled approximately
$799,000, $1,564,000 and $1,792,000, respectively.
On October 31, 1997, Canmax and Southland entered into Amendment No. 3 to
the Master Agreement (the "Southland Amendment"). Pursuant to the terms of the
Southland Amendment, Canmax allowed Southland to exercise its right as specified
in the Master Agreement to use, possess and modify the source code for the
software developed by Canmax for Southland for a one-time license fee of $1.0
million. Payment of the license fee was due in two installments of $500,000. The
first installment was received in November, 1997 and the second installment was
received in January, 1998. The Southland Amendment also contains Southland's
agreement to purchase from Canmax on or before December 7, 1998, no less than
$4.0 million of hardware, software maintenance, help desk, development and other
services. Although Southland has committed to purchase certain products and
services totaling a minimum of $4.0 million through December 7, 1998 in
accordance with the terms of the Southland Amendment, Southland's use and
possession of the source code could result in a material reduction in
Southland's reliance upon, and payment of fees for development services to,
Canmax. The use by Southland of its own staff or a third-party other than Canmax
to perform such services could have a material adverse effect on Canmax.
From time to time, Canmax may also provide development and other resources
to Southland on an as-needed basis under various agreements at terms specified
in the Master Agreement. Approximately $254,000 of development revenue under
such agreements was recognized by Canmax in fiscal 1997. Such agreements extend
through December, 1998.
In 1995, Canmax contracted with NCR to successfully bid for two additional
contracts with Southland relating to business requirements definition and the
development of a preliminary non scanning point of sale system. These projects
resulted in revenues to Canmax of approximately $2,165,000 and $1,005,000 in the
fiscal years ended October 31, 1996 and 1995, respectively.
During fiscal 1996, Canmax reached an agreement with NCR to develop for
Southland a next generation Windows NT based version of the Canmax C-Serve
convenience store software for $9.5 million. NCR was chosen by Southland to
provide project management and other professional services for the project.
Modifications to project requirements increased total project revenues from $9.5
million to
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$11.5 million. Approximately $7,560,000 and $3,920,000 of development revenues
under such agreement was recognized by Canmax in fiscal 1997 and 1996,
respectively.
Canmax is in discussions with Southland regarding the renegotiation of its
contract with Southland, but no definitive agreement has been reached to date.
While Canmax anticipates that it will successfully negotiate future agreements
with Southland, there can be no assurances either that Canmax will continue to
provide services to or receive revenue from Southland after the expiration of
the existing contracts in December, 1998 or, if Canmax enters into new
agreements with Southland extending beyond December, 1998, the amount of
revenues Canmax will receive thereunder. Any termination or significant
disruption of Canmax's relationships with Southland could have a material
adverse effect on Canmax's business, financial condition and results of
operations.
EDS Agreements. On April 29, 1997, Electronic Data Systems ("EDS") exercised
its option to acquire up to 25% of Canmax's Common Stock, resulting in Canmax
issuing an additional 1,598,136 shares. Canmax accounted for this transaction by
reclassifying the amount associated with the option to common stock. EDS then
immediately sold its total interest in Canmax, representing 1,863,364 shares, in
a private transaction to two Texas-based institutional investors. In conjunction
with this transaction, Canmax agreed to extend certain registration rights
similar to those held by EDS with regard to such shares to such investors.
Concurrent with EDS's exercise of its option, EDS and Canmax also agreed to
amend a license and grant of rights agreement which specifies rights and
obligations of both parties as to 788 of Canmax's site licenses sold to EDS in
fiscal 1994, and to terminate all other formal agreements between them including
their joint marketing and other supporting business agreements.
Canmax believes that the termination of its relationship with EDS is
beneficial because Canmax will be able to market its products directly (rather
than through EDS) to a much larger customer base within selected target markets.
Additionally, Canmax believes that the termination of the EDS option will
facilitate Canmax's future growth strategies as the dilutive effect of the EDS
option has been eliminated.
CONCENTRATION OF REVENUES; CUSTOMER CONCENTRATION. Canmax's revenues are
currently concentrated in Southland which accounted for approximately 92%, 83%
and 73% of Canmax's total revenue for fiscal years 1997, 1996 and 1995,
respectively. Canmax's revenues derived from its relationship with Southland
include products and services provided directly by Canmax to Southland and
indirectly through NCR to Southland pursuant to NCR's contract with Southland.
During those same periods, EDS accounted for 2%, 7% and 10%, respectively, of
Canmax's revenues for such fiscal years. No other customer accounted for over
10% of Canmax's total revenues. On April 29, 1997, Canmax and EDS agreed to
terminate substantially all of their business arrangements. Canmax does not
anticipate any significant future revenues from EDS.
At October 31, 1997 and 1996, Southland accounted for 95% and 83%,
respectively, of total accounts receivable. Because a significant portion of
Canmax's revenues are derived from its relationship with Southland, the timing
of payments received from Southland will affect the percentage of the current
assets of Canmax classified as either cash (or cash equivalents) or accounts
receivable; however, Canmax does not currently anticipate any significant
problems in collecting the accounts receivable arising from the Southland
relationship beyond any reserves established therefor. If the financial
condition of Southland adversely changes at a time when the receivable owing
from Southland is substantial and Southland becomes unable to pay its debts as
they become due, then the financial condition, working capital resources, and
results of operations of Canmax would be adversely affected.
In October, 1997, Canmax completed its previously announced $9.5 million
development project contract with NCR/Southland, and Canmax's Master Agreement
with Southland expires on December 7, 1998. See "Southland Agreements."
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PRODUCT DEVELOPMENT. Due to the rapid pace of technological change in its
industry, Canmax believes that its future success will depend, in large part, on
its ability to enhance and develop its software products to meet customer needs.
C-Serve is being enhanced to be operating system independent through the use
of sophisticated software tools. Canmax believes that this independence will be
a competitive advantage. Canmax currently provides C-Serve in a UNIX environment
and released a customized Windows NT based version of
C-Serve for Southland in October, 1997. A generic Windows NT based version of
C-Serve is scheduled for release in the first calendar quarter of 1998. Canmax
has also developed Vista (commonly referred to as a "host system") which enables
operators of chains of gas stations/convenience stores to monitor and control
activities at stores. Operators are able to obtain "real time" store level
information (from all stores or any number of selected stores) at headquarters
over communications lines to provide timely information for decision making.
During the fiscal years ended October 31, 1997, 1996 and 1995, Canmax
expensed approximately $615,000, $1,287,000 and $2,401,000, respectively, on
product development activities. Canmax incurred approximately $209,000, $129,000
and $0 during the fiscal years ended October 31, 1997, 1996 and 1995,
respectively, in software development costs, which were capitalized.
TELECOMMUNICATIONS AND OTHER BUSINESSES
PREPAID PHONE CARDS. USC provides convenient, cost-effective
telecommunications products and services to individuals and businesses through
its prepaid phone card (the "USC Card"). The USC Card provides customers with a
single point of access to prepaid telecommunications services at a fixed rate
charge per minute regardless of the time of day or, in the case of domestic
calls, the distance of the call. USC's services currently include domestic
calling, outbound international long distance calling, as well as enhanced
features such as customized greetings, sequential calling, and voice mail. The
USC Card may also be recharged on-line with a major credit card, allowing the
user to add minutes as needed.
USC's revenues originate from (i) USC Card and co-branded phone card sales
primarily through travel centers and truck stops, (ii) payroll deduction
programs for trucking company drivers, (iii) cards sold for promotional
marketing campaigns, (iv) corporate sales to businesses, and (v) recharges of
existing phone cards.
ONE PLUS LONG DISTANCE SERVICE. USC provides one plus long distance
services to individuals and businesses that have been "presubscribed" by USC. As
a result of deregulation in the industry, consumers have the right to select a
long distance company of their choice to provide them with long distance
services. To presubscribe these consumers, USC enters into agency agreements
with these customers that designate USC as their long distance service provider.
INTERNET ACCESS KIOSKS. Through USC's kiosks, called TravelNet,
professional drivers and business and vacationing motorists are able to "surf
the net" and send and receive e-mail, without subscription. In addition,
subscribers can access America Online at the TravelNet kiosks. USC currently has
internet access kiosks installed at 41 locations. TravelNet distinguishes itself
in the marketplace by accepting cash as well as major credit cards. Many truck
drivers do not carry credit cards and prefer using TravelNet on demand with cash
and without subscription. See "Major Suppliers--PayNet Communications, Inc." In
the future, USC anticipates selling the right for businesses to market their
products and services through TravelNet.
PAY TELEPHONES. USC intends to provide pay telephone services to its
customers to complement its other telecommunications products. The truck stop
and travel center industry has historically been a high volume user of pay
telephones; however, until recently, pay telephone providers were not
compensated for "1-800" calls. Recently enacted FCC rules related to "dial
around compensation" are expected to increase revenues of independent pay
telephone providers. See "Business--Telecommunications Business--Regulatory
Environment."
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PALLET EXCHANGE SERVICES. Through USC's wholly-owned subsidiary, Convenient
Pallets, Inc. ("CPI"), USC operates a pallet exchange business. By enabling
carriers to obtain and discard pallets along their routes, CPI improves the
efficiency of carriers and increases traffic at locations where it provides
pallet exchange services. CPI sends its own management to each location in order
to set up the pallet operation and administer training on all procedures. CPI
pays all start up costs such as signs, pallet inventory, printing, pallet jacks
and fencing. As of January 30, 1998 CPI was operating in 17 locations. CPI has
earned the endorsement of AMBEST, an association of travel center owners,
exposing the business to AMBEST's network of 130 franchised truck stops
nationwide.
MAJOR SUPPLIERS. USC believes that multiple suppliers are available to meet
all of its product and service needs at competitive prices and rates and expects
the availability of such products and services to continue in the future,
however, the continuing availability of alternative sources cannot be assured.
Transition from USC's existing suppliers, if necessary, could have a disruptive
effect on USC's operations and could give rise to unforeseen delays and/or
expenses. USC is not aware of any current circumstances that would require USC
to seek alternative suppliers for any of the products or services used in the
operation of its business. The following discusses USC's major suppliers.
WorldCom Network Services, Inc. Both inbound calls to and outbound calls
from USC's platform placed by consumers through USC's prepaid phone cards and
long distance calls placed by customers subscribing to USC's one plus long
distance services are carried by WorldCom Network Services, Inc. ("WorldCom").
USC obtains telecommunication services pursuant to supply agreements with
WorldCom.
CallSource, Inc. USC's prepaid phone card services are delivered through
proprietary switching, application, and database access software running on the
USC platform. The USC platform is located in Reseda, California, is owned by USC
and is operated for USC by CallSource, Inc. ("CallSource"). The USC platform
allows users to access USC's prepaid phone card services, and provides USC,
through CallSource, with the flexibility to customize and add features to USC's
services on a platform-wide basis. CallSource has also developed for USC a data
reporting system which tracks inventory, controls fraud, monitors usage by card
and retailer and allows USC to provide certain marketing information to its
retailers and business customers.
PayNet Communications, Inc. USC's TravelNet kiosks are operated under a
technology license agreement with PayNet Communications, Inc. ("PayNet"). The
licensed technology consists of a proprietary internet access software package
located at each terminal which (i) tracks and reports revenues, use, and billing
information by kiosk, (ii) allows periodic updating of the kiosk services by
downloading new programs and (iii) provides troubleshooting reports. As USC's
internet access service provider ("ISP"), PayNet provides validation, billing
and collection of all credit card sales, software administrative systems,
software updates to the licensed technology and telephonic technical support for
repairs of the licensed technology.
COMPETITION
SOFTWARE BUSINESS
Canmax believes its competition can be categorized as follows:
- pump manufacturers,
- point-of-sale equipment manufacturers, and
- specialized application software companies.
Pump manufacturers supply the majority of point-of-sale devices used by gas
stations and convenience stores. They supply specialized equipment with
proprietary interfaces specific to their pump control consoles. The proprietary
nature of their products limits the technology used and the ability to interface
to other devices. Their primary intent, however, is to provide a complementary
service to the sale of their
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"core" product - pumps. Canmax faces competition from manufacturers such as
Dresser Industries Inc., Gilbarco Inc. and Tokheim Corporation.
Software firms, such as Canmax, specializing in gas and convenience store
applications enjoy the advantage of bringing specialized knowledge and
applications to customers. The industry, however, does not enjoy a strong
reputation as service consultants who deliver solutions that meet/exceed
customer expectations. Canmax faces competition from software firms such as
Radiant Systems, Inc., MSI, Pinnacle, Inc., and Stores Automated Software, Inc.
Canmax's service strategy is designed to employ "Pathmation," a consulting
service process, to understand customer needs, while guiding and delivering
appropriate products better than other marketplace alternatives.
Specialized POS manufacturers traditionally have developed solutions based
on their proprietary hardware. POS manufacturers, such as Verifone, Ltd. and
IBM, also compete with Canmax.
Many of Canmax's current and prospective competitors have substantially
greater financial, technical and marketing resources than Canmax. Canmax could
face significant competition upon any consolidation or alliance of major
suppliers or competitors creating a larger, stronger presence in the
marketplace. Canmax also anticipates that additional competitors may enter
certain of Canmax's markets, resulting in even greater competition. There can be
no assurance that Canmax will be able to compete with existing or new
competitors. Increased competition could result in significant price reductions
with negative effects upon Canmax's gross margins and a loss of market share,
which could materially and adversely affect Canmax's business, financial
condition and operating results.
TELECOMMUNICATIONS BUSINESS
PREPAID PHONE CARDS AND ONE PLUS LONG DISTANCE SERVICES. The
telecommunications services industry is highly competitive, rapidly evolving and
subject to constant technological change. Currently, numerous companies sell
prepaid calling cards and USC expects competition to increase in the future.
Other providers currently offer one or more of each of the services offered by
USC. Telecommunication service companies compete for consumers based on price,
with the dominant providers conducting extensive advertising campaigns to
capture market share. As a service provider in the long distance
telecommunications industry, USC competes with three dominant providers, AT&T
Corp. ("AT&T"), MCI Communications Corporation ("MCI"), and Sprint Corporation
("Sprint"), all of which are substantially larger and have (i) greater
financial, technical, engineering, personnel and marketing resources; (ii)
longer operating histories; (iii) greater name recognition; and (iv) larger
consumer bases than USC. These advantages afford USC's competitors the ability
to (a) offer greater pricing flexibility, (b) more attractive incentive packages
to encourage retailers to carry competitive products, (c) negotiate more
favorable distribution contracts with retailers, and (d) negotiate more
favorable contracts with suppliers of telecommunication services. USC believes
that existing competitors are likely to continue to expand their service
offerings to appeal to retailers and consumers. In addition, the relatively low
barriers to entry to the markets in which USC competes may encourage new
competitors to enter the telecommunications market.
The ability of USC to compete effectively in the telecommunications services
industry will depend upon USC's ability to (i) continue to provide high quality
services at prices generally competitive with, or lower than, those charged by
its competitors and (ii) develop new innovative products and services. There can
be no assurance that USC will be able to compete successfully in the future.
INTERNET ACCESS KIOSKS. The recent popularity of the internet has resulted
in increased modem access points at various high traffic and convenient
locations, such as hotels and airports. Some of these access points are used by
business and other travelers that carry laptop or other portable computers and
have existing access through ISPs. Additionally, an increasing number of these
locations are providing computer equipment and internet access to their users.
USC's TravelNet kiosks provide both computer equipment and internet access
through PayNet, USC's designated ISP. See "Products and
Services--Telecommunications and Other Businesses--Major Suppliers--PayNet
Communications, Inc". USC expects to encounter
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<PAGE>
increased competition in the future from convenience store chains, trucking
companies and travel centers implementing similar programs.
PAY TELEPHONES. USC will compete for pay telephone locations with local
exchange carriers ("LECs") and other independent pay telephone operators. USC
will also compete, indirectly, with long distance companies that can offer
location owners commissions on long distance calls made from LEC-owned pay
telephones. Most LECs and long distance companies against which USC competes and
some independent operators have greater financial, marketing, and other
resources than USC. In addition, many LECs, faced with competition from
independent pay telephone companies, have increased their compensation
arrangements with owners of pay telephone locations to offer more favorable
commission schedules.
USC believes that pay telephone providers primarily compete on the following
factors: (i) the commission payments to a location owner on both local and long
distance calls (ii) the ability to serve accounts with locations in several
local access transport areas or "LATAs", (iii) the quality of service, (iv) the
ability to provide specialized services to a location owner and its telephone
users, and (v) the ability to quickly respond to customer needs.
USC competes with long distance carriers who provide dial-around services
which can be accessed through USC's pay telephones. Certain national long
distance operator service providers have launched advertising promotions which
have increased dial-around activity on pay telephones owned by LECs and
independent telephone companies. Recent regulatory initiatives resulting from
implementation of the Telecommunications Act of 1996 are expected to increase
the amount of dial around compensation received by independent pay telephone
operators on their pay telephones. See "Business--Telecommunications
Business--Regulatory Environment."
PALLET EXCHANGE SERVICES USC operates its pallet exchange program both
through buying and selling used pallets to and from carriers and buying new
pallets from manufacturers as necessary to maintain inventories at its pallet
exchange locations. Many pallet manufacturers are large companies with
significantly greater financial resources than USC. These companies will be able
to offer new pallets to carriers at lower prices than USC. In addition, trucking
companies may compete with USC's pallet exchange program by offering similar
services at various distribution facilities. USC believes that its ability to
offer convenient access to and drop off points for pallets at travel plazas
across the country differentiates its products and services from those of its
actual or potential competitors. USC believes that the primary barrier to entry
to this market is the ability to secure convenient locations for operating a
pallet exchange program. Therefore, additional potential competitors include
national gasoline stations and travel centers with locations along major
transportation corridors.
SALES AND MARKETING
Canmax markets C-Serve and ancillary products and services from its offices
in Irving, Texas. Virtually all sales efforts are focused on the U.S., Canada
and Mexico at this time. However, Canmax plans to expand its international
marketing efforts in the future. More than 99% of 1997 revenue was derived from
U.S. based customers. USC markets its products and services to truck stops,
travel centers, and the transportation industry throughout the U.S.
BACKLOG
Software and telecommunication products are generally delivered to customers
when ordered and therefore there is no backlog of orders.
IMPACT OF YEAR 2000
Canmax has completed an assessment of the impact of Year 2000 issues on its
internal systems and developed software products and determined that it will be
required to modify or replace portions of its
12
<PAGE>
internal systems and developed software products so that they will function
properly with respect to dates in the year 2000 and thereafter. Canmax has
initiated communications with all of its significant suppliers and customers to
determine the extent to which Canmax's internal systems and developed software
products are vunerable to those third parties failure to remediate their own
Year 2000 issues. Canmax has commenced its Year 2000 compliance project. The
project is estimated to be completed not later than December 31, 1998. Canmax
believes that with modifications to existing internal systems and developed
software products and conversions to new internal systems and developed software
products, the Year 2000 issue will not pose significant problems for its
internal systems and developed software products. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 issue
could have a material impact on the operations of Canmax. Canmax has concluded
that the cost of its Year 2000 project will not materially impact future
financial results. Canmax is in the process of evaluating Year 2000 issues
related to the recently acquired business operations of USC.
EMPLOYEES
As of October 31, 1997, Canmax had 100 full time employees. The functional
distribution of the employees was 9 in sales and marketing and professional
services, 44 in product development and advanced research, 12 in general and
administration, and 35 in service, support and education. All are located in
Irving, Texas with the exception of two sales employees located outside Texas.
As of January 30, 1998, USC had 11 full time employees. All employees are
located in San Diego, California with the exception of 5 employees located in
Arkansas, Connecticut, Utah and Florida. No employees are represented by a labor
union, and Canmax and USC consider their employee relations to be excellent.
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. See Note 12 to the Consolidated Financial
Statements.
ITEM 2. PROPERTIES
Canmax occupies 47,178 square feet of office space at 150 West Carpenter
Freeway, Irving, Texas, pursuant to a lease which expires August 31, 1998. The
space is used for executive, administrative, sales, engineering personnel, help
desk and related services, as well as for inventory storage and demonstration
purposes. Currently, Canmax does not have an option to renew the lease, however,
Canmax is reviewing proposals for suitable available space at several
alternative locations. Canmax does not believe it has been or will be materially
affected by environmental laws.
USC occupies 4,094 square feet of office space at 12245 World Trade Drive,
San Diego, California, pursuant to a lease which expires December 31, 2000. The
space will be used for sales and marketing purposes.
ITEM 3. LEGAL PROCEEDINGS
Neither Canmax, USC, nor any of their subsidiaries are party to any material
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Canmax has only one class of shares, common stock without par value, which
is traded on the Nasdaq SmallCap Market tier of The Nasdaq Stock Market. Each
share ranks equally as to dividends, voting rights, participation in assets on
winding-up and in all other respects. No shares have been or will be issued
subject to call or assessment. There are no preemptive rights, provisions for
redemption or purpose for either cancellation or surrender or provisions for
sinking or purchase funds.
Canmax was listed on the Nasdaq SmallCap Market tier of The Nasdaq Stock
Market on February 10, 1994, and trades under the symbol "CNMX."
Canmax's principal executive offices are located at 150 West Carpenter
Freeway, Irving, Texas 75039, and its telephone number is (972) 541-1600.
CHANGE IN NASDAQ LISTING REQUIREMENTS
On August 25, 1997, the U.S. Securities and Exchange Commission, the
National Association of Securities Dealers, Inc. and The Nasdaq Stock Market
approved increases in the listing and maintenance standards governing the Nasdaq
SmallCap Market. These new standards require, as a condition to continued
listing on the Nasdaq SmallCap Market, an issuer to maintain either "net
tangible assets" (defined as total assets, excluding goodwill, minus total
liabilities) of $2.0 million, market capitalization of $35.0 million or net
income in two of the last three fiscal years of at least $0.5 million. Companies
failing to satisfy the new listing requirements are allowed a six month
"compliance" period during which they may take appropriate steps to comply with
the new listing requirements. As of October 31, 1997, Canmax had net tangible
assets of approximately $2.2 million and a market capitalization of
approximately $11.2 million. In addition, Canmax has not had net income of $0.5
million in any of its last three fiscal years. If in the future Canmax fails to
satisfy the requirements for continued listing on the Nasdaq SmallCap Market,
Canmax will be subject to being delisted from the Nasdaq SmallCap Market. The
delisting of Canmax would materially adversely affect the liquidity of the
Canmax Common Stock and the operations of Canmax.
MARKET PRICES OF CANMAX COMMON STOCK
The following table sets forth for the fiscal periods indicated the high and
low closing sales price per share of Canmax Common Stock as reported on the
Nasdaq SmallCap Market. All per share amounts have been retroactively adjusted
to reflect a one-for-five reverse stock split of Canmax's Common Stock
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<PAGE>
effective December 21, 1995. The market quotations presented reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
CANMAX
COMMON STOCK
CLOSING PRICES
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1996
First Quarter........................................................................ $ 4.31 $ 2.19
Second Quarter....................................................................... $ 4.63 $ 2.50
Third Quarter........................................................................ $ 4.50 $ 1.63
Fourth Quarter....................................................................... $ 3.25 $ 1.50
FISCAL 1997
First Quarter........................................................................ $ 2.50 $ 1.50
Second Quarter....................................................................... $ 2.88 $ 1.50
Third Quarter........................................................................ $ 2.75 $ 1.88
Fourth Quarter....................................................................... $ 2.50 $ 1.38
FISCAL 1998
First Quarter........................................................................ $ 1.50 $ 0.88
Second Quarter (through February 10, 1998)........................................... $ 1.13 $ 1.03
</TABLE>
The closing price for the Canmax Common Stock on February 10, 1998 as
reported by Nasdaq was $1.13.
DIVIDENDS
Canmax has never declared or paid any cash dividends on the Canmax Common
Stock and does not presently intend to pay cash dividends on the Canmax Common
Stock in the foreseeable future. Canmax intends to retain future earnings for
reinvestment in its business.
Additionally, dividends are restricted to less than 5% of net operating
income in accordance with the terms of the convertible loan agreement effective
December 15, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Sources of Capital" and Notes
to the Consolidated Financial Statements regarding subsequent events.
HOLDERS OF RECORDS
There were 454 stockholders of record as at February 10, 1998, and
approximately 4,000 beneficial stockholders.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 12,736 $ 12,264 $ 8,996 $ 9,675 $ 4,659
Cost of software licenses, product revenue and development
revenue................................................... 5,337 4,489 4,352 3,219 1,411
Operating expenses.......................................... 7,291 7,604 8,328 8,305 4,361
Interest expense, net....................................... 21 28 50 66 29
Writedown of capitalized software........................... -- -- -- 4,127 --
Net income (loss)........................................... 87 143 (3,734) (6,042) (1,142)
Net income (loss) per share(1).............................. $ 0.01 $ 0.02 $ (0.79) $ (1.54) $ (0.31)
CONSOLIDATED BALANCE SHEET DATA:
Total assets................................................ $ 4,707 $ 5,650 $ 4,702 $ 5,328 $ 6,883
Working capital (deficiency)................................ 793 208 (469) 146 526
Non-current obligations..................................... 178 256 265 1,375 146
Shareholders' equity........................................ 2,220 2,075 1,719 1,910 4,045
</TABLE>
- ------------------------
(1) All per share amounts have been retroactively adjusted to reflect a
one-for-five reverse stock split of Canmax Common Stock effective December
21, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE FISCAL YEARS ENDED OCTOBER 31, 1997, 1996 AND
1995
GENERAL
Canmax generates its revenues primarily through three sources:
1. licensing its sophisticated software systems and selling or licensing
ancillary hardware and third party software to operators of retail petroleum and
convenience stores;
2. providing related development, customization, and enhancement to its
customers, and
3. providing maintenance by way of 24 hour per day, 365 day per year help
desk, and other services.
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<PAGE>
The following table sets forth certain financial data as a percentage of
total net revenues and the percentage change for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
------------------------------------- PERCENTAGE
INCREASE (DECREASE)
FISCAL YEAR ENDED OCTOBER 31, ------------------------
1997 1996 1995 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses and product revenue..................... 15.1% 15.5% 34.8% 1.2% (39.2)%
Development............................................... 68.3% 64.7% 42.2% 9.6% 108.9%
Service agreements........................................ 16.6% 19.8% 23.0% (13.0)% 17.2%
----- ----- -----
100.0% 100.0% 100.0% 3.9% 36.3%
----- ----- -----
Costs and expenses:
Costs of software licenses, product revenue and
development revenues.................................... 41.9% 36.6% 48.3% 18.9% 3.1%
Customer service.......................................... 17.7% 18.9% 26.2% (2.9)% (1.6)%
Product development....................................... 4.8% 10.5% 26.7% (52.3)% (46.4)%
Sales and marketing....................................... 4.8% 3.6% 7.4% 38.1% (33.6)%
General and administrative................................ 29.9% 29.0% 32.3% 7.3% 22.4%
Interest and financing.................................... 0.2% 0.2% 0.6% (26.0)% (44.4)%
----- ----- -----
99.3% 98.8% 141.5% 4.4% (4.8)%
----- ----- -----
Net income (loss)......................................... 0.7% 1.2% (41.5)% (38.8)% 103.8%
----- ----- -----
----- ----- -----
</TABLE>
RESULTS OF OPERATIONS--1997 VERSUS 1996
REVENUE
For the year ended October 31, 1997, Canmax had revenues of $12,736,223, an
increase of $472,363 or 3.9% over 1996. During 1997, The Southland Corporation
(Southland) and NCR Corporation (NCR) accounted for approximately 92% of
Canmax's total revenue as compared with approximately 83% for the comparable
period of 1996.
Software licenses and product revenue for the year ended October 31, 1997
increased by 1.2% from $1,901,302 in 1996 to $1,924,897 in 1997. This increase
is primarily due to increased software and hardware sales to Southland during
the first nine months of 1997 for the planned implementation by Southland of a
Windows NT solution that commenced in December, 1997 and the sale to Southland
in October, 1997 of the right to use, possess and modify the source code of the
software developed by Canmax for Southland, for a one-time license fee of $1.0
million. These increases were partially offset by a decline in sales of software
and hardware components to other customers and a decrease in software and
hardware sales to Southland resulting from the completion of one phase of a UNIX
store upgrade which commenced during 1995 and concluded during the first quarter
of 1996.
Development revenue for the year ended October 31, 1997 increased $763,823
or 9.6% from $7,940,515 in 1996 to $8,704,338 in 1997. Development revenue from
the base contract with Southland continued to decline from approximately
$1,564,000 in 1996 to approximately $799,000 during the same period in 1997, in
accordance with the terms of the contract. Additionally, during 1996, Canmax
recognized development revenues of approximately $2,165,000 for work associated
with a contract between Canmax and NCR to develop a preliminary (non scanning)
point of sale software application in UNIX for Southland. This project was
completed in July, 1996. Also during 1996, Canmax recognized approximately
$3,920,000 of development revenue for work performed under an agreement which
commenced in May, 1996 with NCR and Southland to develop a scanning point of
sale application for Southland and other associated inventory, merchandising,
and back office functions, running in a Windows NT environment
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<PAGE>
(the "Southland Windows NT development project"). Canmax recognized revenues of
approximately $7,560,000 during 1997 related to the Southland Windows NT
development project. Modifications to original project requirements increased
total project revenues from $9.5 million to $11.5 million. The Southland Windows
NT development project was completed in October, 1997. Additionally, during the
fourth quarter of 1997, Canmax provided development and other resources to
Southland on an as-needed basis. Canmax recognized approximately $254,000 of
development revenue related to this effort.
Development revenue increased $1,415,028 or 50.0% from $603,731 in the third
quarter of 1997 to $2,018,759 in the fourth quarter of 1997. During the third
quarter of 1997, Canmax undertook a significant work effort to support the
expanded testing of the Southland Windows NT development project for an interim
period up to pilot implementation. This expanded work effort was out of scope of
the original contract. Accordingly, at the end of the third quarter, Canmax
increased its cost estimates used to compute development project revenue under
the percentage-of-completion method and expensed all costs incurred related to
the additional work effort, including approximately $854,000 for work performed
during the third quarter of 1997. Canmax subsequently negotiated approximately
$981,000 of additional revenue related to this work effort. Therefore, as the
project was completed in October, 1997, Canmax recognized approximately $543,000
of remaining revenue under the percentage-of-completion method and approximately
$981,000 of the approved change control during the fourth quarter of 1997.
Canmax has negotiated with Southland to provide development and other
resources to Southland on an as-needed basis through December, 1998. Canmax is
in discussions with Southland regarding the renegotiation of its contract, but
no definitive agreement has been reached to date. See "Products and
Services--Software Business--Major Contracts--Southland Agreements."
Service agreements revenue for the year ended October 31, 1997 decreased
$315,055 or 13.0% from $2,422,043 in 1996 to $2,106,988 in 1997. This decrease
resulted from a decline in the installation, training and site survey revenues
reflecting a lower number of new installations of Canmax's proprietary software
accompanied by a decrease in calls received from Southland locations by the 24
hour/7 day a week help desk, which caused a decline in revenue due to the
structure of the support contract with Southland.
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
59.9% for the year ended October 31, 1997 as compared with 30.5% for the same
period in 1996, prior to 1996 inventory writedowns of $217,623. Gross margin on
software sales for 1997 was 66.4% compared with 23.9% for the same period in
1996, excluding 1996 inventory writedowns. The increase is due to the effects of
the higher margin source code sale to Southland in October, 1997. This increase
in margin was partially offset by a decrease in margin resulting from increased
sales of lower margin purchased software during the reporting period coupled
with a decline in sales of Canmax's higher margin proprietary software. Gross
margin on hardware sales for 1997 was 37.6% compared with 32.8% for the same
period in 1996, excluding 1996 inventory writedowns. The increase in margin
resulted from a change in the mix of hardware components sold. Included in the
cost of revenues of software licenses and product revenue for 1996 is a one time
writedown of $105,763 for software inventory that Canmax determined was
necessary due to the limited likelihood of future sales of that item. Further,
also included in cost of revenues of software licenses and product revenue for
1996 is a one time writedown of inventory of $111,860 that Canmax determined was
required to reflect the inventory at net realizable value.
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<PAGE>
Gross margin on development revenues for 1997 was 47.6% for the year ended
October 31, 1997 as compared with 62.9% for the same period in 1996. This
decrease is partially due to lower anticipated profit margins on the Southland
Windows NT development project as compared to the NCR/Southland development
project in progress in 1996, the preliminary (non scanning) point of sale
software application in UNIX as well as changes in cost estimates of the
Southland Windows NT development project. The lower planned profit margin is a
result of the need to employ a significant number of highly skilled contractors
to complete certain phases of the Southland Windows NT development project
throughout the life of the project which was completed in October, 1997. No such
requirements were necessary or incurred for the NCR/Southland UNIX based project
which was completed in July, 1996.
Gross margin on development revenue for the fourth quarter of 1997 was 67.5%
as compared to (51.9)% for the third quarter of 1997. This increase is primarily
related to changes in project cost estimates and accounting for the additional
work effort undertaken in the third quarter of 1997. As previously discussed,
during the third quarter of 1997, Canmax undertook a significant work effort to
support the extended testing of the Southland Windows NT development project for
an interim period up to pilot implementation. This expanded work effort was out
of the scope of the original contract. Accordingly, at the end of the third
quarter, Canmax increased its cost estimates used to compute development project
revenue under the percentage-of-completion method and expensed all costs
incurred related to the additional work effort, including approximately $854,000
for the work effort performed during the third quarter of 1997. Canmax
subsequently negotiated approximately $981,000 of additional revenue related to
this work effort. Therefore, as the Southland Windows NT development project was
completed in October, 1997, Canmax recognized approximately $543,000 of
remaining revenue under the percentage-of-completion method and approximately
$981,000 of the approved change control during the fourth quarter of 1997.
EXPENSES
Customer service costs for the year ended October 31, 1997 decreased by 2.9%
compared with the same period in 1996. The decline in costs is due to lower
operating costs for the service arising from increased efficiencies and lower
overall expenditure levels.
Product development costs declined $672,463 or 52.3% from $1,286,966 in 1996
to $614,503 in 1997. The reduction is due to a significant increase in funded
development projects which resulted in development expenditures being included
in cost of revenues. Additionally, there was an increase in software development
costs capitalized. During the first quarter of 1996, Canmax capitalized $128,874
of software development costs relating to a new credit card processing network
interface as compared with $209,202 of such costs capitalized in the fourth
quarter of 1997 relating to Canmax's next generation Windows based project which
is scheduled for release in the first calendar quarter of 1998.
General and administrative expenses increased $258,225 or 7.3% from
$3,555,042 in 1996 to $3,813,267 in 1997. This net increase is primarily due to
Canmax expensing approximately $360,000 of merger related costs during October,
1997 upon termination of the proposed merger with Auto Gas Systems, Inc. These
costs, comprised primarily of legal and other professional fees incurred during
the second and third quarter of 1997, were originally deferred and would have
been accounted for as additional purchase price or as a reduction in the fair
value of the securities issued upon consummation of the proposed merger
transaction. Additionally, Canmax experienced increases in expenditures related
to the establishment of a business development unit, responsible for identifying
new business opportunities and project management and increased expenditures for
investor relations. These increases were partially offset by a reduction in
development project premiums to ensure timely completion of projects and
performance bonuses.
Sales and marketing expenses increased by $167,864 or 38.1% from $440,581 in
1996 to $608,445 in 1997. These increases are due to increased headcount and
advertising and marketing expenditures aimed
19
<PAGE>
at generating interest in existing products as well as Canmax's new Windows
based product scheduled for release in the first calendar quarter of 1998.
For the year ended October 31, 1997 Canmax recorded no tax provision as net
operating loss carryforwards of approximately $20.3 million would offset any tax
liability related to fiscal year 1997.
As a result of the foregoing, Canmax generated net income of $87,331, or
$0.01 per share, for the year ended October 31, 1997 as compared with net income
of $142,614, or $0.02 per share, for the year ended October 31, 1996.
RESULTS OF OPERATIONS--1996 VERSUS 1995
REVENUE
For the year ended October 31, 1996, Canmax had revenues of $12,263,860, an
increase of $3,267,773, or 36.3%, over 1995. The improvement in revenue is a
result of growth in service agreement revenues and significant growth in
development revenue as Canmax completed a project to develop a preliminary (non
scanning) point of sale software application in UNIX for Southland and commenced
a project to produce a scanning point of sale application and other associated
inventory, merchandising, and back office functions for Southland in a Windows
NT environment.
Software licenses and product revenue for the year ended October 31, 1996
was $1,901,302, a decrease of $1,226,133, or 39.2% over 1995. The decrease is
primarily due to the sale during 1995 of software and hardware components to
Southland in accordance with their contract which did not occur during 1996. The
provision of these items to Southland under their contract commenced during 1995
and concluded during the first quarter of 1996.
Development revenue for the year ended October 31, 1996 was $7,940,515, an
increase of $4,139,307, or 108.9% over 1995. While development revenue from the
base contract with Southland declined in accordance with the terms of the
contract compared with the same period in 1995, Canmax recognized additional
development revenue of approximately $2,165,000 for work associated with a
contract between Canmax and NCR to develop a preliminary (non scanning) point of
sale software application in UNIX for Southland. This project was completed in
July 1996. In fiscal 1996, Canmax reached agreement with NCR to develop for
Southland a next generation Windows NT based version of the Canmax "C-Serve"
convenience store software for $9.5 million. The resulting product will be used
in Southland's approximately 5,000 7-Eleven stores in the United States. NCR was
chosen by Southland to provide project management and other professional
services for this project. The $9.5 million in revenues is in addition to
previous contracts awarded to Canmax from Southland. During 1996, Canmax
recognized revenue of $3,920,098 under this agreement. No such revenue was
recorded in 1995.
Service agreements revenue for the year ended October 31, 1996 was
$2,422,043, an increase of $354,599, or 17.2%, over 1995. This improvement
results from an increase in revenue from the 24 hour/7 day a week help desk
services of 49.4%, reflecting an increase in the number of sites supported from
3,654 as of October 31, 1995 to 5,912 as of October 31, 1996. While the number
of sites increased by 61.8%, revenue increased at a lower rate due to the
structure of the support contract with Southland which provided for a minimum
payment until a certain volume of support calls was reached. These increases
were offset by a reduction in installation and training revenue resulting from a
decrease in the number of sites installed and trained in 1996 compared with
1995.
GROSS MARGIN
Gross margin as a percentage of software license, product and development
revenue was 56.6% for the year ended October 31, 1996 compared with 37.2% for
the same period in 1995, prior to 1996 inventory writedowns of $217,623.
20
<PAGE>
Gross margin on software sales increased from 17.6% for the year ended
October 31, 1995 to 23.9% for the same period in 1996, excluding the $105,763
software inventory writedown recorded in 1996. This improvement was due to a
change in mix of products sold away from low margin products sold to Southland
during 1995 to a mix that is more representative of higher margin products sold
during 1996. Gross margin on hardware sales increased slightly from 31.6% for
the year ended October 31, 1995 to 32.8% for the same period in 1996, excluding
the $111,860 hardware inventory writedown recorded in 1996. The improvement in
1996 was due to the sale of hardware with higher than normal margins compared
with 1995.
For the year ended October 31, 1996, the gross margin on development revenue
was 62.9% compared with 47.1% for the same period in 1995. The improvement is a
result of improved profit margins negotiated on Canmax's development projects.
EXPENSES
For the year ended October 31, 1996, customer service costs decreased 1.6%
compared with the same period in 1995. The decline in cost despite the increase
in the number of sites supported from 3,654 to 5,912 is due to lower operating
costs for the service arising from increased efficiencies and lower overall
expenditure levels.
For the year ended October 31, 1996, product development costs declined from
$2,401,306 for the same period in 1995 to $1,286,966, a reduction of 46.4%. The
reduction was due to an overall reduction in product development funded by
Canmax and due to the capitalization of software development costs amounting to
$128,874 relating to a new credit card processing network interface Canmax
developed during the first quarter of 1996.
General and administrative expenses increased 22.4% for the year ended
October 31, 1996 compared with 1995, predominately as a result of the
establishment of a business development unit responsible for identifying new
business opportunities and project management. Sales and marketing expenses
declined 33.5% for the year ended October 31, 1996 compared with the same period
in 1995. These cost reductions are a result of lower expenditure levels.
During the year ended October 31, 1996, Canmax announced it would close its
wholly owned subsidiary, Dataplane Technologies Inc., on August 31, 1996.
Dataplane had designed and developed certain communication processor boards
which allow C-Serve to handle some of the communication protocols and device
interfaces used in the industry. Canmax determined that the technology had a
limited life and it would no longer continue to develop and manufacture the
technology. Canmax has licensed the manufacturing rights of the technology to
Bass Inc. for the next three years and anticipates providing for future
requirements through Bass. In addition, Canmax closed its non operating
subsidiary, The Point of Sale Corporation.
The cost of closing these subsidiaries has been included in part in the
writedown of $217,623 of inventory previously discussed and $25,000 included in
general and administrative expense representing the write off of intellectual
property.
At October 31, 1996, Canmax ceased operations of its wholly owned
subsidiary, Canmax Retail Systems (British Columbia), which had been providing
software development services on a software development project which was
completed on October 31, 1996. Canmax does not anticipate to incur any
additional material costs to close this subsidiary.
For the year ended October 31, 1996, Canmax recorded no tax provision as net
operating loss carryforwards of approximately $19.1 million would offset any tax
liability related to fiscal year 1996.
21
<PAGE>
As a result of the foregoing, Canmax generated net income of $142,614, or
$0.02 per share, for the year ended October 31, 1996 as compared with incurring
a net loss of $3,734,450, or $0.79 per share, for the year ended October 31,
1995.
LIQUIDITY AND SOURCES OF CAPITAL
At October 31, 1997, Canmax had working capital of $792,807. For the fiscal
year ended October 31, 1997, Canmax used cash from operating activities of
$306,463. Canmax maintained liquidity during fiscal 1997 primarily by utilizing
cash generated from operating activities. 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)
obtain additional lines of credit. Additionally, in December, 1997, Canmax
entered into a convertible loan agreement and on February 11, 1998, Canmax
entered into a loan commitment letter to help provide for its liquidity needs.
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, newly acquired telecommunications business, and, if
necessary, through utilization of its existing loan and loan commitment
agreements.
At October 31, 1996 and 1995 Canmax had a net working capital surplus
(deficiency) of $208,466 and ($468,653), respectively. During the years ended
October 31, 1996 and 1995 Canmax provided (used) cash from operating activities
of $888,220 and ($1,529,593), respectively.
Canmax maintained liquidity during fiscal 1996 primarily from net proceeds
arising from the sale of common stock from the exercise of stock options which
provided cash of $208,940 during the second quarter of 1996 and from cash
provided by operating activities during the third and fourth quarter of 1996.
Canmax maintained liquidity during fiscal 1995 primarily from the receipt of
proceeds from the sale of common shares and exercise of stock options, the
conversion of certain EDS development obligations into shares of common stock
and the proceeds received from shareholder advances.
CONVERTIBLE LOAN AGREEMENTS
On December 15, 1997, Canmax executed a convertible loan agreement with a
shareholder, Founders Equity Group, Inc., ("Founders") which provides financing
of up to $500,000. Funds obtained under the loan agreement are collateralized by
all assets of Canmax and bear interest at 10%. Required payments are for
interest only and are due monthly beginning February 1, 1998. Borrowings under
the loan agreement mature January 1, 1999, unless otherwise redeemed or
converted.
Under the terms of the loan agreement, Founders may exercise its right at
any time to convert all, or in multiples of $25,000, any part of the borrowed
funds into Canmax Common Stock at a conversion price of $1.25 per share. The
conversion price is subject to adjustment for certain events and transactions as
specified in the loan agreement. Additionally, the outstanding principal amount
is redeemable at the option of Canmax at 110% of par.
As of February 11, 1998, Founders had advanced to Canmax $350,000 under the
loan agreement. Canmax used these funds to pay fees and expenses related to the
USC acquisition, to advance to USC $250,000, and for general working capital
requirements, all of which are permitted uses of proceeds under the loan
agreement.
On February 11, 1998, Canmax and Founders executed a loan commitment letter
which provides for multiple advance loans of up to $2 million over the ensuing
12 month period. Funds obtained under the loan commitment agreement are
collateralized by all assets of Canmax and bear interest at 10%. Interest is
payable monthly and borrowings under the agreement mature one year from the date
of the advance. Amounts borrowed under the agreement are convertible into Canamx
Common Stock at a conversion
22
<PAGE>
price equal to the five (5) day trading average of the Canmax Common Stock
immediately preceding the date of the advance. The maximum amount of Canmax
Common Stock issuable under the loan commitment is 1.6 million shares. As
consideration for the loan commitment, Canmax paid a commitment fee of $10,000.
As of February 11, 1998, no amounts had been advanced to Canmax under the loan
commitment agreement.
PRODUCT DEVELOPMENT
To complete development of the next generation Windows based product, Canmax
will need to perform additional development effort that is not funded by work
currently being performed for Southland. 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.
Canmax 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 Canmax's liquidity
requirements, Canmax may be required to sell additional debt or equity
securities or utilize existing lines of credit, delay new product development or
restructure operations to reduce costs. Such financing could have a dilutive
effect on the stockholders of Canmax.
USC LIQUIDITY NEEDS
Canmax anticipates that approximately $3.5 to $5.0 million will be required
to realize anticipated revenue growth in its telecommunications businesses.
These funds will be used to purchase and install additional prepaid phone card
vending machines and internet access kiosks. Canmax is seeking to secure
equipment financing for these purchases.
In addition, Canmax anticipates incurring at least $75,000 in fees and
expenses to obtain federal and state authorizations and approvals related to
USC's telecommunications business.
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's 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's working capital depending on the amount, timing and nature of the
consideration to be paid.
SOUTHLAND AGREEMENTS
In December, 1993, Canmax signed a five year agreement with Southland to
provide software licenses, development services, and provide hardware and help
desk services (the "Master Agreement"). Southland chose Canmax's proprietary
convenience store automation software, C-Serve, as the basis for its automation
of store functions and operations at its corporate and franchise operated
7-Eleven convenience stores in the United States. Software licensing, product
and service revenue under this agreement during the fiscal years ended October
31, 1997, 1996, and 1995 totaled approximately $2,051,000, $2,581,000 and
$3,733,000, respectively, while development revenues recorded under the Master
Agreement during these same periods totaled approximately $799,000, $1,564,000
and $1,792,000, respectively.
On October 31, 1997, Canmax and Southland entered into Amendment No. 3 to
the Master Agreement (the "Southland Amendment"). Pursuant to the terms of the
Southland Amendment, Canmax allowed Southland to exercise its right as specified
in the Master Agreement to use, possess and modify the
23
<PAGE>
source code for the software developed by Canmax for Southland for a one-time
license fee of $1.0 million. Payment of the license fee was due in two
installments of $500,000. The first installment was received in November, 1997
and the second installment was received in January, 1998. The Southland
Amendment also contains Southland's agreement to purchase from Canmax on or
before December 7, 1998, no less than $4.0 million of hardware, software
maintenance, help desk, development and other services. Although Southland has
committed to purchase certain products and services totaling a minimum of $4.0
million through December 7, 1998 in accordance with the terms of the Southland
Amendment, Southland's use and possession of the source code could result in a
material reduction in Southland's reliance upon, and payment of fees for
development services to, Canmax. The use by Southland of its own staff or a
third-party other than Canmax to perform such services could have a material
adverse effect on Canmax.
From time to time, Canmax may also provide development and other resources
to Southland on an as-needed basis under various agreements at terms specified
in the Master Agreement. Approximately $254,000 of development revenue under
such agreements was recognized by Canmax in fiscal 1997. Such agreements extend
through December, 1998.
In 1995, Canmax contracted with NCR to successfully bid for two additional
contracts with Southland relating to business requirements definition and the
development of a preliminary point of sale system. These projects resulted in
revenues to Canmax of approximately $2,165,000 and $1,005,000 in the fiscal
years ended October 31, 1996 and 1995, respectively.
During fiscal 1996, Canmax reached an agreement with NCR to develop for
Southland a next generation Windows NT based version of the Canmax C-Serve
convenience store software for $9.5 million. NCR was chosen by Southland to
provide project management and other professional services for the project.
Modifications to project requirements increased total project revenues from $9.5
million to $11.5 million. Approximately $7,560,000 and $3,920,000 of development
revenues under such agreement was recognized by Canmax in fiscal 1997 and 1996,
respectively.
Canmax is in discussions with Southland regarding the renegotiation of its
contract, but no definitive agreement has been reached to date. While Canmax
anticipates that it will successfully negotiate future agreements with
Southland, there can be no assurances either that Canmax will continue to
provide services to or receive revenue from Southland after the expiration of
the existing contracts in December, 1998 or, if Canmax enters into new
agreements with Southland extending beyond December, 1998, the amount of
revenues Canmax will receive thereunder. Any termination or significant
disruption of Canmax's relationships with Southland could have a material
adverse effect on Canmax's business, financial condition and results of
operations.
Due to periodic fluctuations in billing and collection cycles in the
Southland relationship, Canmax's accounts receivable as a percentage of its
total assets will fluctuate; however, Canmax does not anticipate any material
problems in collecting its accounts receivable with Southland. Any material
adverse change in the ability of Southland to pay the amounts owed to Canmax
would result in a write down in such receivables (beyond any reasons currently
established therefor) and, if significant, could have a material adverse effect
on Canmax.
In October, 1997 Canmax completed an enhanced version of its C-Serve product
to run on the Windows NT operating system in conjunction with a development
project with NCR and Southland. Canmax continues to develop a generic 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 first calendar quarter
of 1998. The new product is being developed in conjunction with the
NCR/Southland 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.
24
<PAGE>
CHANGE IN NASDAQ LISTING REQUIREMENTS
On August 25, 1997, the listing and maintenance standards applicable to the
Nasdaq SmallCap Market were increased. See "Market for Registrant's Common
Equity and Related Stockholder Matters-- Nasdaq Increased Listing Standards."
Although Canmax met the new requirements at October 31, 1997, there can be no
assurances that Canmax will continue to do so in the future. If in the future
Canmax fails to satisfy the requirements for continued listing on the Nasdaq
SmallCap Market, Canmax will be subject to being delisted from the Nasdaq
SmallCap Market. The delisting of Canmax would materially adversely affect the
liquidity of the Canmax Common Stock and the operations of Canmax.
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: user
acceptance of Windows NT as an operating system, continued acceptance of UNIX
based software and Canmax's products and services, timing of completion of
development projects and new products, competitive factors such as pricing and
the release of new products and services by competitors, potential need for
additional financing to fund product development, capital expenditure financing,
general economic conditions, product demand, manufacturing efficiencies and
merger and acquisition integration.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is presented at pages F-1 to
F-25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Registrant's
definitive proxy statement which the Registrant will file with the Commission no
later than February 28, 1998 (120 days after the Registrant's fiscal year end
covered by this Report) and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Registrant's
definitive proxy statement which the Registrant's will file with the Commission
no later than February 28, 1998 (120 days after the Registrant's fiscal year end
covered by this Report) and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will contained in the Registrant's
definitive proxy statement which the Registrant will file with the Commission no
later than February 28, 1998 (120 days after the Registrant's fiscal year end
covered by this Report) and is incorporated herein by reference.
25
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will contained in the Registrant's
definitive proxy statement which the Registrant will file with the Commission no
later than February 28, 1998 (120 days after the Registrant's fiscal year end
covered by this Report) and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) AND (2) LIST OF FINANCIAL STATEMENTS
The response to this item is submitted as a separate section of the Report.
See the index on Page F-1.
(3) EXHIBITS
The following is a list of all exhibits filed with this 10-K, including
those incorporated by reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of January 30, 1998, among Canmax Inc., CNMX MergerSub, Inc.
and USCommunication Services, Inc. (filed as Exhibit 2.1 to Form 8-K filed February 9, 1998 (the
"USC 8-K"), and incorporated herein by reference)
3.1 Articles of Incorporation (filed as Exhibit 3.01 to Canmax's Registration Statement on Form 10,
File No. 0-22636 (the "Form 10"), and incorporated herein by reference)
3.2 Bylaws (filed as Exhibit 3.02 to the Form 10 and incorporated herein by reference)
4.1 Registration Rights Agreement between Canmax and the Dodge Jones Foundation (filed as Exhibit 4.02
to Canmax's Quarterly Report on Form 10-Q for the period ended April 30, 1997 and incorporated
herein by reference)
4.2 Registration Rights Agreement between Canmax and Founders Equity Group, Inc. (filed as Exhibit
4.02 to Canmax's Quarterly Report on Form 10-Q for the period ended April 30, 1997 and
incorporated herein by reference)
4.3 Amended Stock Option Plan (filed as Exhibit 10.08 to Canmax's Quarterly Report on Form 10-Q for
the period ended July 31, 1996 and incorporated herein by reference)
9.1 Voting Trust Agreement of Nationwide Transportation Products, Inc. (subsequently known as
USCommunication Services, Inc.) made as of May 1, 1997 (filed as Exhibit 9.1 to the USC 8-K and
incorporated herein by reference)
9.2 First Amendment to Voting Trust Agreement of USCommunication Services, Inc. dated as of December
1, 1997 (filed as Exhibit 9.2 to the USC 8-K and incorporated herein by reference)
10.1 Master Agreement for Computer Software Development, License and Maintenance between CRSI and The
Southland Corporation (filed as Exhibit 10.05 to the Form 10 and incorporated herein by
reference)
10.2** Software Development Agreement dated July 1, 1996 between NCR Corporation and CRSI (filed as
Exhibit 10.09 to Canmax's Annual Report on Form 10-K for the period ended October 31, 1996)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
10.3 Office Building Lease between Canmax and Commercial Properties Inc. (filed as Exhibit 10.3 to
Canmax's Registration Statement on Form S-3, File No. 333-33523 (the "Form S-3"), and
incorporated herein by reference)
10.4 Employment Agreement, dated June 30, 1997 between Canmax Retail Systems, Inc. and Roger Bryant
(filed as Exhibit 10.4 to the Form S-3 and incorporated herein by reference)
10.5 Employment Agreement, dated June 30, 1997 between Canmax Retail Systems, Inc. and Philip Parsons
(filed as Exhibit 10.5 to the Form S-3 and incorporated herein by reference)
10.6 Employment Agreement, dated June 30, 1997 between Canmax Retail Systems, Inc. and Debra L. Burgess
(filed as Exhibit 10.6 to the Form S-3 and incorporated herein by reference)
10.7 Amendment No. 3 to Master Agreement for Computer Software Development, License and Maintenance
dated October 31, 1997 between Canmax Retail Systems, Inc. and The Southland Corporation (filed
as Exhibit 10.7 to the Form S-3 and incorporated herein by reference)
10.8* Convertible Loan Agreement by and between Canmax Inc. and Canmax Retail Systems, Inc. as
Co-Borrowers and Founders Equity Group, Inc. and Founders Mezzanine Investors III, LLC as
Lenders dated December 15, 1997
10.9* Security Agreement between Canmax Inc. and Canmax Retail Systems, Inc. as Co-Borrowers and
Founders Equity Group, Inc. and Founders Mezzanine Investors III, LLC as Lenders dated December
15, 1997
10.10* Canmax Inc. and Canmax Retail Systems, Inc. 10.00% Senior Secured Convertible Debenture No. 1
10.11* Canmax Inc. and Canmax Retail Systems, Inc. 10.00% Senior Secured Convertible Debenture No. 2
10.12* Standard Industrial/Commercial Multi-Tenant Lease between TMT Carmel Business Center, Inc. and
USCommunication Services, Inc.
10.13 Common Stock Purchase Warrant dated January 30, 1998, between Canmax Inc. and Delia O'Donnell,
Trustee (filed as Exhibit 10.1 to the USC 8-K and incorporated herein by reference)
10.14 Common Stock Purchase Warrant dated January 30, 1998, between Canmax Inc. and Delia O'Donnell,
Trustee (filed as Exhibit 10.2 to the USC 8-K and incorporated herein by reference)
10.15 Employment Contract dated as of January 30, 1998 among Canmax Inc., USCommunication Services,
Inc., and James C. Bernet (filed as Exhibit 10.3 to the USC 8-K and incorporated herein by
reference)
10.16 Common Stock Purchase Warrant dated January 30, 1998, between Canmax Inc. and James C. Bernet
(filed as Exhibit 10.4 to the USC 8-K and incorporated herein by reference)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
10.17 Common Stock Purchase Warrant dated January 30, 1998, between Canmax Inc. and James C. Bernet
(filed as Exhibit 10.5 to the USC 8-K and incorporated herein by reference)
10.18* Loan commitment letter dated February 11, 1998, between Canmax Inc. and Canmax Retail Systems,
Inc. as Borrowers and Founders Equity Group, Inc. and Founders Mezzanine Investors III, LLC as
Lenders
11.1* Statement re: Computation of earnings per share
21.1* Subsidiaries of the Registrant
23.1* Consent of Independent Auditors
27.1* Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
** Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to Canmax's Application requesting
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
October 31, 1997. However, 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. Additionally, on February 9, 1998, the Registrant
filed a report on Form 8-K regarding the consummation of the USCommunication
Services, Inc. acquisition.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
CANMAX INC.
(Registrant)
Date: February 11, 1998 By: /s/ ROGER D. BRYANT
-----------------------------------------
(Roger D. Bryant, President and
Chief Executive Officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ ROGER D. BRYANT Officer and Director
- ------------------------------ (Principal Executive February 11, 1998
(Roger D. Bryant) Officer)
Executive Vice President,
Chief Financial Officer
/s/ PHILIP M. PARSONS and Director (Principal
- ------------------------------ Financial Officer and February 11, 1998
(Philip M. Parsons) Principal Accounting
Officer)
/s/ DEBRA L. BURGESS Executive Vice President,
- ------------------------------ Chief Operating Officer February 11, 1998
(Debra L. Burgess) and Director
/s/ ROBERT M. FIDLER
- ------------------------------ Director February 11, 1998
(Robert M. Fidler)
/s/ W. THOMAS RINEHART
- ------------------------------ Director February 11, 1998
(W. Thomas Rinehart)
/s/ NICK DEMARE
- ------------------------------ Director February 11, 1998
(Nick DeMare)
29
<PAGE>
CANMAX INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
ITEM 14(A)(1) AND (2)
<TABLE>
<S> <C> <C>
1. The Consolidated Financial Statements, the Notes to Consolidated Financial
Statements and Report of Ernst & Young LLP, Independent Auditors, for the fiscal
year ended October 31, 1997:
Report of Ernst & Young LLP, Independent Auditors................................ F-2
Consolidated Balance Sheets at October 31, 1997 and October 31, 1996............. F-3
Consolidated Statements of Operations for the fiscal years ended October 31,
1997, October 31, 1996 and October 31, 1995...................................... F-4
Consolidated Statements of Shareholders' Equity for the fiscal years ended
October 31, 1997, October 31, 1996 and October 31, 1995.......................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended October 31,
1997, October 31, 1996 and October 31, 1995...................................... F-6
Notes to Consolidated Financial Statements....................................... F-7
2. Financial Statement Schedules
Schedules are omitted because they are not applicable or because the required
information is shown in the consolidated financial statements or notes hereto.
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Canmax Inc.
We have audited the accompanying consolidated balance sheets of Canmax Inc.
and subsidiaries as of October 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended October 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Canmax Inc. and
subsidiaries at October 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
December 18, 1997, except for note 16,
as to which the date is February 11, 1998
F-2
<PAGE>
CANMAX INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash............................................................................ $ 128,871 $ 908,772
Accounts receivable, less allowance for doubtful accounts of $26,900 in 1997 and
$95,207 in 1996 (note 5)...................................................... 2,751,264 2,027,288
Inventory....................................................................... 46,615 388,800
Prepaid expenses and other...................................................... 175,494 202,513
-------------- --------------
Total current assets.......................................................... 3,102,244 3,527,373
Property and equipment, net (note 6)............................................ 962,175 1,411,567
Capitalized software costs, net of accumulated amortization of $839,271 in 1997
and $607,857 in 1996.......................................................... 494,786 516,999
Intellectual property rights, net of accumulated amortization of $639,617 in
1997 and $620,173 in 1996..................................................... 30,556 50,000
Other assets.................................................................... 117,717 144,194
-------------- --------------
Total assets.................................................................. $ 4,707,478 $ 5,650,133
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $ 878,241 $ 1,724,195
Accrued liabilities (note 7).................................................... 867,233 778,521
Deferred revenue................................................................ 269,404 558,122
Current portion of lease obligations............................................ 159,364 128,282
Current portion of long-term debt............................................... 35,195 34,022
Advances from shareholders (note 8)............................................. 100,000 95,765
-------------- --------------
Total current liabilities..................................................... 2,309,437 3,318,907
Lease obligations (note 9)...................................................... 127,051 169,794
Long-term debt (note 10)........................................................ 51,056 86,114
Commitments (notes 9 and 14)
Shareholders' equity (notes 4, 11 and 16)
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.................................................................. 23,290,733 18,372,574
Option to purchase common stock (note 4)...................................... -- 4,861,659
Accumulated deficit........................................................... (21,065,383) (21,152,714)
Foreign currency translation adjustment....................................... (5,416) (6,201)
-------------- --------------
Total shareholders' equity.................................................... 2,219,934 2,075,318
-------------- --------------
Total liabilities and shareholders' equity.................................... $ 4,707,478 $ 5,650,133
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
CANMAX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Software licenses and product revenue............................. $ 1,924,897 $ 1,901,302 $ 3,127,435
Development....................................................... 8,704,338 7,940,515 3,801,208
Service agreements................................................ 2,106,988 2,422,043 2,067,444
------------- ------------- -------------
12,736,223 12,263,860 8,996,087
Costs and expenses:
Cost of software licenses and product revenue..................... 772,502 1,539,646 2,342,937
Cost of development revenue....................................... 4,564,441 2,949,166 2,009,060
Customer service.................................................. 2,254,986 2,321,798 2,359,279
Product development............................................... 614,503 1,286,966 2,401,306
General and administrative........................................ 3,813,267 3,555,042 2,904,548
Sales and marketing............................................... 608,445 440,581 662,982
Interest and financing costs, net................................. 20,748 28,047 50,425
------------- ------------- -------------
12,648,892 12,121,246 12,730,537
------------- ------------- -------------
Net income (loss)................................................... $ 87,331 $ 142,614 $ (3,734,450)
------------- ------------- -------------
------------- ------------- -------------
Net income (loss) per common and common equivalent share............ $ 0.01 $ 0.02 $ (0.79)
------------- ------------- -------------
------------- ------------- -------------
Weighted average common and common equivalent shares outstanding.... 6,649,641 6,851,148 4,706,382
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
CANMAX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
OPTION TO FOREIGN
COMMON PURCHASE CURRENCY
STOCK COMMON ACCUMULATED TRANSLATION
SHARES AMOUNT STOCK DEFICIT ADJUSTMENT TOTAL
---------- ------------ ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1994................ 4,131,174 $ 14,614,539 $ 4,861,659 $ (17,560,878) $ (5,415) $ 1,909,905
Shares issued:
For cash on exercise of options.......... 294,200 1,321,000 -- -- -- 1,321,000
For conversion of advances from
shareholder............................ 30,000 150,000 -- -- -- 150,000
EDS...................................... 265,228 1,273,095 -- -- -- 1,273,095
Private Placement........................ 214,667 805,000 -- -- -- 805,000
Net loss................................... -- -- -- (3,734,450) -- (3,734,450)
Translation adjustment..................... -- -- -- -- (5,878) (5,878)
---------- ------------ ------------ -------------- ----------- ------------
BALANCE AT OCTOBER 31, 1995................ 4,935,269 18,163,634 4,861,659 (21,295,328) (11,293) 1,718,672
Shares issued for cash on exercise of
options.................................. 77,600 208,940 -- -- -- 208,940
Net income................................. -- -- -- 142,614 -- 142,614
Translation adjustment..................... -- -- -- -- 5,092 5,092
---------- ------------ ------------ -------------- ----------- ------------
BALANCE AT OCTOBER 31, 1996................ 5,012,869 18,372,574 4,861,659 (21,152,714) (6,201) 2,075,318
Shares issued to EDS....................... 1,598,136 4,861,659 (4,861,659) -- -- --
Warrants issued in settlement of
registration obligation.................. -- 56,500 -- -- -- 56,500
Net income................................. -- -- -- 87,331 -- 87,331
Translation adjustment..................... -- -- -- -- 785 785
---------- ------------ ------------ -------------- ----------- ------------
BALANCE AT OCTOBER 31, 1997................ 6,611,005 $ 23,290,733 $ -- $ (21,065,383) $ (5,416) $ 2,219,934
---------- ------------ ------------ -------------- ----------- ------------
---------- ------------ ------------ -------------- ----------- ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
CANMAX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -------------
<S> <C> <C> <C>
Operating activities:
Net income (loss)..................................................... $ 87,331 $ 142,614 $ (3,734,450)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Inventory write-down................................................ -- 217,623 --
Warrants issued in settlement of registration obligation............ 56,500 -- --
Loss on disposal of assets.......................................... 10,584 3,329 --
Depreciation and amortization....................................... 939,854 916,582 849,251
Changes in operating assets and liabilities:
Accounts receivable................................................. (723,976) (805,830) 154,535
Accounts receivable from EDS........................................ -- -- 446,976
Inventory........................................................... 342,185 (131,942) (151,566)
Prepaid expenses and other.......................................... 27,019 (126,254) (43,358)
Accounts payable.................................................... (845,954) 433,932 533,286
Accounts payable to EDS............................................. -- -- 67,539
Accrued liabilities................................................. 88,712 266,880 (84,707)
Deferred revenue.................................................... (288,718) (28,714) 432,901
----------- ----------- -------------
Net cash provided by (used in) operating activities................. (306,463) 888,220 (1,529,593)
----------- ----------- -------------
Investing activities:
Purchase of property and equipment.................................... (117,030) (241,889) (163,575)
Capitalized software costs............................................ (209,202) (128,874) --
Decrease (increase) in other assets................................... 26,477 (113,518) --
----------- ----------- -------------
Net cash used in investing activities............................... (299,755) (484,281) (163,575)
----------- ----------- -------------
Financing activities:
Net proceeds from issuance of common stock............................ -- 208,940 2,126,000
Payments made on leasehold obligations................................ (144,818) (117,464) (102,971)
Repayment of shareholder advances..................................... (95,765) (124,235) (107,200)
Advances from shareholders............................................ 100,000 -- 250,000
Decrease in development obligations................................... -- (65,000) --
Proceeds from borrowing............................................... -- 123,602 --
Repayment on borrowing................................................ (33,885) (3,466) --
----------- ----------- -------------
Net cash (used in) provided by financing activities................. (174,468) 22,377 2,165,829
----------- ----------- -------------
Effect of exchange rate changes on cash................................. 785 5,092 (5,878)
----------- ----------- -------------
Net (decrease) increase in cash......................................... (779,901) 431,408 466,783
Cash at beginning of year............................................... 908,772 477,364 10,581
----------- ----------- -------------
Cash at end of year..................................................... $ 128,871 $ 908,772 $ 477,364
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Canmax Inc. ("Canmax") was incorporated on July 10, 1986 under the Company
Act of the Province of British Columbia, Canada, and subsequently changed its
name to "International Retail Systems Inc." On August 7, 1992, Canmax renounced
its original province of incorporation and elected to continue its domicile
under the laws of the State of Wyoming, and on November 30, 1994, its name was
changed to "Canmax Inc."
Canmax through its wholly owned subsidiary Canmax Retail Systems, Inc.,
("CRSI") develops and provides enterprise wide technology solutions to the
convenience store and retail petroleum industries. Canmax offers fully
integrated retail automation solutions, including "C-Serve," which includes
point of sale ("POS") systems, credit/debit network authorization systems, pump
control systems, and other back office management systems, and "Vista," its
headquarters-based management system. Canmax's products and services enable
retailers and operators to interact electronically with customers, capture data
at the point of sale, manage site operations and logistics and communicate
electronically with their sites, vendors and credit/debit networks. Canmax also
provides (a) software development, customization and enhancements, (b) systems
integration, installation and training services, and (c) 24 hour a day, 365 day
per year help desk services. These additional services enable Canmax to tailor
the solutions to each customer's specifications and provide successful system
implementation, installation, training and after sales support.
LIQUIDITY
At October 31, 1997, Canmax had an accumulated deficit of $21,065,383 and a
net working capital surplus of $792,807. 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)
obtain additional lines of credit. Additionally, in December, 1997, Canmax
entered into a convertible loan agreement and on February 11, 1998, Canmax
entered into a loan commitment letter to help provide for its liquidity needs.
See Note 16--Subsequent Events--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, newly acquired telecommunications
business, and, if necessary, through utilization of its existing loan and loan
commitment agreements.
Canmax commenced work on a next generation Windows based product in May of
1996 which is expected to be completed during the first calendar quarter of
1998. The majority of Canmax's new product has been developed in conjunction
with a development project for The Southland Corporation. To complete
development of the next generation Windows based product, Canmax will need to
perform additional development effort that is not funded by the work performed
for The Southland Corporation. Costs necessary to perform the additional
development and to bring the new product to market are estimated to be in the
range of $250,000 to $500,000. Canmax 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
Canmax's liquidity requirements, Canmax may be required to sell additional debt
or equity securities or utilize existing lines of credit, delay new product
development or restructure operations to reduce costs.
F-7
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of Canmax and
its wholly-owned subsidiaries, Canmax Retail Systems Inc. (Texas) and Canmax
Retail Systems Inc. (British Columbia). All significant intercompany
transactions have been eliminated.
REVENUE RECOGNITION
The following describes Canmax's revenue recognition policies by type of
activity:
SOFTWARE LICENSES AND PRODUCTS--Revenue is recognized when the software or
products have been delivered to the customer, collectibility is probable, and no
significant vendor obligations remain after delivery.
SOFTWARE DEVELOPMENT CONTRACTS--Revenue is recognized as Canmax performs the
services in accordance with the contract terms. Revenue from long-term contracts
is recognized using the percentage-of-completion method. Progress to completion
is measured based upon the relationship that total costs incurred to date bears
to the total costs expected to be incurred on a specified project. Losses on
fixed price contracts are recorded when estimable.
SERVICE AGREEMENTS--Revenue from maintenance and support agreements is
generally recognized in one of the following ways:
- Billed annually in advance and recognized ratably over the ensuing year.
- Billed and recognized monthly based on a fixed fee per site.
- Billed and recognized monthly at a minimum base fee plus a variable fee
which is dependent on call volumes.
INVENTORY
Inventory is stated at the lower of cost (first in-first out) or market and
is primarily comprised of computer hardware and purchased software.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets ranging from three to five years. Equipment held under
capital leases and leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or the estimated useful life of the related
asset.
CAPITALIZED SOFTWARE COSTS
Under provisions of the Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," software development costs are charged to expense when incurred until
technological feasibility for the product has been established, at which time
the costs are capitalized until the product is available for release. Canmax
begins amortizing capitalized software costs upon general release of the
software products to customers. Canmax evaluates the net realizable value for
each of its capitalized projects by comparing the estimated future gross
F-8
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
revenues from a project less estimated future disposal costs to the amount of
the unamortized capitalized cost. Costs are being amortized using the greater of
1) the ratio that current gross revenues for a capitalized software project
bears to the total of current and future gross revenue for that project or 2)
the straight-line method over the remaining economic life of the related
projects which is estimated to be a period of between four and five years.
Amortization of capitalized software costs amounted to approximately $231,000,
$226,000, and $119,000, in 1997, 1996, and 1995, respectively.
INTELLECTUAL PROPERTY RIGHTS
Intellectual property rights consist of the rights to computer software used
in Canmax's products. Expenditures are recorded at cost and are being amortized
on a straight-line basis over a projected life of five years. Amortization of
intellectual property rights amounted to approximately $20,000, $123,000, and
$131,000 in 1997, 1996, and 1995, respectively.
NET INCOME (LOSS) PER SHARE
Net income (loss) per common and common equivalent share is computed in
accordance with Accounting Principles Board Opinion No. 15, "Earnings Per
Share". Net income (loss) per share data are based upon the weighted average
number outstanding shares of common stock plus dilutive common stock
equivalents. Common stock equivalent shares consist of stock options and
warrants (using the treasury stock method), and an option to purchase common
stock held by EDS (see Note 4).
In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", which will
require Canmax to report basic and diluted earnings per share in future periods.
(See Note 12).
INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, Canmax considers all cash and
highly liquid short-term deposits to be cash equivalents. Total interest paid
during 1997, 1996, and 1995 amounted approximately to $46,000, $50,000, and
$44,000, respectively.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Canmax derives its sales primarily from customers in the retail petroleum
market. Canmax performs periodic credit evaluations of its customers and
generally does not require collateral. Billed receivables are generally due
within 30 days. Credit losses have historically been insignificant.
Canmax's revenues are currently concentrated in The Southland Corporation
("Southland"), which accounted for approximately 92%, 83% and 73% of Canmax's
total revenue for fiscal years 1997, 1996 and 1995, respectively. Canmax's
revenues derived from its relationship with Southland include products and
F-9
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
services provided directly by Canmax to Southland and indirectly through NCR
Corporation ("NCR") to Southland pursuant to NCR's contract with Southland.
During those same periods, Electronic Data Systems ("EDS") accounted for 2%, 7%
and 10%, respectively, of Canmax's revenues for such fiscal years. No other
customer accounted for over 10% of Canmax's total revenues. On April 29, 1997,
Canmax and EDS agreed to terminate substantially all of their business
arrangements.
At October 31, 1997 and 1996, Southland accounted for 95% and 83%,
respectively of total accounts receivable. Because a significant portion of
Canmax's revenues are derived from its relationship with Southland, the timing
of payments received from Southland will affect the percentage of current assets
of Canmax classified as either cash (or cash equivalents) or accounts
receivable; however, Canmax does not anticipate any significant problems in
collecting the accounts receivable arising from the Southland relationship. If
the financial condition of Southland adversely changes at a time when the
receivable owing from Southland is substantial and Southland becomes unable to
pay its debts as they become due, then the financial condition, working capital
resources, and results of operations of Canmax may be adversely affected.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
Canmax accounts for its stock-based compensation in accordance with
provisions of the Accounting Principles Board's Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees."
RECLASSIFICATIONS
Certain amounts previously reported in the consolidated statements of
operations for the fiscal years ended October 31, 1996 and 1995, namely
depreciation and amortization, have been reclassified to various cost and
expense line items to conform to the 1997 presentation.
3. SOUTHLAND AGREEMENTS
In December, 1993, Canmax signed a five year agreement with Southland to
provide software licenses, development services, and provide hardware and help
desk services (the "Master Agreement"). Southland chose Canmax's proprietary
convenience store automation software, C-Serve, as the basis for its automation
of store functions and operations at its corporate and franchise operated
7-Eleven convenience stores in the United States. Software licensing, product
and service revenue under this agreement during the fiscal years ended October
31, 1997, 1996 and 1995 totaled approximately $2,051,000, $2,581,000 and
$3,733,000, respectively, while development revenues recorded under the Master
Agreement during these same periods totaled approximately $799,000, $1,564,000,
and $1,792,000, respectively. This agreement expires December 7, 1998.
On October 31, 1997, Canmax and Southland entered into Amendment No.3 to the
Master Agreement (the "Southland Amendment"). Pursuant to the terms of the
Southland Amendment, Canmax allowed Southland to exercise its right as specified
in the Master Agreement to use, possess and modify the
F-10
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SOUTHLAND AGREEMENTS (CONTINUED)
source code for the software developed by Canmax for Southland for a one-time
license fee of $1.0 million. Payment of the license fee was due in two
installments of $500,000. The first installment was received in November, 1997
and the second installment was received in January, 1998. The Southland
Amendment also contains Southland's agreement to purchase from Canmax on or
before December 7, 1998, no less than $4.0 million of hardware, software
maintenance, help desk, development and other services. Although Southland has
committed to purchase certain products and services totaling a minimum of $4.0
million through December 7, 1998 in accordance with the terms of the Southland
Amendment, Southland's use and possession of the source code could result in a
material reduction in Southland's reliance upon, and payment of fees for
development services to, Canmax.
From time to time Canmax may also provide development and other resources to
Southland on an as-needed basis under various agreements at terms specified in
the Master Agreement. Approximately $254,000 of development revenue under such
agreements was recognized by Canmax in fiscal 1997. Such agreements extend
through December, 1998.
In 1995, Canmax contracted with NCR to successfully bid for two additional
contracts with Southland relating to business requirements definition and the
development of a preliminary point of sale system. These projects resulted in
revenues to Canmax of approximately $2,165,000 and $1,005,000 in the fiscal
years ended October 31, 1996 and 1995, respectively.
During fiscal 1996, Canmax reached an agreement with NCR to develop for
Southland a next generation Windows NT based version of the Canmax C-Serve
convenience store software for $9.5 million. NCR was chosen by Southland to
provide project management and other professional services for the project.
Modifications to project requirements increased total project revenues from $9.5
million to $11.5 million. Approximately $7,560,000 and $3,920,000 of development
revenues under such agreement was recognized by Canmax in fiscal 1997 and 1996,
respectively.
4. EDS AGREEMENTS AND TRANSACTION
Canmax signed agreements with Electronic Data Systems Corporation ("EDS") in
April 1993 which were amended in October 1994. Under the terms of the amended
agreements, EDS marketed Canmax's software, services and hardware technology to
the retail petroleum marketplace exclusively, and Canmax offered EDS the right
to participate with its customers and prospective customers. Additionally,
Canmax granted EDS the right to acquire up to 25% of Canmax's Common Stock
calculated on a fully diluted basis at the time of exercise, at an exercise
price of not less than 75% of the market value of the Common Stock at the time
of exercise, minus $4,861,659, which would be reduced by royalties or similar
payments received by EDS from any licensing of Canmax's product other than
through EDS.
On April 29, 1997, EDS exercised its option to acquire up to 25% of Canmax's
Common Stock, resulting in Canmax issuing an additional 1,598,136 shares. Canmax
accounted for this transaction by reclassifying the amount associated with the
option to Common Stock. EDS then immediately sold its total interest in Canmax,
representing 1,863,364 shares, in a private transaction to Founders Equity
Group, Inc. and the Dodge Jones Foundation, two Texas-based institutional
investors. In conjunction with this transaction, Canmax entered into
registration rights agreements with the two institutional investors.
Additionally, EDS and Canmax agreed to amend a license and grant of rights
agreement which specifies rights and obligations of both parties as to 788 of
Canmax's site licenses sold to EDS in fiscal
F-11
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EDS AGREEMENTS AND TRANSACTION (CONTINUED)
1994, and to terminate all formal agreements including the aforementioned stock
option agreement, as well as their joint marketing and other supporting business
agreements.
A summary of transactions with EDS for the last three fiscal years is set
forth below:
<TABLE>
<CAPTION>
RECORDED AS
-------------------------------------------------
OPTION TO
TOTAL PURCHASE
AMOUNT OF COMMON COMMON REVENUE
YEAR/ TRANSACTION DESCRIPTION TRANSACTION STOCK STOCK (EXPENSE)
- ------------------------------------------------------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
1995
Other development services purchased from EDS............. 1,188,168 -- -- (1,188,168)
Conversion of development obligations due to EDS into
shares of Canmax common stock........................... 1,273,095(1) -- 1,273,095 --
Development Revenue....................................... 175,513 -- -- 175,513
Product & services revenue................................ 751,440 -- -- 751,440
1996
Other services purchased from EDS......................... 84,327 -- -- (84,327)
Development revenue....................................... 143,415 -- -- 143,415
Product & services revenue................................ 690,751 -- -- 690,748
1997
Exercise of EDS options................................... 4,861,659 (4,861,659) 4,861,659 --
</TABLE>
- ------------------------
(1) EDS obligations were converted into 265,228 shares of Canmax common stock.
5. ACCOUNTS RECEIVABLE
At October 31, 1997, accounts receivable included approximately $1,212,000
of work performed under development contracts for which billings have not been
presented to the customer or for which amounts are not contractually billable.
Approximately $712,000 of this amount was billed and collected in December,
1997. The remaining amounts were billed and collected by January 15, 1998.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at October 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Furniture and fixtures.................................................... $ 929,060 $ 925,637
Computer equipment........................................................ 1,464,809 1,524,887
Computer software......................................................... 465,321 388,041
Leasehold improvements.................................................... 87,635 84,951
Equipment held under capital lease obligations (Note 9)................... 239,207 106,050
Leasehold improvements under leasehold obligations (Note 9)............... 508,892 508,892
------------- -------------
3,694,924 3,538,458
Less accumulated depreciation and amortization............................ (2,732,749) (2,126,891)
------------- -------------
$ 962,175 $ 1,411,567
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation and amortization expense amounted to approximately $689,000,
$567,000, and $519,000 in 1997, 1996, and 1995, respectively.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following at October 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued compensation and benefits............................................... $ 184,860 $ 405,924
Accrued rent.................................................................... 68,525 150,755
Sales tax payable............................................................... 314,503 --
Other........................................................................... 299,345 221,842
---------- ----------
$ 867,233 $ 778,521
---------- ----------
---------- ----------
</TABLE>
8. ADVANCES FROM SHAREHOLDERS
On October 30, 1997, a shareholder, Founders Equity Group, Inc., 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.
During 1995, a director, W. Thomas Rinehart advanced Canmax $250,000. The
advance was unsecured and had an interest rate of 10%. The principal balance was
due on demand. Canmax repaid principal of $30,000 and paid interest of $13,456
in fiscal 1995 and repaid principal of $124,235 and interest of $37,732 in
fiscal 1996. Principal and interest payments of $95,765 and $2,132 were paid
during the first six months of fiscal 1997, which fully satisfied Canmax's
obligation.
9. LEASEHOLD AND CAPITAL LEASE OBLIGATIONS
Through October 31, 1997, a total of $508,892 of leasehold obligations were
incurred on behalf of Canmax. These costs have been capitalized as leasehold
improvements and are to be repaid with interest calculated at 8% to 11% per
annum in monthly installments of $11,104, over the remaining lease term, which
terminates on August 31, 1998.
Canmax leased equipment under capital leases in 1997 totaling $133,157. The
capital lease obligations are to be repaid with interest at 12% to 21% per annum
in monthly installments of $4,731 through June, 2000.
Canmax leased equipment under capital leases in 1996 totaling $106,050. The
capital lease obligations are to be repaid with interest at 15% to 16% per annum
in monthly installments of $2,995 through June, 2000.
F-13
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEASEHOLD AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Future minimum payments due under leasehold and capital lease obligations
are as follows:
<TABLE>
<S> <C>
Years ended October 31:
1998.................................................................... $ 190,866
1999.................................................................... 92,706
2000.................................................................... 59,717
---------
Total future minimum lease payments....................................... 343,289
Less amount representing interest......................................... 56,874
---------
Present value of minimum lease payments................................... 286,415
Less current portion...................................................... 159,364
---------
Leasehold and capital lease obligations................................... $ 127,051
---------
---------
</TABLE>
10. LONG-TERM DEBT
Long-term debt consists of the following at October 31:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Bank term note, interest at prime, principal of $1,679 plus interest payable
monthly through October 29, 1999............................................... $ 40,297 $ 60,445
Bank term note, interest at bank's base rate, principal and interest of $1,524
payable monthly through August 15, 2000........................................ 45,954 59,691
--------- ----------
Total............................................................................ 86,251 120,136
Less current portion............................................................. 35,195 34,022
--------- ----------
$ 51,056 $ 86,114
--------- ----------
--------- ----------
</TABLE>
At October 31, 1997, the prime and base rates were 8.5%. The bank term notes
are collateralized by investments in government securities totaling $106,858 and
$133,335 at October 31, 1997 and 1996, respectively. Such restricted investments
are classified as other non-current assets.
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998............................................................... $ 35,195
1999............................................................... 36,485
2000............................................................... 14,571
---------
$ 86,251
---------
---------
</TABLE>
F-14
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SHAREHOLDERS' EQUITY
REVERSE STOCK SPLIT
In December 1995, Canmax's Board of Directors authorized a one-for-five
reverse stock split of the Company's Common Stock, effective December 21, 1995.
All applicable share and per share data have been retroactively restated to give
effect to the reverse stock split.
WARRANT ISSUANCES
FOUNDERS EQUITY GROUP, INC.
On May 9, 1997, Founders Equity Group, Inc. exercised its right to demand
that Canmax file a registration statement with regard to all its shares
(863,364) of Canmax Common Stock. Such shares were acquired from EDS on April
29, 1997 (see Note 4--EDS Agreements and Transaction). Under applicable
securities laws, Canmax was unable to file such registration statement until
after the filing of the registration statement relating to the resale of shares
of Canmax Common Stock in the proposed Merger of Canmax and Auto-Gas Systems,
Inc. Pursuant to the terms of the registration rights agreement with Founders
Equity Group, Inc., Canmax was to have filed a registration statement on or
about July 23, 1997 or incur a registration penalty of 50,000 shares per month.
Founders Equity Group, Inc. agreed to extend the registration obligation until
August 26, 1997 in exchange for its receipt of a warrant to purchase 50,000
shares of Canmax Common Stock at an exercise price of $2.00 per share. Such
warrants are exerciseable and expire on August 1, 2000. The registration
obligation was satisfied by the filing of a registration statement on Form S-3
on August 13, 1997.
Canmax recorded expense of $56,500 in August, 1997 related to these
Warrants. This amount represents Canmax's estimate of the fair value of these
warrants at the date of grant using a Black-Scholes pricing model with the
following assumptions: applicable risk-free interest rate based on the current
treasury-bill interest rate at the grant date of 5.9%; dividend yields of 0%;
volatility factors of the expected market price of Canmax common stock of .85;
and an expected life of the warrant of 1.5 years.
PERFORMANCE WARRANTS
In September 1997, Canmax executed employment agreements with certain
executives which provided for the issuance of warrants ("Performance Warrants")
to each executive as additional compensation. These agreements were effective
July 1, 1997. The aggregate number of shares to be issued upon exercise of such
Performance Warrants is 475,000. Each Performance Warrant expires 10 years from
the date of issuance, and is exercisable at a price of $2.25 per share, the
closing price of the Canmax Common Stock on July 17, 1997, the date that the
compensation committee approved the issuance of such warrants. The Performance
Warrants vest 50% upon the "Trigger Date" and 50% on the one-year anniversary of
the Trigger Date. As used in each employment agreement, the Trigger Date means
the date of the earlier of the following events: (i) the earnings per share of
Canmax (after tax) equals or exceeds $0.30 per share during any fiscal year,
(ii) the closing price of the Canmax Common Stock equals or exceeds $8.00 per
share for sixty-five consecutive trading days, or (iii) a Change of Control.
The employment agreements define a "Change of Control" as existing upon any
of the following: (i) any person or entity is or becomes the beneficial owner of
more than thirty percent (30%) of the combined voting power of the outstanding
securities of CRSI or Canmax; (ii) at any time during the twenty-four month
period following a merger, tender offer, consolidation, sale of assets or
contested election, or any combination of such transactions, at least a majority
of the Board of Directors of CRSI or
F-15
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
Canmax shall cease to be "continuing directors" (meaning a director of CRSI or
Canmax prior to such transaction or who subsequently became directors and whose
election or nomination for election by the stockholders of CRSI or Canmax, was
approved by a vote of at least two-thirds of the directors then still in office
prior to such transaction); or (iii) the stockholders approve an agreement of
sale or disposition by CRSI or Canmax of all or substantially all of the assets
of CRSI or Canmax.
In accordance with APB No. 25, and its related interpretations, Canmax has
recorded no compensation expense to date. Compensation expense will be
recognized when it becomes probable that an event which will trigger vesting
will occur.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 "Accounting for Stock-Based Compensation", and has been
determined as if Canmax had accounted for the Performance Warrants under the
fair value method of that statement. The fair value of the Performance Warrants
was estimated to be approximately $822,000 at the date of grant using a
Black-Scholes pricing model with the following assumptions: applicable risk-free
interest rates based on the current treasury-bill interest rate at the grant
date of 6.2%; dividend yields of 0%; volatility factors of the expected market
price of the Canmax common stock of .94; and an expected life of the Performance
Warrants of 5 to 6 years.
The weighted-average fair value of warrants granted during the year is $1.67
and the weighted-average remaining contracted life of warrants outstanding at
October 31, 1997 is 9.1 years.
STOCK OPTIONS
In 1990, Canmax adopted a stock option plan (the "Stock Option Plan"). The
Stock Option Plan authorizes the Board of Directors to grant up to 1,200,000
options to purchase common shares of the Company. No options will be granted to
any individual director or employee which will, when exercised, exceed 5% of the
issued and outstanding shares of the Company. The term of any option granted
under the Stock Option Plan is fixed by the Board of Directors at the time the
options are granted, provided that the exercise period may not be longer than 10
years from the date of granting. All options granted under the Stock Option Plan
have up to 10 year terms and have vesting periods which range from 0 to 3 years
from the grant date. The exercise price of any options granted under the Stock
Option Plan is the fair market value at the date of grant. As of October 31,
1997, the Board had granted certain options under the Stock Option Plan in
excess of shares authorized under the plan. The Board is in the process of
amending
F-16
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
the Stock Option Plan to cover all outstanding stock options. Activity under the
Stock Option Plan for the three years ended October 31, 1996 was as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Options outstanding at October 31, 1994.............................................. 411,910 $1.95 - $6.25
Options granted.................................................................... 418,200 2.50 - 5.00
Options exercised.................................................................. (294,200) 3.75 - 5.00
Options canceled................................................................... (45,360) 5.00 - 6.75
---------- --------------
Options outstanding at October 31, 1995.............................................. 490,550 2.50 - 5.00
Options granted.................................................................... 729,600 1.88 - 4.19
Options exercised.................................................................. (77,600) 1.90 - 2.88
Options canceled................................................................... (91,500) 2.25 - 6.25
---------- --------------
Options outstanding at October 31, 1996.............................................. 1,051,050 1.88 - 5.00
Options granted.................................................................... 266,000 1.50 - 2.50
Options canceled................................................................... (299,350) 1.88 - 5.00
---------- --------------
Options outstanding at October 31, 1997.............................................. 1,017,700 $1.50 - $5.00
---------- --------------
---------- --------------
</TABLE>
Effective December 29, 1995, employee options to purchase 87,100 shares of
Canmax's Common stock were repriced to the then current market price. The
repricing was made because management believed that the higher priced options
were no longer a motivating factor for key employees and officers. The options
repriced are reflected in the cancellation and grant activity for 1996.
A summary of Canmax's stock option activity and related information for the
years ended October 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding--Beginning of year......................... 1,051,050 $ 3.04 490,550 $ 4.10
Granted................................................ 266,000 1.91 729,600 2.19
Exercised.............................................. -- -- (77,600) 2.69
Canceled............................................... (299,350) 4.35 (91,500) 4.86
---------- ----------
Outstanding--End of year............................... 1,017,700 $ 2.23 1,051,050 $ 3.04
---------- ----------
---------- ----------
Exerciseable at end of year............................ 691,535 $ 2.29 623,300 $ 3.67
Weighted-average fair value of options granted
during the year....................................... $ 1.33 $ 2.18
</TABLE>
The weighted-average remaining contractual life of options outstanding at
October 31, 1997 and 1996 is 4.37 years and 5.37 years, respectively.
F-17
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
At October 31, 1997, there are 1,542,700 shares issuable upon the exercise
or conversion of outstanding warrants or options under the Stock Option Plan.
Under APB 25, because the exercise price of Canmax's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if Canmax had accounted for
its employee stock options under the fair value method of that statement. The
fair value for options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions: applicable risk-free
interest rates based on the current treasury-bill interest rate at the grant
date, which ranged from 5.8% to 6.2% in 1997 and 5.2% to 5.6% in 1996; dividend
yields of 0% in 1997 and 1996; volatility factors of the expected market price
of Canmax common stock of between .89 and .95 in 1997 and between 0.8 and 0.9 in
1996; and an expected life of the option of between 1.6 and 6 years in 1997 and
between 2 and 7 years in 1996.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because Canmax employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options and warrants is amortized to expense over the vesting period of the
related option or warrant. The effects of applying SFAS No. 123 in computing the
pro forma disclosures presented below are not indicative of future amounts as
only options and warrants granted subsequent to October 31, 1995 have been
included in the pro forma computations. Canmax's pro forma information for the
year ended October 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income as reported........................................................ $ 87,331 $ 142,614
SFAS No. 123 Pro forma adjustments:
Stock options............................................................... (465,476) (585,718)
Founders Equity Group, Inc. warrants........................................ -- --
Performance warrants........................................................ -- --
----------- -----------
Pro forma net loss............................................................ $ (378,145) $ (443,104)
----------- -----------
----------- -----------
Pro forma loss per share...................................................... $ (0.06) $ (0.09)
----------- -----------
----------- -----------
</TABLE>
CHANGES IN NASDAQ LISTING REQUIREMENTS
On August 25, 1997, the U.S. Securities and Exchange Commission, the
National Association of Securities Dealers, Inc. and The Nasdaq Stock Market
approved increases in the listing and maintenance standards governing the Nasdaq
SmallCap Market. These new standards require, as a condition to continued
listing on the Nasdaq SmallCap Market, an issuer to maintain either "net
tangible assets" (defined as total assets, excluding goodwill, minus total
liabilities) of $2.0 million, market capitalization of
F-18
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
$35.0 million or net income in two of the last three fiscal years of at least
$0.5 million. Companies failing to satisfy the new listing requirements are
allowed a six month "compliance" period during which they may take appropriate
steps to comply with the new listing requirements. As of October 31, 1997,
Canmax had net tangible assets of approximately $2.2 million and a market
capitalization of approximately $11.2 million. In addition, Canmax has not had
net income of $0.5 million in any of its last three fiscal years. If in the
future Canmax fails to satisfy the requirements for continued listing on the
Nasdaq SmallCap Market, Canmax will 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 the operations of Canmax.
12. 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. Early adoption is not allowed. When adopted,
Canmax 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 standard, earnings (loss) per
share would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Basic......................................................................... $ 0.01 $ 0.03 $ (0.79)
Diluted....................................................................... $ 0.01 $ 0.02 $ (0.79)
</TABLE>
13. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax
F-19
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
purposes. Significant components of Canmax's deferred tax liabilities and assets
as of October 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets (liabilities):
Current:
Allowance for doubtful accounts........................................ $ 9,146 $ 32,370
Provisions and accrued expenses........................................ 5,100 69,700
Less: valuation allowance.............................................. (14,246) (102,070)
------------- -------------
Total current............................................................ -- --
------------- -------------
Noncurrent:
Capitalized software and intellectual property......................... (4,906) 417,613
Property and equipment................................................. 94,289 19,927
Net operating loss..................................................... 6,892,327 6,503,397
Less: valuation allowance.............................................. (6,981,710) (6,940,937)
------------- -------------
Total noncurrent......................................................... -- --
------------- -------------
Total deferred tax assets................................................ $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The valuation allowance for deferred tax assets decreased by $47,052 and
$40,057 during the years ended October 31, 1997 and 1996, respectively.
The reconciliation of income tax provision at the statutory United States
federal income tax rates to income tax provision is:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate.......................... $ 29,693 $ 48,489 $ (1,269,713)
Benefit of net operating loss not recognized.............................. -- -- 1,331,851
Other..................................................................... (29,693) (48,489) (62,138)
---------- ---------- -------------
$ -- $ -- $ --
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
At October 31, 1997, Canmax has net operating loss carryforwards for federal
income tax purposes of approximately $20.3 million which expire in 2006 through
2011. Utilization of net operating losses may be subject to annual limitations
due to the ownership change limitation provided by the Internal Revenue Code of
1986. The annual limitation may result in the expiration of net operating losses
before utilization. At October 31, 1997, the net operating losses carryforwards
of Canmax and its subsidiaries were not subject to any material annual
limitation.
Canmax anticipates that it may undergo a change of ownership as defined in
Internal Revenue Code Section 382 upon issuance of the shares in the merger
transaction with USCommunication Services, Inc. (See Note 16). Any resulting
annual limitation of the combined company's ability to utilize the net operating
loss carryforward is expect to result in the expiration of a significant portion
of the net operating losses before utilization.
F-20
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS
The Company leases office space and computer equipment under noncancellable
operating leases. Approximate future minimum lease payments for the fiscal years
ending October 31 are as follows:
<TABLE>
<S> <C>
1998.............................................. $ 515,000
1999.............................................. 34,000
2000.............................................. 17,000
2001.............................................. 14,000
---------
$ 580,000
---------
---------
</TABLE>
Total rent expense amounted to approximately $609,000, $499,000, and
$633,000, for 1997, 1996, and 1995, respectively.
The lease on Canmax's office space expires August 31, 1998. The space is
used for executive, administrative, sales, engineering personnel, help desk and
related services, as well as for inventory storage and demonstration purposes.
Currently, Canmax does not have an option to renew the lease, however, Canmax is
reviewing proposals for suitable available space at several alternative
locations.
15. BENEFIT PLAN
Effective January 1, 1994, the Company implemented an Internal Revenue Code
Section 401(k) Profit Sharing Plan for all employees of the Company. The Plan
provides for voluntary contributions by employees into the Plan subject to the
limitations imposed by the Internal Revenue Code Section 401(k). The Company may
match employee contributions to a discretionary percentage of the employees
contribution. The Company's matching funds are determined at the discretion of
the Board of Directors and are subject to a seven year vesting schedule from the
date of original employment. The Company made no matching contributions during
the years ended October 31, 1997, 1996 and 1995.
16. SUBSEQUENT EVENTS
USCOMMUNICATION SERVICES, INC.
On January 30, 1998, Canmax acquired USCommunication Services, Inc. ("USC"),
a San Diego, California based provider of telecommunication products and
internet services to the transportation industry, through a private stock
transaction which will be accounted for under the purchase method. USC's
products and services include prepaid calling cards, one plus long distance
services, public internet access kiosks, pay telephones, and pallet exchange
services.
In accordance with the terms of the merger transaction, USC shareholders
received 1.5 million shares of Canmax Common Stock and warrants to acquire 2.5
million shares of Canmax Common Stock with exercise prices of $1.25 and $2.00
per share. Additionally, upon close, Canmax entered into a three year employment
agreement with the President of USC. As part of the terms of his employment
agreement, the President received 2.0 million warrants which will vest, if at
all, upon achievement of certain earnings per share targets over the initial
term of the employment agreement. The exercise price of these warrants are $2.00
and $3.00 per share and the warrants expire five years from the date of vesting.
F-21
<PAGE>
CANMAX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (CONTINUED)
CONVERTIBLE LOAN AGREEMENTS
On December 15, 1997, Canmax executed a convertible loan agreement with a
shareholder, Founders Equity Group, Inc., ("Founders") which provides financing
of up to $500,000. Funds obtained under the loan agreement are collateralized by
all assets of Canmax and bear interest at 10%. Required payments are for
interest only and are due monthly beginning February 1, 1998. Borrowings under
the loan agreement mature January 1, 1999, unless otherwise redeemed or
converted.
Under the terms of the loan agreement, Founders may exercise its right at
any time to convert all, or in multiples of $25,000, any part of the borrowed
funds into Canmax Common Stock at a conversion price of $1.25 per share. The
conversion price is subject to adjustment for certain events and transactions as
specified in the loan agreement. Additionally, the outstanding principal amount
is redeemable at the option of Canmax at 110% of par.
As of February 11, 1998, Founders had advanced to Canmax $350,000 under the
loan agreement. Canmax used these funds to pay fees and expenses related to the
USC acquisition, to advance USC $250,000 for equipment purchases and for USC's
general working capital requirements, and for Canmax's general working capital
requirements, all of which are permitted uses of proceeds under the loan
agreement.
On February 11, 1998, Canmax and Founders executed a loan commitment letter
which provides for multiple advance loans of up to $2 million over the ensuing
12 month period. Funds obtained under the loan commitment agreement are
collateralized by all assets of Canmax and bear interest at 10%. Interest is
payable monthly and borrowings under the agreement mature one year from the date
of the advance. Amounts borrowed under the agreement are convertible into Canamx
Common Stock at a conversion price equal to the five (5) day trading average of
the Canmax Common Stock immediately preceding the date of the advance. The
maximum amount of Canmax Common Stock issuable under the loan commitment is 1.6
million shares. As consideration for the loan commitment, Canmax paid a
commitment fee of $10,000. As of February 11, 1998, no amounts had been advanced
to Canmax under the loan commitment agreement.
F-22
<PAGE>
CONVERTIBLE LOAN AGREEMENT
BY AND BETWEEN
CANMAX INC.
AND
CANMAX RETAIL SYSTEMS, INC.
AS CO-BORROWER
AND
FOUNDERS EQUITY GROUP, INC.
AND
FOUNDERS MEZZANINE INVESTORS III, LLC
AS LENDERS
This Convertible Loan Agreement (the "Agreement") is entered into as of
DECEMBER 15, 1997, by and among CANMAX INC. (a Wyoming corporation) and
CANMAX RETAIL SYSTEMS, INC. (a Texas corporation) as co-borrowers
(hereinafter collectively referred to as "BORROWER"), FOUNDERS MEZZANINE
INVESTORS, LLC (a Texas limited liability corporation) FOUNDERS EQUITY GROUP,
INC. (a Texas corporation) (individually referred to as "Mezzanine" and
"Founders Equity", respectively, together with any assignees or successors in
interest collectively referred to as "LENDERS") and Founders Equity Group,
Inc. also as agent (hereinafter referred to as ("AGENT").
WITNESSETH:
WHEREAS, Borrower seeks to obtain $500,000 in financing through issuance
of Convertible Debentures, such funds to be used for the purposes as set
forth herein; and
WHEREAS, Founders Equity purchased a Promissory Note dated November 26,
1997 directly from the Borrower and the Borrower has requested that this
indebtedness be retired and replaced by Convertible Debentures issued
pursuant hereto; and
WHEREAS, Borrower agrees to issue this indebtedness in a senior secured
position; and
WHEREAS, Borrower has requested that Lenders provide such financing as
herein provided, and Lenders are willing to furnish financing such to
Borrower upon the terms and subject to the conditions and for the
considerations hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises herein contained
and for other valuable consideration, receipt and sufficiency of which is
acknowledged, the parties hereto agree as follows:
- -------------------------------------------------------------------------------
<PAGE>
AGREEMENT (CONTINUED)
- -------------------------------------------------------------------------------
ARTICLE I - DEFINITION OF TERMS
SECTION 1.01. DEFINITIONS.
(a) For the purposes of this Agreement, unless the context otherwise
requires, the following terms shall have the respective meanings assigned to
them in this Article I or in the section or recital referred to below:
"Affiliate" with respect to any Person shall mean (i) any person directly or
indirectly owning, controlling or holding power to vote 10% or more of the
outstanding voting securities of any Person; (ii) any person, 10% or more of
whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by any Person; (iii) any person
directly or indirectly controlling, controlled by or under common control
with any Person; (iv) any officer, director or partner of any Person; and (v)
if a Person is an officer, director or partner, any company for which any
Person acts in such capacity. For purposes of this Agreement, any
partnership of which any Person is a general partner, or any joint venture in
which any Person is a joint venturer, is an Affiliate of each Person.
"Agent" shall mean Founders Equity Group, Inc., its successor or its assigns.
"Capital Expenditure" shall mean, with respect to any period, the aggregate
of all expenditures (whether paid in cash or accrued as liabilities and
including expenditures for capitalized lease obligations) by Borrower during
such period that are required by GAAP to be included in or reflected by the
property, plant, or equipment or similar fixed asset accounts in the balance
sheet of Borrower.
"Capital Lease" shall mean any lease of property, real or personal, which is
in substance a financing lease and which would be capitalized on a balance
sheet of the lessee, including without limitation, any lease under which (i)
such lessee will have an obligation to purchase the property for a fixed sum,
(ii) an option to purchase the property at an amount less than a reasonable
estimate of the fair market value of such property as of the date such lease
is executed, or (iii) the term of the lease approximates or exceeds the
expected useful life of the property leased thereunder.
"Collateral" shall mean each and all of the following wherever located and
whether now existing or owned or hereafter created or acquired: the
accounts; the general intangibles; the negotiable collateral; the inventory;
Borrower's books; the equipment; the real estate collateral; any money,
deposit accounts or other assets of Borrower in which Lenders receive a lien
or which hereafter comes into the possession, custody or control of Lenders;
and all products an proceeds of every nature of any of the foregoing,
including, but not limited to, proceeds of insurance covering the collateral
and any and all accounts, general intangibles, negotiable collateral,
inventory, contract rights, instruments, documents and chattel paper,
equipment, money, deposit accounts or other tangible and intangible property
of Borrower resulting from the sale or other disposition of the Collateral,
and the proceeds and products thereof.
"Consolidated Subsidiaries" shall mean those corporations of which 50% or
more of the voting stock is owned by Borrower and their financial statements
are consolidated with those of the Borrower.
"Conversion " or "Conversion Rights" shall mean exchange of, or the rights to
exchange, the Principal Amount of the loan, or any part thereof, for fully
paid and non assessable Common Stock on the terms and conditions as provided
in the Debenture.
"Conversion Price" shall mean the conversion price as then in effect as
stipulated in the Debentures.
"Common Stock" shall mean the Canmax Inc. common stock, no par value.
"Debentures" shall mean the Debentures executed by Borrower and made payable
to the order of the Lenders in the aggregate principal amount of $500,000 and
delivered pursuant to the terms of this Agreement, together with any
renewals, extensions or modifications thereof.
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2
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AGREEMENT (CONTINUED)
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"Debtor Laws" shall mean all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization
or similar laws from time to time in effect affecting the rights of creditors
generally.
"Default" shall mean an event with notice or lapse of time or both, could
become an Event of Default.
"Dividends", in respect of any corporation, shall mean (i) cash distributions
or any other distributions on, or in respect of, any class of capital stock
of such corporation, except for distributions made solely in shares of stock
of the same class, and (ii) any and all funds, cash and other payments made
in respect of the redemption, repurchase or acquisition of such stock, unless
such stock shall be redeemed or acquired through the exchange of such stock
with stock of the same class.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, together with all regulations issued pursuant thereto.
"Event of Default" shall mean any of the events specified in Article VIII.
"GAAP" shall mean generally accepted accounting principles applied on a
consistent basis, set forth in the opinions of the Accounting Principles
Board of the American Institute of Certified Public Accountants, or their
successors, which are applicable in the circumstances as of the date in
question. The requisite that such principles be applied on a consistent
basis shall mean that the accounting principles observed in a current period
are comparable in all material respects to those applied in a preceding
period.
"Governmental Authority" shall mean any government (or any political
subdivision or jurisdiction thereof), court, bureau, agency or other
governmental authority having jurisdiction over Borrower or a Subsidiary or
any of its or their businesses, operations or properties.
"Guaranty" of any Person shall mean any contract, agreement or understanding
of such Person pursuant to which such Person in effect guarantees the payment
of any Indebtedness of any other Person (the "Primary Obligor") in any
manner, whether directly or indirectly, including without limitation
agreements: (i) to purchase such Indebtedness or any property constituting
security therefor; (ii) to advance or supply funds primarily for the purpose
of assuring the holder of such Indebtedness of the ability of the Primary
Obligor to make payment; or (iii) otherwise to assure the holder of the
Indebtedness of the Primary Obligor against loss in respect thereof, except
that "Guaranty" shall not include the endorsement by Borrower or a Subsidiary
in the ordinary course of business of negotiable instruments or documents for
deposit or collection.
"Holder" shall mean the owner of Registrable Securities.
"Indebtedness" shall mean, with respect to any Person, (a) indebtedness for
borrowed money or for the deferred purchase price of property or services in
respect of which such Person is liable, contingently or otherwise, as obligor
or otherwise or any commitment by which such Person assures a creditor
against loss, including contingent reimbursement obligations with respect to
letter of credit, (b) indebtedness guaranteed in any manner by such Person,
including guarantees in the form of an agreement to repurchase or reimburse,
(c) obligations under leases which shall have been or should be, in
accordance with GAAP, recorded as capital leases, in respect of which
obligations such Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which obligations such Person
assures a creditor against loss, and (d) any unfunded obligation of such
Person to any employee/employer benefit plan.
"Investment" in any Person shall mean any investment, whether by means of
share purchase, loan, advance, extension of credit, capital contribution or
otherwise, in or to such Person, the Guaranty of any Indebtedness of such
Person, or the subordination of any claim against such Person to other
Indebtedness of such Person.
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3
<PAGE>
AGREEMENT (CONTINUED)
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"IRS Code" shall mean the Internal Revenue Code of 1986, as amended, together
with all regulations issued thereunder.
"Lien" shall mean any lien, mortgage, security interest, tax lien, pledge,
encumbrance, conditional sale or title retention arrangement, or any other
interest in property designed to secure the repayment of Indebtedness,
whether arising by agreement or under any statute or law, or otherwise.
"Loan" shall mean the money lent to Borrower pursuant to this Agreement,
along with any accrued interest thereon.
"Loan Closing" or "Loan Closing Date" shall mean the initial disbursement of
Loan funds which shall occur on a date 30 days from the date hereof or such
earlier date on which Borrower requests, and Lenders approve, as the date at
which the initial advance of the Loan funds shall be consummated, provided
that such date may be mutually extended beyond 30 days, but only by written
agreement of the parties hereto.
"Loan Documents" shall mean this Agreement, the Debentures, the security
agreement, financing statements (including any renewals, extensions and
refundings thereof), and any other agreements or documents (and with respect
to this Agreement, and such other agreements and documents, any amendments or
supplements thereto or modifications thereof) executed or delivered pursuant
to the terms of this Agreement.
"Majority in Interest" shall mean Lenders holding among them at least 50.1%
of the then outstanding Loan.
"Material Adverse Effect" or "Material Adverse Change" shall mean any change,
factor or event that shall (i) have a material adverse effect upon the
validity, performance or enforceability of any material provision of any Loan
Documents, (ii) have a material adverse effect upon the financial condition
or business operations of Borrower or any Subsidiaries, (iii) have a material
adverse effect upon the ability of the Borrower to fulfill its material
obligations under the Loan Documents, or (iv) any event that causes a Default
or Event of Default.
"Obligation" shall mean: (i) all present and future indebtedness, obligations
and liabilities of Borrower to Lenders arising pursuant to this Agreement,
regardless of whether such indebtedness, obligations and liabilities are
direct, indirect, fixed, contingent, joint, several, or joint and several;
(ii) all present and future indebtedness, obligations and liabilities of
Borrower to Lenders arising pursuant to or represented by the Debentures and
all interest accruing thereon, and reasonable attorneys' fees incurred in the
enforcement or collection thereof; (iii) all present and future indebtedness,
obligations and liabilities of Borrower and any Subsidiary evidenced by or
arising pursuant to any of the Loan Documents; (iv) all costs incurred by
Lenders, including but not limited to reasonable attorneys' fees and legal
expenses related to this transaction; and (v) all renewals, extensions and
modifications of the indebtedness referred to in the foregoing clauses, or
any part thereof.
"Other Taxes" shall have the meaning set forth in Section 2.09(b).
"Permitted Liens" shall mean: (i) Liens (if any) granted Agent for the
benefit of the Lenders to secure the Obligation; (ii) pledges or deposits
made to secure payment of worker's compensation insurance (or to participate
in any fund in connection with worker's compensation insurance), unemployment
insurance, pensions or social security programs; (iii) Liens imposed by
mandatory provisions of law such as for landlord's, materialmen's,
mechanics', warehousemen's and other like Liens arising in the ordinary
course of business, securing Indebtedness whose payment is not yet due; (iv)
Liens for taxes, assessments and governmental charges or levies imposed upon
a Person or upon such Person's income or profits or property, if the same are
not yet due and payable or if the same are being contested in good faith and
as to which adequate cash reserves have been provided or if an extension is
obtained with respect thereto; (v) Liens arising from good faith deposits in
connection with tenders, leases, real estate bids or contracts (other than
contracts involving the borrowing of money), pledges or deposits to
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4
<PAGE>
AGREEMENT (CONTINUED)
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secure public or statutory obligations and deposits to secure (or in lieu of)
surety, stay, appeal or customs bonds and deposits to secure the payment of
taxes, assessments, customs duties or other similar charges; (vi)
encumbrances consisting of zoning restrictions, easements, or other
restrictions on the use of real property, provided that such items do not
materially impair the use of such property for the purposes intended, and
none of which is violated by existing or proposed structures or land use;
(vii) mortgages, financing statements, equipment leases or other encumbrances
incurred in connection with the acquisition of property or equipment or the
replacement of existing property or equipment, provided that such liens shall
be limited to the property or equipment then being acquired, (viii) Liens in
existence as of the date hereof and as disclosed in the attached exhibit, and
(ix) Lien on any Permitted Investments or assets acquired in connection
therewith.
"Permitted Indebtedness" shall mean (i) current liabilities as reflected on
Borrower's balance sheet prepared in accordance with GAAP from time to time
(ii) indebtedness incurred in the purchase of capital equipment not to exceed
$2,000,000 per year, and (iii) debt associated with Permitted Liens.
"Person" shall include an individual, a corporation, a joint venture, a
general or limited partnership, a trust, an unincorporated organization or a
government or any agency or political subdivision thereof.
"Plan" shall mean an employee benefit plan or other plan maintained by
Borrower for employees of Borrower and/or any Subsidiaries and covered by
Title IV of ERISA, or subject to the minimum funding standards under Section
412 of the Internal Revenue Code of 1986, as amended.
"Principal Amount" shall mean, as of any time, the then aggregate outstanding
face amount of the Debentures after any conversions or redemptions and after
giving effect to any installment payments received by Lenders.
"Registrable Securities" shall mean (i) the Common Stock issued or issueable
upon Conversion of the Debentures, or (ii) any Common Stock issued upon
Conversion of the Debentures or exercise of any warrant, right or other
security which is issued with respect to the Common Stock referred to in
clause (i) above by way of stock dividend; any other distribution with
respect to or in exchange for, or in replacement of Common Stock; stock
split; or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization; excluding in all cases,
however, any Registrable Security that is not a Restricted Security and any
Registrable Securities sold or transferred by a person in a transaction in
which the rights under this Agreement are not assigned.
"Registrable Securities Then Outstanding" shall mean an amount equal to the
number of Registrable Securities outstanding which have been issued pursuant
to the Conversion of the Debentures.
"Restricted Security" shall mean a security that has not been (i) registered
under the 1933 Act or (ii) distributed to the public pursuant to Rule 144 (or
any similar provisions that are in force) under the 1933 Act.
"SEC" shall mean the Securities and Exchange Commission.
"1933 Act" shall refer to the Securities Act of 1933, as amended.
"1934 Act" shall refer to the Securities Exchange Act of 1934, as amended.
"Solvent" shall mean, with respect to any Person on a particular date, that
on such date: (i) the fair value of the property of such Person is greater
than the total amount of liabilities, including, without limitation,
contingent liabilities, of such Person; (ii) the present fair salable value,
in the ordinary course of business, of the assets of such Person is not less
than the amount that will be required to pay the probable liability of such
Person on its debts as they become absolute and matured; (iii) such Person is
able to realize upon its assets and pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal
course of business; (iv) such Person does not intend to, and does not believe
that it will, incur debts or liabilities beyond such Person's ability to pay
as such debts and liabilities mature; and (v) such Person is not engaged in
business or a transaction,
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5
<PAGE>
AGREEMENT (CONTINUED)
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and is not about to engage in business or a transaction, for which such
Person's property would constitute unreasonably small capital after giving
due consideration to the prevailing practice in the industry in which such
Person is engaged. In computing the amount of contingent liabilities at any
time, it is intended that such liabilities will be computed at the amount
which, in light of all the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual or
matured liability.
"Subordinated Debt" shall mean any indebtedness of the Borrower or any
Subsidiaries, now existing or hereafter incurred, which indebtedness is, by
its terms, junior in right of repayment to the payment of the Debentures.
"Subsidiary" shall mean any corporation whether now existing or hereafter
acquired of which fifty percent (50%) or more of the Voting Shares are owned,
directly or indirectly, by Borrower.
"Voting Shares" of any corporation shall mean shares of any class or classes
(however designated) having ordinary voting power for the election of at
least a majority of the members of the Board of Directors (or other governing
bodies) of such corporation, other than shares having such power only by
reason of the happening of a contingency.
SECTION 1.02. OTHER DEFINITION PROVISIONS.
(a) All terms defined in this Agreement shall have the above-defined
meanings when used in the Debentures or any other Loan Documents, certificate,
report or other document made or delivered pursuant to this Agreement, unless
the context therein shall otherwise require. Reference to Borrower as parent
company exclusively does occur where the context requires.
(b) Defined terms used herein in the singular shall import the plural and
vice versa.
(c) The words "hereof," "herein," "hereunder" and similar terms when used
in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement.
(d) References to financial statements and reports shall be deemed to be
a reference to such statements and reports prepared in accordance with GAAP
on the basis used by Borrower in prior years, for all periods after the date
hereof so as to properly reflect the financial condition, and the results of
operations and statement of cash flows, of Borrower and its Consolidated
Subsidiaries, if any.
(e) Accounting terms not specifically defined above, or not defined in
the Agreement, shall be construed in accordance with GAAP as recognized as of
this date by the American Institute of Certified Public Accountants.
ARTICLE II - LOAN PROVISIONS
SECTION 2.01. LOAN CLOSING.
(a) Subject to the terms and conditions of this Agreement, and the
compliance with such terms and conditions by all parties, Lenders agree to
lend to Borrower, and Borrower agrees to borrow from Lenders, the aggregate
sum of up to FIVE HUNDRED THOUSAND DOLLARS ($500,000) which shall be
disbursed at the Loan Closing as follows:
<TABLE>
<S> <C>
Founders Equity Group, Inc. (cancellation and reissuance) $100,000
Founders Equity Group, Inc. $150,000
Founders Mezzanine Investors III, LLC $250,000
--------
Total $500,000
</TABLE>
(b) Such disbursements are to be at such time and subject to the
conditions as provided hereunder and such borrowing shall be evidenced by
Borrower's duly executed Debentures (in one or more counterparts) in the
aggregate sum of $500,000 substantially in the form of Exhibit 2.01(b)
attached hereto and made a part hereof, with appropriate insertion of names,
dates and amounts. In the event of
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6
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AGREEMENT (CONTINUED)
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any differences in terms between this Agreement and the Debentures, the
Debentures will be controlling; provided, however, that the holder of the
Debentures shall be entitled to all the rights and benefits of the Lenders
provided in this Agreement.
(c) Unless otherwise mutually agreed, the Loan Closing shall be at the
offices of Founders Equity Group, Inc., Dallas, Texas.
(d) If, within 10 days of the date of this Agreement (i) Borrower has
failed to comply with the conditions precedent to the Loan Closing as
specified in Article III hereof (unless compliance with such conditions in
whole or in part has been waived or modified by Lenders in their sole
discretion) or (ii) the Loan Closing has not occurred (unless the date of
such Loan Closing has been mutually extended) then, in either such case, the
obligations of Lenders under this Agreement shall terminate, provided however
that Borrower shall be obligated for payment of Loan Commitment Fee as
provided in Section 2.07 due and payable as of such date of termination.
SECTION 2.02. USE OF PROCEEDS.
(a) Borrower intends to use the money advanced hereunder for the
purposes of (i) the payment of fees and expenses incurred in connection with
the proposed acquisition of USCommunication Services, Inc. ("USC"), (ii)
lending to USC up to $250,000 of such proceeds prior to the consummation of
the proposed acquisition, (iii) pursuing such other acquisitions of
businesses or assets as Borrower, in its discretion, elects (iv) general
working capital.
SECTION 2.03. INTEREST RATE AND INTEREST PAYMENTS.
(a) Interest on the Principal Amount outstanding from time to time shall
accrue at the rate of 10.00% per annum, with the first installment payable on
FEBRUARY 1, 1998 and subsequent payments at the first day of each month
thereafter. Overdue principal and interest on the Debentures shall bear
interest, to the extent permitted by applicable law, at a rate of 12.00% per
annum. Interest on the Principal Amount of each Debenture shall be
calculated, from time to time, on the basis of the actual days elapsed in a
year consisting of 365 days.
SECTION 2.04. MATURITY.
(a) If not sooner redeemed or converted, the Debentures shall mature on
JANUARY 1, 1999, at which time all the remaining unpaid principal, interest
and any other charges then due under the Agreement shall be due and payable
in full.
SECTION 2.06. OPTIONAL REDEMPTION.
(a) Optional principal redemption on each Debenture shall be as provided
for in such Debentures.
SECTION 2.07 LOAN CLOSING COSTS.
(a) Borrower agrees to pay to Agent, a Loan Commitment fee of 1% of the
loan amount available under this Loan Agreement such to be due and payable at
Loan Closing or upon termination of this Loan Agreement.
(b) Borrower agrees to pay to Agent, a Loan Closing Fee of 1% of the
amount of Loan funds disbursed at each Loan Closing, such to be due and
payable at Loan Closing.
(c) Lender agrees to a similar fee arrangement on any additional funds
provided under this Loan Agreement or similar agreement between Lender and
Borrower.
SECTION 2.08. NO BROKERS.
Borrower and Lenders represent and warrant to each other that they have
not engaged any brokers in connection with the Loan or taken any action that
would otherwise subject either party to claims for placement fees,
commissions, brokerage fees, or finders fees or similar claims arising in
connection with
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7
<PAGE>
AGREEMENT (CONTINUED)
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the Loan. Each party shall indemnify the other for any costs or expenses
incurred in connection with the breach of the representations or warranties
contained in this Section 2.08.
SECTION 2.09. TAXES.
(a) Each Debenture shall be exchangeable for shares of Borrower's Common
Stock on such terms hereunder and shall be made without deduction for any
present or future taxes, duties, charges or withholdings, (excluding, in the
case of the Lenders, any foreign taxes, any federal, state or local income
taxes and any franchise taxes or taxes imposed upon it by the jurisdiction,
or any political subdivision thereof, under which the Lenders are organized
or is qualified to do business) and all liabilities with respect thereto
(herein "Taxes") shall be paid by Borrower. If Borrower shall be required by
law to deduct any Taxes for which Borrower is responsible under the preceding
sentence from any sum payable hereunder to any Lenders: (i) the sum payable
shall be increased so that after making all required deductions, such Lenders
receive an amount equal to the sum it would have received had no such
deductions been made; (ii) Borrower shall make such deductions; and (iii)
Borrower shall pay the full amount deducted to the relevant taxing authority
or other authority in accordance with applicable law.
(b) Except as otherwise set forth in this Agreement or the other Loan
Documents, Borrower shall pay any present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies which
arise from any payment made hereunder or under the Loan Documents or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or the other Loan Documents (hereinafter referred to as "Other
Taxes").
(c) Borrower shall indemnify Lenders for the full amount of Taxes and
Other Taxes reasonably paid by Lenders or any liability (including any
penalties or interest assessed because of Borrower's defaults) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes
were correctly or legally asserted. This indemnification shall be made
within thirty (30) days from the date Lenders make written demand therefor
and has delivered to Borrower all documentation with respect thereto
reasonably requested by Borrower. Lenders shall subrogate any and all rights
and claims relating to such Taxes and Other Taxes to Borrower upon payment of
said indemnification.
(d) Without prejudice to the survival of any other agreement of Borrower
hereunder, the agreements and obligations of Borrower in this Section 2.09
shall survive the payment in full of the Loan.
SECTION 2.10 STOCK CONVERSION RIGHTS.
(a) Each Debenture shall be exchangeable for shares of Common Stock on
such terms and in such amounts as shall be stated in such Debenture. The
holders of the stock issued upon exercise of the right of conversion as
provided in said Debenture shall be entitled to all the rights of the Lenders
as stated in this Agreement or the other Loan Documents to the extent such
rights are specifically stated to survive the surrender of the Debenture for
conversion as therein provided.
SECTION 2.11 REGISTRATION RIGHTS AGREEMENT.
(a) The holder of shares of Common Stock issued upon Conversion shall be
entitled to registration rights as provided in Article IX of this Agreement
to the extent set forth therein.
ARTICLE III - CONDITIONS PRECEDENT
SECTION 3.01. DOCUMENT REQUIREMENTS.
(a) The obligations of Lenders to advance funds at the Loan Closing are
subject to the condition precedent that, on or before the date of such
advance, Lenders shall have received the following in form and substance
satisfactory to Lenders:
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AGREEMENT (CONTINUED)
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(i) One or more duly executed Debentures with the insertions of date,
amount and conversion features and aggregating five hundred thousand dollars
($500,000.00) each in amounts as requested by Lenders, which shall be styled
as follows:
Founders Equity Group, Inc. and Founders Mezzanine Investors III, LLC.
(ii) One or more duly executed security agreements.
(iii) One or more duly executed financing statements.
(iv) Copies of resolutions, as adopted by the Borrower's Board of
Directors, approving the execution, delivery and performance of this
Agreement, the Debentures, and the other Loan Documents, including the
transactions contemplated herein and accompanied by a certificate of the
Secretary or Assistant Secretary of Borrower stating that such resolutions
have been duly adopted, are true and correct, have not been altered or
repealed and are in full force and effect.
(v) A signed certificate of the Secretary or Assistant Secretary of
the Borrower which shall certify the names of the officers of Borrower
authorized to sign each of the Loan Documents to be executed by such officer,
together with the true signatures of each of such officers. It is herewith
stipulated and agreed that Lenders may thereafter rely conclusively on the
validity of this certificate as a representation of the officers of Borrower
duly authorized to act with respect to the Loan Documents until such time as
Lenders shall receive a further certificate of the Secretary or Assistant
Secretary of Borrower canceling or amending the prior certificate and
submitting the signatures of the officers thereupon authorized in such
further certificate.
(vi) Certificates of good standing (or other similar instrument) for
the Borrower issued by the Secretary of State of the state of incorporation
of Borrower, and certificates of qualification and good standing for Borrower
issued by the Secretary of State of each of the states wherein the failure to
be qualified to do business as a foreign corporation would have a Material
Adverse Effect, dated within fifteen (15) days of Loan Closing, and
(vii) Such other information and documents as may reasonably be required
by Lenders and Lenders' counsel to substantiate Borrower's compliance with
the requirements of this Agreement.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
To induce Lenders to make the Loan hereunder, Borrower represents and warrants
to Lenders that:
SECTION 4.01. ORGANIZATION AND GOOD STANDING.
(a) Borrower is duly organized and existing in good standing under the
laws of the state of its incorporation, is duly qualified as a foreign
corporation and in good standing in all states in which failure to qualify
would have a Material Adverse Effect, and has the corporate power and
authority to own its properties and assets and to transact the business in
which it is engaged and is or will be qualified in those states wherein it
proposes to transact material business operations in the future and where
failure to qualify would have a Material Adverse Effect.
SECTION 4.02. AUTHORIZATION AND POWER.
(a) Borrower has the corporate power and requisite authority to execute,
deliver and perform the Loan Documents to be executed by Borrower. The
Borrower is duly authorized to, and has taken all corporate action necessary
to authorize, execute, deliver and perform the Loan Documents executed by
Borrower. The Borrower is and will continue to be duly authorized to perform
the Loan Documents executed by Borrower.
SECTION 4.03. ENFORCEABLE OBLIGATIONS.
(a) The Loan Documents to which it is a party have been duly executed
and delivered by the Borrower and are the legal and binding obligations of
the Borrower, enforceable in accordance with their
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9
<PAGE>
AGREEMENT (CONTINUED)
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respective terms, except as limited by any applicable bankruptcy, insolvency
or similar laws now or hereafter in effect affecting creditors rights and
debtor's obligations.
SECTION 4.04. NO LIENS.
(a) Except for Permitted Liens, all of the properties and assets owned
by the Borrower are free and clear of all Liens and other adverse claims of
any nature, and Borrower has good and marketable title to such properties and
assets. A true and complete list of all Liens for borrowed money is
disclosed to Lenders pursuant to Exhibit 4.04.
SECTION 4.05. FINANCIAL CONDITION.
(a) Borrower has delivered to Lenders copies of the Form 10-K of
Borrower dated October 31, 1996 and 10-Q dated July 31, 1997. The financial
statements contained in the 10-K and 10-Q are true and correct in all
material respects, fairly represent the financial condition of Borrower as of
such dates and have been prepared in accordance with GAAP (except unaudited
financial statements omit certain footnotes and are subject to year end
adjustment in the ordinary course); and as of the date hereof, there are no
obligations, liabilities or Indebtedness (including contingent and indirect
liabilities and obligations) of Borrower which are (separately or in the
aggregate) material and are not reflected in such financial statements.
Since the date of the above referenced Form 10-K and 10-Q, there has not been
(i) any Material Adverse Change in the financial condition, results of
operations, business, prospects, assets or liabilities (contingent or
otherwise, whether due or to become due, known or unknown), of the Borrower;
(ii) any dividend declared or paid or distribution made on the capital stock
of the Borrower or any capital stock thereof redeemed or repurchased; (iii)
any incurrence of long-term debt by the Borrower; (iv) any salary, bonus or
compensation increases to any officers, key employees or agents of the
Borrower or; (v) any other transaction entered into by the Borrower except in
the ordinary course of business and consistent with past practice.
SECTION 4.06. FULL DISCLOSURE.
(a) To the best of Borrower's knowledge and belief after current
investigation, there is no material fact that Borrower has not disclosed to
Lenders which could reasonably be expected to have a Material Adverse Effect.
Neither the financial statements referenced in Section 4.05 hereof, nor any
business plan, offering memorandum or prospectus, certificate or statement
delivered herewith or heretofore by Borrower to Lenders in connection with
the negotiations of this Agreement, contained any untrue statement of a
material fact or omitted to state any material fact necessary to keep the
statements contained herein or therein from being misleading.
SECTION 4.07. NO DEFAULT.
(a) No Default or Event of Default under this Agreement has occurred or
is continuing.
SECTION 4.08. MATERIAL AGREEMENTS.
(a) The Borrower is not in default in any material respect under any
material contract, lease, loan agreement, indenture, mortgage, security
agreement or other material agreement or obligation to which it is a party or
by which any of its properties is bound.
SECTION 4.09. NO LITIGATION.
(a) There are no actions, suits, investigations, arbitrations or
administrative proceedings pending, or to the knowledge of Borrower
threatened, against Borrower that would have a Material Adverse Effect, and
there has been no change in the status of any of the actions, suits,
investigations, litigation or proceedings disclosed to Lenders which could
have a Material Adverse Effect on Borrower or on any transactions
contemplated by any Loan Document.
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10
<PAGE>
AGREEMENT (CONTINUED)
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SECTION 4.10. BURDENSOME CONTRACTS.
(a) To the best knowledge of the Borrower, it is not a party to, or
bound by, any contract or agreement, the faithful performance of which is so
onerous so as to create or to likely create a Material Adverse Effect.
SECTION 4.11. TAXES.
(a) All tax returns required to be filed by Borrower in any jurisdiction
have been filed and all taxes (including mortgage recording taxes),
assessments, fees and other governmental charges upon Borrower or upon any of
its properties, income or franchises have been paid except for (i) where a
failure to file could not reasonably be anticipated to have a Material
Adverse Effect or (ii) immaterial amounts and taxes being contested by
Borrower in good faith and by appropriate proceedings. To the best knowledge
of Borrower, there is no proposed tax assessment against Borrower and there
is no basis for such assessment.
SECTION 4.12 PRINCIPAL OFFICE, ETC.
(a) The principal office and principal place of business of the Borrower
is:
Canmax Inc.
150 W. Carpenter Freeway
Irving, TX 75039
SECTION 4.13. USE OF PROCEEDS.
(a) The Borrower hereby acknowledges that it intends to use proceeds
from the Loans the set forth in Section 2.02
SECTION 4.14. COMPLIANCE WITH LAW.
(a) To the best knowledge of Borrower, Borrower is in compliance in all
material respects with all laws, rules, regulations, orders and decrees which
are applicable to Borrower or its properties by reason of any Governmental
Authority which are material to the conduct of the business of Borrower or
any of its properties.
SECTION 4.15. SCHEDULE OF CAPITAL STOCK AND SEC REQUIREMENTS.
(a) As of the date hereof, set forth on Exhibit 4.15 - Schedule of
Capital Stock is a true and correct schedule of all classes of authorized,
issued, and outstanding Capital Stock of the Borrower, all stock options,
warrants, conversion rights, subscription rights and other rights or
agreements to acquire securities of Borrower (other than the Debentures )and
any shares held in treasury or reserved for issue upon exercise of such stock
options, warrants or conversion rights, subscription rights and other rights
or agreements to acquire securities including date of termination of such
right and the consideration therefor.
(b) Except as provided in Exhibit 4.15 - Schedule of Capital Stock, to
the best of the Borrower's knowledge, all securities of Borrower have been
issued in compliance with the requirements of the 1933 Act, and the rules and
regulation promulgated thereunder, or pursuant to an exemption therefrom.
(c) The shares of Common Stock when issued to Lenders upon Conversion
will be duly and validly issued, fully paid and nonassessable and in
compliance with all applicable securities laws. Such issuance will not give
rise to preemptive rights or similar rights by any other security holder of
Borrower. Borrower shall at all times reserve and keep available sufficient
authorized and unissued shares of Common Stock to effectuate the Conversion.
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SECTION 4.16. SUBSIDIARIES.
(a) As of the date hereof, the Borrower but not have any Subsidiaries
other than (i) Canmax Retail Systems, Inc., a Texas corporation, or (ii)
subsidiaries with no material assets or liabilities through which no
operations have been conducted within the preceding 24 months.
(b) Except to set forth and Section 4.16(a) above, Borrower does not own
any equity or debt interest or any form of proprietary interest (other than
standard commercial money market accounts) in any entity, or any right or
option to acquire any such interest in any such entity.
SECTION 4.17 PATENTS, TRADEMARKS AND COPYRIGHTS.
(a) To the best of Borrower's knowledge and belief after current
investigation, Borrower owns all patents, trademarks and copyrights, if any,
necessary to conduct its business or possesses licenses or other rights, if
any, therefor. All such intangible property rights are listed in Exhibit 4.17
- - Schedule of Patents, Trademarks and Copyrights. To its knowledge, Borrower
has the right to use such proprietary rights without infringing or violating
the rights of any third parties. No claim has been asserted by any person to
the ownership of or right to use any such proprietary right or challenging or
questioning the validity or effectiveness of any such license or agreement
which would have a Material Adverse Effect, however Buyer has granted to The
Southland Corporation ("Southland") a license to use, possess and modify the
source code for its "C-Serve Software" and related software of Borrower used
by Southland. To Borrower's knowledge, each of the proprietary rights is
valid and subsisting, and has not been canceled, abandoned or otherwise
terminated.
SECTION 4.18. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
(a) All representations and warranties by Borrower herein shall survive
the Loan Closing and any subsequent Loan Closings and the delivery of the
Debentures, and any investigation at any time made by or on behalf of any
Lender shall not diminish Lenders' right to rely on Borrower's
representations and warranties as herein set forth, except to the extent that
such warranty was made as of a specific date or was subsequently modified or
supplemented with the consent of the Majority in Interest.
ARTICLE V - AFFIRMATIVE COVENANTS
So long as any part of the Debentures remains unpaid or has not been
redeemed or converted hereunder, and until such payment, redemption or
conversion in full, unless the Majority in Interest shall otherwise consent
in writing, which consent shall not be unreasonably withheld, Borrower agrees
that:
SECTION 5.01. FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS.
(a) The Borrower shall accurately and fairly maintain its books of
account in accordance with GAAP, employ a firm of independent certified
public accountants, which firm is and shall be one of the six largest
national accounting firms or which is approved by the Majority in Interest,
to make annual audits of its accounts in accordance with generally accepted
auditing standards; permit the Lenders and their representatives to have
access to and to examine its properties, books and records (and to copy and
make extracts therefrom) at such reasonable times and intervals as the
Lenders may request; and to discuss its affairs, finances and accounts with
its officers and auditors, all to such reasonable extent and at such
reasonable times and intervals as the Lenders may request.
(b) The Borrower shall provide the following reports and information to
the Lenders:
(i) As soon as available, and in any event within forty-five (45)
days after the close of each quarter, the Borrower's report on Form 10-Q with
exhibits for said period. In addition, the Lenders may at their sole
discretion request internal monthly reports for specific periods.
(ii) As soon as available, and in any event within ninety (90) days
after the close of each year, the Borrower's report on Form 10-K with
exhibits for said period.
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(iii) Each quarter, concurrent with the periodic report required
above, a certificate executed by the Chief Financial Officer or Chief
Executive Officer of the Borrower, (A) stating that a review of the
activities of the Borrower during such fiscal period has been made under his
supervision and that the Borrower has observed, performed and fulfilled each
and every obligation and covenant contained herein and no Default or Event of
Default shall have occurred, or if a Default or Event of Default shall
occurred, specifying the nature and status thereof, and (B) setting forth a
computation in reasonable detail as of the end of the period covered by such
statements, of compliance with the Agreed Minimum Financial Standards in
Exhibit 7.01 as provided therein.
(iv) So long as any Debenture remains outstanding, promptly (but in
any event within five (5) business days) upon learning of the occurrence of a
Default or an Event of Default deliver a certificate signed by the Chief
Executive Officer or Chief Financial Officer of the Borrower describing such
Default or Event of Default and stating what steps are being taken to remedy
or cure the same.
(v) Promptly (but in any event within five (5) business days) upon
the receipt thereof by the Borrower or the Board of Directors of the
Borrower, copies of all reports, all management letters and other detailed
information submitted to the Borrower or the Board by independent accountants
in connection with each annual or interim audit or review of the accounts or
affairs of the Borrower made by such accountants.
(vi) With reasonable promptness, such other information relating to
the finances, properties, business and affairs of the Borrower and each
Subsidiary, as Lenders may reasonably request from time to time.
(vii) Promptly upon its becoming available, one copy of each
financial statement, report, press release, notice or proxy statement sent by
Borrower to stockholders generally, and of each regular or periodic report,
registration statement or prospectus filed by Borrower with any securities
exchange or the SEC or any successor agency, and of any order issued by any
Governmental Authority in any proceeding to which the Borrower is a party.
SECTION 5.02. OPERATION REVIEW.
(a) Borrower agrees that it will review its operations with Lenders.
Such operations reviews will be in such depth and detail as Lenders shall
reasonably request. Operations reviews, which usually will require a day or
less to complete, will be held as reasonably necessary, generally once a
fiscal quarter.
SECTION 5.03. PAYMENT OF TAXES AND OTHER INDEBTEDNESS.
(a) Borrower shall, and shall cause its Subsidiaries (if any) to, pay
and discharge (i) all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits, or upon any property belonging
to it, before delinquent, (ii) all lawful claims (including claims for labor,
materials and supplies), which, if unpaid, might give rise to a Lien upon any
of its property other than Permitted Liens, and (iii) all of its other
Indebtedness, except as prohibited hereunder; provided, however, that
Borrower and its Subsidiaries, if any, shall not be required to pay any such
tax, assessment, charge or levy if and so long as the amount, applicability
or validity thereof shall currently be contested in good faith by appropriate
proceedings and appropriate accruals and reserves therefor have been
established in accordance with GAAP.
SECTION 5.04. MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS.
(a) Borrower shall, and shall cause its Subsidiaries (if any) to,
preserve and maintain its corporate existence and all of its rights,
privileges and franchises necessary or desirable in the normal conduct of its
business, and conduct its business in an orderly and efficient manner
consistent with good business practices and in accordance with all valid
regulations and orders of any Governmental Authority. Borrower shall keep its
principal place of business within the United States.
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SECTION 5.05. SEC FILING AND MAINTENANCE OF SEC REPORTING REQUIREMENTS.
(a) So long as Borrower has a class of securities registered pursuant to
Section 12 of the 1934 Act, Borrower shall duly file, when due, all reports
and statements required of a company whose securities are registered for
public trading under and pursuant to the 1934 Act, as amended, and any rules
and regulations issued thereunder, and to preserve and maintain its
registration thereunder and all of the rights of its security holders
normally associated with a publicly traded stock company.
SECTION 5.06. NOTICE OF DEFAULT.
(a) Borrower shall furnish to Lenders, immediately upon becoming aware
of the existence of any condition or event which constitutes a Default or
would with the passage of time become a Default or an Event of Default,
written notice specifying the nature and period of existence thereof and the
action which Borrower is taking or proposes to take with respect thereto.
SECTION 5.07. OTHER NOTICES.
(a) Borrower shall promptly notify Lenders of (i) any Material Adverse
Change, (ii) any default under any material agreement, contract or other
instrument to which it is a party or by which any of its properties are
bound, or any acceleration of the maturity of any Indebtedness owing by
Borrower or its Subsidiaries, if any, (iii) any material adverse claim that
would have a Material Adverse Effect against or affecting Borrower or its
Subsidiaries, if any, or any of its properties, and (iv) the commencement of,
and any material determination in, any litigation with any third party or any
proceeding before any Governmental Authority, the negative result of which
has a Material Adverse Effect on Borrower and its Subsidiaries.
SECTION 5.08. BOOKS AND RECORDS; ACCESS.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any)
to, maintain complete and accurate books and records of its transactions in
accordance with GAAP. Borrower shall give each duly authorized representative
of Lenders access during all normal business hours to, and shall permit such
representative to examine, copy or make excerpts from, any and all books,
records and documents in the possession of Borrower and its Subsidiaries and
relating to its affairs, and to inspect any of the properties of Borrower and
its Subsidiaries, if any. Borrower shall make a copy of this Agreement, along
with any waivers, consents, modifications or amendments, available for review
at its principal office by Lenders or Lenders' representatives. Borrower
shall not be responsible for Lenders' costs and expenses of inspection.
SECTION 5.09. COMPLIANCE WITH LAW.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any)
to, comply with all applicable laws, rules, regulations, and all orders of
any Governmental Authority applicable to it or any of its property, business
operations or transactions, a breach of which could reasonably be expected to
have a Material Adverse Effect.
SECTION 5.10. INSURANCE.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any)
to, maintain such worker's compensation insurance, liability insurance and
insurance on its properties, assets and business, now owned or hereafter
acquired, against such casualties, risks and contingencies, and in such types
and amounts, as are consistent with customary practices and standards of
companies engaged in similar businesses.
SECTION 5.11. FURTHER ASSURANCES.
(a) Borrower shall, and shall cause each of its Subsidiaries (if any)
to, make, execute or endorse, and acknowledge and deliver or file or cause
the same to be done, all such notices, certifications and
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additional agreements, undertakings, transfers, assignments, or other
assurances, and take any and all such other action, as Lenders may, from time
to time, deem reasonably necessary or proper in connection with any of the
Loan Documents, or the obligations of Borrower or its Subsidiaries, if any,
thereunder, which Lenders may request from time to time.
SECTION 5.12. INDEMNITY BY BORROWER.
(a) Borrower shall indemnify, save, and hold harmless, Lenders and their
directors, officers, agents, attorneys, and employees (singularly or
collectively, the "Indemnitee") from and against (i) any and all claims,
demands, actions or causes of action that are asserted against any Indemnitee
if the claim, demand, action or cause of action directly or indirectly
relates to this Agreement and the other Loan Documents issued pursuant
thereto, the use of proceeds of the Loans, or the relationship of Borrower
and Lenders under this Agreement or any transaction contemplated pursuant to
this Agreement, (ii) any administrative or investigative proceeding by any
Governmental Authority directly or indirectly related to a claim, demand,
action or cause of action described in clause (i) above, and (iii) any and
all liabilities, losses, costs, or expenses (including reasonable attorneys'
fees and disbursements) that any Indemnitee suffers or incurs as a result of
any of the foregoing; provided, however, that Borrower shall have no
obligation under this Section 5.12 to any Indemnitees with respect to any of
the foregoing arising out of the negligence or willful misconduct of any
Indemnitees or the breach by the Lenders or its assignees of this Agreement
or any other Loan Document or other document executed in connection with any
of the aforesaid, the breach by any Indemnitees of any agreement or
commitment with other parties, the violation or alleged violation of any law,
rule or regulation by any Indemnitees, or from the acquisition, transfer or
disposition by Lenders of any Debenture or the Common Stock issued upon
Conversion of the Debenture. If any claim, demand, action or cause of action
is asserted against any Indemnitee, such Indemnitee shall promptly notify
Borrower, but the failure to so promptly notify Borrower shall not affect
Borrower's obligations under this Section unless such failure materially
prejudices Borrower's right to participate in the contest of such claim,
demand, action or cause of action, as hereinafter provided. In the event
that such indemnitee's failure to properly notify the Borrower materially
prejudices Borrower's right to participate in the contest of such claim,
demand, action, or cause of action, then said Indemnitee shall have no right
to receive, and Borrower shall have no obligation to pay, any indemnification
amounts hereunder. Borrower may elect to defend any such claim, demand,
action or cause of action (at its own expense) asserted against said
Indemnitee and, if requested by Borrower in writing and so long as no Default
or Event of Default shall have occurred and be continuing, such Indemnitee
(at Borrower's expense) shall in good faith contest the validity,
applicability and amount of such claim, demand, action or cause of action and
shall permit Borrower to participate in such contest. Any Indemnitee that
proposes to settle or compromise any claim or proceeding for which Borrower
may be liable for payment to or on behalf of an Indemnitee hereunder shall
give Borrower written notice of the terms of such proposed settlement or
compromise reasonably in advance of settling or compromising such claim or
proceeding and shall obtain Borrower's written concurrence thereto. In the
event that said Indemnitee fails to obtain Borrower's prior written consent
to any such settlement or compromise, said Indemnitee shall have no right to
receive and Borrower shall have no obligation to pay any indemnification
amounts hereunder. Each Indemnitee may employ counsel in enforcing its
rights hereunder and in defending against any claim, demand, action, or cause
of action covered by this Section 5.12; provided, however, that each
Indemnitee shall endeavor, but shall not be obligated, in connection with any
matter covered by this Section which also involves any other Indemnitee, to
use reasonable efforts to avoid unnecessary duplication of effort by counsel
for all Indemnitees, including by allowing Borrower to select one lawyer for
all parties, such selection to be subject to the approval of such parties,
which approval shall not be unreasonably withheld. Any obligation or
liability of Borrower to any Indemnitee under this Section 5.12 shall survive
the expiration or termination of this Agreement and the repayment of the
Debentures.
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AGREEMENT (CONTINUED)
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ARTICLE VI - NEGATIVE COVENANTS
So long as any part of the Debentures have not been redeemed or
converted hereunder, and until such redemption or conversion in full, unless
the Majority in Interest shall otherwise consent in writing, which consent
shall not be unreasonably withheld, Borrower agrees that, unless permitted
otherwise:
SECTION 6.01. LIMITATION ON INDEBTEDNESS.
(a) Borrower and its Subsidiaries shall not incur, create, contract,
waive, assume, have outstanding, guarantee or otherwise be or become,
directly or indirectly, liable in respect of any Indebtedness, except:
(i) Indebtedness arising out of this Agreement or otherwise contemplated
herein;
(ii) Permitted Indebtedness
(iii) Intercompany loans and advances;
(iv) contingent liabilities totaling less than $500,000 arising out of
endorsements of checks or other negotiable instrument for deposit or
collection in the ordinary course of business;
(v) indebtedness outstanding on the date hereof and described in the
financial statements delivered pursuant to Section 4.05 hereof or on
Exhibit 6.01, and any refinancings or extensions thereof; and
(vi) Indebtedness associated with Permitted Investments.
SECTION 6.02. NEGATIVE PLEDGE/PREPAYMENTS.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any)
to, create, incur, permit or suffer to exist any Lien upon any of its
property or assets other than Permitted Liens.
SECTION 6.03. LIMITATION ON INVESTMENTS.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any)
to, make any advance, loan, investment or material acquisition of assets for
cash or cash equivalents, other than (i) advances made to employees in the
ordinary course of business so long as the aggregate amount of such advances
do not exceed Twenty-five Thousand Dollars ($25,000.00) in the aggregate
outstanding at any time; (ii) investments in marketable securities so long as
the aggregate amount of such investments do not exceed One Hundred Thousand
Dollars ($100,000.00) at any time; (iii) investments in short-term direct
obligations of the United States government or any agency thereof; (iv)
investments in negotiable certificates of deposit and repurchase agreements
issued by a United States bank having a combined capital and surplus of at
least $50,000,000 payable to the order of Borrower or to bearer, (v)
investments in commercial paper rated A-1 or P-1, and (vi) acquisition of the
stock or assets of other Persons other than USC.
SECTION 6.04. CERTAIN TRANSACTIONS.
Intentionally omitted.
SECTION 6.05. LIMITATION ON SALE OF PROPERTIES.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any)
to (i) sell, assign, convey, exchange, lease or otherwise dispose of any of
its properties, rights, assets or business, whether now owned or hereafter
acquired, except in the ordinary course of its business and for a fair
consideration, or (ii) sell, assign or discount any accounts receivable
except in the ordinary course of business or to secure bank or commercial
working capital loans in the ordinary course of business.
SECTION 6.06. NO AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS.
(a) Borrower shall not, and shall not permit its Subsidiaries (if any)
to, materially amend its Articles of Incorporation or bylaws except as is
necessary to fulfill the conditions of this Agreement or to change its
domicile from the state of Wyoming to the state of Delaware or Texas.
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SECTION 6.07. LIMITATION ON INCREASED EXECUTIVE COMPENSATION AND BONUS,
PROFIT SHARING OR OTHER INCENTIVE PAYMENTS.
(a) Borrower will not increase the salary, bonus, or other compensation
programs (whether in cash, securities, or other property, and whether payment
is deferred or current) of its top five executive officers unless such
compensation increase is approved by a majority of the Board or a
Compensation Committee of the Board of Directors, a majority of whom shall
non-employee Directors.
SECTION 6.08. RESTRICTED PAYMENTS.
(a) So long as any Debentures are outstanding, Borrower shall not (i)
declare or pay any dividend on any Common Stock or Preferred Stock that
exceeds five percent (5%) of Net Operating Income as defined by GAAP for the
most recent 12 month period, or (ii) purchase, redeem, decrease, or otherwise
acquire any shares of Common Stock, or any Preferred Stock.
ARTICLE VII - EVENTS OF DEFAULT
SECTION 7.01. EVENTS OF DEFAULT.
(a) An "Event of Default" shall exist if any one or more of the
following events (herein collectively called "Events of Default") shall occur
and be continuing:
(i) Borrower shall fail to pay (or shall state in writing an intention
not to pay or its inability to pay), not later than ten (10) days after the
due date, any installment of interest on or principal of, any Debenture or
any fee, expense or other payment required hereunder;
(ii) Any representation or warranty made under this Agreement, or any of
the other Loan Documents, or in any certificate or statement furnished by
Borrower to Lenders pursuant hereto or in connection herewith or with the
Loans hereunder, shall prove to be untrue or inaccurate in any material
respect as of the date on which such representation or warranty was made;
(iii) Default shall occur in the performance of any of the covenants or
agreements of Borrower or of its Subsidiaries (if any) contained herein, or
in any of the other Loan Documents, which is not remedied within fifteen (15)
days after written notice thereof to Borrower from Lenders;
(iv) Default shall occur in the payment of any Indebtedness in excess of
one hundred thousand dollars ($100,000) of the Borrower or its Subsidiaries
(if any), or default shall occur in respect of any note, loan agreement or
credit agreement relating to any such Indebtedness, and such default shall
continue for more than the period of grace, if any, specified therein or any
such indebtedness shall become due before its stated maturity by acceleration
of the maturity thereof or shall become due by its terms and shall not be
promptly paid or extended;
(v) Any of the Loan Documents shall cease to be legal, valid and binding
agreements enforceable against the Borrower in accordance with the respective
terms thereof, or shall in any way be terminated except as otherwise provided
for therein or become or be declared ineffective or inoperative, or shall in
any way whatsoever cease to give or provide the respective rights, titles,
interests, remedies, powers or privileges intended to be created thereby;
(vi) Borrower or its Subsidiaries (if any) shall (A) apply for or
consent to the appointment of a receiver, trustee, custodian, intervenor or
liquidator of itself, or of all or substantially all of such Person's assets,
(B) file a voluntary petition in bankruptcy, admit in writing that such
Person is unable to pay such Person's debts as they become due or generally
not pay such Person's debts as they become due, (C) make a general assignment
for the benefit of creditors, (D) file a petition or answer seeking
reorganization or an arrangement with creditors or to take advantage of any
bankruptcy or insolvency laws, (E) file an answer admitting the material
allegations of, or consent to, or default in answering, a
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AGREEMENT (CONTINUED)
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petition filed against such Person in any bankruptcy, reorganization or
insolvency proceeding, or (F) take corporate action for the purpose of
effecting any of the foregoing;
(vii) An involuntary petition or complaint shall be filed against
Borrower or any of its Subsidiaries (if any) seeking bankruptcy or
reorganization of such Person or the appointment of a receiver, custodian,
trustee, intervenor or liquidator of such Person, or all or substantially all
of such Person's assets, and such petition or complaint shall not have been
dismissed within sixty (60) days of the filing thereof or an order, order for
relief, judgment or decree shall be entered by any court of competent
jurisdiction or other competent authority approving a petition or complaint
seeking reorganization of Borrower or its subsidiary (if any) or appointing a
receiver, custodian, trustee, intervenor or liquidator of such Person, or of
all or substantially all of such Person's assets;
(viii) Any final judgment for the payment of money, in excess of $50,000
individually or $100,0000 in the aggregate, shall be rendered against the
Borrower and which is not covered by insurance; or
(ix) The Borrower shall fail to issue and deliver shares of Common Stock
as provided in the Debentures.
SECTION 7.02. REMEDIES UPON EVENT OF DEFAULT.
(a) If an Event of Default shall have occurred and be continuing for a
period of fifteen (15) days, then Lenders may exercise any one or more of the
following rights and remedies, and any other remedies provided in any of the
Loan Documents, as the Majority in Interest in their sole discretion may deem
necessary or appropriate:
(i) declare the unpaid Principal Amount (after application of any
payments or installments received by Lenders) of, and all interest then
accrued but unpaid on, the Debentures and any other liabilities hereunder to
be forthwith due and payable, whereupon the same shall forthwith become due
and payable without presentment, demand, protest, notice of default, notice
of acceleration or of intention to accelerate or other notice of any kind,
all of which Borrower hereby expressly waives, anything contained herein or
in the Debentures to the contrary notwithstanding;
(ii) reduce any claim to judgment; and
(iii) without notice of default or demand, pursue and enforce any of
Lenders' rights and remedies under the Loan Documents, or otherwise provided
under or pursuant to any applicable law or agreement, all of which rights may
be specifically enforced.
SECTION 7.03. PERFORMANCE BY LENDERS.
(a) Should Borrower fail to perform any covenant, duty or agreement
contained herein or in any of the other Loan Documents, Lenders may perform
or attempt to perform such covenant, duty or agreement on behalf of Borrower.
In such event, Borrower shall, at the request of Lenders, promptly pay any
amount reasonably expended by Lenders in such performance or attempted
performance to Lenders at their principal office in Dallas, Texas, together
with interest thereon, at the interest rate specified in the Debenture, from
the date of such expenditure until paid. Notwithstanding the foregoing, it
is expressly understood that Lenders assume no liability or responsibility
for the performance of any duties of Borrower hereunder or under any of the
other Loan Documents.
SECTION 7.04. PAYMENT OF EXPENSES INCURRED BY LENDERS.
(a) Upon the occurrence of a Default or an Event of Default, which
occurrence is not cured within the notice provisions, if any, provided
herein, Borrower agrees to pay and shall pay all costs and expenses
(including Lenders' attorney's fees and expenses) reasonably incurred by
Lenders or their Agent in connection with the preservation and enforcement of
Lenders' rights under this Agreement, the Debentures, or any other Loan
Document.
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ARTICLE VIII - REGISTRATION RIGHTS
SECTION 8.01. PIGGY BACK RIGHTS. PENALTY FOR FAILURE TO REGISTER.
(a) If at any time after the date hereof, the Borrower shall file a
registration statement relating to any of its securities, it will notify the
Holder in writing and, upon the Holder's request, will include the offer and
sale of Registrable Securities in such registration statement. In the event
that the Borrower fails include Registrable Securities in a piggy back
statement as required herein, the Borrower shall give notice demanding a
registration and 105 days after the notice the Borrower shall prepare and
file a registration statement with the SEC with respect to such Registrable
Securities. If the Borrower fails to file within said time period, the
Conversion Price of the Debentures issued pursuant to this Agreement shall
decrease by $0.0625 per month until a complete registration statement has
been filed.
SECTION 8.02. OBLIGATIONS OF THE BORROWER.
Whenever required to include Registrable Securities in any registration
or to effect the registration of any Registrable Securities pursuant to this
Agreement, the Borrower shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use its best lawful efforts to cause such
registration statement to become effective, and use its best efforts to keep
such registration statement effective until all such Registrable Securities
have been distributed;
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
the 1933 Act with respect to the disposition of all Registrable Securities
covered by such registration statement;
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of
the 1933 Act, and such other documents as they may reasonably request in
order to facilitate the disposition of Registrable Securities owned by them;
(d) Use its best lawful efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Borrower shall not be required in connection
therewith or as a condition thereto to qualify as a broker-dealer in any
states or jurisdictions or to do business or to file a general consent to
service of process in any such states or jurisdictions;
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with the managing
underwriter of such offering, in usual and customary form reasonably
satisfactory to the Borrower and the Holders of a majority of the Registrable
Securities to be included in such offering. Each Holder participating in
such underwriting shall also enter into and perform its obligations under
such an agreement; and
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto and
covered by such registration statement is required to be delivered under the
1933 Act, of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
SECTION 8.03. FURNISH INFORMATION.
(a) It shall be a condition precedent to the obligations of the Borrower
to take any action pursuant to this Article VIII that the selling Holders
shall furnish to the Borrower any and all information reasonably requested by
the Borrower, its officers, directors, employees, counsel, agents or
representatives, the
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AGREEMENT (CONTINUED)
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underwriter or underwriters, if any, and the SEC or any other Governmental
Authority, including but not limited to: (i) such information regarding
themselves, the Registrable Securities held by them, and the intended method
of disposition of such securities, as shall be required to effect the
registration of their Registrable Securities, and (ii) the identity of and
compensation to be paid to any proposed underwriter or broker-dealer to be
employed in connection therewith.
(b) In connection with the preparation and filing of each registration
statement registering Registrable Securities under the 1933 Act, the Borrower
shall give the Holders of Registrable Securities on whose behalf such
Registrable Securities are to be registered and their underwriters, if any,
and their respective counsel and accountants, at such Holders' sole cost and
expense (except as otherwise set forth herein), such access to copies of the
Borrower's records and documents and such opportunities to discuss the
business of the Borrower with its officers and the independent public
accountants (in the presence of the Borrower) who have certified its
financial statements as shall be reasonably necessary in the opinion of such
Holders and such underwriters or their respective counsel, to conduct a
reasonable investigation within the meaning of the 1933 Act, after written
notice to Borrower.
SECTION 8.04. EXPENSES OF REGISTRATION.
All expenses, other than underwriting discounts and commissions incurred
in connection the registrations contemplated herein, including, without
limitation, all registration, filing and qualification fees, printers' and
accounting fees, fees and disbursements of counsel for the Borrower, and the
reasonable fees and disbursements of one counsel for the selling Holders,
shall be borne by the Borrower.
SECTION 8.05. INDEMNIFICATION REGARDING REGISTRATION RIGHTS.
If any Registrable Securities are included in a registration statement
under this Article VIII:
(a) To the extent permitted by law, the Borrower will indemnify and
hold harmless each Holder, the officers and directors of each Holder, any
underwriter (as defined in the 1933 Act) for such Holder and each person, if
any, who controls such Holder or underwriter within the meaning of the 1933
Act or the 1934 Act, against any losses, claims, damages, liabilities (joint
or several) or any legal or other costs and expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
damage, liability or action to which they may become subject under the 1933
Act, the 1934 Act or other federal or state law, insofar as such losses,
claims, damages, costs, expenses or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue
statement or alleged untrue statement of a material fact with respect to the
Borrower or its securities contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements therein; (ii) the omission or alleged omission
to state therein a material fact with respect to the Borrower or its
securities required to be stated therein or necessary to make the statements
therein not misleading; or (iii) any violation or alleged violation by the
Borrower of the 1933 Act, the 1934 Act, any federal or state securities law
or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any
state securities law. Notwithstanding the foregoing, the indemnity agreement
contained in this Section 8.05(a) shall not apply and the Borrower shall not
be liable (i) in any such case for any such loss, claim, damage, costs,
expenses, liability or action to the extent that it arises out of or is based
upon a Violation which occurs in (a) reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person or (b) as
a result of the gross negligence, willful misconduct or breach of any
warranty, covenant or agreement of such Holder contained herein, or (ii) for
amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the prior written consent of
the Borrower, which consent shall not be unreasonably withheld.
(b) To the extent permitted by law, each Holder who participates in a
registration pursuant to the terms and conditions of this Agreement shall
indemnify and hold harmless the Borrower, each of its
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AGREEMENT (CONTINUED)
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directors and officers who have signed the registration statement, each
Person, if any, who controls the Borrower within the meaning of the 1933 Act
or the 1934 Act, each of the Borrower's employees, agents, counsel and
representatives, any underwriter and any other Holder selling securities in
such registration statement, or any of its directors or officers, or any
person who controls such Holder, against any losses, claims, damages, costs,
expenses, liabilities (joint or several) to which the Borrower or any such
director, officer, controlling person, employee, agent, representative,
underwriter, or other such Holder, or director, officer or controlling person
thereof, may become subject, under the 1933 Act, the 1934 Act or other
federal or state law, only insofar as such losses, claims, damages, costs,
expenses or liabilities or actions in respect thereto arise out of or are
based upon any Violation, in each case to the extent and only to the extent
that such Violation occurs (i) in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such or (ii) as a result of the gross negligence, willful misconduct or
breach of any warranty, covenant or agreement of such Holder contained
herein. Each such Holder will indemnify any legal or other expenses
reasonably incurred by the Borrower or any such director, officer, employee,
agent representative, controlling person, underwriter or other Holder, or
officer, director or of any controlling person thereof, in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section
8.05(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, costs, expenses, liability or action if such settlement is
effected without the prior written consent of the Holder, which consent shall
not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this Section
8.05 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 8.05, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
shall have the right to retain its own counsel, with the reasonable fees and
expenses of such counsel to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflict
of interests between such indemnified party and any other party represented
by such counsel in such proceeding. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of any
such action shall not relieve the indemnifying party of its obligations under
this Section 8.05, except to the extent that the failure results in a failure
of actual notice to the indemnifying party and such indemnifying party is
materially prejudiced in its ability to defend such action solely as a result
of the failure to give such notice.
(d) If the indemnification provided for in this Section 8.05 is
unavailable to an indemnified party under this Section in respect of any
losses, claims, damages, costs, expenses, liabilities or actions referred to
herein, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, costs,
expenses, liabilities or actions in such proportion as is appropriate to
reflect the relative fault of the Borrower, on the one hand and of the
Holder, on the other, in connection with the Violation that resulted in such
losses, claims, damages, costs, expenses, liabilities or actions. The
relative fault of the Borrower, on the one hand, and of the Holder, on the
other, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of the material fact or the omission to
state a material fact relates to information supplied by the Borrower or by
the Holder, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(e) The Borrower, on the one hand, and the Holders, on the other hand,
agree that it would not be just and equitable if contribution pursuant to
this Section 8.05 were determined by a pro rata allocation or by any other
method of allocation which does not take account of the equitable
considerations referred to
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AGREEMENT (CONTINUED)
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in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of losses, claims, damages, costs, expenses,
liabilities and actions referred to in the immediately preceding paragraph
shall be deemed to include, subject to the limitations set forth above, any
reasonable legal or other expenses incurred by such indemnified party in
connection with defending any such action or claim. Notwithstanding the
provisions of this Section 8.05, neither the Borrower nor the Holders shall
be required to contribute any amount in excess of the amount by which the
total price at which the securities were offered to the public exceeds the
amount of any damages which the Borrower or each such Holder has otherwise
been required to pay by reason of such Violation. No person guilty of
fraudulent misrepresentations (within the meaning of Section 11(f) of the
1933 Act) shall be entitled to contribution from any person who is not guilty
of such fraudulent misrepresentation.
SECTION 8.06. ASSIGNMENT OF REGISTRATION RIGHTS.
(a) Subject to the terms and conditions of this Agreement and the
Debentures, the right to cause the Borrower to register Registrable
Securities pursuant to this Agreement may be assigned by Holder to any
transferee or assignee of such securities; provided that said transferee or
assignee is a transferee or assignee of at least five percent (5%) of the
Registrable Securities and provided that the Borrower is, within a reasonable
time after such transfer, furnished with written notice of the name and
address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned; and provided, further,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the 1933 Act; it being the intention that so
long as Holder holds any Registrable Securities hereunder, either Holder or
its transferee or assignee of at least five percent may exercise the demand
right to registration and piggy-back registration rights hereunder. Other
than as set forth above, the parties hereto hereby agree that the
registration rights hereunder shall not be transferable or assigned and any
contemplated transfer or assignment in contravention of this Agreement shall
be deemed null and void and of no effect whatsoever.
SECTION 8.07. OTHER MATTERS.
(a) Each Holder of Registrable Securities hereby agrees by acquisition
of such Registrable Securities that, with respect to each offering of the
Registrable Securities, whether each Holder is offering such Registrable
Securities in an underwritten or non-underwritten offering, such Holder will
comply with Rules 10b-2, 10b-6 and 10b-7 of the 1934 Act and such other or
additional anti-manipulation rules then in effect until such offering has
been completed, and in respect of any non-underwritten offering, in writing
will inform the Borrower, any other Holders who are selling shareholders, and
any national securities exchange upon which the securities of the Borrower
are listed, that the Registrable Securities have been sold and will, upon the
Borrower's request, furnish the distribution list of the Registrable
Securities. In addition, upon the request of the Borrower, each Holder will
supply the Borrower with such documents and information as the Borrower may
reasonably request with respect to the subject matter set forth and described
in this Section 8.07.
(b) Each Holder of Registrable Securities hereby agrees by acquisition
of such Registrable Securities that, upon receipt of any notice from the
Borrower of the happening of any event which makes any statement made in the
registration statement, the prospectus or any document incorporated therein
by reference, untrue in any material respect or which requires the making of
any changes in the registration statement, the prospectus or any document
incorporated therein by reference, in order to make the statements therein
not misleading in any material respect, such Holder will forthwith
discontinue disposition of Registrable Securities under the prospectus
related to the applicable registration statement until such Holder's receipt
of the copies of the supplemented or amended prospectus, or until it is
advised in writing by the Borrower that the use of the prospectus may be
resumed, and has received copies of any additional or supplemental filings
which are incorporated by reference in the prospectus.
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AGREEMENT (CONTINUED)
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ARTICLE IX - AGENCY AND INTER-LENDER PROVISIONS
SECTION 9.01. LENDERS REPRESENTATIONS AND WARRANTIES TO OTHER LENDERS
Each Lender represents and warrants to the other Lenders and the Agent:
(a) It is legal for it to make its portion of the Loan, and the making
of such portion of the Loan complies with laws applicable to it.
(b) It has made, without reliance upon any other Lender, its own
independent review (including any desired investigations and inspections) of,
and it accepts and approves, the Loan, this Agreement and the associated
documents and all other matters and information which it deems pertinent. It
acknowledges that the Loan Documents are a complete statement of all
understandings and respective rights and obligations between and among
Lenders and Borrower regarding the Loan.
(c) No Lender has made any express or implied representation or warranty
to any other Lender with respect to this transaction.
(d) It will, independently and without reliance upon any other Lender,
and based upon such documents and information as it shall deem appropriate at
the time, continue to make its own credit analysis, appraisals and decisions
in taking or not taking action under this Agreement, and will make such
investigation as it deems necessary to inform itself as to the Loan, the Loan
Document, the Borrower and any Collateral; provided, however, nothing
contained in this Section shall limit Agent's obligation to provide the other
Lenders with the information and documents Agent is expressly required to
deliver under this Agreement.
(e) The relationship of Lenders are, and shall at all times remain,
solely that of a lender of its respective Loan portion. Lenders are not
partners or joint venturers in connection with the Loan.
SECTION 9.02. WAIVER OF LOAN PROVISIONS OR INTEREST OR PRINCIPAL PAYMENTS
(a) So long as no Lender has sold or assigned any of the debentures
issued to such Lender pursuant to this Agreement, unanimous consent of the
Lenders will be required for the waiver of principal or interest payment and
any alterations thereto.
(b) If any Lender disposes of any part of their Debentures, a waiver of
an interest or principal payment and any alterations thereto will require the
consent of the Majority in Interest.
(c) All other modifications, consents, amendments or waivers of any
provision of this Agreement, the Debentures or other Loan Documents shall
require the consent of the Majority in Interest.
SECTION 9.03. AGENCY
(a) Each Lender hereby designates and appoints Founders Equity Group,
Inc. ("Agent") as its agent under this Agreement and authorizes the Agent to
take such action on its behalf under the provisions of this Agreement and the
other Loan Documents and to exercise such powers as are set forth herein or
therein, together with such other powers as are reasonable incidental
thereto. In performing its functions and duties under this Agreement, the
Agent shall act solely as agent of the Lenders and does not assume and shall
not be deemed to have assumed any obligation toward or relationship of agency
or trust with or for the Borrower. The Agent may perform any of its duties
under this Agreement, or under the other Loan Documents, by or through its
agents or employees.
(b) The Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement or in the other Loan Documents. Except
as expressly provided herein, the duties of the Agent shall be mechanical and
administrative in nature. The Agent shall have and may use its sole
discretion with respect to exercising or refraining from taking any actions
which the Agent is expressly entitled to take or assert under this Agreement
and the other Loan Documents. The Agent shall not have by reason of this
Agreement a fiduciary relationship with respect to any Lender. Nothing in
this Agreement or any of the other Loan Documents, express or implied, is
intended to or shall be construed to impose upon the
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AGREEMENT (CONTINUED)
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Agent any obligations in respect of this Agreement or any of the other Loan
Documents except as expressly set forth herein or therein. If the Agent
seeks the consent or approval of the Majority in Interest to the taking or
refraining from taking any action hereunder, the Agent shall send notice
thereof to each Lender. The Agent shall promptly notify each Lender any time
that the Majority in Interest have instructed the Agent to act or refrain
from acting pursuant hereto. The Agent may employ agents, co-agents and
attorneys-in-fact and shall not be responsible to the Lenders or the
Borrower, except as to money or securities received by it or its authorized
agents, for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care.
(c) Neither the Agent nor any of its officers, directors, employees or
agents shall be liable to any Lender for any action taken or omitted by it or
any of them under this Agreement or under any of the other Loan Documents, or
in connection herewith or therewith, except that no Person shall be relieved
of any liability imposed by law, intentional tort or gross negligence. The
Agent shall not be not be responsible to any Lender for any recitals,
statements, representations or warranties contained in this Agreement or for
the execution, effectiveness, genuiness, validity, enforceability,
collectibility, or sufficiency of this Agreement or any of the other Loan
Documents or any of the transactions contemplated thereby, or for the
financial condition of the Borrower. The Agent shall not be required to make
any inquiry concerning either the performance or observance of any of the
terms, provisions or conditions of this Agreement or any of the other Loan
Documents or the financial condition of the Borrower, or the existence or
possible existence of any Default or Event of Default. Agent shall give
Lender notice of any Default or Event of Default of which Agent has actual
notice. The Agent may at any time request instructions from the Lenders with
respect to any actions or approvals which by the terms of this Agreement or
of any of the other Loan Documents the Agent is permitted or required to take
or to grant, and if such instructions are promptly requested, the Agent shall
be absolutely entitled to refrain from taking any action or to withhold any
approval and shall not be under any liability whatsoever to any Person for
refraining from any action or withholding any approval under any of the Loan
Documents until it shall have received such instructions from the Majority in
Interest. Without limiting the foregoing, no Lender shall have any right of
action whatsoever against the Agent as a result of the Agent acting or
refraining from acting under this Agreement or any of the other Loan
Documents in accordance with the instructions of the Majority in Interest.
(d) The Agent shall be entitled to rely upon any written notices,
statements, certificates, orders or other documents or any telephone message
believed by it in good faith to be genuine and correct and to have been
signed, sent or made by the proper Person, and with respect to all matters
pertaining to this Agreement or any of the other Loan Documents and its
duties hereunder or thereunder, upon advice of counsel selected by it.
(e) To the extent that the Agent is not reimbursed and indemnified by
the Borrower, the Lenders will reimburse and indemnify the Agent for and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs (including all professional fees), expenses,
advances or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by or asserted against the Agent in any way relating to
or arising out of this Agreement or any of the other Loan Documents or any
action taken or omitted by the Agent under this Agreement or any of the other
Loan Documents, in proportion to each Lenders' pro rata share of the Loan.
The obligations of the Lenders under this indemnification provision shall
survive the payment in full of the Loans and the termination of this
Agreement.
(f)(i) The Agent is hereby authorized by the Borrower and the Lenders,
from time to time, before or after the occurrence of an Event of Default, to
make such disbursements and advances ("Agent Advances") pursuant to this
Agreement and the other Loan Documents which the Agent, in its sole
discretion, deems necessary or desirable to preserve or protect the
Collateral, or any portion thereof, in order to enhance the likelihood of, or
maximize the amount of, repayment by the Borrower, or any
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24
<PAGE>
AGREEMENT (CONTINUED)
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guarantor or other Person, of the Loans and other Obligation or to pay any
other amount chargeable to the Borrower pursuant to the terms of this
Agreement, including, without limitation, costs, fees and expenses. The
Agent Advances shall be repayable on demand and be secured by the Collateral.
(ii) If and so long as the Loan is secured or the Lenders are a
beneficiary of any security agreement or pledge, the Lenders hereby
irrevocably authorize the Agent, at its option and in its discretion, to
release any Lien granted to or held by the Agent for the benefit of Lenders
upon any Collateral (A) upon termination of the commitments and payments and
satisfaction of all Loans, (whether or not due) and all other Obligations
which have matured and which the Agent has been notified in writing are then
due and payable, (B) constituting property being sold or disposed in
compliance with this Agreement (and the Agent may rely conclusively on any
such certificate, without further inquiry); (C) constituting property in
which the Borrower did not own any interest at the time the Lien was granted
or at any time thereafter; (D) constituting property leased to the Borrower
under a lease which has expired or been terminated in a transaction permitted
under this Agreement or which will expire imminently and which has not been,
and is not intended by such Borrower to be, renewed or extended; or (E) if
approved, authorized or ratified in writing by the Majority in Interest.
Upon request by the Agent or the Borrower at any time, the Lenders will
confirm in writing the Agent's authority to release any Lien granted to or
held by the Agent, for the benefit of the secured creditors, upon particular
types or items of Collateral pursuant to this section.
(iii) So long as no Event of Default has occurred and is then
continuing, upon receipt by the Agent of confirmation from the Majority in
Interest of its authority to release any Lien granted to or held by the
Agent, for the benefit of the Lenders, upon particular types or items of
Collateral, and upon at least five (5) business days prior written request by
the Borrower, the Agent shall (and is hereby irrevocable authorized by the
Lenders to) execute such documents as may be necessary to evidence the
release of the Liens granted to the Agent, for the benefit of the Lenders,
herein or pursuant hereto upon such Collateral; PROVIDED, HOWEVER, that the
Agent (i) shall not be required to execute any such document on terms which,
in the Agent's opinion, would expose the Agent to liability or create any
obligation or entail any consequence other than the release and (ii) shall
not in any manner discharge, affect or impair the Obligations or any Liens
(other than those expressly being released) upon (or obligations of the
Borrower in respect of) all interests retained by Borrower, including
(without limitation) the proceeds of any sale, all of which shall continue to
constitute part of the Collateral.
(iv) The Agent shall have no obligation whatsoever to any Lender to
assure that the Collateral exists or is owned by Borrower or is cared for,
protected or insured or has been encumbered or that the Liens granted to the
Agent, for the benefit of the Lenders, herein or pursuant hereto have been
properly or sufficiently or lawfully created, perfected, protected or
enforced or are entitled to any particular priority, or to exercise at all or
in any particular manner or under any duty or care, disclosure or fidelity,
or to continue exercising, any of the rights, authorities and powers granted
or available to the pursuant to this section or pursuant to any of the Loan
Documents, it being understood and agreed that in respect of the Collateral,
or any act, omission or event related thereto, the Agent may act in any
manner it may deem appropriate, in its sole discretion, given the Agent's own
interest in the Collateral in its capacity as one of the Lenders and that the
Agent shall have no duty or liability whatsoever to any Lender as to any of
the foregoing.
SECTION 9.04. RESIGNATION; REMOVAL; SUCCESSOR AGENT
(a) Agent may resign at any time upon written notice to all of the
Lenders. In addition, if Agent fails, for a period of twenty (20) days after
written notice from any Lender of such failure, substantially to comply with
or perform any obligation imposed upon it by this Agreement or any of the
Loan Documents, then Agent may be removed by the vote of the Majority in
Interest and the Majority in Interest shall have the right to appoint a
successor Agent. If no successor Agent shall have been so appointed, and
shall have accepted such appointment, within thirty (30) days after such
resigning Agent's
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25
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AGREEMENT (CONTINUED)
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notice of resignation or such removal of the Agent, then the retiring Agent
may, on behalf of the Lenders, appoint a successor Agent. Any successor
Agent shall be one of the other Lenders or any commercial bank organized
under the laws of the United States or of any State thereof and having a
combined capital and surplus of at least $50,000,000 and such successor Agent
shall serve at no cost to Borrower. Any such commercial bank appointed
pursuant to this Section may condition its acceptance of such appointment on
the execution of such additional instruments, documents and agreements by
each of the parties hereto and by Borrower as such successor Agent may in its
sole discretion require. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed
to and become vested with all the rights, powers, privileges and duties of
the retiring Agent, and the retiring Agent shall be discharged from its
duties and obligations as Agent under this Agreement, but shall retain all
its rights, powers, privileges and duties as a Lender. After any retiring
Agent's resignation or removal hereunder as Agent, all provisions of this
Agreement applicable to "Agent" shall continue to inure to its benefit as to
any actions taken or omitted to be taken by it while it was Agent under this
Agreement.
SECTION 9.05. NOTICE, RECOMMENDATIONS
(a) Upon the happening of any Event of Default by Borrower coming to the
actual knowledge of Agent, Agent shall within ten (10) days after obtaining
such knowledge give notice of such default to Lenders, and Lenders shall
consult and confer with Agent within five (5) Business Days after such notice
regarding actions to be taken. Agent shall also promptly advise Lenders of
any other matter coming to the actual knowledge of Agent which, in Agent's
reasonable judgment, has a Materially Adverse Effect upon the interests of
the Lenders.
(b) Agent may, but shall have no duty to, recommend to Lenders the
taking of action within any provisions of this Agreement or any other Loan
Document which require or permit the concurrence of a Majority in Interest or
all Lenders in such actions. If any such recommendation is made in writing,
and if any Lender fails to advise Agent whether it concurs in or objects to
such action within ten (10) Business Days after the effective date of such
recommendation, such Lender shall be deemed to have concurred therein and
authorized Agent to proceed in accordance therewith, but Agent shall have no
duty to so proceed in the absence of the express concurrence of a Majority in
Interest or all Lenders, as applicable.
SECTION 9.06. RECEIPT OF PAYMENTS
Lenders shall only be allowed to accept or receive payments pursuant to the
terms of their Debentures. Should any Lender receive payment or
distributions from Borrower in excess of their scheduled payments, the Lender
shall hold the same in trust, as trustee, for the benefit of the other
Lenders and shall forthwith deliver the same to the Lenders for application
on the Debentures.
ARTICLE X - MISCELLANEOUS
SECTION 10.01. STRICT COMPLIANCE.
(a) Any waiver by Lenders of any breach or any term or condition of this
Agreement or the other Loan Documents shall not be deemed a waiver of any
other breach, nor shall any failure to enforce any provision of this
Agreement or the other Loan Documents operate as a waiver of such provision
or of any other provision, nor constitute nor be deemed a waiver or release
of the Borrower for anything arising out of, connected with or based upon
this Agreement or the other Loan Documents.
SECTION 10.02. WAIVERS AND MODIFICATIONS.
(a) All modifications, consents, amendments or waivers (herein
"Waivers") of any provision of this Agreement, the Debentures or any other
Loan Documents, and any consent to departure therefrom, shall be effective
only if the same shall be in writing by the Majority in Interest and then
shall be effective only in the specific instance and for the purpose for
which given. No notice or demand given in any case shall
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AGREEMENT (CONTINUED)
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constitute a waiver of the right to take other action in the same, similar or
other instances without such notice or demand. No failure to exercise, and
no delay in exercising, on the part of Lenders, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right. The rights of Lenders hereunder and under the other Loan Documents
shall be in addition to all other rights provided by law.
SECTION 10.03. NOTICES.
(a) Any notices or other communications required or permitted to be
given by this Agreement or any other documents and instruments referred to
herein must be (i) given in writing and personally delivered, mailed by
prepaid certified, registered mail or sent by overnight service such as
Federal Express, or (ii) made by telex or facsimile transmission delivered or
transmitted to the party to whom such notice or communication is directed,
with confirmation thereupon given in writing and personally delivered or
mailed by prepaid certified or registered mail.
(b) Any notice to be mailed, sent or personally delivered shall be
mailed or delivered to the principal offices of the party to whom such notice
is addressed, as that address is specified herein on the signature page
hereof. Any such notice or other communication shall be deemed to have been
given (whether actually received or not) on the day it is mailed, postage
prepaid, or sent by overnight service or personally delivered or, if
transmitted by telex or facsimile transmission, on the day that such notice
is transmitted; provided, however, that any notice by telex or facsimile
transmission, received by Borrower or Lenders after 4:00 p.m., Standard Time
at the recipient's address, on any day, shall be deemed to have been given on
the next succeeding day. Any party may change its address for purposes of
this Agreement by giving notice of such change to the other parties pursuant
to this Section 10.03.
SECTION 10.04. CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION.
(a) Any suit, action or proceeding against the Borrower with respect to
this Agreement, the Debentures or any judgment entered by any court in
respect thereof, may be brought in the courts of the State of Texas, County
of Dallas, or in the United States courts located in the State of Texas as
Lenders in their sole discretion may elect, and Borrower hereby submits to
the non-exclusive jurisdiction of such courts for the purpose of any such
suit, action or proceeding. Borrower hereby irrevocably waives any
objections which it may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement or
any Debenture brought in the courts located in the State of Texas, County of
Dallas, and hereby further irrevocably waives any claim that any such suit,
action or proceeding brought in any such court has been brought in any
inconvenient forum.
SECTION 10.05. ARBITRATION
(a) Upon the demand of the Lenders or Borrower (collectively the
"parties"), made before the institution of any judicial proceeding or not
more than 60 days after service of a complaint, third party complaint,
cross-claim or counterclaim or any answer thereto or any amendment to any of
the above, any Dispute (as defined below) shall be resolved by binding
arbitration in accordance with the terms of this arbitration clause. A
"Dispute" shall include any action, dispute, claim, or controversy of any
kind, whether founded in contract, tort, statutory or common law, equity, or
otherwise, now existing or hereafter occurring between the parties arising
out of, pertaining to or in connection with this Agreement, any document
evidencing, creating, governing, or securing any indebtedness guaranteed
pursuant to the terms hereof, or any related agreements, documents, or
instruments (the "Documents"). The parties understand that by this Agreement
they have decided that the Disputes may be submitted to arbitration rather
that being decided through litigation in court before a judge or jury and
that once decided by an arbitrator the claims involved cannot later be
brought, filed, or pursued in court. IF BORROWER SHALL FAIL TO PAY (OR SHALL
STATE IN WRITING AN INTENTION NOT TO PAY OR ITS INABILITY TO PAY), NOT LATER
THAN TEN (10) DAYS AFTER THE DUE DATE, ANY INSTALLMENT OF INTEREST ON OR
PRINCIPAL OF, ANY DEBENTURE OR ANY FEE,
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27
<PAGE>
AGREEMENT (CONTINUED)
- -------------------------------------------------------------------------------
EXPENSE OR OTHER PAYMENT REQUIRED HEREUNDER, LENDERS MAY, AT THEIR SOLE
OPTION, ENFORCE THEIR RIGHTS OUTSIDE THE ARBITRATION PROVISION FOUND IN THIS
SECTION 10.05 OR ANY DEBENTURE.
(b) Arbitrations conducted pursuant to this Agreement, including
selection of arbitrators, shall be administered by the American Arbitration
Association ("Administrator") pursuant to the Commercial Arbitration rules of
the Administrator. Arbitrations conducted pursuant to the terms hereof shall
be governed by the provisions of the Federal Arbitration Act (Title 9 of the
United States Code), and to the extent the foregoing are inapplicable,
unenforceable or invalid, the laws of the State of Texas. Judgment upon any
award rendered hereunder may be entered in any court having jurisdiction;
provided, however, that nothing contained herein shall be deemed to be a
waiver by any party that is a bank of the protections afforded to it under 12
U.S.C. 91 or similar governing state law. Any party who fails to submit to
binding arbitration following a lawful demand by the opposing party shall
bear all costs and expenses, including reasonable attorney's fees, incurred
by the opposing party in compelling arbitration of any Dispute.
(c) No provision of, nor the exercise of any rights under, this
arbitration clause shall limit the right of any party to (i) foreclose
against any real or personal property Collateral or other security, (ii)
exercise self-help remedies (including repossession and setoff rights) or
(iii) obtain provisional or ancillary remedies such as injunctive relief,
sequestration, attachment, replevin, garnishment, or the appointment of a
receiver from a court having jurisdiction. Such rights can be exercised at
any time except to the extent such action is contrary to a final award or
decision in any arbitration proceeding. The institution and maintenance of
an action as described above shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the Dispute to arbitration, nor
render inapplicable the compulsory arbitration provisions hereof. Any claim
or Dispute related to exercise of any self-help, auxiliary or other exercise
of rights under this section shall be a Dispute hereunder.
(d) Arbitrator(s) shall resolve all Disputes in accordance with the
applicable substantive law of the State of Texas. Arbitrator(s) may make an
award of attorneys' fees and expenses if permitted by law or the agreement of
the parties. All statutes of limitation applicable to any Dispute shall
apply to any proceeding in accordance with this arbitration clause. Any
arbitrator selected to act as the only arbitrator in a Dispute shall be
required to be a practicing attorney with not less than 5 years practice in
commercial law in the State of Texas. With respect to a Dispute in which the
claims or amounts in controversy do not exceed five hundred thousand dollars
($500,000), a single arbitrator shall be chosen and shall resolve the
Dispute. In such case the arbitrator shall have authority to render an award
up to but not to exceed five hundred thousand dollars ($500,000) including
all damages of any kind whatsoever, costs, fees and expenses. Submission to
a single arbitrator shall be a waiver of all parties' claims to recover more
than five hundred thousand dollars ($500,000). A Dispute involving claims or
amounts in controversy exceeding five hundred thousand dollars ($500,000)
shall be decided by a majority vote of a panel of three arbitrators
("Arbitration Panel"), one of whom must possess the qualifications to sit as
a single arbitrator in a Dispute decided by one arbitrator. If the
arbitration is consolidated with one conducted pursuant to the terms of an
agreement between the Lenders and the Borrower related to the indebtedness
guaranteed, then the Arbitration Panel shall be one which meets the criteria
set forth between the Lenders and Borrower. Arbitrator(s) may, in the
exercise of their discretion, at the written request of a party, (i)
consolidate in a single proceeding any multiple party claims that are
substantially identical and all claims arising out of a single loan or series
of loans including claims by or against borrower(s), guarantors, sureties
and/or owners of Collateral if different from the Borrower, and (ii)
administer multiple arbitration claims as class actions in accordance with
Rule 23 of the Federal Rules of Civil Procedure. The arbitrator(s) shall be
empowered to resolve any dispute regarding the terms of this Agreement or the
arbitrability of any Dispute or any claim that all or any part (including
this provision) is void or voidable but shall have no power to change or
alter the terms of this Agreement. The award of the arbitrator(s) shall be
in writing and shall specify the factual and legal basis for the award.
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28
<PAGE>
AGREEMENT (CONTINUED)
- -------------------------------------------------------------------------------
(e) To the maximum extent practicable, the Administrator, the
arbitrator(s) and the parties shall take any action necessary to require that
an arbitration proceeding hereunder be concluded within 180 days of the
filing of the Dispute with the Administrator. The arbitrator(s) shall be
empowered to impose sanctions for any party's failure to proceed within the
times established herein. Arbitration proceedings hereunder shall be
conducted in Texas at a location determined by the Administrator. In any
such proceeding a party shall state as a counterclaim any claim which arises
out of the transaction or occurrence or is in any way related to the
Documents which does not require the presence of a third party which could
not be joined as a party in the proceeding, The provisions of this
arbitration clause shall survive any termination, amendment, or expiration of
the Documents and repayment in full of sums owed to Lenders by Borrower
unless the parties otherwise expressly agree in writing. Each party agrees
to keep all Disputes and arbitration proceedings strictly confidential,
except for disclosures of information required in the ordinary course of
business of the parties or as required by applicable law or regulation.
SECTION 10.06. INVALID PROVISIONS.
(a) If any provision of any Loan Document is held to be illegal, invalid
or unenforceable under present or future laws during the term of this
Agreement, such provision shall be fully severable; such Loan Document shall
be construed and enforced as if such illegal, invalid or unenforceable
provision had never comprised a part of such Loan Document; and the remaining
provisions of such Loan Document shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or
by its severance from such Loan Document. Furthermore, in lieu of each such
illegal, invalid or unenforceable provision shall be added as part of such
Loan Document a provision mutually agreeable to Borrower and Lenders as
similar in terms to such illegal, invalid or unenforceable provision as may
be possible and be legal, valid and enforceable. In the event Borrower and
Lenders are unable to agree upon a provision to be added to the Loan Document
within a period of ten (10) business days after a provision of the Loan
Document is held to be illegal, invalid or unenforceable, then a provision
acceptable to independent arbitrators, such to be selected in accordance with
the provisions of the American Arbitration Association, as similar in terms
to the illegal, invalid or unenforceable provision as is possible and be
legal, valid and enforceable shall be added automatically to such Loan
Document. In either case, the effective date of the added provision shall be
the date upon which the prior provision was held to be illegal, invalid or
unenforceable.
SECTION 10.07. MAXIMUM INTEREST RATE.
(a) Regardless of any provision contained in any of the Loan Documents,
Lenders shall never be entitled to receive, collect or apply as interest on
the Debentures any amount in excess of interest calculated at the Maximum
Rate, and, in the event that any Lenders ever receives, collects or applies
as interest any such excess, the amount which would be excessive interest
shall be deemed to be a partial prepayment of principal and treated hereunder
as such; and, if the principal amount of the Obligation is paid in full, any
remaining excess shall forthwith be paid to Borrower. In determining whether
or not the interest paid or payable under any specific contingency exceeds
interest calculated at the Maximum Rate, Borrower and Lenders shall, to the
maximum extent permitted under applicable law, (i) characterize any
non-principal payment as an expense, fee or premium rather than as interest;
(ii) exclude voluntary prepayments and the effects thereof, and (iii)
amortize, pro rate, allocate and spread, in equal parts, the total amount of
interest throughout the entire contemplated term of the Debentures; provided
that, if the Debentures are paid and performed in full prior to the end of
the full contemplated term thereof, and if the interest received for the
actual period of existence thereof exceeds interest calculated at the Maximum
Rate, Lenders shall refund to Borrower the amount of such excess or credit
the amount of such excess against the principal amount of the Debentures and,
in such event, Lenders shall not be subject to any penalties provided by any
laws for contracting for, charging, taking, reserving or receiving interest
in excess of interest calculated at the Maximum Rate.
- -------------------------------------------------------------------------------
29
<PAGE>
AGREEMENT (CONTINUED)
- -------------------------------------------------------------------------------
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate
of interest (if any) permitted by applicable law on such day that at any
time, or from time to time, may be contracted for, taken, reserved, charged
or received on the Indebtedness evidenced by the Debentures under the laws
which are presently in effect of the United States of America and the State
of Texas or by the laws of any other jurisdiction which are or may be
applicable to the holders of the Debentures and such Indebtedness or, to the
extent permitted by law, under such applicable laws of the United States of
America and the State of Texas or by the laws of any other jurisdiction which
are or may be applicable to the holder of the Debentures and which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow.
SECTION 10.08. PARTICIPATIONS AND ASSIGNMENTS OF THE DEBENTURES.
(a) The Lenders shall have the right to enter into a participation
agreement with any other party with respect to the Debentures, or to sell all
or any part of the Debentures, but any participation or sale shall not affect
the rights and duties of such Lenders hereunder vis-a-vis Borrower. In the
event that all or any portion of the Loan shall be, at any time, assigned,
transferred or conveyed to other parties, any action, consent or waiver
(except for compromise or extension of maturity), to be given or taken by
Lenders hereunder (herein "Action"), shall be such action as taken by
Majority in Interest.
(b) Assignment or sale of the Debentures shall be effective, on the
books of the Borrower only upon (i) endorsement of the Debenture, or part
thereof, to the proposed new holder, along with a current notation of the
amount of payments or installments received and net Principal Amount yet
unfunded or unpaid, and presentment of such Debenture to the Borrower for
issue of a replacement Debenture, or Debentures, in the name of the new
holder; (ii) a designation by the holders of a single Lenders' Agent for
Notice, such agent to be the sole party to whom Borrower shall be required to
provide notice when notice to Lenders are required hereunder and who shall be
the sole party authorized to represent Lenders in regard to modification or
waivers under the Debenture, this Agreement, or other Loan Documents; and
(iii) delivery of an opinion of counsel, reasonably satisfactory to Borrower,
that transfer shall not require registration or qualification under
applicable state or federal securities laws.
(c) So long as the Borrower is not in default hereunder, the Lenders
shall not sell or assign an interest in the Debentures or rights under this
Agreement to any Person that the Borrower reasonably identifies to Lenders as
being engaged as a competitor.
SECTION 10.09 CONFIDENTIALITY.
(a) All financial reports or information which are furnished to Lenders,
or THEIR director designee or other representatives, pursuant to this
Agreement or pursuant to the Debentures or other Loan Documents shall be
treated as confidential unless and to the extent that such information has
been otherwise disclosed by the Borrower, but nothing herein contained shall
limit or impair Lenders' right to disclose such reports to any appropriate
Governmental Authority, or to use such information to the extent pertinent to
an evaluation of the Obligation, or to enforce compliance with the terms and
conditions of this Agreement, or to take any lawful action which Lenders deem
necessary to protect THEIR interests under this Agreement.
(b) Lenders, THEIR director designees, and agents shall use their
reasonable best efforts to protect and preserve the confidentiality of such
information except for such disclosure as shall be required for compliance by
Lenders or THEIR director designees with SEC reporting requirements or
otherwise as a matter of law.
SECTION 10.10. BINDING EFFECT.
(a) The Loan Documents shall be binding upon and inure to the benefit of
Borrower and Lenders and their respective successors, assigns and legal
representatives; provided, however, that Borrower may not, without the prior
written consent of Lenders, assign any rights, powers, duties or obligations
thereunder.
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30
<PAGE>
AGREEMENT (CONTINUED)
- -------------------------------------------------------------------------------
SECTION 10.11. NO THIRD PARTY BENEFICIARY.
(a) The parties do not intend the benefits of this Agreement to inure to
any third party other than persons entitled to indemnification pursuant to
Article VIII, nor shall this Agreement be construed to make or render Lenders
liable to any materialman, supplier, contractor, subcontractor, purchaser or
lessee of any property owned by Borrower, or for debts or claims accruing to
any such persons against Borrower. Notwithstanding anything contained herein
or in the Debentures, or in any other Loan Document, no conduct by any or all
of the parties hereto, before or after signing this Agreement nor any other
Loan Document, shall be construed as creating any right, claim or cause of
action against Lenders, or any of their officers, directors, agents or
employees, in favor of any materialman, supplier, contractor, subcontractor,
purchaser or lessee of any property owned by Borrower, nor to any other
person or entity other than Borrower.
SECTION 10.12. ENTIRETY.
(a) This Agreement and the Debentures and the other Loan Documents
issued pursuant thereto contain the entire agreement between the parties and
supersede all prior agreements and understandings, if any, relating to the
subject matter hereof and thereof.
SECTION 10.13. HEADINGS.
(a) Section headings are for convenience of reference only and, except
as a means of identification of reference, shall in no way affect the
interpretation of this Agreement.
SECTION 10.14. SURVIVAL.
(a) All representations and warranties made by Borrower herein shall
survive delivery of the Debentures and the making of the Loans.
SECTION 10.15. MULTIPLE COUNTERPARTS.
(a) This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same agreement, and any of
the parties hereto may execute this Agreement by signing any such
counterpart.
SECTION 10.16. GOVERNING LAW.
(a) THIS LOAN AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND
DELIVERED, AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE
SUBSTANTIVE LAWS OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED
STATES OF AMERICA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF THIS LOAN AGREEMENT AND ALL OF THE OTHER LOAN DOCUMENTS.
(signature page follows)
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31
<PAGE>
AGREEMENT (CONTINUED)
- -------------------------------------------------------------------------------
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
executed, sealed, and delivered, as of the day and year first above written.
ADDRESS FOR NOTICE: BORROWER
- ------------------- --------
150 W. Carpenter Freeway
Irving, TX 75039 CANMAX INC.
972 541-1600
972 281-2388 By: /s/ Roger Bryant
------------------------------------
Roger Bryant
Chief Executive Officer
Attest by: /s/ Philip Parsons
-----------------------------
Philip Parsons
Chief Financial Officer
CANMAX RETAIL SYSTEMS, INC.
By: /s/ Roger Bryant
------------------------------------
Roger Bryant
Chief Executive Officer
Attest by: /s/ Philip Parsons
-----------------------------
Philip Parsons
Chief Financial Officer
LENDERS
-------
ADDRESS FOR NOTICE:
- -------------------
2602 McKinney, Suite 220 Founders Mezzanine Investors, LLC
Dallas, TX 75204
214 871-3000 By:
214 871-0088 ------------------------------------
by Founders Equity Group, Inc.
its Manager, Scott Cook, Chairman
AGENT
-----
ADDRESS FOR NOTICE:
- -------------------
2602 McKinney, Suite 220 Founders Equity Group, Inc.
Dallas, TX 75204
214 871-3000 By:
214 871-0088 ------------------------------------
Scotty Dell Cook, Chairman
Attest by:
-----------------------------
Title: President
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32
<PAGE>
SECURITY AGREEMENT
DATE:
December 15, 1997
DEBTOR:
Canmax, Inc. and Canmax Retail Systems, Inc. (hereinafter jointly and
collectively called "Debtor").
DEBTOR'S MAILING ADDRESS (INCLUDING COUNTY):
150 W. Carpenter Freeway
Irving, TX 75037
SECURED PARTY:
Founders Equity Group, Inc.
Agent on behalf of:
Founders Equity Group, Inc. and
Founders Mezzanine Investors III, LLC
SECURED PARTY'S MAILING ADDRESS (INCLUDING COUNTY):
c/o Founders Equity Group, Inc.
2602 McKinney Avenue, Suite 220
Dallas, Texas 75
CLASSIFICATION OF COLLATERAL: Accounts, contract rights, property, equipment,
inventory, general intangibles, instruments, deposit accounts, chattel paper and
all other assets.
COLLATERAL (INCLUDING ALL ACCESSIONS): Accounts, contract rights, property,
equipment, inventory, general intangibles, instruments, deposit accounts,
chattel paper and all other assets.
a) All attachments, accessions accessories, tools, parts supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
b) All products and produce of any of the property described in this
Collateral section.
c) All accounts, contracts rights, general intangibles, instruments,
rents, monies, payments, and all other rights, arising out of a sale,
lease, or other disposition of any of the property described in this
Collateral section.
d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other deposition of any of the property
described in this Collateral section.
OBLIGATION: Senior Secured Convertible Debentures issued pursuant to that
certain Convertible Loan Agreement dated December 15, 1997 ("Loan Agreement"),
and all other indebtedness, liabilities and obligations of the Debtor to the
Secured Party now owing or hereinafter incurred.
----------------------------------
SECURITY AGREEMENT - PAGE 1
<PAGE>
DATE: December 15, 1997
AMOUNT: $500,000
MAKER: The Debtor
PAYEE: The Secured Party
FINAL MATURITY DATE: January 1, 1999
TERMS OF PAYMENT (OPTIONAL): As therein provided
Debtor grants to Secured Party a security interest in the Collateral and all
its proceeds to secure payment and performance of Debtor's Obligation and all
renewals and extensions of any of the Obligation.
DEBTOR'S WARRANTIES:
1. OWNERSHIP. Debtor owns the Collateral and has the authority to grant
this security interest.
2. FINANCIAL STATEMENTS. All information about Debtor's financial condition
provided to Secured Party was accurate when submitted, as will be any
information subsequently provided.
DEBTOR'S COVENANTS:
1. PROTECTION OF COLLATERAL. Debtor will defend the Collateral against all
claims and demands adverse to Secured Party's interest in it and will keep
it free from all liens except those for taxes not yet due and from all
security interests except this one and Permitted Liens as defined Loan
Agreement. The Collateral will remain in Debtor's possession or control
at all times, except as otherwise provided in this agreement. Debtor will
maintain the Collateral in good condition and protect it against misuse,
abuse, waste and deterioration except for ordinary wear and tear
resulting from its intended use.
2. INSURANCE. Debtor, in the ordinary course of business, will insure the
Collateral in accord with Secured Party's reasonable requirements.
3. SECURED PARTY'S COSTS. Debtor will pay all expenses incurred by Secured
Party in obtaining, preserving, perfecting, defending and enforcing this
security interest or the Collateral and in collecting or enforcing the
Obligation. Expenses for which Debtor is liable include, but are not
limited to, taxes, assessments, reasonable attorney's fees, and other
legal expenses. These expenses will bear interest from the dates of
payments at the highest rate stated in notes that are part of the
Obligation, and Debtor will pay Secured Party this interest on demand at
a time and place reasonably specified by Secured Party. These expenses
and interest will be part of the Obligation and will be recovered as such
in all respects.
4. ADDITIONAL DOCUMENTS. Debtor will sign any papers that Secured Party
considers necessary to obtain, maintain, and perfect this security interest
or to comply with any relevant law.
5. NOTICE OF CHANGES. Debtor will immediately notify Secured Party of any
material change in the Collateral other than in the ordinary course of
business; change in Debtor's name, address, or location; change in any
matter warranted or represented in this agreement; change that may affect
this security interest; and any event of default.
6. USE AND REMOVAL OF COLLATERAL. Debtor will use the Collateral primarily
according to the stated classification
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SECURITY AGREEMENT - PAGE 2
<PAGE>
unless Secured Party consents otherwise in writing. Debtor will not to
become an accession to any goods, to be commingled with other goods, or to
become a fixture, accession, or part of a product or mass with other goods
except as expressly provided in this agreement or in the ordinary course
of business.
7. SALE. Debtor will not sell, transfer, or encumber any of the Collateral
without the prior written consent of Secured Party other than in the
ordinary course of business except the Debtor may sell, transfer or
encumber Collateral secured by Permitted Liens.
8. Debtor agrees not to commingle the Rights to Payment, proceeds or
collections thereunder with other property.
9. Debtor agrees, with regard to the Collateral and proceeds, from time to
time when reasonably requested by Secured Party, to prepare and deliver a
schedule of all Collateral and proceeds subject to this agreement and to
assign in writing and deliver to secured party all accounts, contracts,
leases and other chattel paper, instruments, documents and other evidences
thereof.
10. Debtor agrees with regard to the Collateral and proceeds in the event
Secured Party elects to receive payments of rights to payment or proceeds
hereunder, to pay all reasonable expenses incurred by secured party in
connection therewith, including reasonable expenses of accounting,
correspondence, collection efforts, reporting to account or contract
debtors, filing, recording, record keeping and expenses incidental thereto.
RIGHTS AND REMEDIES OF SECURED PARTY:
1. GENERALLY. Secured Party may exercise the following rights and remedies
after the occurrence and continuance of an Event of Default:
a) take control of any proceeds of the Collateral;
b) release any Collateral in Secured Party's possession to any debtor,
temporarily or otherwise;
c) take control of any funds generated by the Collateral, such as refunds
from and proceeds of insurance, and reduce any part of the Obligation
accordingly or permit Debtor to use such funds to repair or replace
damaged or destroyed Collateral covered by insurance; and
d) demand, collect, convert, redeem, settle, compromise, receipt for,
realize on, adjust, sue for, and foreclose on the Collateral as
Secured Party desires.
e) exercise any of the other remedies available to the Secured Party
under the Loan Agreement.
2. INSURANCE. If Debtor fails to maintain insurance as required by this
agreement or otherwise by Secured Party, then after written notice to
Debtor, Secured Party may purchase single-interest insurance coverage up
to the replacement value of the Collateral that is insurable that will
protect only Secured Party. If Secured Party purchases this insurance,
its premiums will become part of the Obligation.
EVENTS OF DEFAULT: Each of the following conditions is an Event of Default if
not cured within an applicable cure period:
1. if Debtor defaults in timely payment or performance of any obligation,
covenant, or liability in any written agreement between Debtor and Secured
Party or in any other transaction secured by this agreement;
2. if any warranty, covenant or representation made to Secured Party by or
on behalf of Debtor proves to have
----------------------------------
SECURITY AGREEMENT - PAGE 3
<PAGE>
been false in any material respect when made;
3. if a receiver is appointed for Debtor or any of the Collateral;
4. if any financing statement regarding the Collateral but not related to
this security interest and not favoring Secured Party is filed other than
financing statements for the purpose of noticing Permitted Liens;
5. if any lien, other than Permitted Liens, attaches to any of the Collateral;
6. if any material amount of the Collateral is lost, stolen, damaged, or
destroyed, unless it is promptly replaced with Collateral of like quality
or restored to its former condition.
7. Secured party, in good faith, believes that any or all of the Collateral
and/or proceeds to be danger of misuse, dissipation, commingling, loss,
theft, damage or destruction, or otherwise in jeopardy or unsatisfactory
in character or value.
8. An Event of Default shall occur and be continuing under the Loan Agreement.
REMEDIES OF SECURED PARTY ON DEFAULT:
1. During the existence or any Event of Default and subject to any applicable
cure periods, Secured Party may declare the unpaid principal and earned
interest of the Obligation immediately due in whole or part, enforce the
Obligation, and exercise any rights and remedies granted by the Uniform
Commercial Code or by this agreement, including the following:
a) require Debtor to deliver to Secured Party all books and records
relating to the Collateral;
b) require Debtor to assemble the Collateral and make it available to
Secured Party at a place reasonably convenient to both parties;
c) take possession of any of the Collateral and for this purpose enter
any premises where it is located if this can be done without breach
of the peace;
d) sell, lease, or otherwise dispose of any of the Collateral in accord
with the rights, remedies, and duties of a secured party under
chapters 2 and 9 of the Texas Uniform Commercial Code after notice as
required by those chapters; unless the Collateral threatens to decline
speedily in value, is perishable, or would typically be sold on a
recognized market, Secured Party will give Debtor reasonable notice
of any public sale of the Collateral or of a time after which it may
be otherwise disposed of without further notice to Debtor; in this
event, notice will be deemed reasonable if it is mailed, postage
prepaid, to Debtor at the address specified in this agreement at least
ten days before any public sale or ten days before the time when the
Collateral may be otherwise disposed of without further notice to
Debtor; in this event, notice will be deemed reasonable if it is
mailed, postage prepaid, to Debtor at the address specified in this
agreement at least ten days before any private sale or ten days
before any public sale or ten days before time when the Collateral
may be otherwise disposed of without further notice to Debtor;
e) surrender any insurance policies covering the Collateral and receive
the unearned premium;
f) apply any proceeds from disposition of the Collateral after default
in the manner specified in chapter 9 of the Uniform Commercial Code,
including payment of Secured Party's reasonable attorney's fees and
court expenses; and
----------------------------------
SECURITY AGREEMENT - PAGE 4
<PAGE>
g) if disposition of the Collateral leaves the Obligation unsatisfied,
collect the deficiency from Debtor.
GENERAL PROVISIONS
1. PARTIES BOUND. Secured Party's rights under this agreement shall inure to
the benefit of its successors and assigns. Assignment of any part of the
Obligation and delivery by Secured Party of any part of the Collateral will
fully discharge Secured Party from responsibility for that part of the
Collateral. If Debtor is more than one, all their representations,
warranties, and agreements are joint and several. Debtor's obligations
under this agreement shall bind Debtor's personal representatives,
successors, and assigns.
2. WAIVER. Neither delay in exercise nor partial exercise of any Secured
Party's remedies or rights shall waive further exercise of those remedies
or rights. Secured Party's failure to exercise remedies or rights does
not waive subsequent exercise of those remedies or rights. Secured
Party's waiver of any default does not waive further default. Secured
Party's waiver of any right in this agreement or of any default is binding
only if it is in writing. Secured Party may remedy any default without
waiving it.
3. REIMBURSEMENT. If Debtor fails to perform any of Debtor's obligations,
Secured Party may perform those obligations and be reimbursed by Debtor on
demand at the place where the note is payable for any sums so paid,
including attorney's fees and other legal expenses, plus interest on those
sums from the dates of payment at the rate stated in the note for matured,
unpaid amounts. The sum to be reimbursed shall be secured by this security
agreement.
4. INTEREST RATE. Interest included in the Obligation shall not exceed the
maximum amount of nonusurious interest that may be contracted for, taken,
reserved, charged, or received under law; any interest in excess of that
maximum amount shall be credited to the principal of the obligation or,
if that has been paid, refunded. On any acceleration or required or
permitted prepayment of the Obligation, any such excess shall be canceled
automatically as of the acceleration or prepayment or, if already paid,
credited on the principal amount of the Obligation or, if the principal
amount has been paid or refunded. This provision overrides other
provisions in this and all other instruments concerning the Obligation.
5. MODIFICATIONS. No provisions of this agreement shall be modified or
limited except by written agreement.
6. SEVERABILITY. The unenforceability of any provision of this agreement will
not effect the enforceability or validity of any other provision.
7. AFTER-ACQUIRED CONSUMER GOODS. This security interest shall attach to
after-acquired consumer goods only to the extent permitted by law.
8. APPLICABLE LAW. This agreement will be construed according to Texas laws.
9. PLACE OF PERFORMANCE. This agreement is to be performed in the county of
Secured Party's mailing address.
10. FINANCING STATEMENT. A carbon, photographic, or other reproduction of this
agreement or any financing statement covering the Collateral is sufficient
as a financing statement.
11. PRESUMPTION OF TRUTH AND VALIDITY. If the Collateral is sold after
default, recitals in the bill of sale or transfer will be prima facie
evidence of their truth, and all prerequisites to the sale specified by
this agreement and by the Texas Uniform Commercial Code will be presumed
satisfied.
12. SINGULAR AND PLURAL. When the context requires, singular nouns and
pronouns include the plural.
----------------------------------
SECURITY AGREEMENT - PAGE 5
<PAGE>
13. CUMULATIVE REMEDIES. Foreclosure of this security interest by suit does
not limit Secured Party's remedies, including the right to sell the
Collateral under the terms of this agreement. All remedies of Secured
Party may be exercised at the same or different times, and no remedy shall
be a defense to any other. Secured Party's rights and remedies include
all those granted by law or otherwise, in addition to those specified in
this agreement.
----------------------------------
SECURITY AGREEMENT - PAGE 6
<PAGE>
14. AGENCY. Debtor's appointment of Secured Party as Debtor's agent is coupled
with an interest and will survive any disability of Debtor.
Secured Party:
Agent on behalf of Secured Party
- ------------------------------------
Founder Equity Group, Inc.
By:
Title:
Debtor:
Canmax, Inc.
/s/ Roger Bryant
- ------------------------------------
Roger Bryant
CEO
Canmax Retail Systems, Inc.
/s/ Roger Bryant
- ------------------------------------
Roger Bryant
CEO
----------------------------------
SECURITY AGREEMENT - PAGE 7
<PAGE>
- -------------------------------------------------------------------------------
The Securities represented by this Debenture have not been registered under
the Securities Act of 1933, as amended ("Act"), or applicable state
securities laws ("State Acts") and shall not be sold, hypothecated, donated
or otherwise transferred unless the Borrower shall have received an opinion
of Legal Counsel for the holder hereof, or such other evidence as may be
satisfactory to Legal Counsel for the Borrower, to the effect that any such
transfer shall not require registration under the Act and the State Acts.
- -------------------------------------------------------------------------------
CANMAX INC.
CANMAX RETAIL SYSTEMS, INC.
10.00% SENIOR SECURED CONVERTIBLE DEBENTURE
$250,000 No: 1
Date of Issue: December 15, 1997
CANMAX INC. (a Wyoming corporation) and CANMAX RETAIL SYSTEMS, INC. (a
Texas corporation) (collectively hereinafter referred to as the "Borrower")
is indebted and, for value received, herewith promises to pay to:
Founders Mezzanine Investors III, LLC
or to its order, (together with any assignee, jointly or severally, the
"Holder" or "Lender") on or before January 1, 1999 (the "Due Date") (unless
this Debenture shall have been sooner called for redemption or presented for
conversion as herein provided), the sum of Two Hundred Fifty Thousand Dollars
($250,000) (the "Principal Amount") and to pay interest on the Principal
Amount at the rate of ten percent (10.00%) per annum as provided herein.
This Debenture is a Debenture referred to in the Convertible Loan Agreement
dated December 15, 1997 among Borrower, Holder and other Lenders named
therein. Capitalized Terms used herein and not otherwise defined shall have
the meaning set forth for such terms in the Loan Agreement. In furtherance
thereof, and in consideration of the premises, the Borrower covenants,
promises and agrees as follows:
1. INTEREST: Interest on the Principal Amount outstanding from time to
time shall accrue at the rate of 10.00% per annum and be payable in monthly
installments commencing February 1, 1998, and subsequent payments shall be
made on the first day of each month thereafter until the Principal Amount and
all accrued and unpaid interest shall have been paid in full. Overdue
principal and interest on the Debenture shall, to the extent permitted by
applicable law, bear interest at the rate of 12.00% per annum. All payments
of both principal and interest shall be made at the address of the Holder
hereof as it appears in the books and records of the Borrower, or at such
other place as may be designated by the Holder hereof in writing to Borrower.
2. MATURITY: If not sooner redeemed or converted, this Debenture shall
mature on January 1, 1999 at which time all then remaining unpaid principal,
interest and any other charges then due under the Loan Agreement shall be due
and payable in full.
3. MANDATORY PRINCIPAL INSTALLMENT: If this Debenture is not sooner
redeemed or converted, Borrower shall pay to Holder on January 1, 1999, a
final installment of all of the remaining unpaid Principal plus the amount of
any unpaid interest and other charges then due.
4. OPTIONAL REDEMPTION: On any interest payment date, and after prior
irrevocable notice as provided for below, the outstanding principal amount of
this Debenture is redeemable at the option of the Borrower, in whole but not
in part, at 110% of par.
<PAGE>
(b) The Borrower may exercise its right to redeem prior to Due Date by
giving notice (the "Redemption Notice") thereof to the Holder as such name
appears on the books of the Borrower, which notice shall specify the terms of
redemption (including the place at which the Holder may obtain payment), the
total principal amount to be redeemed (such principal amount plus the premium
thereon herein called the "Redemption Amount") and the date for redemption
(the "Redemption Date"), which date shall not be less than 30 days nor more
than 60 days after the date of the Redemption Notice. On the Redemption
Date, the Borrower shall pay all accrued unpaid interest on the Debenture up
to and including the Redemption Date, and shall pay to the Holder a dollar
amount equal to the Redemption Amount. In the case of Debentures called for
redemption, the conversion rights will expire at the close of business on the
Redemption Date.
5. CONVERSION RIGHT: The Holder shall have the right, at Holder's option,
at any time, to convert all, or, in multiples of $25,000, any part of this
Debenture into such number of fully paid and nonassessable shares of common
stock, NO par value, of Canmax Inc. (the "Common Stock") as shall be provided
herein. The Holder may exercise the conversion right by giving written
notice (the "Conversion Notice") to the Borrower of the exercise of such
right and stating the name or names in which the stock certificate or stock
certificates for the shares of Common Stock are to be issued and the address
to which such certificates shall be delivered. The Conversion Notice shall
be accompanied by the Debenture. The number of shares of Common Stock that
shall be issuable upon conversion of the Debenture shall equal the face
amount of the Debenture divided by the Conversion Price as defined below and
in effect on the date the Conversion Notice is given; provided, however, that
in the event that this Debenture shall have been partially redeemed, shares
of Common Stock shall be issued pro rata, rounded to the nearest whole share.
Conversion shall be deemed to have been effected on the date the Conversion
Notice is received (the "Conversion Date"). Within 10 business days after
receipt of the Conversion Notice, Borrower shall issue and deliver by hand
against a signed receipt therefor or by United States registered mail, return
receipt requested, to the address designated in the Conversion Notice, a
stock certificate or stock certificates of Canmax, Inc. representing the
number of shares of Common Stock to which Holder is entitled and a check or
cash in payment of all interest accrued and unpaid on the Debenture being
converted up to and including the Conversion Date. The conversion rights
will be governed by the following provisions:
(a) Conversion Price: On the issue date hereof and until such time as an
adjustment shall occur, the Conversion price shall be $1.25 PER SHARE;
provided, however, that the Conversion Price shall be subject to adjustment
at the times, and in accordance with the provisions, as follows:
(i) Adjustment for Issuance of Shares at less than the Conversion Price: If
and whenever any Additional Common Stock (as herein defined) shares shall be
issued by the Borrower (the "Stock Issue Date") for a consideration per share
less than the Conversion Price, then in each such case the Conversion Price
shall be reduced to a new Conversion Price equal to the consideration per
share received by the Borrower for the additional shares of Common Stock then
issued and the number of shares issuable to Holder upon conversion shall be
proportionately increased; and, in the case of shares issued without
consideration, the initial Conversion Price shall be reduced in amount and
the number of shares issued upon conversion shall be increased in an amount
so as to maintain for the Holder the right to convert the Debenture into
shares equal in amount to the same percentage interest in the Common Stock of
the Borrower as existed for the Holder immediately preceding the Stock Issue
Date.
(ii) Sale of Shares: In case of the issuance of Additional Common Stock
for a consideration part or all of which shall be cash, the amount of the
cash consideration therefor shall be deemed to be the amount of the cash
received by Borrower for such shares, after any compensation or discount in
the sale, underwriting or purchase thereof by underwriters or dealers or
others performing similar services or for any expenses incurred in connection
therewith. In case of the issuance of any shares of Additional Common Stock
for a consideration part or all of which shall be other than cash, the amount
of the consideration therefor, other than cash, shall be deemed to be the
then fair market value (as hereinafter defined) of the property received.
(iii) Reclassification of Shares: In case of the reclassification of
securities into shares of Common Stock, the shares of Common Stock issued in
such reclassification shall be deemed to have been issued for a consideration
other than cash. Shares of Additional Common Stock issued by way of dividend
or other distribution on any class of stock of the Borrower shall be deemed
to have been issued without consideration.
(iv) Split up or Combination of Shares: In case issued and outstanding
shares of Common Stock shall be subdivided or split up into a greater number
of shares of the Common Stock, the Conversion Price shall be proportionately
decreased, and in case issued and outstanding shares of Common Stock shall be
combined into a
- -------------------------------------------------------------------------------
Page 2
Issuer's Initial _____
<PAGE>
smaller number of shares of Common Stock, the Conversion Price shall be
proportionately increased, such increase or decrease, as the case may be,
becoming effective at the time of record of the split-up or combination, as
the case may be.
(v) Exceptions: The term "Additional Common Stock" herein shall mean all
shares of Common Stock hereafter issued by the Borrower (including Common
Stock held in the treasury of the Borrower), except (1) Common Stock issued
upon the conversion of this Debentures; (2) Common Stock issued pursuant to
exercise of authorized or outstanding options under any incentive stock
option plan for the officers, directors, and certain other key personnel as
defined in said stock option plans of the Borrower as currently established;
and (3) shares for and on the closing of USC.
(b) Adjustment for Mergers, Consolidations, Etc.:
(i) In the event of distribution to all Common Stock holders of any stock,
indebtedness of the Borrower or assets (excluding cash dividends or
distributions from retained earnings) or other rights to purchase securities
or assets, then, after such event, this Debenture will be convertible into
the kind and amount of securities, cash and other property which the Holder
would have been entitled to receive if the Holder owned the Common Stock
issuable upon conversion of this Debenture immediately prior to the
occurrence of such event.
(ii) In case of any capital reorganization, reclassification of the stock of
the Borrower (other than a change in par value or as a result of a stock
dividend, subdivision, split up or combination of shares), this Debenture
shall be convertible into the kind and number of shares of stock or other
securities or property of the Borrower to which the Holder would have been
entitled to receive if the Holder owned the Common Stock issuable upon
conversion of the Debenture immediately prior to the occurrence of such
event. The provisions of these foregoing sentence shall similarly apply to
successive reorganizations, reclassifications, consolidations, exchanges,
leases, transfers or other dispositions or other share exchanges.
(iii) The term "Fair Market Value", as used herein, is the value ascribed to
consideration other than cash as determined by the Board of Directors of the
Borrower in good faith, which determination shall be final, conclusive and
binding. If the Board of Directors shall be unable to agree as to such fair
market value, then the issue of fair market value shall be submitted to
arbitration under and pursuant to the rules and regulations of the American
Arbitration Association, and the decision of the arbitrators shall be final,
conclusive and binding, and a final judgment may be entered thereon, provided
however that such arbitration shall be limited to determination of the fair
market value of assets tendered in consideration for the issue of Common
Stock.
(iv) Notice of Adjustment. (A) In the event the Borrower shall propose to
take any action which shall result in an adjustment in the Conversion Price,
the Borrower shall give notice to the Holder, which notice shall specify the
record date, if any, with respect to such action and the date on which such
action is to take place. Such notice shall be given on or before the earlier
of 10 days before the record date or the date which such action shall be
taken. Such notice shall also set forth all facts (to the extent known)
material to the effect of such action on the Conversion Price and the number,
kind or class of shares or other securities or property which shall be
deliverable or purchasable upon the occurrence of such action or deliverable
upon conversion of this Debenture. (B) Following completion of an event
wherein the Conversion Price shall be adjusted, the Borrower shall furnish to
the Holder a statement, signed by the Chief Executive Officer of the Borrower
of the facts creating such adjustment and specifying the resultant adjusted
Conversion Price then in effect.
6. RESERVATION OF SHARES: Borrower warrants and agrees that it shall at
all times reserve and keep available, free from preemptive rights, sufficient
authorized and unissued shares of Common Stock to effect conversion of this
Debenture.
7. REGISTRATION RIGHTS: Shares issued upon conversion of this Debenture
shall be restricted from transfer by the Holder except if and unless the
shares are duly registered for sale pursuant to the Securities Act of 1933,
as amended, or the transfer is duly exempt from registration.
The Holder has certain rights with respect to the registration of shares of
Common Stock issued upon the conversion of this Debenture pursuant to the
terms of the Loan Agreement. Borrower agrees that a copy of the Loan
Agreement with all amendments, additions or substitutions therefor shall be
available to the Holder at the offices of the Borrower.
8. HOLDERS RIGHT TO REQUEST MULTIPLE DEBENTURES: The Holder shall, upon
written request and presentation of the Debenture, have the right, at any
interest payment date, to request division of this Debenture into two or more
- -------------------------------------------------------------------------------
Page 3
Issuer's Initial _____
<PAGE>
units, each of such to be in such amounts as shall be requested; provided
however that no Debentures shall be issued in denominations of face amount
less than $25,000.00.
9. TRANSFER: This Debenture may be transferred on the books of the
Borrower by the registered Holder hereof, or by Holder's attorney duly
authorized in writing, only upon (i) delivery to the Borrower of a duly
executed assignment of the Debenture, or part thereof, to the proposed new
Holder, along with a current notation of the amount of payments received and
net Principal Amount yet unfunded, and presentment of such Debenture to the
Borrower for issue of a replacement Debenture, or Debentures, in the name of
the new Holder, (ii) the designation by the new Holder of the Lender's agent
for notice, such agent to be the sole party to whom Borrower shall be
required to provide notice when notice to Lender is required hereunder and
who shall be the sole party authorized to represent Lender in regard to
modification or waivers under the Debenture, the Loan Agreement, or other
Loan Documents; and any action, consent or waiver, (other than a compromise
of principal and interest), when given or taken by Lender's agent for notice,
shall be deemed to be the action of the holders of a majority in amount of
the Principal Amount of the Debentures, as such holders are recorded on the
books of the Borrower, and (iii) in compliance with the legend to read "The
Securities represented by this Debenture have not been registered under the
Securities Act of 1933, as amended ("Act"), or applicable state securities
laws ("State Acts") and shall not be sold, hypothecated, donated or otherwise
transferred unless the Borrower shall have received an opinion of Legal
Counsel for the Borrower, or such other evidence as may be satisfactory to
Legal Counsel for the Borrower, to the effect that any such transfer shall
not require registration under the Act and the State Acts."
The Borrower shall be entitled to treat any holder of record of the
Debenture as the Holder in fact thereof and of the Debenture and shall not be
bound to recognize any equitable or other claim to or interest in this
Debenture in the name of any other person, whether or not it shall have
express or other notice thereof, save as expressly provided by the laws of
Texas.
10. MAXIMUM INTEREST RATE: Regardless of any provision contained in this
Debenture, Lender shall never be entitled to receive, collect or apply as
interest on the Debenture any amount in excess of interest calculated at the
Maximum Rate, and, in the event that Lender ever receives, collects or
applies as interest any such excess, the amount which would be excessive
interest shall be deemed to be a partial prepayment of principal and treated
hereunder as such; and, if the principal amount of the Debenture is paid in
full, any remaining excess shall forthwith be paid to Borrower. In
determining whether or not the interest paid or payable under any specific
contingency exceeds interest calculated at the Maximum Rate, Borrower and
Lender shall, to the maximum extent permitted under applicable law, (i)
characterize any non principal payment as an expense, fee or premium rather
than as interest; (ii) exclude voluntary prepayments and the effects thereof,
and (iii) amortize, pro rate, allocate and spread, in equal parts, the total
amount of interest throughout the entire contemplated term of the Debenture;
provided that, if the Debenture is paid and performed in full prior to the
end of the full contemplated term thereof, and if the interest received for
the actual period of existence thereof exceeds interest calculated at the
Maximum Rate, Lender shall refund to Borrower the amount of such excess or
credit the amount of such excess against the principal amount of the
Debenture and, in such event, Lender shall not be subject to any penalties
provided by any laws for contracting for, charging, taking, reserving or
receiving interest in excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate of
interest (if any) permitted by applicable law on such day that at any time,
or from time to time, may be contracted for, taken, reserved, charged or
received on the Indebtedness evidenced by the Debenture under the laws which
are presently in effect of the United States of America and the State of
Texas or by the laws of any other jurisdiction which are or may be applicable
to the holders of the Debenture and such Indebtedness or, to the extent
permitted by law, under such applicable laws of the United States of America
and the State of Texas or by the laws of any other jurisdiction which are or
may be applicable to the Holder and which may hereafter be in effect and
which allow a higher maximum nonusurious interest rate than applicable laws
now allow.
11. RIGHTS UNDER LOAN AGREEMENT: This Debenture is issued pursuant to that
certain Convertible Loan Agreement dated December 15, 1997 by and between the
Borrower and Founders Equity Group, Inc. and Founders Mezzanine Investors
III, LLC and the Holder hereof is entitled to all the rights and benefits,
and is subject to all the obligations of Lenders and Borrower under said
agreement. Borrower and Lenders have participated in the negotiation and
preparation of the Loan Agreement and of this Debenture. Borrower agrees
that a copy of the Loan Agreement with all amendments, additions and
substitutions therefor shall be available to the Holder at the offices of the
Borrower. This Debenture is secured pursuant to a Security Agreement around
December 15, 1997.
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Page 4
Issuer's Initial _____
<PAGE>
12. GOVERNING LAW: THIS DEBENTURE SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, OR, WHERE
APPLICABLE, THE LAWS OF THE UNITED STATES.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Debenture
to be duly issued and executed on the Date of Issue as stated above.
ADDRESS FOR NOTICE: BORROWER
150 W. Carpenter Freeway
Irving, TX 75039 CANMAX INC.
972 541-1600
972 281-2385
By: /s/ Roger Bryant
-----------------------------------
Roger Bryant
Chief Executive Officer
Attest by: /s/ Philip Parsons
---------------------------
Philip Parsons
Chief Financial Officer
CANMAX RETAIL SYSTEMS, INC.
By: /s/ Roger Bryant
-----------------------------------
Roger Bryant
Chief Executive Officer
Attest by: /s/ Philip Parsons
---------------------------
Philip Parsons
Chief Financial Officer
This instrument was acknowledged before me on Dec. 30, 1997, by Philip M.
Parsons, Chief Financial Officer of Canmax, a______________________ corporation.
Notary Public, State of Texas
--------------------
[Notary Seal] My Commission Expires: April 14, 1998
----------------------
Printed Name of Notary Diane Kay Crone
----------------------
- -------------------------------------------------------------------------------
Page 5
Issuer's Initial _____
<PAGE>
- -------------------------------------------------------------------------------
The Securities represented by this Debenture have not been registered under the
Securities Act of 1933, as amended ("Act"), or applicable state securities laws
("State Acts") and shall not be sold, hypothecated, donated or otherwise
transferred unless the Borrower shall have received an opinion of Legal Counsel
for the holder hereof, or such other evidence as may be satisfactory to Legal
Counsel for the Borrower, to the effect that any such transfer shall not require
registration under the Act and the State Acts.
- -------------------------------------------------------------------------------
CANMAX INC.
CANMAX RETAIL SYSTEMS, INC.
10.00% SENIOR SECURED CONVERTIBLE DEBENTURE
$250,000 No: 2
Date of Issue: December 15, 1997
CANMAX INC. (a Wyoming corporation) and CANMAX RETAIL SYSTEMS, INC. (a
Texas corporation) (collectively hereinafter referred to as the "Borrower")
is indebted and, for value received, herewith promises to pay to:
Founders Equity Group, Inc.
or to its order, (together with any assignee, jointly or severally, the
"Holder" or "Lender") on or before January 1, 1999 (the "Due Date") (unless
this Debenture shall have been sooner called for redemption or presented for
conversion as herein provided), the sum of Two Hundred Fifty Thousand Dollars
($250,000) (the "Principal Amount") and to pay interest on the Principal
Amount at the rate of ten percent (10.00%) per annum as provided herein.
This Debenture is a Debenture referred to in the Convertible Loan Agreement
dated December 15, 1997 among Borrower, Holder and other Lenders named
therein. Capitalized Terms used herein and not otherwise defined shall have
the meaning set forth for such terms in the Loan Agreement. In furtherance
thereof, and in consideration of the premises, the Borrower covenants,
promises and agrees as follows:
1. INTEREST: Interest on the Principal Amount outstanding from time to
time shall accrue at the rate of 10.00% per annum and be payable in monthly
installments commencing February 1, 1998, and subsequent payments shall be
made on the first day of each month thereafter until the Principal Amount and
all accrued and unpaid interest shall have been paid in full. Overdue
principal and interest on the Debenture shall, to the extent permitted by
applicable law, bear interest at the rate of 12.00% per annum. All payments
of both principal and interest shall be made at the address of the Holder
hereof as it appears in the books and records of the Borrower, or at such
other place as may be designated by the Holder hereof in writing to Borrower.
2. MATURITY: If not sooner redeemed or converted, this Debenture shall
mature on January 1, 1999 at which time all then remaining unpaid principal,
interest and any other charges then due under the Loan Agreement shall be due
and payable in full.
3. MANDATORY PRINCIPAL INSTALLMENT: If this Debenture is not sooner
redeemed or converted, Borrower shall pay to Holder on January 1, 1999, a
final installment of all of the remaining unpaid Principal plus the amount of
any unpaid interest and other charges then due.
4. OPTIONAL REDEMPTION: On any interest payment date, and after prior
irrevocable notice as provided for below, the outstanding principal amount of
this Debenture is redeemable at the option of the Borrower, in whole but not
in part, at 110% of par.
<PAGE>
(b) The Borrower may exercise its right to redeem prior to Due Date by
giving notice (the "Redemption Notice") thereof to the Holder as such name
appears on the books of the Borrower, which notice shall specify the terms of
redemption (including the place at which the Holder may obtain payment), the
total principal amount to be redeemed (such principal amount plus the premium
thereon herein called the "Redemption Amount") and the date for redemption
(the "Redemption Date"), which date shall not be less than 30 days nor more
than 60 days after the date of the Redemption Notice. On the Redemption
Date, the Borrower shall pay all accrued unpaid interest on the Debenture up
to and including the Redemption Date, and shall pay to the Holder a dollar
amount equal to the Redemption Amount. In the case of Debentures called for
redemption, the conversion rights will expire at the close of business on the
Redemption Date.
5. CONVERSION RIGHT: The Holder shall have the right, at Holder's option,
at any time, to convert all, or, in multiples of $25,000, any part of this
Debenture into such number of fully paid and nonassessable shares of common
stock, NO par value, of Canmax Inc. (the "Common Stock") as shall be provided
herein. The Holder may exercise the conversion right by giving written
notice (the "Conversion Notice") to the Borrower of the exercise of such
right and stating the name or names in which the stock certificate or stock
certificates for the shares of Common Stock are to be issued and the address
to which such certificates shall be delivered. The Conversion Notice shall
be accompanied by the Debenture. The number of shares of Common Stock that
shall be issuable upon conversion of the Debenture shall equal the face
amount of the Debenture divided by the Conversion Price as defined below and
in effect on the date the Conversion Notice is given; provided, however, that
in the event that this Debenture shall have been partially redeemed, shares
of Common Stock shall be issued pro rata, rounded to the nearest whole share.
Conversion shall be deemed to have been effected on the date the Conversion
Notice is received (the "Conversion Date"). Within 10 business days after
receipt of the Conversion Notice, Borrower shall issue and deliver by hand
against a signed receipt therefor or by United States registered mail, return
receipt requested, to the address designated in the Conversion Notice, a
stock certificate or stock certificates of Canmax, Inc. representing the
number of shares of Common Stock to which Holder is entitled and a check or
cash in payment of all interest accrued and unpaid on the Debenture being
converted up to and including the Conversion Date. The conversion rights
will be governed by the following provisions:
(a) Conversion Price: On the issue date hereof and until such time as an
adjustment shall occur, the Conversion price shall be $1.25 PER SHARE;
provided, however, that the Conversion Price shall be subject to adjustment
at the times, and in accordance with the provisions, as follows:
(i) Adjustment for Issuance of Shares at less than the Conversion Price: If
and whenever any Additional Common Stock (as herein defined) shares shall be
issued by the Borrower (the "Stock Issue Date") for a consideration per share
less than the Conversion Price, then in each such case the Conversion Price
shall be reduced to a new Conversion Price equal to the consideration per
share received by the Borrower for the additional shares of Common Stock then
issued and the number of shares issuable to Holder upon conversion shall be
proportionately increased; and, in the case of shares issued without
consideration, the initial Conversion Price shall be reduced in amount and
the number of shares issued upon conversion shall be increased in an amount
so as to maintain for the Holder the right to convert the Debenture into
shares equal in amount to the same percentage interest in the Common Stock of
the Borrower as existed for the Holder immediately preceding the Stock Issue
Date.
(ii) Sale of Shares: In case of the issuance of Additional Common Stock
for a consideration part or all of which shall be cash, the amount of the
cash consideration therefor shall be deemed to be the amount of the cash
received by Borrower for such shares, after any compensation or discount in
the sale, underwriting or purchase thereof by underwriters or dealers or
others performing similar services or for any expenses incurred in connection
therewith. In case of the issuance of any shares of Additional Common Stock
for a consideration part or all of which shall be other than cash, the amount
of the consideration therefor, other than cash, shall be deemed to be the
then fair market value (as hereinafter defined) of the property received.
(iii) Reclassification of Shares: In case of the reclassification of
securities into shares of Common Stock, the shares of Common Stock issued in
such reclassification shall be deemed to have been issued for a consideration
other than cash. Shares of Additional Common Stock issued by way of dividend
or other distribution on any class of stock of the Borrower shall be deemed
to have been issued without consideration.
(iv) Split up or Combination of Shares: In case issued and outstanding
shares of Common Stock shall be subdivided or split up into a greater number
of shares of the Common Stock, the Conversion Price shall be proportionately
decreased, and in case issued and outstanding shares of Common Stock shall be
combined into a
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Issuer's Initial _____
<PAGE>
smaller number of shares of Common Stock, the Conversion Price shall be
proportionately increased, such increase or decrease, as the case may be,
becoming effective at the time of record of the split-up or combination, as
the case may be.
(v) Exceptions: The term "Additional Common Stock" herein shall mean all
shares of Common Stock hereafter issued by the Borrower (including Common
Stock held in the treasury of the Borrower), except (1) Common Stock issued
upon the conversion of this Debentures; (2) Common Stock issued pursuant to
exercise of authorized or outstanding options under any incentive stock
option plan for the officers, directors, and certain other key personnel as
defined in said stock option plans of the Borrower as currently established;
and (3) shares for and on the closing of USC.
(b) Adjustment for Mergers, Consolidations, Etc.:
(i) In the event of distribution to all Common Stock holders of any stock,
indebtedness of the Borrower or assets (excluding cash dividends or
distributions from retained earnings) or other rights to purchase securities
or assets, then, after such event, this Debenture will be convertible into
the kind and amount of securities, cash and other property which the Holder
would have been entitled to receive if the Holder owned the Common Stock
issuable upon conversion of this Debenture immediately prior to the
occurrence of such event.
(ii) In case of any capital reorganization, reclassification of the stock of
the Borrower (other than a change in par value or as a result of a stock
dividend, subdivision, split up or combination of shares), this Debenture
shall be convertible into the kind and number of shares of stock or other
securities or property of the Borrower to which the Holder would have been
entitled to receive if the Holder owned the Common Stock issuable upon
conversion of the Debenture immediately prior to the occurrence of such
event. The provisions of these foregoing sentence shall similarly apply to
successive reorganizations, reclassifications, consolidations, exchanges,
leases, transfers or other dispositions or other share exchanges.
(iii) The term "Fair Market Value", as used herein, is the value ascribed to
consideration other than cash as determined by the Board of Directors of the
Borrower in good faith, which determination shall be final, conclusive and
binding. If the Board of Directors shall be unable to agree as to such fair
market value, then the issue of fair market value shall be submitted to
arbitration under and pursuant to the rules and regulations of the American
Arbitration Association, and the decision of the arbitrators shall be final,
conclusive and binding, and a final judgment may be entered thereon, provided
however that such arbitration shall be limited to determination of the fair
market value of assets tendered in consideration for the issue of Common
Stock.
(iv) Notice of Adjustment. (A) In the event the Borrower shall propose to
take any action which shall result in an adjustment in the Conversion Price,
the Borrower shall give notice to the Holder, which notice shall specify the
record date, if any, with respect to such action and the date on which such
action is to take place. Such notice shall be given on or before the earlier
of 10 days before the record date or the date which such action shall be
taken. Such notice shall also set forth all facts (to the extent known)
material to the effect of such action on the Conversion Price and the number,
kind or class of shares or other securities or property which shall be
deliverable or purchasable upon the occurrence of such action or deliverable
upon conversion of this Debenture. (B) Following completion of an event
wherein the Conversion Price shall be adjusted, the Borrower shall furnish to
the Holder a statement, signed by the Chief Executive Officer of the Borrower
of the facts creating such adjustment and specifying the resultant adjusted
Conversion Price then in effect.
6. RESERVATION OF SHARES: Borrower warrants and agrees that it shall at
all times reserve and keep available, free from preemptive rights, sufficient
authorized and unissued shares of Common Stock to effect conversion of this
Debenture.
7. REGISTRATION RIGHTS: Shares issued upon conversion of this Debenture
shall be restricted from transfer by the Holder except if and unless the
shares are duly registered for sale pursuant to the Securities Act of 1933,
as amended, or the transfer is duly exempt from registration.
The Holder has certain rights with respect to the registration of shares of
Common Stock issued upon the conversion of this Debenture pursuant to the
terms of the Loan Agreement. Borrower agrees that a copy of the Loan
Agreement with all amendments, additions or substitutions therefor shall be
available to the Holder at the offices of the Borrower.
8. HOLDERS RIGHT TO REQUEST MULTIPLE DEBENTURES: The Holder shall, upon
written request and presentation of the Debenture, have the right, at any
interest payment date, to request division of this Debenture into two or more
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Issuer's Initial _____
<PAGE>
units, each of such to be in such amounts as shall be requested; provided
however that no Debentures shall be issued in denominations of face amount
less than $25,000.00.
9. TRANSFER: This Debenture may be transferred on the books of the
Borrower by the registered Holder hereof, or by Holder's attorney duly
authorized in writing, only upon (i) delivery to the Borrower of a duly
executed assignment of the Debenture, or part thereof, to the proposed new
Holder, along with a current notation of the amount of payments received and
net Principal Amount yet unfunded, and presentment of such Debenture to the
Borrower for issue of a replacement Debenture, or Debentures, in the name of
the new Holder, (ii) the designation by the new Holder of the Lender's agent
for notice, such agent to be the sole party to whom Borrower shall be
required to provide notice when notice to Lender is required hereunder and
who shall be the sole party authorized to represent Lender in regard to
modification or waivers under the Debenture, the Loan Agreement, or other
Loan Documents; and any action, consent or waiver, (other than a compromise
of principal and interest), when given or taken by Lender's agent for notice,
shall be deemed to be the action of the holders of a majority in amount of
the Principal Amount of the Debentures, as such holders are recorded on the
books of the Borrower, and (iii) in compliance with the legend to read "The
Securities represented by this Debenture have not been registered under the
Securities Act of 1933, as amended ("Act"), or applicable state securities
laws ("State Acts") and shall not be sold, hypothecated, donated or otherwise
transferred unless the Borrower shall have received an opinion of Legal
Counsel for the Borrower, or such other evidence as may be satisfactory to
Legal Counsel for the Borrower, to the effect that any such transfer shall
not require registration under the Act and the State Acts."
The Borrower shall be entitled to treat any holder of record of the
Debenture as the Holder in fact thereof and of the Debenture and shall not be
bound to recognize any equitable or other claim to or interest in this
Debenture in the name of any other person, whether or not it shall have
express or other notice thereof, save as expressly provided by the laws of
Texas.
10. MAXIMUM INTEREST RATE: Regardless of any provision contained in this
Debenture, Lender shall never be entitled to receive, collect or apply as
interest on the Debenture any amount in excess of interest calculated at the
Maximum Rate, and, in the event that Lender ever receives, collects or
applies as interest any such excess, the amount which would be excessive
interest shall be deemed to be a partial prepayment of principal and treated
hereunder as such; and, if the principal amount of the Debenture is paid in
full, any remaining excess shall forthwith be paid to Borrower. In
determining whether or not the interest paid or payable under any specific
contingency exceeds interest calculated at the Maximum Rate, Borrower and
Lender shall, to the maximum extent permitted under applicable law, (i)
characterize any non principal payment as an expense, fee or premium rather
than as interest; (ii) exclude voluntary prepayments and the effects thereof,
and (iii) amortize, pro rate, allocate and spread, in equal parts, the total
amount of interest throughout the entire contemplated term of the Debenture;
provided that, if the Debenture is paid and performed in full prior to the
end of the full contemplated term thereof, and if the interest received for
the actual period of existence thereof exceeds interest calculated at the
Maximum Rate, Lender shall refund to Borrower the amount of such excess or
credit the amount of such excess against the principal amount of the
Debenture and, in such event, Lender shall not be subject to any penalties
provided by any laws for contracting for, charging, taking, reserving or
receiving interest in excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious rate of
interest (if any) permitted by applicable law on such day that at any time,
or from time to time, may be contracted for, taken, reserved, charged or
received on the Indebtedness evidenced by the Debenture under the laws which
are presently in effect of the United States of America and the State of
Texas or by the laws of any other jurisdiction which are or may be applicable
to the holders of the Debenture and such Indebtedness or, to the extent
permitted by law, under such applicable laws of the United States of America
and the State of Texas or by the laws of any other jurisdiction which are or
may be applicable to the Holder and which may hereafter be in effect and
which allow a higher maximum nonusurious interest rate than applicable laws
now allow.
11. RIGHTS UNDER LOAN AGREEMENT: This Debenture is issued pursuant to that
certain Convertible Loan Agreement dated December 15, 1997 by and between the
Borrower and Founders Equity Group, Inc. and Founders Mezzanine Investors
III, LLC and the Holder hereof is entitled to all the rights and benefits,
and is subject to all the obligations of Lenders and Borrower under said
agreement. Borrower and Lenders have participated in the negotiation and
preparation of the Loan Agreement and of this Debenture. Borrower agrees
that a copy of the Loan Agreement with all amendments, additions and
substitutions therefor shall be available to the Holder at the offices of the
Borrower. This Debenture is secured pursuant to a Security Agreement around
December 15, 1997.
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Issuer's Initial _____
<PAGE>
12. GOVERNING LAW: THIS DEBENTURE SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, OR, WHERE
APPLICABLE, THE LAWS OF THE UNITED STATES.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Debenture
to be duly issued and executed on the Date of Issue as stated above.
ADDRESS FOR NOTICE: BORROWER
150 W. Carpenter Freeway
Irving, TX 75039 CANMAX INC.
972 541-1600
972 281-2385 By: /s/ Roger Bryant
-----------------------------------
Roger Bryant
Chief Executive Officer
Attest by: /s/ Philip Parsons
-----------------------------
Philip Parsons
Chief Financial Officer
CANMAX RETAIL SYSTEMS, INC.
By: /s/ Roger Bryant
------------------------------------
Roger Bryant
Chief Executive Officer
Attest by: /s/ Philip Parsons
----------------------------
Philip Parsons
Chief Financial Officer
This instrument was acknowledged before me on Dec. 30, 1997, by Philip
Parsons, Chief Financial Officer of Canmax, a ____________________ corporation.
Notary Public, State of Texas
--------------------
[Notary Seal] My Commission Expires: April 14, 1998
---------------------
Printed Name of Notary Diane Kay Crone
---------------------
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Issuer's Initial _____
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basic Provision").
1.1 Parties. This Lease ("Lease"), dated for reference purposes only,
December 12, 1997, is made by and between TMT Carmel Business Center, Inc., a
Delaware corporation ("Lessor") and USCommunication Systems, Inc., a Delaware
corporation ("Lessee"), (collectively the "Parties," or individually a
"Party").
1.2 (a) Premises: That certain portion of the building, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, commonly known by the street address of 12245 World Trade Drive,
Suites F and G, located in the City of San Diego, County of San Diego, State
of California, with zip code 92128, as outlined on Exhibit A attached hereto
("Premises"). The "Building" is that certain building containing the
Premises and generally described as (describe briefly the nature of the
Building): 12245 World Trade Center, Suites F and G of which approximately
4,094 square feet comprises the Premises. In addition to Lessee's rights to
use and occupy the Premises as hereinafter specified, Lessee shall have
non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below)
as hereinafter specified, but shall not have any rights to the roof, exterior
walls or utility raceways of the Building or to any other buildings in the
Industrial Center. The Premises, the Building, the Common Areas, the land
upon which they are located, along with all other buildings and improvements
thereon, are herein collectively referred to as the "Industrial Center."
(Also see Paragraph 2.)
(b) Parking: N/A unreserved vehicle parking spaces
("Unreserved Parking Spaces"); and: N/A reserved vehicle parking
spaces ("Reserved Parking Spaces"). (Also see Paragraph 2.6.)
1.3 Term: Three years and zero months ("Original Term") commencing
December 22, 1997 ("Commencement Date") and ending December 31, 2000
("Expiration Date"). (Also see Paragraph 3.)
1.4 Early Possession: N/A ("Early Possession Date").
(Also see Paragraphs 3.2 and 3.3.)
1.5 Base Rent: $3,029.56 per month ("Base Rent"), payable on the first
day of each month commencing December 22, 1997. (Also see Paragraph 4.)
/X/ If this box is checked, this Lease provides for the Base Rent to
be adjusted per Addendum I, attached hereto.
1.6 (a) Base Rent Paid Upon Execution: $3,029.56 as Base Rent for the
period December 22, 1997 - January 21, 1998.
(b) Lessee's Share of Common Area Operating Expenses: 4.71 percent
(4.71%) ("Lessee's Share") as determined by /X/ prorata square footage of the
Premises as compared to the total square footage of the Building or /X/ other
criteria as described in Addendum I.
1.7 Security Deposit: $3,510.00 ("Security Deposit"). (Also see
Paragraph 5.)
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<PAGE>
1.8 Permitted Use: Administrative and sales offices for truck stop
communication systems, as allowed under existing zoning ("Permitted Use").
(Also see Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see
Paragraph 8.)
1.10 (a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
/X/ Larry Jackel, CB Commercial Real Estate represents Lessor
exclusively ("Lessor's Broker");
/X/ Malinda Louie, Voit Commercial Brokerage represents Lessee
exclusively ("Lessee's Broker"); or
/ / N/A represents both Lessor and Lessee ("Dual Agency").
(Also see Paragraph 15.)
(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and said Broker(s) (or in the event
there is no separate written agreement between Lessor and said Broker(s), the
sum as agreed for brokerage services rendered by said Broker(s) in connection
with this transaction.
1.11 Guarantor: The obligations of the Lessee under this Lease are to
be guaranteed by Delia O'Donnell ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 1 through 7 and Exhibits A through D, all of which
constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon
is not subject to revision whether or not the actual square footage is more
or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, electrical systems, fire sprinkler system, lighting, air
conditioning and heating systems and loading doors, if any, in the Premises,
other than those constructed by Lessee, shall be in good operating condition
on the Commencement Date. If a non-compliance with said warranty exists as
of the Commencement Date, Lessor shall except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expenses. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation
of Lessee and Lessee's sole cost and expense.
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<PAGE>
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement
Date. Lessor further warrants to Lessee that Lessor has no knowledge of any
claim having been made by any governmental agency that a violation or
violations of applicable building codes, regulations, or ordinances exist
with regard to the Premises as of the Commencement Date. Said warranties
shall not apply to any Alterations or Utility Installations (defined in
Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not
comply with said warranties, Lessor shall, except as otherwise provided in
this Lease, promptly after receipt of written notice from Lessee given within
six (6) months following the Commencement Date and setting forth with
specificity the nature and extent of such non-compliance, take such action,
at Lessor's expense, as may be reasonable or appropriate to rectify the
non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph
1.8 is permitted for the Premises under Applicable Laws (as defined in
Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it
has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and
fire sprinkler systems, security, environmental aspects, seismic and
earthquake requirements, and compliance with the Americans with Disabilities
Act and applicable zoning, municipal, county, state and federal laws,
ordinances and regulations and any covenants or restrictions of record
(collectively, "Applicable Laws") and the present and future suitability of
the Premises for Lessee's intended use, (b) that Lessee has made such
investigation as it deems necessary with reference to such matters, is
satisfied with reference thereto, and assumes all responsibility therefore as
the same relate to Lessee's occupancy of the Premises and/or the terms of
this Lease; and (c) that neither Lessor nor any of Lessor's agents, has made
any oral or written representations or warranties with respect to said
matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the
date set forth in Paragraph 1.1 Lessee was the owner or occupant of the
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any non-compliance of the Premises with said warranties.
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said
number. Said parking spaces shall be used for parking by vehicles no larger
than full-size passenger automobiles or pick-up trucks, herein called
"Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall
be parked and loaded or unloaded as directed by Lessor in the Rules and
Regulations (as defined in Paragraph 40) issued by Lessor. (Also see
Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessee shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
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<PAGE>
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 Common Areas - Definition. The term "Common Areas" is defined as
all areas and facilities outside the Premises and within the exterior
boundary line of the Industrial Center and interior utility raceways within
the Premises that are provided and designated by the Lessor from time to time
for the general non-exclusive use of Lessor, Lessee and other lessees of the
industrial Center and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways and landscaped areas.
2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee,
for the benefit of Lessee and its employees, suppliers, shippers,
contractors, customers and invitees, during the term of this Lease, the
non-exclusive right to use, in common with others entitled to such use, the
Common Areas as they exist from time to time, subject to any rights, powers,
and privileges reserved by Lessor under the terms hereof or under the terms
of any rules and regulations or restrictions governing the use of the
Industrial Center. Under no circumstances shall the right herein granted to
use the Common Areas be deemed to include the right to store any property,
temporarily or permanently, in the Common Areas. Any such storage shall be
permitted only by the prior written consent of Lessor or Lessor's designated
agent, which consent may be revoked at any time. In the event that any
unauthorized storage shall occur then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 Common Areas - Rules and Regulations. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time,
to establish, modify, amend and enforce reasonable Rules and Regulations with
respect thereto in accordance with Paragraph 40. Lessee agrees to abide by
and conform to all such Rules and Regulations, and to cause its employees,
suppliers, shippers, customers, contractors and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance
with said rules and regulations by other lessees of the Industrial Center.
2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas,
ingress, egress, direction of traffic, landscaped areas, walkways and utility
raceways.
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial
Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
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<PAGE>
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes
in, to or with respect too the Common Areas and Industrial Center as Lessor
may, in the exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after
the Early Possession Date but prior to the Commencement Date, the obligation
to pay Base Rent shall be abated for the period of such early occupancy. All
other terms of this Lease, however, (including but not limited to the
obligations to pay Lessee's Share of Common Area Operating Expenses and to
carry the insurance required by Paragraph 8) shall be in effect during such
period. Any such early possession shall not affect nor advance the
Expiration Date of the Original Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by
the Commencement Date, Lessee shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease, or the obligations
of Lessee hereunder, or extend the term hereof, but in such case, Lessee
shall not, except as otherwise provided herein, be obligated to pay rent or
perform any other obligation of Lessee under the terms of this Lease until
Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date Lessee may, at its option, by notice in writing to Lessor
within ten (10) days after the end of said sixty (60) day period, cancel this
Lease, in which event the parties shall be discharged from all obligations
hereunder; provided further, however, that if such written notice of Lessee
is not received by Lessor within said ten (10) day period, Lessee's right to
cancel this Lease hereunder shall terminate and be of no further force or
effect. Except as may be otherwise provided, and regardless of when the
Original Term actually commences, if possession is not tendered to Lessee
when required by this Lease and Lessee does not terminate this Lease, as
aforesaid, the period free of the obligation to pay Base Rent, if any, that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to the period during which the
Lessee would have otherwise enjoyed under the terms hereof, but minus any
days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges,
as the same may be adjusted from time to time, to Lessor in lawful money of
the United States, without offset or deduction, on or before the day on which
it is due under the terms of this Lease. Base Rent and all other rent and
charges for any period during the term hereof which is for less than one full
month shall be prorated based upon the actual number of days of the month
involved. Payment of Base Rent and other charges shall be made to Lessor at
its address stated herein or to such other persons or at such other addresses
as Lessor may from time to time designate in writing to Lessee.
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<PAGE>
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified
in Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter
defined, during each calendar year of the term of this Lease, in accordance
with the following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
aa. The Common Areas, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common
Area lighting facilities, fences and gates, elevators and roof.
bb. Exterior signs and any tenant directors.
cc. Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to service
the Common Areas.
(iii) Trash disposal, property management and security services and
the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common Areas.
(v) Real Property Taxes (as defined in Paragraph 10.2) to be paid
by Lessor for the Building and the Common Areas under Paragraph 10 hereof.
(vi) The cost of the premiums for the insurance policies maintained
by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(viii) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense.
(ix) HVAC maintenance contract and HVAC repairs within tenant
suites.
(x) Costs and expenses of managing the Building including
management or administrative fees.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in the
Industrial Center or to the
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operation, repair and maintenance thereof, shall be allocated entirely to the
Building or to such other building. However, any Common Area Operating
Expenses and Real Property Taxes that are not specifically attributable to
the Building or to any other building or to the operation, repair and
maintenance thereof, shall be equitably allocated by Lessor to all buildings
in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to
provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement
of actual expenses is presented to Lessee by Lessor. At Lessor's option,
however, an amount may be estimated by Lessor from time to time of Lessee's
Share of annual Common Area Operating Expenses and the same shall be payable
monthly or quarterly, as Lessor shall designate, during each 12-month period
of the Lease term, on the same day as the Base Rent is due hereunder. Lessor
shall deliver to Lessee within sixty (60) days after the expiration of each
calendar year a reasonably detailed statement showing Lessee's Share of the
actual Common Area Operating Expenses incurred during the preceding year. If
Lessee's payments under this Paragraph 4.2(d) during said preceding year
exceed Lessee's Share as indicated on said statement, Lessee shall be
credited the amount of such overpayment against Lessee's Share of Common Area
Operating Expense next becoming due. If Lessee's payments under this
Paragraph 4.2(d) during said preceding year were less than Lessee's Share as
indicated on said statement, Lessee shall pay to Lessor the amount of the
deficiency within ten (10) days after delivery by Lessor to Lessee of said
statement.
5. Security Deposit. Lessee shall deposit with Lessor upon lessee's
execution hereof the Security Deposit as set forth in Paragraph 1.7 as
security for Lessee's faithful performance of Lessee's obligations under this
Lease. If Lessee fails to pay Base Rent or other rent or charges due
hereunder, or otherwise Defaults under this Lease (as defined in Paragraph
13.1), Lessor may use, apply or retain all or any portion of said Security
Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, cost, expense including but not limited
to the cleaning of the Premises after Lessee vacates, loss or damage
(including attorneys' fees) which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during
the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor as an addition to the Security Deposit
so that the total amount of the Security Deposit shall at all times bear the
same proportion to the then current Base Rent as the initial Security Deposit
bears to the Initial Base Rent set forth in Paragraph 1.5. Lessor shall not
be required to keep all or any part of the Security Deposit separate from its
general accounts. Lessor shall, at the expiration or earlier termination of
the term hereof and after Lessee has vacated the Premises, return to Lessee
(or, at Lessor's option, to the last assignee, if any, of Lessee's interest
herein), that portion of the Security Deposit not used or applied by Lessor.
Unless otherwise expressly agreed in writing by Lessor, no part of the
Security Deposit shall be considered to be held in trust, to bear interest or
other increment for its use, or to be prepayment for any monies to be paid by
Lessee under this Lease.
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6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit
the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to
the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withheld or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants,
and by prospective assignees and subtenants of Lessee, its assignees and
subtenants, for a modification of said Permitted Use, so long as the same
will not impair the structural integrity of the improvements on the Premises
or in the Building or the mechanical or electrical systems therein, does not
conflict with uses by other lessees, is not significantly more burdensome to
the Premises or the Building and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days after such request give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, chemical, material
or waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises
which constitutes a Reportable Use (as hereinafter defined) of Hazardous
Substances without the express prior written consent of Lessor and compliance
in a timely manner (at Lessee's sole cost and expense) with all Applicable
Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i)
the installation or use of any above or below ground storage tank, (ii) the
generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filled with,
any governmental authority, and (iii) the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Laws
require that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the foregoing, Lessee may,
without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the
Permitted Use, so long as such is not a Reportable Use and does not expose
the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In
addition, Lessor may (but without any obligation to do so) condition its
consent to any Reportable Use of any Hazardous Substance by Lessee upon
Lessee's giving Lessor such additional assurances as Lessor, in its
reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefor, including but not limited to the installation (and, at
Lessor's option, removal on or before Lease expiration or earlier
termination) of
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reasonably necessary protective modifications to the Premises (such as
concrete encasements) and/or the deposit of an additional Security Deposit
under Paragraph 5 hereof.
(b) Duty of Inform Lessor. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously
consented to by Lessor, Lessee shall immediately give Lessor written notice
thereof, together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding
given to, or received from, any governmental authority or private party
concerning the presence, spill, release, discharge of, or exposure to, such
Hazardous Substance including but not limited to all such documents as may be
involved in any Reportable Use involving the Premises. Lessee shall not
cause or permit any Hazardous Substance to be spilled or released in, on,
under or about the Premises (including, without limitation, through the
plumbing or sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and
the Premises, harmless from and against any and all damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under
Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the
cost of investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or
earlier termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with
all "Applicable Requirements," which term is used in this Lease to mean all
laws, rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene,
(ii) environmental conditions on, in, under or about the Premises, including
soil and groundwater conditions, and (iii) the use, generation, manufacture,
production, installation, maintenance, removal, transportation, storage,
spill, or release of any Hazardous Substance), now in effect or which may
hereafter come into effect. Lessee shall, within five (5) days after receipt
of Lessor' written request, provide Lessor with copies of all documents and
information, including but not limited to permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with
any Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving failure by Lessee or the Premises to comply
with any Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the
condition of the Premises and for verifying compliance by Lessee with this
Lease and all Applicable Requirements (as defined in
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Paragraph 6.3), and Lessor shall be entitled to employ experts and/or
consultants in connection therewith to advise Lessor with respect to Lessee's
activities, including but not limited to Lessee's installation, operation,
use, monitoring, maintenance, or removal of any Hazardous Substance on or
from the Premises. The costs and expenses of any such inspections shall be
paid by the party requesting same, unless a Default or Breach of this Lease
by Lessee or a violation of Application Requirements or a contamination,
caused or materially contributed to by Lessee, is found to exist or to be
imminent, or unless the inspection is requested or ordered by a governmental
authority as the result of any such existing or imminent violation or
contamination. In such case, Lessee shall upon request reimburse Lessor
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures or Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraph 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall,
at Lessee's sole cost and expense and at all times, keep the Premises and
every part thereof in good order, condition and repair (whether or not such
portion of the Premises requiring repair, or the means of repairing the same,
are reasonably or readily accessible to Lessee, and whether or not the need
for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, without
limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections
if within the Premises, fixtures, interior walls, interior surfaces of
exterior walls, ceilings, floors, windows, doors, plate glass, and skylights,
but excluding any items which are the responsibility of Lessor pursuant to
Paragraph 7.2 below. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices.
Lessee's obligations shall include restorations, replacements or renewals
when necessary to keep the Premises and all improvements thereon or a part
thereof in good order, condition and state of repair.
(b) Lessor shall procure and maintain the contract for the heating,
air conditioning and ventilating systems, Lessee shall reimburse Lessor for
its pro-rata share of the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case
no notice shall be required), perform such obligations on Lessee's behalf,
and put the Premises in good order, condition and repair, in accordance with
Paragraph 13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to
reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition
and repair the foundations, exterior walls, structural condition of interior
bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if
located in the Common Areas) or other automatic fire extinguishing system
including fire alarm and/or smoke detection systems and equipment, fire
hydrants, parking lots, walkways, parkways, driveways, landscaping, fences,
signs and utility systems serving the Common Areas and all parts thereof, as
well as providing the services for which there is a Common Area Operating
Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to pain the
exterior or interior surfaces of exterior walls nor shall Lessor be obligated
to maintain, repair or replace windows,
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doors or plate glass of the Premises. Lessee expressly waives the benefit of
any statute nor or hereafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Building, Industrial Center or Common
Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning
equipment, plumbing, and fencing in, on or about the Premises. The term
"Trade Fixtures" shall mean Lessee's machinery and equipment which can be
removed without doing material damage to the Premises. The term
"Alterations" shall mean any modification of the improvements on the Premises
which are provided by Lessor under the terms of this Lease, other than
Utility Installations or Trade Fixtures. "Lessee-Owned Alterations and/or
Utility Installations" are defined as Alterations and/or Utility
Installations made by Lessee that are not yet owned by Lessor pursuant to
Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations
or Utility Installations in, on, under or about the Premises without Lessor's
prior written consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible
from the outside of the Premises, do not involve puncturing, relocation or
removing the roof or any existing walls, or changing or interfering with the
fire sprinkler or fire detection systems and the cumulative cost thereof
during the term of this Lease as extended does not exceed $2,500.00.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given
by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all
applicable permits required by governmental authorities; (ii) the furnishing
of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon; and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any
Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good and workmanlike manner, with good and sufficient
materials, and be in compliance with all Applicable Requirements. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may, (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation
that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and
completion bond in an amount equal to one and one-half times the estimated
cost of such Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for
labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanic's or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on, or about the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense, defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises.
If Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to one and one-half
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times the amount of such contested lien claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorneys' fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal
and to cause Lessee to become the owner thereof as hereinafter provided in
this Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but
considered a part of the Premises. Lessor may, at any time and at its
option, elect in writing to Lessee to be the owner of all or any specified
part of the Lessee-Owned Alterations and Utility Installations. Unless
otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned
Alterations and Utility Installations shall, at the expiration or earlier
termination of this Lease, become the property of Lessor and remain upon the
Premises and be surrendered with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease,
notwithstanding that their installation may have been consented to by Lessor.
Lessor may require the removal at any time of all or any part of any
Alterations or Utility Installations made without the required consent of
Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear excepted. Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under
this Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the removal of any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or ground water
contaminated by Lessee, all as may then be required by Applicable
Requirements and/or good practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation
to repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment of Premiums. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy
periods commencing prior to, or extending beyond, the term of this Lease
shall be prorated to coincide with the corresponding Commencement Date or
Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee, Lessor and any Lender(s) whose names have been
provided to Lessee in writing (as additional insureds) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use,
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occupancy or maintenance of the Premises and all areas appurtenant thereto.
Such insurance shall be on an occurrence basis providing single limit
coverage in an amount not less than $1,000,000 per occurrence with an
"Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but
shall include coverage liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee
of any obligation hereunder. All insurance to be carried by Lessee shall be
primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only. (See Addendum 1.)
(b) Carried by Lessor. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of
Lessor with loss payable to Lessor and to any Lender(s) insuring against loss
or damage to the Premises. Such insurance shall be for full replacement
cost, except with regard to earthquake and/or flood where insurance may be
for a lesser amount, as the same shall exist from time to time, or the amount
required by any Lender(s), but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than
full replacement cost. Lessee-Owned Alterations and Utility Installations,
Trade Fixtures and Lessee's personal property shall be insured by Lessee
pursuant to Paragraph 8.4. If the coverage is available and commercially
appropriate, Lessor's policy or policies shall insure against all risks of
direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender or at Lessor's discretion), including coverage
for any additional costs resulting from debris removal and reasonable amounts
of coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Building
required to be demolished or removed by reason of the enforcement of any
building, zoning, safety or land use laws as the result of a covered loss,
but not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance clause or
waiver of subrogation.
(b) Rental Value. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and any Lender(s), insuring the loss of the full
rental and other charges payable by all lessees of the Building to Lessor for
one year (including all Real Property Taxes, insurance costs, all Common Area
Operating Expenses and any scheduled rental increases). Said insurance may
provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide
for one full year's loss of rental revenues from the date of any such loss.
Said insurance shall contain an agreed valuation provision in lieu of any
co-insurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income, Real Property Taxes, insurance premium
costs and other expenses, if any, otherwise payable, for the next 12-month
period. Common Area Operating Expenses shall include any deductible amount
in the event of such loss.
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(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Industrial Center if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures and
Lessee-Owned Alterations and Utility Installations in, on, or about the
Premises similar in coverage to that carried by Lessor as the Insuring Party
under Paragraph 8.3(a). Such insurance shall be full replacement cost
coverage with a deductible not to exceed $1,000 per occurrence. The proceeds
from any such insurance shall be used by Lessee for the replacement of
personal property and the restoration of Trade Fixtures and Lessee-Owned
Alterations and Utility Installations. Upon request from Lessor, Lessee
shall provide Lessor with written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least A, VII, or such other rating as may be required by a
Lender, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in this Paragraph 8. Lessee shall cause to be
delivered to Lessor, within seven (7) days after the earlier of the Early
Possession Date or the Commencement Date, certified copies of, or
certificates evidencing the existence and amounts of, the insurance required
under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or
subject to modification except after thirty (30) days' prior written notice
to Lessor. Lessee shall at least thirty (30) days prior to the expiration of
such policies, furnish Lessor with evidence of renewals of "insurance
binders" evidencing renewal thereof, or Lessor may order such insurance and
charge the cost thereof to Lessee, which amount shall be payable by Lessee to
Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss or damage to their property arising out of or
incident to the perils required to be insured against under Paragraph 8. The
effect of such releases and waivers of the right to recover damages shall not
be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto. Lessor and Lessee agree to have their
respective insurance companies issuing property damage insurance waive any
right to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated thereby.
8.7 Indemnity. Except to the extent caused by or arising from gross
negligence or willful misconduct of Lessor or it's agents, employees or
contractors, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, costs, liens, judgments, penalties, loss of permits, attorneys' and
consultants' fees, expenses and/or liabilities arising out of, involving, or
in connection with, the occupancy of the Premises by Lessee, the conduct of
Lessee's business, any act, omission or neglect of Lessee, its agents,
contractors, employees or invitees, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's
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part to be performed under this Lease. The foregoing shall include, but not
be limited to, the defense or pursuit of any claim or any action or
proceeding involved therein, and whether or not (in the case of claims made
against Lessor) litigated and/or reduced to judgment. In case any action or
proceeding involved therein, and whether or not (in the case of claims made
against Lessor) litigated and/or reduced to judgment. In case any action or
proceeding be brought against Lessor by reason of any of the foregoing
matters, Lessee upon notice from Lessor shall defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property
of Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by
or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from
any other cause, whether said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, from other sources or places, and regardless of whether
the cause of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising from
any act or neglect of any other lessee of Lessor nor from the failure by
Lessor to enforce the provisions of any other lease in the Industrial Center.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent
(50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the
Premises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Code of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Code (excluding Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building) of the
Building shall, at the option of Lessor, be deemed to be Premises Total
Destruction.
(c) "Insured Loss" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible
amounts or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto,
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including demolition, debris removal and upgrading required by the operation
of applicable building codes, ordinances or laws, and without deduction for
depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Premises Partial Damage - Insured Loss. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect. In the event, however,
that there is a shortage of insurance proceeds and such shortage is due to
the fact that, by reason of the unique nature of the improvements in the
Premises, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds
or adequate assurance thereof within said ten (10) day period, Lessor shall
complete them as soon as reasonably possible and this Lease shall remain in
full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If Lessor does not
receive such funds or assurance within such ten (10) day period, and if
Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any
right to reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood
or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if
made by either Party.
9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which even this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
receipt by Lessor of knowledge of the occurrence of such damage of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the
date of such notice. In the event Lessor elects to give such notice of
Lessor's intention to terminate this Lease, Lessee shall have the right
within ten (10) days after the receipt of such notice to give written notice
to Lessor of Lessee's commitment to pay for the repair of such damage totally
at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof
within thirty (30) days following such commitment from Lessee. In such event
this Lease shall continue in full force and effect, and Lessor shall proceed
to make such repairs as soon as reasonably possible after the required funds
are available. If Lessee does not give such notice and provide the funds or
assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
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damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessee may, at
Lessor's option, terminate this Lease effectively sixty (60) days following
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then
Lessee may preserve this Lease by (a) exercising such option, and (b)
providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten (10) days after Lessee's receipt of Lessor's written
notice purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option during
such period and provides Lessor with funds (or adequate assurance thereof) to
cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense
repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
and provide such funds or assurance during such period, then this Lease shall
terminate as of the date set forth in the first sentence of this Paragraph
9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base
Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired, but not in
excess of proceeds from insurance required to be carried under Paragraph
8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses
and other charges, if any, as aforesaid, all other obligations of Lessee
hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the Premises under the provisions of this Paragraph 9 and shall not
commence, in a substantial and meaningful way, the repair or restoration of
the Premises within ninety (90) days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee
gives such notice to Lessor and such Lenders and such repair or restoration
is not commenced within thirty (30) days after receipt of such notice, this
Lease shall terminate as of the date specified in said notice. If Lessor or
a Lender commences the repair or restoration of the Premises within thirty
(30) days after the receipt of such notice, this Lease shall continue in full
force and effect. "Commence" as used in this Paragraph 9.6 shall mean either
the unconditional authorization of the preparation of the required plans, or
the beginning of the actual work on the Premises, whichever occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but
subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor
may at Lessor's option either
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(i) investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) if the estimated
cost to investigate and remediate such condition exceeds twelve (12) times
the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge
of the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of
such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten
(10) days after the receipt of such notice to give written notice to Lessor
of Lessee's commitment to pay for the excess costs of (a) investigation and
remediation of such Hazardous Substance Condition to the extent required by
Applicable Requirements, over (b) an amount equal to twelve (12) times the
then monthly Base Rent or $100,000, whichever is greater. Lessee shall
provide Lessor with the funds required of Lessee or satisfactory assurance
thereof within thirty (30) days following said commitment by Lessee. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such investigation and remediation as soon as reasonably
possible after the required funds are available. If Lessee does not give
such notice and provide the required funds or assurance thereof within the
time period specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
9.8 Termination - Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance
payment made by Lessee to Lessor and so much of Lessee's Security Deposit as
has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby
waive the provisions of any present or future statute to the extent it is
inconsistent therewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any such amounts shall be included in
the calculation of Common Area Operating Expenses in accordance with the
provisions of Paragraph 4.2.
10.2 Real Property Tax Definition. As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Industrial Center by any
authority having the direct or indirect power to tax, including any city,
state or federal government, or any school, agricultural, sanitary, fire,
street, drainage, or other improvement district thereof, levied against any
legal or equitable interest of Lessor in the Industrial Center or any portion
thereof, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in Applicable Law taking
effect, during the term of this Lease, including but not limited to a change
in the ownership of the Industrial Center or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer thereof,
and whether or not contemplated by the Parties. In calculating Real Property
Taxes for any calendar year, the Real Property
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Taxes for any real estate tax year shall be included in the calculation of
Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such
other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however,
pay to Lessor at the time Common Area Operating Expenses are payable under
Paragraph 4.2, the entirety of any increase in Real Property Taxes if
assessed solely by reason of Alterations, Trade Fixtures or Utility
Installations placed upon the Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed,
Real Property Taxes allocated to the Building shall be an equitable
proportion of the Real Property Taxes for all of the land and improvements
included within the tax parcel assessed, such proportion to be determined by
Lessor from the respective valuations assigned in the assessor's work sheets
or such other information as may be reasonably available. Lessor's
reasonable determination thereof, in good faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee-Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all
personal property of Lessee contained in the Premises or stored within the
Industrial Center. When possible, Lessee shall cause its Lessee-Owned
Alterations and Utility Installations, Trade Fixtures, furnishings, equipment
and all other personal property to be assessed and billed separately from the
real property of Lessor. If any of Lessee's said property shall be assessed
with Lessor's real property, Lessor shall pay Lessor the taxes attributable
to Lessee's property within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity,
telephone, security, gas and cleaning of the Premises, together with any
taxes thereon. If any such utilities or services are not separately metered
to the Premises or separately billed to the Premises, Lessee shall pay to
Lessor a reasonable proportion to be determined by Lessor of all such charges
jointly metered or billed with other premises in the Building in the manner
and within the time periods set forth in Paragraph 4.2(d).
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign")
or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis,
of twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a
formal assignment or hypothecation of this Lease or Lessee's assets occurs,
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which results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at
the time of full execution and delivery of this Lease or at the time of the
most recent assignment to which Lessor has consented, or as it exists
immediately prior to said transaction or transactions constituting such
reduction, at whichever time said Net Worth of Lessee was or is greater,
shall be considered an assignment of this Lease by Lessee to which Lessor may
reasonably withhold its consent. "Net Worth of Lessee" for purposes of this
Lease shall be the net worth of Lessee (excluding any Guarantors) established
under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be
a Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a non-curable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii)
upon thirty (30) days' written notice ("Lessor's Notice"), increase the
monthly Base Rent for the Premises to the greater of the then fair market
rental value of the Premises, as reasonably determined by Lessor, or one
hundred ten percent (110%) of he Base Rent then in effect. Pending
determination of the new fair market rental value, if disputed by Lessee,
Lessee shall pay the amount set forth in Lessor's Notice, with any
overpayment credited against the next installment(s) of Base Rent coming due,
and any underpayment for the period retroactively to the effective date of
the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or
any deduction for depreciation or obsolescence, and considering the Premises
at its highest and best use and in good condition) or one hundred ten percent
(110%) of the price previously in effect, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index
applicable to the time of such adjustment, and (iii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be
increased in the same ratio as the new rental bears to the Base Rent in
effect immediately prior to the adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) after the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent for performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
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(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and without
obtaining their consent, and such action shall not relieve such periods from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors
or anyone else responsible for the performance of the Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors
or anyone else responsible for the performance of the Lessee's obligations
under this Lease, including any sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor,
or any security held by Lessor.
(e) Each request for consent to an assignment for subletting shall
be in writing, accompanied by information relevant to Lessor's determination
as to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base
Rent applicable to the portion of the Premises which is the subject of the
proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for
consent. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations are as contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment schedule of the
rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of
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Lessee's obligations under this Lease, Lessee may, except as otherwise
provided, however, that until a Breach (as defined in Paragraph 13.1) shall
occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy
the rents accruing under such sublease. Lessor shall not, by reason of the
foregoing provision or any other assignment of such sublease to Lessor, nor
by reason of the collection of the rents from a sublessee, be deemed liable
to the sublessee for any failure of Lessee to perform and comply with any of
Lessee's obligations to such sublessee under such Sublease. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a
written notice from Lessor stating that a Breach exists in the performance of
Lessee's obligations under this Lease, to pay to Lessor the rents and other
charges due and to become due under the sublease. Sublessee shall rely upon
any such statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to whether
such Breach exists and notwithstanding any notice from or claim from Lessee
to the contrary. Lessee shall have no right or claim against such sublessee,
or, until the Breach has been cured, against Lessor, for any such rents and
other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requesting the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said default. A "Default" by
Lessee is defined as a failure by Lessee to observe, comply with or perform
any of the terms, covenants, conditions or rules applicable to Lessee under
this Lease. A "Breach" by Lessee is defined as the occurrence of any one or
more of the following Defaults, and, where a grace period for cure after
notice is specified herein, the failure by Lessee to cure such Default prior
to the expiration of the applicable grace period, and shall entitle Lessor to
pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other
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monetary payment required to be made by Lessee hereunder as and when due, the
failure by Lessee to provide Lessor with reasonable evidence of insurance or
surety bond required under this Lease, or the failure of Lessee to fulfill
any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) days
following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than
those described in Subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice
thereof by or on behalf of Lessor Lessee; provided, however, that if the
nature of Lessee's Default is such that more than thirty (30) days are
reasonably required for its cure, then it shall not be deemed to be a Breach
of this Lease by Lessee if Lessee commences such cure within said thirty (30)
day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code
Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
Subparagraph 13.1(e) is contrary to any applicable law, such provision shall
be of no force or effect, and shall not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement of Lessee
or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurances of security,
which, when coupled with the then existing resources of
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Lessee, equals or exceeds the combined financial resources of Lessee and the
Guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check
given to Lessor by Lessee shall not be honored by the bank upon which it is
drawn, Lessor, at its own option, may require all future payments to be made
under this Lease by Lessee to be made only by cashier's check. In the event
of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or
without further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have by reason of such Breach, Lessor
may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of such rental loss that the
Lessee proves could have been reasonably avoided; (iii) the worth at the time
of award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of such rental loss that the
Lessee proves could be reasonably avoided; and (iv) any other amount
necessary to compensate Lessor for all the detriment proximately caused by
the Lessee's failure to perform its obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom, including
but not limited to the cost of recovery possession of the Premises, expenses
of reletting, including necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and that portion of any leasing commission paid
by Lessor in connection with this Lease applicable to the unexpired term of
this Lease. The worth at the time of award of the amount referred to in
provision, (iii) of the immediately preceding sentence shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco or the Federal Reserve Bank District in which the Premises are
located at the time of award plus one percent (1%). Efforts by Lessor to
mitigate damages caused by Lessee's Default or Breach of this Lease shall not
waive Lessor's right to recover damages under this Paragraph 13.2. If
termination of this Lease is obtained through the provisional remedy of
unlawful detainer, Lessor shall have the right to recover in such proceeding
the unpaid rent and damages as are recoverable therein, or Lessor may reserve
the right to recover all or any part thereof in a separate suit for such rent
and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit,
or to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two (2) such grace periods shall constitute both an unlawful
detainer and a Breach of this Lease entitling Lessor to the remedies provided
for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California Civil Code Section 1951.4) after Lessee's Breach and recover
the rent as it becomes due, provided Lessee has
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the right to sublet or assign, subject only to reasonable limitations.
Lessor and Lessee agree that the limitations on assignment and subletting in
this Lease are reasonable. Acts of maintenance or preservation, efforts to
relet the Premises, or the appointment of a receiver to protect the Lessor's
Interest under this Lease, shall not constitute a termination of the Lessee's
right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters
occurring or accruing during the term hereof or by reason of Lessee's
occupancy of the Premises.
13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for
the giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of
which concessions are hereinafter referred to as "Inducement Provisions"
shall be deemed conditioned upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by
Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional rent
due under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph 13.3 shall not be deemed a waiver
by Lessor of the provisions of this Paragraph 13.3 unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited
to, processing and accounting charges, and late charges which may be imposed
upon Lessor by the terms of any ground lease, mortgage or deed of trust
covering the Premises. Accordingly, if any installment of rent or other sum
due from Lessee shall not be received by Lessor or Lessor's designee within
ten (10) days after such amount shall be due, then, without any requirement
for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six
percent (6%) of such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Lessor will
incur by reason of late payment by Lessee. Acceptance of such late charge by
Lessor shall in no event constitute a waiver of Lessee's Default or Breach
with respect to such overdue amount, nor prevent Lessor from exercising any
of the other rights and remedies granted hereunder. In the event that a late
charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or
any other provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed;
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provided, however, that if the nature of Lessor's obligation is such that
more than thirty (30) days after such notice are reasonably required for its
performance, then Lessor shall not be in breach of this Lease if performance
is commenced within such thirty (30) day period and thereafter diligently
pursue to completed.
14. Condemnation. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the concerning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five (25%) of
the portion of the Common Areas designated for Lessee's parking, is taken by
condemnation, Lessee may, at Lessee's option, to be exercised in writing
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in the same proportion as the
rentable floor area of the Premises taken bears to the total rentable floor
area of the Premises. No reduction of Base Rent shall occur if the
condemnation does not apply to any portion of the Premises. Any award for
the taking of all or any part of the Premises under the power of eminent
domain or any payment made under threat of the exercise of such power shall
be the property of Lessor, whether such award shall be made as compensation
for diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation for diminution of value of the leasehold or for the taking of
the fee, or as severance damages; provided, however, that Lessee shall be
entitled to any compensation, separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event
that this Lease is not terminated by reason of such condemnation, Lessor
shall to the extent of its net severance damages received, over and above
Lessee's Share of the legal and other expenses incurred by Lessor in the
condemnation matter, repair any damage to the Premises caused by such
condemnation authority. Lessee shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such
repair.
15. Brokers' Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 Assumption of Obligations. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation
of law, shall be deemed to have assumed Lessor's obligation under this
Paragraph 15. Each Broker shall be an intended third party beneficiary of
the provisions of Paragraph 1.10 and of this Paragraph 15 to the extent o
fits interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.3 Representations and Warranties. Lessee and Lessor each represent
and warrant to the other that it has had no dealings with any person, firm,
broker or finder other than as named in Paragraph 1.10(a) in connection with
the negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such
unnamed broker, finder or other similar
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party by reason of any dealings or actions of the Indemnifying Party,
including any costs, expenses, and/or attorneys' fees reasonably incurred
with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall within
ten (10) days after written notice from the other Party (the "Requesting
Party") execute, acknowledge and deliver to the Requesting Party a statement
in writing in a form similar to the then most current "Tenancy Statement"
form published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
required by the Requesting Party.
16.2 Financial Statement. If Lessor desire to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. Lessor' Liability. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In
the event of a transfer of Lessor's title or interest in the Premises or in
this Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit, held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15.3, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in
this Lease to be performed by the Lessor shall be binding on upon the Lessor
as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at the prime rate charged by the largest state chartered bank in the
state in which the Premises are located plus four percent (4%) per annum, but
not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this
Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. No Prior or other Agreements; Broker Disclaimer. This Lease contains
all agreements between the Parties with respect to any matter mentioned
herein, and no other prior or contemporaneous agreement or understanding
shall be effective. Lessor and Lessee each represents and warrants to the
Brokers that it has made, and is relying solely upon, its own investigation
as to the nature, quality, character and financial responsibility of the
other Party to this Lease and as to the nature, quality and character of the
Premises. Brokers have no responsibility with respect thereto or with regard
to any
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default or breach hereof by either Party. Each Broker shall be an intended
third party beneficiary of the provisions of this Paragraph 22.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or
registered mail or U.S. Postal Service Express Mail, with postage prepaid, or
by facsimile transmission during normal business hours, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may
be written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate by written notice to Lessee.
23.3 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown
on the receipt card, or if no delivery date is shown, the postmark thereon.
If sent by regular mail, the notice shall be deemed given forty-eight (48)
hours after the same is addressed as required herein and mailed with postage
prepaid. Notices delivered by United States Express Mail or overnight
courier that guarantees next day delivery shall be deemed given twenty-four
(24) hours after delivery of the same to the United States Postal Service or
courier. If any notice is transmitted by facsimile transmission or similar
means, the same shall be deemed served or delivered upon telephone or
facsimile confirmation of receipt of the transmission thereof, provided a
copy is also delivered via delivery or mail. If notice is received on a
Saturday or a Sunday or a legal holiday, it shall be deemed received on the
next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any Default or Breach by Lessee of any provision hereof. Any payment given
Lessor by Lessee may be accepted by Lessor on account of moneys or damages
due Lessor, notwithstanding any qualifying statements or conditions made by
Lessee in connection therewith, which such statements and/or conditions shall
be of no force or effect whatsoever unless specifically agreed to in writing
by Lessor at or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this
Paragraph 26 then the Base Rent payable from and after the time of the
expiration or earlier termination of this Lease shall be increased to two
hundred percent (200%) of the Base Rent
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applicable during the month immediately preceding such expiration or earlier
termination. Nothing contained herein shall be construed as a consent by
Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "Security Device"), now
or hereafter placed by Lessor on the real property of which the Premises are
a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have
no duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or
(iii) be bound by prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's possession and this Lease,
including any options to extend the term hereof, will not be disturbed so
long as Lessee is not in Breach hereof and attorns to the record owner of the
Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document
any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.
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31. Attorneys' Fees. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorneys' fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be, whether by
compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fee award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys' fees reasonably incurred. Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in preparation and
service of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection with
such Default or resulting Breach. Broker(s) shall be intended third party
beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or Building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred eighty (180) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs.
All such activities of Lessor shall be without abatement of rent or liability
to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the
Premises or the Building, except that Lessee may, with Lessor's prior written
consent, install (but not on the roof) such signs as are reasonably required
to advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation
of any sign on the Premises by or for Lessee shall be subject to the
provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade
Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor
reserves all rights to the use of the roof of the Building, and the right to
install advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one
or all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
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36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act
by or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering
and responding to Lessee's request. Any unused portion of said deposit shall
be refunded to Lessee without interest. Lessor's consent to any act,
assignment of this Lease or subletting of the Premises by Lessee shall not
constitute an acknowledgment that no Default or Breach by Lessee of this
Lease exists, nor shall such consent be deemed a waiver of any then existing
Default or Breach, except as may be otherwise specifically stated in writing
by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the
impositions by Lessor at the time of consent of such further or other
conditions as are then reasonable with reference to the particular matter for
which consent is being given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the
same obligations as Lessee under this Lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a
Default of the Lessee under this Lease if any such Guarantor fails or
refuses, upon reasonable request by Lessor to give: (a) evidence of the due
execution of the guaranty called for by this Lease, including the authority
of the Guarantor (and of the party signing on Guarantor's behalf) to obligate
such Guarantor on said guaranty, and resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signatures of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to
time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises
and the performance of all of the covenants, conditions and provisions on
Lessee's part to be observed and performed under this Lease, Lessee shall
have quiet possession of the Premises for the entire term hereof subject to
all of the provisions of this Lease.
31
<PAGE>
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this lease or to extend or renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal to lease the Premises or the right
of first offer to lease the Premises or the right of first refusal to lease
other property of lessor or the right of first offer to lease other property
of Lessor; (c) the right to purchase the Premises, or the right of first
refusal to purchase the Premises, or the right of first offer to purchase the
Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of lessor, or the right of first
offer to purchase other property of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to
Lessee in this lease is personal to the original Lessee named in Paragraph
1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised
by any person or entity other than said original lessee while the original
Lessee is in full and actual possession of the premises and without the
intention of thereafter assigning or subletting. The options, if any, herein
granted to Lessee are not assignable, either as part of an assignment of this
Lease or separately or apart therefrom, and no Option may be separated from
this Lease in any manner, by reservation or otherwise.
39.3 Multiple options. In the event that lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised
unless the prior Options to extend or renew this Lease have been validly
exercised.
39.4 Effect on Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the notices Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from lessee is
unpaid (without regard to whether notice thereof is given Lessee), or (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessor has given to Lessee three 93) or more notices of separate Defaults
under Paragraph 13.1 during the twelve (12) month period immediately
preceding the exercise of the Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a).
(c) All right of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this lease, (i) Lessee fails to pay to Lessor a monetary obligation
of lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of separate Defaults under
Paragraph 13.1 during any twelve (12) month period, whether or not the
Defaults are cured, or (iii) if lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep
and observe all reasonable rules and regulations ("Rules and Regulations")
which Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
32
<PAGE>
preservation of good order, as well as for the convenience of other occupants
or tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way,
utility raceways, and dedications that Lessor deems necessary, and to cause
the recordation of parcel maps and restrictions, so long as such easements,
rights of way, utility raceways, dedications, maps and restrictions do not
reasonably interfere with the use of the Premises by Lessee. Lessee agrees
to sign any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to
any amount of sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of the said Party to institute suit for recovery of
such sum. If it shall be adjudged that there was no legal obligation on the
part of said party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provision of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of
such entity represents and warrants that he or she is duly authorized to
execute and deliver this lease on its behalf. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after request by
Lessor, deliver to lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Leas and
the typewritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not
be deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee,
the obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
33
<PAGE>
Listed as Page 8
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER
THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED
SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
LESSOR: LESSEE:
TMT Carmel Business Center, Inc. USCommunications, Inc.,
a Delaware corporationa Delaware corporation
BY:RREEF Management Company,
a California corporation
BY: BY: /s/ James C. Bernet
------------------------------- -----------------------------------
Jill E. Shanahan James C. Bernet
TITLE: Vice President TITLE: President
DATE: DATE: 12-19-97
----------------------------- ----------------------------------
- ----------------------------------
7330 Engineer Road, Suite A
San Diego, CA 92111
BY: /s/ Delia O'Donnell
-----------------------------------
Delia O'Donnell
TITLE: Secretary
DATE: 12-19-97
-----------------------------------
34
<PAGE>
ADDENDUM I
This Addendum is attached to and made a part of the Lease agreement dated
December 12, 1997, between TMT Carmel Business Center, Inc., a Delaware
corporation ("Lessor"), and USCommunication Services, Inc., a Delaware
corporation ("Lessee"), for the Premises commonly known as 12245 World Trade
Drive, Suites F and G, San Diego, California 92128, consisting of approximately
4,094 square feet.
1. RENT SCHEDULE
Rent for the period 12/22/97 through 12/31/98 shall be $3,029.56 per month
Rent for the period 01/01/98 through 12/31/98 shall be $3,181.04 per month
Rent for the period 01/01/99 through 12/31/00 shall be $3,340.09 per month
2. LESSEE'S SHARE
"Lessee's Share" is defined, for purposes of this Lease, as the percentage which
the total square footage of the Premises as stated in Article 1.2(a) of the
Lease bears to the total square footage of all buildings located on the
property. Lessee's Share is subject to change according to BOMA standards.
3. RENEWAL OPTION - MARKET RATE
Lessee shall, provided the Lease is in full force and effect and Lessee is not
in default under any of the other terms and conditions of the Lease at the time
of notification or commencement, have one (1) successive option to renew this
Lease for a term of three (3) years, for the portion of the Premises being
leased by Lessee as of the date the renewal term is to commence, on the same
terms and conditions set forth in the lease, except as modified by the terms,
covenants and conditions as set forth below:
(a) If Lessee elects to exercise said option, then Lessee shall provide
lessor with written notice no earlier than the date which is one hundred
- -eighty (180) days prior to the expiration of the then current term of the
lease but no later than the date which is one hundred - twenty (120) days
prior to the expiration of the current term of the Lease, and the annual rent
and monthly installment in effect at the expiration of the current term of
the Lease, and the annual rent and monthly installment in effect at the
expiration of the then current term of the Lease shall be increased,
commencing on the first day of the new renewal term, to reflect the current
fair market rental for comparable space in other similar buildings in the
same rental market as of the date the renewal term is to commence. If Lessee
fails to provide such notice, Lessee shall have no further or additional
right to extend or renew the term of the Lease. The notice shall be given in
the manner provided in the lease for the giving of notices to Lessor.
(b) Lessor shall advise Lessee of the new annual rent and monthly
installment for the Premises no later than thirty (30) days after receipt of
lessee's written request therefor. Said request shall be made no earlier than
thirty (30) days prior to the first date on which Lessee may exercise its option
under this Paragraph. Said notification of the new annual rent may include a
provision for its escalation to provide for a change in fair market rental
between the time of notification and the commence of the renewal term. Neither
party to the Lease shall have the right to have a court or third party set the
annual rent and monthly installment and in no event shall the annual rent and
monthly installment for any option period be less than the annual rent and
monthly installment in preceding period.
ADDENDUM PAGE 1
<PAGE>
(c) This option is not transferable; the parties hereto acknowledge and
agree that they intend that the aforesaid option to renew this Lease shall be
"personal" to Lessee as set forth above and that in no event will any assignee
or sublessee have any rights to exercise the aforesaid option to renew.
4. RELOCATION
Lessor, at its sole expense, on at least thirty (30) days prior written notice,
may require Lessee to move from the Premises to other space of comparable size
and decor in order to permit Lessor to consolidate the space leased to Lessee
with other adjoining space leased or for any reason Lessor may have. Provided,
however, that in the event of receipt of any such notice, Lessee by written
notice to Lessor may elect not to move to the other space and in lieu thereof
terminate this Lease, effective thirty (30) days after the date of the original
notice of relocating by Lessor. In the event of any such relocation, Lessor
will pay all expenses of preparing and decorating the new premises so that they
will be substantially similar to the Premises from which Lessee is moving and
Lessor will also pay the expense of moving lessee's furniture and equipment to
the relocated premises. In such event this Lease and each and all of the terms
and covenants and conditions hereof shall remain in full force and effect and
thereupon be deemed applicable to such new space except that revised Exhibit A
shall become part of this Lease and shall reflect the location of the new
premises.
5. HAZARDOUS MATERIALS
(a) Lessee agrees that Lessee, its agents and contractors, licensees, or
invitees shall not handle, use, manufacture, store or dispose of any flammables,
explosives, radioactive materials, hazardous wastes or materials, toxic wastes
or materials or other similar substances, petroleum products or derivatives
(collectively "Hazardous Materials") on, under, or about the Premises, without
Lessor's prior written consent (which consent may be given or withheld in
Lessor's sole discretion), provided that lessee may handle, store, use or
dispose of products containing small quantities of Hazardous Materials, which
products are of a type customarily found in offices and households (such as
aerosol cans containing insecticides, toner for copies, paints, paint remover,
and the like), provided further that Lessee shall handle, store, use and dispose
of any such Hazardous Materials in a safe and lawful manner and shall not allow
such Hazardous Materials to contaminate the Premises or the environment.
(b) Without limiting the above, Lessee shall reimburse, defend, indemnify
and hold Lessor harmless from and against any and all claims, losses,
liabilities, damages, costs and expenses, including without limitation, loss of
rental income, loss due to business interruption, and attorneys fees and costs,
arising out of or in any way connected with the use, manufacture, storage, or
disposal of Hazardous Materials by Lessee, its agents or contractors on, under
or about the premises including, without limitation, the costs of any required
or necessary investigation repair, cleanup or detoxification and the preparation
of any closure or other required plans in connection herewith, whether voluntary
or compelled by governmental authority. The indemnity obligations of Lessee
under this clause shall survive any termination of the Lease.
(c) Notwithstanding anything set forth in this Lease, Lessee shall only be
responsible for contamination of Hazardous Materials or any cleanup resulting
directly therefrom, resulting directly from matters occurring or Hazardous
Materials deposited (other than by contractors, agents or representatives
controlled by Lessor) during the Lease term, and any other period of time during
which Lessee is in actual or constructive occupancy of the Premises. Lessee
shall take reasonable precautions to prevent the contamination of the Premise
with Hazardous Materials by third parties.
ADDENDUM PAGE 2
<PAGE>
(d) It shall not be unreasonable for Lessor to withhold its consent to any
proposed Assignment or Sublease if (i) the proposed Assignee's or Sublessee's
anticipated use of the premises involves the generation, storage, use, treatment
or disposal of Hazardous Materials; (ii) the proposed Assignee or Sublessee has
been required by any prior Lessor, lender, or governmental authority to take
remedial action in connection with Hazardous materials contaminating a property
if the contamination resulted from such Assignee's or Sublessee's actions or use
of the property in question; or (iii) the proposed Assignee or Sublessee is
subject to an enforcement order issued by any governmental authority in
connection with the use, disposal, or storage of a hazardous material.
6. LIABILITY INSURANCE CONTINUED FROM LEASE ARTICLE 8.2(a)
In addition to the provision of Section 8.29a) of this Lease, Lessee's liability
insurance shall contain an annual aggregate limit of not less than $2,000,000.
Lessee shall provide evidence of Business Auto Liability covering owned, non-
owned and hired vehicles with a limit of not less than $1,000,000 per accident;
insurance protecting against liability under workman's Compensation Laws with
limits at least as required by statute; (a) Employers Liability with limits of
$500,000 each accident, $500,000 disease policy limit, $500,000 disease--each
employee; (b) All Risk or Special Form coverage protecting Lessee against loss
of or damage to Lessee's alterations, additions, improvements, carpeting, floor
coverings, panelings, decorations, fixtures, inventory and other business
personal property situated in or about the Premises to the full replacement
value of the property so insured; and, (c) Business Interruption Insurance with
limit of liability representing loss of at least approximately six months of
income.
Whenever Lessee shall undertake any alterations, additions or improvements in to
or about the Premises ("Work") the aforesaid insurance protection must extend to
and include injuries to persons and damage to property arising in connection
with such Work, without limitation including liability under any applicable
structural work act, and such other insurance as Lessor shall require; and the
policies of our certificates evidencing such insurance must be delivered to
Lessor prior to the commencement of any such Work.
7. LIMITATION OF LESSOR'S LIABILITY
Redress for any claim against Lessor under this Lease shall be limited to an
enforceable only against and to the extent of Lessor's interest in the Building.
The obligations of Lessor under this Lease are not intended to and shall not be
personally binding on, nor shall any resort be had to the private properties, of
any of it's trustees or board of directors and officers, as the case may be,
it's investment manager, the general partners thereof, or any beneficiaries,
stockholders, employees or agents of Lessor, or the investment manager.
ADDENDUM PAGE 3
<PAGE>
LESSOR: LESSEE:
TMT Carmel Business Center, Inc. USCommunications, Inc.,
a Delaware corporation a Delaware corporation
BY: RREEF Management Company,
a California corporation
BY: BY: /s/ James C. Bernet
------------------------------ ------------------------------
Jill E. Shanahan James C. Bernet
TITLE: Vice President TITLE: President
DATE: DATE: 12-19-97
---------------------------- ----------------------------
7330 Engineer Road, Suite A
San Diego, CA 92111
BY: /s/ Delia O'Donnell
-------------------------------
Delia O'Donnell
TITLE: Secretary
DATE: 12-19-97
-----------------------------
ADDENDUM PAGE 4
<PAGE>
FOUNDERS EQUITY GROUP, INC.
2602 McKinney, Suite 220
Dallas, Texas 75204
February 11, 1998
Canmax Retail Systems, Inc.
150 W. Carpenter Freeway
Irving, Texas 75039
Canmax Inc.
150 W. Carpenter Freeway
Irving, Texas 75039
Re: Loan Agreement
Gentlemen:
Canmax Retail Systems, Inc., a Texas corporation ("CRSI"), and Canmax
Inc., a Wyoming Corporation ("Canmax" and collectively with CRSI referred to
as "Borrowers"), have requested Founders Equity Group, Inc. ("Founders") and
Founders Mezzanine Investors III, LLC ("Mezzanine" and collectively with
Founders referred to as "Lenders"), to make up to a $2 million multiple
advance loan (the "Loan") to Borrowers. Lenders are willing to enter into a
loan agreement with Borrowers (the "Agreement") and to make the Loan to
Borrowers upon the terms and conditions hereof subject to the covenants and
agreements set forth herein.
Lenders and Borrowers have previously executed that certain Convertible
Loan Agreement dated as of December 15, 1997 (the "Prior Agreement"), pursuant
to which Lender agreed to advance to Borrowers up to $500,000 ($350,000 of which
has been advanced as of the date hereof). Lenders hereby agree to make the Loan
to Borrowers on substantially the same terms and conditions as set forth in the
Prior Agreement, with the following modifications:
1. LOAN CLOSING. The Loan shall be a multiple advance loan, pursuant to
which Borrowers may request, and Lender shall fund, advances (each an
"Advance") from time to time in increments of not less than $100,000.
2. DEBENTURES. Concurrent with each Advance, Borrowers shall execute a
debenture (each a "Debenture") in substantially the same form as the
debenture attached to the Prior Agreement, modified to reflect the
following terms:
a) each Advance shall bear interest at the rate of 10% per annum from
the date of Advance, payable on the first day of each month
following such Advance through the first anniversary of the date of
the Advance (each a "Maturity Date"), at which time the principal
and all unpaid interest shall be due and payable;
<PAGE>
Letter to Canmax
February 11, 1998
Page 2
b) overdue amounts of principal and interest shall bear interest at the
rate of 12% per annum;
c) each Debenture shall be redeemable and/or convertible, as set forth
in the Debenture, at a conversion price equal to the five (5) day
trading average of the common stock of Canmax immediately preceding
the date of the Advance (the "Conversion Price"); and
d) in no event shall the maximum amount of shares of Canmax common
stock issuable in connection with the Loan exceed 1.6 million shares.
3. COMMITMENT FEE. As consideration for the commitment evidenced hereby,
Borrowers shall pay to Lender concurrent with the execution hereof a
commitment fee of $10,000. No other fees shall be due in connection with
the Loan.
4. USE OF PROCEEDS. Borrowers shall use the proceeds of the Loan for
working capital and other purposes approved by its Board of Directors.
5. SECURITY. Each Advance shall be secured pursuant to the terms of the
Security Agreement in the form as attached to the Prior Agreement.
6. COMMITMENT TERMINATION. Lender shall not have any obligation to accept
or make any requested Advances under the Loan following the first
anniversary of the date hereof.
If this Agreement represents your understanding as to the Loan, and you
agree to be bound by its terms, please sign below where indicated and return an
executed copy of this Agreement to Lenders. By your execution below, you agree
to execute within 30 days of the date hereof a Convertible Loan Agreement in
substantially the same form as the Prior Agreement, subject to the modifications
set forth herein.
Sincerely,
FOUNDERS EQUITY GROUP, INC.
By: /s/ Scotty Dell Cook
-------------------------------------
Scotty Dell Cook, Chairman
FOUNDERS MEZZANINE INVESTORS, LLC
By: Founders Equity Group, Inc., Manager
By: /s/ Scotty Dell Cook
---------------------------------
Scotty Dell Cook, Chairman
<PAGE>
Letter to Canmax
February 11, 1998
Page 3
AGREED TO AND ACCEPTED BY:
Canmax Inc.
By: /s/ Roger D. Bryant
--------------------------------
Roger D. Bryant,
President
Canmax Retail Systems, Inc.
By: /s/ Roger D. Bryant
--------------------------------
Roger D. Bryant,
President
<PAGE>
Exhibit 11.01
Canmax Inc.
Computation of Earnings per Share
<TABLE>
Years Ended October 31,
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Primary earnings (loss) per share:
Net income (loss) $ 87,331 $ 142,614 $(3,734,450)
---------- ---------- -----------
---------- ---------- -----------
Weighted average common shares 5,827,262 4,983,011 4,706,382
Shares issued upon assumed exercise
of dilutive stock options and
warrants 1,181,590 2,448,269 -
Shares assumed repurchased (359,211) (580,132) -
---------- ---------- -----------
Weighted average common and common
equivalent shares 6,649,641 6,851,148 4,706,382
---------- ---------- -----------
---------- ---------- -----------
Net income (loss) per common and
common equivalent share $ 0.01 $ 0.02 $ (0.79)
---------- ---------- -----------
---------- ---------- -----------
Fully diluted earnings (loss)
per share:
Net income (loss) $ 87,331 $ 142,614 $(3,734,450)
---------- ---------- -----------
---------- ---------- -----------
Weighted average common shares 5,827,262 4,983,011 4,706,382
Shares issued upon assumed
exercise of dilutive stock
options and warrants 1,181,590 2,448,269 -
Shares assumed repurchased (353,887) (580,132) -
---------- ---------- -----------
Weighted average common and
common equivalent shares 6,654,965 6,851,148 4,706,382
---------- ---------- -----------
---------- ---------- -----------
Net income (loss) per common and
common equivalent share $ 0.01 $ 0.02 $ (0.79)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
<PAGE>
EXHIBIT 21.1
Canmax Inc.
Subsidiaries of the Registrant
Name of Subsidiary State of Organization
- -------------------------------------- -----------------------------
Canmax Retail Systems, Inc. Texas
USCommunication Services, Inc. Delaware
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-23313) pertaining to the Canmax Inc. Stock Option Plan and
the Registration Statement (Form S-3 No. 333-33523) pertaining to 863,364
shares of Canmax Inc. common stock, of our report dated December 18, 1997,
except for note 16, as to which the date is February 11, 1998, with respect
to the consolidated financial statements of Canmax Inc. included in the
Annual Report (Form 10-K) for the year ended October 31, 1997.
/s/ Ernst & Young LLP
Dallas, Texas
February 11, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 129
<SECURITIES> 0
<RECEIVABLES> 2,778
<ALLOWANCES> 27
<INVENTORY> 47
<CURRENT-ASSETS> 3,102
<PP&E> 3,695
<DEPRECIATION> 2,733
<TOTAL-ASSETS> 4,707
<CURRENT-LIABILITIES> 2,309
<BONDS> 0
0
0
<COMMON> 23,291
<OTHER-SE> (21,071)
<TOTAL-LIABILITY-AND-EQUITY> 4,707
<SALES> 12,736
<TOTAL-REVENUES> 12,736
<CGS> 5,337
<TOTAL-COSTS> 12,628
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 87
<INCOME-TAX> 0
<INCOME-CONTINUING> 87
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
