United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q/A
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended July 31, 1998
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From _______________
to _______________
Commission file number 0-22636
-------
CANMAX INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wyoming 75-2461665
- ---------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 W. Carpenter Freeway
Irving, Texas 75039
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
(972) 541-1600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, No Par Value---- 6,611,005 shares as of August 31, 1998.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, OCTOBER 31,
1998 1997
---------------------------
ASSETS
Current Assets:
Cash $ 160,971 $ 128,871
Accounts receivable, net 1,941,540 2,751,264
Inventory 69,648 46,615
Note receivable - current 245,972 -
Prepaid expenses and other 190,782 175,494
---------- ----------
Total current assets 2,608,913 3,102,244
Property and equipment at cost less
accumulated depreciation and amortization
of $3,219,862 in 1998 and $2,732,749 in 1997 596,882 962,175
Capitalized software costs, net of
accumulated amortization of $1,012,832
in 1998 and $839,721 in 1997 740,030 494,786
Intellectual property rights, net of
accumulated amortization of $652,117 in 1998
and $639,617 in 1997 18,055 30,556
Note receivable - long term 450,989 -
Other assets 84,479 117,717
---------- ----------
$4,499,348 $4,707,478
---------- ----------
---------- ----------
See accompanying notes.
2
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
JULY 31, OCTOBER 31,
1998 1997
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Convertible debentures - shareholder $ 1,500,000 $ -
Accounts payable 664,639 878,241
Accrued liabilities 532,458 867,233
Deferred revenue 581,085 269,404
Current portion of lease obligation 108,129 159,364
Current portion of long-term debt 35,195 35,195
Advance from shareholder - 100,000
------------ ------------
Total current liabilities 3,421,506 2,309,437
Lease obligations 119,262 127,051
Long - term debt 24,885 51,056
Shareholders' equity:
Common stock, no par value,
44,169,100 shares authorized;
6,611,005 shares issued and
outstanding in 1998 and 1997,
respectively 23,290,733 23,290,733
Accumulated deficit (22,357,038) (21,070,799)
------------ ------------
Total shareholders' equity 933,695 2,219,934
------------ ------------
$ 4,499,348 $ 4,707,478
------------ ------------
------------ ------------
See accompanying notes.
3
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JULY 31, ENDED JULY 31,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ----------- ----------- ----------
Revenues:
Software licenses and product revenue $ 106,866 $ 214,006 $ 392,963 $ 868,767
Development 1,541,988 603,731 3,330,131 6,685,579
Customer service 722,457 536,709 2,039,180 1,534,274
Prepaid phone cards - USCommunication - - 1,430,856 -
Prepaid phone cards 110,722 - 110,722 -
---------- ----------- ----------- ----------
2,482,033 1,354,446 7,303,852 9,088,620
---------- ----------- ----------- ----------
Costs and expenses:
Software licenses and product revenue 29,856 166,860 160,643 525,506
Development 709,965 858,843 1,964,893 3,702,002
Customer service 706,246 540,523 1,628,244 1,570,183
Prepaid phone cards 226,630 - 226,630 -
Prepaid phone cards - USCommunication - - 1,165,255 -
Product development - 145,238 - 444,130
Sales and marketing 187,475 170,568 481,392 413,893
General and administrative 666,427 693,445 1,923,478 2,527,598
Selling, general and administrative -
USCommunication - - 499,970 -
Depreciation and amortization 219,636 243,653 673,174 703,476
Interest and financing 45,582 6,010 100,781 13,260
---------- ----------- ----------- ----------
2,791,817 2,825,140 8,824,460 9,900,048
---------- ----------- ----------- ----------
Gain on disposal of USCommunication - - 234,369 -
---------- ----------- ----------- ----------
Net income (loss) $ (309,784) $(1,470,694) $(1,286,239) $ (811,428)
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Basic earnings (loss) per share $ (0.05) $ (0.22) $ (0.19) $ (0.15)
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Diluted earnings (loss) per share $ (0.05) $ (0.22) $ (0.19) $ (0.15)
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Weighted average shares outstanding 6,611,005 6,611,005 6,611,005 5,563,143
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
See accompanying notes.
4
CANMAX INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED JULY 31,
------------------------------
1998 1997
------------ ------------
Operating activities:
Net loss $(1,286,239) $ (811,428)
Adjustments to reconcile net loss
to net cash provided (used) in operating activities:
Depreciation and amortization 672,725 703,476
Change in bad debt reserve (22,900) 8,793
Gain on disposal of USCommunication (234,369) -
Changes in assets and liabilities:
Accounts receivable 832,624 1,451,792
Inventory (23,033) 345,940
Prepaid expenses and other (15,288) 49,086
Accounts payable (213,601) (1,037,180)
Accrued liabilities (334,775) 8,328
Deferred revenue 311,681 (290,076)
----------- -----------
Net cash provided (used) in operating activities (313,175) 428,731
Investing activities:
Purchase of property and equipment (40,769) (103,294)
Capitalized software costs (418,356) -
Payments of notes receivable (462,591) -
Decrease in other assets 33,238 (236,651)
----------- -----------
Net cash used in investing activities (888,478) (339,945)
Financing activities:
Proceeds from convertible debentures -
shareholders 1,500,000 -
Payments made on lease obligation (85,385) (98,556)
Repayment of shareholder advance (100,000) (95,765)
Repayment on borrowing (80,862) (25,327)
----------- -----------
Net cash (used in) provided by financing
activities 1,233,753 (219,648)
----------- -----------
Effect of exchange rate changes on cash - 121
----------- -----------
Net increase (decrease) in cash 32,100 (130,741)
Cash at beginning of period 128,871 908,772
----------- -----------
Cash at end of period $ 160,971 $ 778,031
----------- -----------
----------- -----------
5
CANMAX INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the three month and nine month period ended July 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending October
31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in Canmax's annual report on Form
10-K for the year ended October 31, 1997. The accompanying statement of
operations for the nine months ended July 31, 1998 includes the operations of
USCommunications since its acquisition through April 30, 1998. Activity
during the third quarter through the disposition date is not material to the
condensed consolidated financial statements and is not included therein.
On June 5, 1998, Canmax, Inc., ("Canmax" or the "Company"), established a
wholly owned subsidiary, Canmax Telecom, Inc., to focus on the
telecommunications marketplace.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
INVENTORY
Inventory consists primarily of computer hardware and purchased software.
REVENUE RECOGNITION
Under the majority of agreements with customers, the Company sells phone
cards to the customer at a fixed price with normal credit terms. Upon
shipment of the customer's order, revenue is recognized, except for phone
cards shipped on consignment to certain customers at which time revenue is
recognized upon sale of phone cards to end users. Concurrently with the
recognition of revenue, the Company accrues the estimated cost of the phone
card minutes sold based on historical information. As the Company receives
invoices from its suppliers for actual minutes used, the accrual account is
reduced.
The Company periodically evaluates the cost of actual minutes used and
updates its estimates accordingly. At the end of each period, the Company
adjusts the accrued minutes account to reflect the estimated cost of unused
calling time outstanding. Such adjustments typically result from the
expiration of cards containing unused calling time and differences in minutes
decremented on the calling card platform versus minutes invoiced by the
Companies supplier.
EARNINGS PER SHARE
Basic earnings per share of common stock is based upon the weighted average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding
dilutive stock options. As the Company incurred a net loss for the three
months and the nine months ended July 31, 1997 and 1998, there were no
adjustments for potentially dilutive securities as the adjustments would
have been antidilutive.
6
CANMAX INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION (CONTINUED)
CURRENT AND PENDING ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS No. 130"), which establishes new guidance for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
that the Company's foreign currency translation adjustment be included in
other comprehensive income. The provisions of SFAS No. 130 have been applied
to the prior period presentation. The Company is not required to adopt these
Statements until November 1, 1998 and does not expect the adoption of these
standards to result in material changes to previously reported amounts.
In July 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement expands certain
reporting and disclosure requirements for segments from current standards.
In February 1998, the FASB issued Statement #132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This Statement revises
employers' disclosures about pension and other postretirement benefit plans.
It does not change the measurement or recognition of those plans. The
Company is not required to adopt these Statements until November 1, 1998 and
does not expect the adoption of these standards to result in material
changes to previously reported amounts.
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No.
97-2, "Software Revenue Recognition" (SOP 97-2), which supercedes Statement
of Position No. 91-1. SOP 97-2 will be effective for all transactions
entered into by the Company subsequent to October 31, 1998. The Company is
currently evaluating the impact that SOP 97-2 will have on software license
revenue transactions entered into subsequent to October 31, 1998.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a Statement of Position
No. 98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1), which will be effective for all transactions
entered into by the Company subsequent to October 31, 1999. The Company is
currently evaluating the impact that SOP 98-1 will have on software developed
or obtained for internal use subsequent to October 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Standard No.
133 "Accounting for Derivative Instruments and Hedging Activities." The
Standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. The new Standard is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. The Company does not expect the
adoption of the new Standard to have a material impact on its financial
position or results of operations.
NOTE B - RELATED PARTY ADVANCES AND CONVERTIBLE DEBENTURES
ADVANCES FROM SHAREHOLDERS
On October 30, 1997, a shareholder, Founders Equity Group, Inc. ("Founders"),
advanced Canmax $100,000. The advance was unsecured and had an interest rate
of 12%. On November 6, 1997, Canmax repaid principal and interest of
$100,230, which fully satisfied Canmax's obligation.
7
CANMAX INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONVERTIBLE DEBENTURES TO SHAREHOLDERS
On December 15, 1997, Canmax executed a convertible loan agreement (the
"Original Agreement") with a shareholder, Founders which provided financing
of up to $500,000. Funds obtained under the loan agreement are
collateralized by all assets of Canmax and bear interest at 10%. Required
payments are for interest only and are due monthly beginning February 1,
1998. Borrowings under the loan agreement 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.
On February 11, 1998, Canmax and Founders executed a loan commitment letter
(the "Loan Commitment") which provided for multiple advance loans of up to $2
million upon terms similar to the Original Agreement; however, indebtedness
outstanding under the Loan Commitment was convertible into shares of Canmax
Common Stock at a conversion price equal to the average closing prices of the
Canmax Common Stock over the five-day trading period immediately preceding
the date of each advance. As consideration for the Loan Commitment, Canmax
paid a commitment fee of $10,000.
As of March 31, 1998, Founders (and certain of its affiliates) entered into
the First Restated Loan Agreement (the "Loan Agreement") which consolidated
all rights and obligations of Canmax to Founders under the Original Agreement
and the Loan Commitment. Amounts advanced under the Loan Agreement bear
interest at the rate of 12% per annum, are secured by a lien on all of the
Company's assets and are convertible into shares of Canmax Common Stock, at
the option of Founders, at $0.80 per share. On August 25, 1998, Founders
agreed to release its lien on all of the Company's assets upon the
consummation of the Proposed Sale (see Subsequent Events). As consideration
for the release, the Company agreed, upon the consummation of the Proposed
Sale, to repay $1.0 million of the $1.5 million currently outstanding under
the Loan Agreement, and to allow Founders to convert the remaining $0.5
million plus accrued but unpaid interest outstanding under the Loan Agreement
into shares of Canmax Common Stock at a conversion price of $0.50 per share.
Interest expense related to Founders was $83,317 for the nine months ended
July 31, 1998.
On February 5, 1998, Founders and the Company entered into a financial
consulting agreement pursuant to which Founders agreed to provide financial
advisory and consulting services to the Company, and the Company agreed to
pay to Founders a fee equal to 3% of the value of the consideration received
in any sale or merger of any division or subsidiary of the Company. As a
result of this agreement, Founders will receive $120,000 of the initial
proceeds of the Proposed Sale, should it be consummated. Founders has agreed
to forego any further payments that may be attributable to the Company's
receipt of deferred payments in connection with the Proposed Sale.
8
CANMAX INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - ACQUISITIONS AND REVERSALS
ACQUISITION AND REVERSAL
On January 30, 1998, the Company acquired USCommunications, Inc.
("USCommunictaions") in a transaction recorded under the purchase method.
The total purchase price of the acquisition was $2,952,204.
On June 15, 1998, the Company and USCommunications signed an agreement to
reverse the purchase of USCommunications. The Company recovered 1.5 million
shares, and warrants to purchase an additional 4.5 million share as a result
of this reversal. Cash payments made on behalf of USCommunications will be
recovered through a note receivable. The two board members who were elected
as part of the acquisition agreement have resigned.
The Company recognized a gain on the reversal of $234,369. The gain resulted
from reimbursements from USCommunications to the Company for net expense
over revenues incurred by the Company related to the USCommunications
operations for the three months ended April 30, 1998. The gain of $234,369
is included in the notes receivable balance at July 31, 1998 and reflects the
Company's and USCommunications' intent in accordance with the rescission
agreement to reverse the effect of the transaction. At July 31, 1998 there are
no other assets or liabilities pertaining to USCommunications.
ACQUISITION OF TALK TIME INC.
On June 16, 1998, the Company acquired the assets of Talk Time, a wholesale
distributor of prepaid calling cards to convenience stores in the Rocky
Mountain and Oklahoma Regions. The asset purchase agreement provides for the
acquisition of certain assets for assumption of obligations approximating
$54,000. In addition the owner of Talk Time received 50,000 warrants to
purchase 50,000 shares of the Company's common stock for $1 per share. The
value of these warrants using the Black-Scholes method approximates the
fair value assigned by management to the net assets acquired of $3,000. The
following assumptions were used in the Black-Scholes model; dividend yield
of 0%, expected volatility of 112%, risk free interest rate of 6% over a 2
year period and expected life of 2 years.
NOTE D - SHAREHOLDERS' EQUITY
STOCK OPTION PLAN
On February 26, 1998, the Board of Directors increased the number of shares
issuable under Canmax's stock option plan (the "Stock Option Plan") from 1.2
million shares to 2.3 million shares so that stock options previously granted
by the Board in excess of those permitted by the Stock Option Plan could be
covered by the Plan. As of February 27, 1998, 1,121,990 shares of Canmax
Common Stock have been issued under the Stock Option Plan, 1,074,650 shares
remain subject to outstanding options under the Stock Option Plan, and
103,360 shares were available for future grants under the Stock Option Plan.
NOTE E - NASDAQ LISTING
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. Canmax was delisted from the NASDAQ SmallCap Market, and is
now traded on the OTC Bulletin Board. The delisting of Canmax Common Stock
may adversely affect the liquidity of the Canmax Common Stock, the operations
of Canmax and the ability of Canmax to raise capital in the future.
9
CANMAX INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - SUBSEQUENT EVENTS
In August 1998, the Company entered into an agreement with PT-1
Communications, Inc. ("PT-1"). The agreement provides for PT-1 to supply
long distance telecom and debit services to the Company for use in the
Company's subsidiary's, Canmax Telecom Inc., marketing and distribution of
domestic and international prepaid long distance calling cards.
In September 1998, the Company entered into a definitive agreement for the
sale of substantially all of the assets and operations of its retail systems
subsidiary for $4 million in cash consideration and deferred payments up to
an additional $3.625 million, based upon future revenues from the sold
business. The proposed sale will be recorded as a sale of a segment of the
Company's business and reported as a discontinued operation. In connection
with the closing of the sale, the convertible debentures to shareholders and
related accrued will be settled for $1,077,500 in cash and 1,282,740 shares
of the company's common stock. The common stock amount was determined by
using $0.50 per share, which approximates the current trading price
NOTE G - SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY
FOR THE NINE MONTHS
ENDED JULY 31,
----------------------
1998 1997
---------- --------
Property and Equipment acquired
by assuming notes payable and $ 81,051 $ 133,157
capital leases ---------- ---------
---------- ---------
Note receivable offset against $ 27,700 $ -
accounts payable ---------- ---------
---------- ---------
Note receivable issued in
connection with disposal of ---------- ---------
USCommunications $ 234,369 $ -
---------- ---------
---------- ---------
Interest Paid $ 29,396 $ 13,260
---------- ---------
---------- ---------
See accompanying notes.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Form 10-K and the consolidated financial statements for the year ended
October 31, 1997 and October 31, 1996; the Company's Form 10-Q for the
quarters ending April 30, 1998, January 31, 1998, July 31, 1997, April 30,
1997 and January 31, 1997; and the consolidated financial statements and
related notes, for the quarter ended July 31, 1998, found elsewhere in this
report. The accompanying statement of operations for the nine months ended
July 31, 1998 includes the operations of USCommunications since its acquisition
through April 30, 1998. Activity during the third quarter through the
disposition date is not material to the condensed consolidated financial
statements and is not included therein.
RESULTS OF OPERATIONS
In the later part of fiscal 1996, the Company decided that it was critical
that it expand its market beyond the one vertical market and beyond one large
customer. After evaluating a number of alternative strategies, the Company
decided that the rapidly expanding telecommunications market presented an
opportunity to utilize some of the technology and support capabilities that
it had developed through its Software Business. The Company chose to make
its entry into the Telecommunications industry via the prepaid long distance
markets. The Company hopes to be able to establish significant revenues and
valuable distribution channels in this market, from which to launch other
telecommunications products, utilizing its technology base to enhance its
competitive position.
Since launching its Telecommunications Business, the Company has established
sales and marketing activities in four principle marketing channels for its
prepaid phone card program. These channels include (a) wholesale and
distributor accounts, (b) direct sales to retail stores, (c) telemarketing
sales to retail stores, and (d) promotional and specialty marketing.
On January 30, 1998, the Company acquired USCommunications. On June 15, 1998,
the Company and USCommunications signed an agreement to reverse the purchase
of USCommunications. The statement of operations for the nine months ended
July 31, 1998 includes the operations of USCommunications since its
acquisition through April 30, 1998. Activity during the third quarter
through the disposition date is not material to the condensed consolidated
financial statements and is not included therein.
The Company recently announced its establishment of a strategic relationship
with PT-1 Communications, Inc., the nations largest prepaid card provider.
This relationship enables the Company to pursue its rapid growth plan in the
prepaid market prior to the commitment of large facilities investments. The
Company plans to commit approximately $1.0 million in capital investments for
fiscal 1999 to its Telecommunications Business, and plans to be able to
internally fund additional infrastructure development through operations.
The Telecommunications Business was launched during the second quarter of 1998,
and the Company's results of operations from the Telecommunications Business is
reflected in the results of operations for the period ended July 31, 1998.
REVENUE (EXCLUDING USCOMMINCATIONS)
During the third quarter of 1998, Canmax had revenues of $2,482,033, an increase
of $1,127,587 or 83% over the third quarter of 1997. During the third quarter
of 1998, The Southland Corporation (Southland) and NCR Corporation (NCR)
accounted for approximately 85% of the Company's total revenue as compared with
approximately 81.4% for the comparable period of 1997. For the nine months
ended July 31, 1998 Canmax had revenues of $5,872,996, a decrease of $3,215,624
or 35.4% over the comparable period in 1997. For the nine months ended July 31,
1998, Southland and NCR accounted for approximately 84% of the Company's total
revenue as compared to approximately 92.1% for the comparable period of 1997.
The decline in revenue is due to a decrease in development sales to Southland
which was partially offset by revenue generated by the recently acquired
telecommunications business. Revenues from pre-paid phone cards and other
telecommunication products for the 3 month period ending July 31, 1998 was
$110,722.
Development revenue for the three-month period ended July 31, 1998 increased
$938,257 or 155.4% from $603,731 to $1,541,988. This increase was due primarily
to the additional resources provided to Southland during the completion of
testing and preparation for rollout of the new POS and ordering and distribution
system. Additional developers and production support personnel were utilized,
as well as the physical relocation of testing facilities from Southland
headquarters to Canmax.
For the nine months ended July 31, 1998 development revenue decreased $3,355,448
or 50.2%, from $6,685,579 in 1997 to $3,330,131 in 1998. This decrease was due
primarily to the completion of a large development for the Southland Corporation
that took place in 1997, and no comparable project occurred for the same period
in 1998.
Service agreement revenue for the three months ended July 31, 1998 and 1997
increased $185,748 or 34.6% from $536,709 to $722,457, respectively. For the
nine months ended July 31, 1998, service agreement revenue increased $504,906 or
32.9% from $1,534,274 in 1997 to $2,039,180 in 1998. This increase resulted
primarily from increases in calls received from The Southland Corporation.
See discussion in "Liquidity and Sources of Capital" for future trends and
status of contracts.
EXPENSES (EXCLUDING USC COMMUNICATIONS)
Customer service costs for the three months ended July 31, 1998 increased by
$165,723 or 31% compared with the same period in 1997. For the nine months ended
July 31, 1998, customer service costs increased $58,061 or 3.7% from $1,570,183
in 1997 to $1,628,244 in 1998. The increase in cost is due to additional staff
and expenditures associated with the increased revenue from The Southland
Corporation.
Development costs decreased $148,878 or 17.3% for the three months ended July
31, 1998 compared to the comparable period in 1997, and decreased $1,737,109
or 47% for the nine months ended July 31, 1998 compared to the same period in
1997. The decrease in costs for the three month period ended July 31, 1998
compared to the same period in 1997 was due primarily to the elimination of a
number of expensive software consultants that were necessary during the 1997
period. The fact that costs were reduced during this period even though
revenues were significantly increased is due primarily to the fact that the
work during the 1998 period was performed on a time and materials basis
(which allowed for the recognition of revenue in the current period) while
work during the 1997 period was performed on a deliverable basis (for which
revenue could not be recognized until a later period).
General and administrative costs decreased $604,120 or 24% for the nine
months ended July 31, 1998 compared to the same period in 1997. This
decrease in costs was primarily due to two factors: (a) reduction in staff
for the 1998 period, and (b) significantly higher legal and accounting costs
in the 1997 period associated with efforts to acquire AutoGas Systems, Inc.
Interest and financing expenses increased $36,572 or 658% for the
three months ended July 31, 1998 compared to the same period in 1997, and
increased $87,521 or 660% for the nine months ended July 31, 1998 compared to
the same period in 1997. This increase was principally associated with
indebtedness outstanding under the Loan Agreement that was entered into
during the 1998 period.
11
USCOMMUNICATIONS
On June 15, 1998, the Company and USCommunications signed an agreement to
rescind the purchase of USCommunications. Revenues, phone card cost of
revenues, and other expenses for the period from acquisition through
disposition amounted to $1,430,856, $1,165,255 and $499,970, respectively.
The Company recorded a gain on disposal of $234,369 such gain being included
in a note receivable balance due from USCommunications.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
For the three month and nine month periods ended July 31, 1998 and July 31, 1997
Canmax recorded no tax provision due to adequate net operating loss
carryforwards.
As a result of the foregoing, Canmax incurred a net loss of ($309,784) or
($0.05) per share, for the three months ended July 31, 1998 as compared with net
loss of ($1,470,694) or ($0.22) per share (basic), for the three months ended
July 31, 1997.
For the nine months ended July 31, 1998, Canmax incurred a net loss of
($1,286,239) or ($0.19) per share as compared with net loss of ($811,428) or
($0.15) per share, for the same period in 1997.
LIQUIDITY AND SOURCES OF CAPITAL
At July 31, 1998, the Company had cash and cash equivalents of approximately
$161,000, down from $778,000 for the same period in 1997, a decline of
$617,000. The decrease was primarily due to operating shortfalls and funds
provided to USCommunications.
Cash used by operating activities totaled $313,000 for the nine months
ended July 31, 1998. Cash used was comprised of the Company's net loss of
$1.3 million, adjusted for: gain on disposal of USCommunications of $234,369,
depreciation and capitalized software and intellectual property rights
amortization of $672,725; and net changes in operating assets and liabilities
of $558,000. Cash provided by operating activities in the first nine months
of 1997 totaled $420,000.
Cash used in investing activities for the nine months ended July 31,
1998 totaled $888,000 and was primarily comprised of funds provided to
USCommunications in the form of a note receivable of $463,000 and capitalized
software costs of $418,000. Cash used in investing activities for the nine
months ended July 31, 1997 totaled $340,000.
Cash provided by financing activities for the nine months ended July 31, 1998
totaled $1,234,000 and was primarily comprised of $1.5 million of borrowings
from the convertible debentures, reduced by note shareholder advance
repayments and lease payments of $266,000. Cash used by financing activities
for the same period in 1997 totaled $220,000.
Current assets totaled $2,609,000 at the end of the third quarter of 1998,
resulting in negative working capital of $813,000. Cash and cash equivalents
totaled $161,000 at the end of the third quarter of 1998. Accounts receivable
totaled $1,946,000 and represents 75% of current assets. Accounts receivables
were primarily comprised of Southland Corporation. The note receivable
totaled $697,000 at July 31, 1998 and consists of the funds provided to USC.
Net property and equipment totaled $597,000 at the end of the third quarter of
1998. The majority of property and equipment is comprised of furniture,
fixtures and computer equipment. Net intangible assets totaled $758,000 at the
end of the third quarter of 1998 and were primarily comprised of capitalized
software costs.
Current liabilities totaled $3,422,000 and long-term liabilities totaled
$144,000 at the end of the third quarter of 1998. The majority of liabilities
were comprised of convertible debentures, accounts payable and accrued
liabilities.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
On June 15, 1998, Canmax and USCommunications agreed to rescind Canmax's
acquisition of USC, in connection with which USCommunications executed a note
payable to Canmax in the amount of $724,660. As of October 22, 1998,
approximately $550,000 remained outstanding under the note. USCommunications
has informed Canmax that it intends to prepay the note on or before December
31, 1998. The Company has no reason to believe at this time that the
USCommunications note will not be collected.
On September 3, 1998, Canmax entered into an agreement to sell substantially
all of its assets used in the retail software business to the Buyer for a
cash consideration comprised of an initial deposit of $4.0 million and
deferred payments of up to $3.625 million. The Company expects that the
aggregate cash proceeds to be received from this transaction will exceed $7.0
million. If the Proposed Sale is consummated, the Company has reached an
agreement with Founders Equity Group, Inc., pursuant to which the Company
would repay $1.0 million of the outstanding $1.5 million principal
outstanding under the Loan Agreement, with the remaining portion to be
converted into shares of Canmax Common Stock at a conversion price of $.50
per share. The Company plans to commit approximately $1.0 million for capital
investments in the Telecommunications Business for fiscal 1999, and plans to
internally fund additional infrastructure development through operations of
the Telecommunications Business. If the Proposed Sale is not consummated, to
maintain liquidity during fiscal 1998, Canmax must (i) increase revenue with
low cost/rapid entry into the telecommunications market and/or (ii) utilize
existing loan agreements or obtain additional lines of credit. Canmax
believes that it will meet its liquidity needs in 1998 either (a) from
proceeds of the Proposed Sale and (b) through cash generated from its
telecommunications business, and, if necessary, through utilization of its
existing Loan Agreement. As of September 1, 1998, approximately $1.5 million
was outstanding under the Loan Agreement.
PRODUCT DEVELOPMENT
To complete development of the next generation Windows based product, Canmax is
performing additional development effort that is not funded by work currently
being performed for Southland Corporation. Costs necessary to perform the
additional development and to bring the new product to market are estimated to
range from $200,000 to $500,000.
ACQUISITIONS
Canmax continues to review an acquisition strategy. From time to time Canmax
will review acquisition candidates with products, technologies or other services
that could enhance Canmax product offerings or services. Any material
acquisitions could result in Canmax issuing or selling additional debt or equity
securities, obtaining additional debt or other lines of credit and may result in
a decrease to Canmax working capital depending on the amount, timing and nature
of the consideration to be paid.
SIGNIFICANT CUSTOMERS
Southland Corporation has accounted for 95% of the Revenue of Canmax in prior
periods.
CURRENT AND PENDING ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes new guidance for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires that the
Company's foreign currency translation adjustment be included in other
comprehensive income. The provisions of SFAS No. 130 have been applied to the
prior period presentation. The Company is not required to adopt these
Statements until November 1, 1998 and does not expect the adoption of these
standards to result in material changes to previously reported amounts.
In July 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement expands certain
reporting and disclosure requirements for segments from current
standards. In February 1998, the FASB issued Statement #132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Statement
revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans. The Company is not required to adopt these Statements until November 1,
13
1998 and does not expect the adoption of these standards to result in
material changes to previously reported amounts.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 97-2,
"Software Revenue Recognition" (SOP 97-2), which supercedes Statement of
Position No. 91-1. SOP 97-2 will be effective for all transactions entered into
by Canmax subsequent to October 31, 1998. Canmax is currently evaluating the
impact that SOP 97-2 will have on software license revenue transactions entered
into subsequent to October 31, 1998.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a Statement of Position No.
98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1), which will be effective for all transactions
entered into by the Company subsequent to October 31, 1999. The Company is
currently evaluating the impact that SOP 98-1 will have on software developed
or obtained for internal use subsequent to October 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Standard No. 133
"Accounting for Derivative Instruments and Hedging Activities." The Standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. The new
Standard is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company does not expect the adoption of the new
Standard to have a material impact on its financial position or results of
operations.
IMPACT OF YEAR 2000
Canmax has completed an assessment of the impact of Year 2000 issues on its
internal systems and determined that the cost for any modifications or
replacements will be immaterial and not exceed $50,000. In connection with
the Proposed Sale, Canmax and Buyer conducted a Year 2000 compliance audit of
software and systems developed by Canmax. Such audit did not reveal any
material items of noncompliance, and Canmax does not expect to incur any
material expenses to cause its developed software and systems to become Year
2000 compliant.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
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, but are not limited to: (i)
future supply and demand for the Company's products, including user acceptance
of Windows NT as an operating system, (ii) concentration of revenues in one
customer and Canmax's relationship with such customer, (iii) the ability of
Canmax to manage its growth, (iv) Canmax's need for additional financing to fund
product development, marketing and related support services, and acquisitions,
(v) future technological developments and product acceptance, (vi) intense price
and product competition within the industry, (vii) general economic conditions,
(viii) possible disruptions of normal business activity from Year 2000 issues
and other risks and uncertainties as discussed in this Quarterly Report and the
14
1997 Annual Report, (ix) competitive products and substitute products, and
(x) other risks indicated herein and in filings with the commission.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
July 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are required to be filed with this quarterly report
on Form 10-Q:
11 Statement re Computation of Per Share Earnings (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
On July 13, 1998, the Registrant filed a report on Form 8-K regarding the change
in certifying accountants.
On June 30, 1998, the Registrant filed a report on Form 8-K regarding the
rescindment of the USCommunication Services, Inc. acquisition.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Canmax Inc.
(Registrant)
DATE: October 22, 1998 /s/ Roger D. Bryant
---------------------------- ----------------------------
Roger D. Bryant
President & CEO
16