-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SiNu51nr5IuWlUqcm+sc7MDI4/gkt9e/W40j18T2iTkUkKollUg0vxRs6kG/FuIT SZN/opqfvhTSsPbGxlb68g== 0001047469-98-006171.txt : 19980218 0001047469-98-006171.hdr.sgml : 19980218 ACCESSION NUMBER: 0001047469-98-006171 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANMAX INC /WY/ CENTRAL INDEX KEY: 0000913659 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 752461665 STATE OF INCORPORATION: WY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22636 FILM NUMBER: 98539914 BUSINESS ADDRESS: STREET 1: 150 W CARPENTER FREEWAY CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 2145411600 MAIL ADDRESS: STREET 1: 150 W CARPENTER FRWY CITY: IRVING STATE: TX ZIP: 75039 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL RETAIL SYSTEMS INC/BD DATE OF NAME CHANGE: 19941215 FORMER COMPANY: FORMER CONFORMED NAME: CANMAX INC DATE OF NAME CHANGE: 19941215 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /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
------------------------ CANMAX INC. (Exact name of Registrant as specified in its Charter) WYOMING 75-2461665 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.)
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) ------------------------ 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 ------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 2 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 3 (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. 4 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, 5 - 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 6 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 7 $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." 8 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." 9 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 10 "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 11 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 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 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 14 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.
CANMAX COMMON STOCK CLOSING PRICES -------------------- HIGH LOW --------- --------- 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
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 ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED OCTOBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (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
- ------------------------ (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. 16 The following table sets forth certain financial data as a percentage of total net revenues and the percentage change for the periods indicated.
PERCENTAGE OF TOTAL REVENUE ------------------------------------- PERCENTAGE INCREASE (DECREASE) FISCAL YEAR ENDED OCTOBER 31, ------------------------ 1997 1996 1995 1997 1996 ----------- ----------- ----------- ----------- ----------- 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% ----- ----- ----- ----- ----- -----
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 17 (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. 18 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 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 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 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 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 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 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 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.
EXHIBIT NO. DESCRIPTION OF EXHIBIT - --------- -------------------------------------------------------------------------------------------------- 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)
26
EXHIBIT NO. DESCRIPTION OF EXHIBIT - --------- -------------------------------------------------------------------------------------------------- 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)
27
EXHIBIT NO. DESCRIPTION OF EXHIBIT - --------- -------------------------------------------------------------------------------------------------- 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
- ------------------------ * 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 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. CANMAX INC. (Registrant) Date: February 11, 1998 By: /s/ ROGER D. BRYANT ----------------------------------------- (Roger D. Bryant, President and Chief Executive Officer)
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 CANMAX INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS ITEM 14(A)(1) AND (2) 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.
F-1 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 CANMAX INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
OCTOBER 31, ------------------------------ 1997 1996 -------------- -------------- 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 -------------- -------------- -------------- --------------
See accompanying notes. F-3 CANMAX INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, ------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- 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 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes. F-4 CANMAX INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
OPTION TO FOREIGN COMMON PURCHASE CURRENCY STOCK COMMON ACCUMULATED TRANSLATION SHARES AMOUNT STOCK DEFICIT ADJUSTMENT TOTAL ---------- ------------ ------------ -------------- ----------- ------------ 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 ---------- ------------ ------------ -------------- ----------- ------------ ---------- ------------ ------------ -------------- ----------- ------------
See accompanying notes. F-5 CANMAX INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, --------------------------------------- 1997 1996 1995 ----------- ----------- ------------- 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 ----------- ----------- ------------- ----------- ----------- -------------
See accompanying notes. F-6 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 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 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 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 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 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:
RECORDED AS ------------------------------------------------- OPTION TO TOTAL PURCHASE AMOUNT OF COMMON COMMON REVENUE YEAR/ TRANSACTION DESCRIPTION TRANSACTION STOCK STOCK (EXPENSE) - ------------------------------------------------------------ ----------- ----------- ---------- ----------- 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 --
- ------------------------ (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:
1997 1996 ------------- ------------- 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 ------------- ------------- ------------- -------------
F-12 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:
1997 1996 ---------- ---------- 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 ---------- ---------- ---------- ----------
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 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: 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 --------- ---------
10. LONG-TERM DEBT Long-term debt consists of the following at October 31:
1997 1996 --------- ---------- 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 --------- ---------- --------- ----------
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: 1998............................................................... $ 35,195 1999............................................................... 36,485 2000............................................................... 14,571 --------- $ 86,251 --------- ---------
F-14 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 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 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:
NUMBER OF OPTION PRICE SHARES PER SHARE ---------- -------------- 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 ---------- -------------- ---------- --------------
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:
1997 1996 ----------------------- ----------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE ---------- ----------- ---------- ----------- 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
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 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:
1997 1996 ----------- ----------- 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) ----------- ----------- ----------- -----------
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 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:
FOR THE YEARS ENDED OCTOBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Basic......................................................................... $ 0.01 $ 0.03 $ (0.79) Diluted....................................................................... $ 0.01 $ 0.02 $ (0.79)
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 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:
1997 1996 ------------- ------------- 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................................................ $ -- $ -- ------------- ------------- ------------- -------------
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:
1997 1996 1995 ---------- ---------- ------------- 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) ---------- ---------- ------------- $ -- $ -- $ -- ---------- ---------- ------------- ---------- ---------- -------------
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 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: 1998.............................................. $ 515,000 1999.............................................. 34,000 2000.............................................. 17,000 2001.............................................. 14,000 --------- $ 580,000 --------- ---------
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 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 EX-10.8 2 EXHIBIT 10-8 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: - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 2 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- "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. - ------------------------------------------------------------------------------- 3 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- "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 - ------------------------------------------------------------------------------- 4 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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, - ------------------------------------------------------------------------------- 5 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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: 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
(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 - ------------------------------------------------------------------------------- 6 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 7 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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: - ------------------------------------------------------------------------------- 8 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- (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 - ------------------------------------------------------------------------------- 9 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 10 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 11 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 12 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- (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. - ------------------------------------------------------------------------------- 13 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 14 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 15 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 16 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 17 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 18 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 19 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 20 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 21 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 22 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 23 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 24 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 25 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 26 AGREEMENT (CONTINUED) - ------------------------------------------------------------------------------- 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, - ------------------------------------------------------------------------------- 27 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. - ------------------------------------------------------------------------------- 28 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 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. - ------------------------------------------------------------------------------- 30 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) - ------------------------------------------------------------------------------- 31 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 - ------------------------------------------------------------------------------- 32 EX-10.9 3 EXHIBIT 10.9 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 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 ---------------------------------- SECURITY AGREEMENT - PAGE 2 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 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 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 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 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 EX-10.10 4 EXHIBIT 10.10 - ------------------------------------------------------------------------------- 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. (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 _____ 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 _____ 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. - ------------------------------------------------------------------------------- Page 4 Issuer's Initial _____ 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 _____ EX-10.11 5 EXHIBIT 10.11 - ------------------------------------------------------------------------------- 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. (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 _____ 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 _____ 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. - ------------------------------------------------------------------------------- Page 4 Issuer's Initial _____ 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 --------------------- - ------------------------------------------------------------------------------- Page 5 Issuer's Initial _____ EX-10.12 6 EXHIBIT 10.12 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.) Page 1 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. Page 2 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. Page 3 (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; Page 4 (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. Page 5 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 Page 6 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. Page 7 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 Page 8 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 Page 9 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, Page 10 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 Page 11 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, Page 12 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. Page 13 (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 14 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, 15 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 16 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 17 (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 18 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, 19 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. 20 (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 21 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 22 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 23 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 24 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; 25 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 26 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 27 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 28 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. 29 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. 30 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 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 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 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 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 (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 (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 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 EX-10.18 7 EXHIBIT 10.18 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; 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 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 EX-11.1 8 EXHIBIT 11.1 Exhibit 11.01 Canmax Inc. Computation of Earnings per Share Years Ended October 31, 1997 1996 1995 ---------- ---------- ----------- 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) ---------- ---------- ----------- ---------- ---------- -----------
EX-21.1 9 EXHIBIT 21.1 EXHIBIT 21.1 Canmax Inc. Subsidiaries of the Registrant Name of Subsidiary State of Organization - -------------------------------------- ----------------------------- Canmax Retail Systems, Inc. Texas USCommunication Services, Inc. Delaware EX-23.1 10 EXHIBIT 23.1 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 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS OCT-31-1997 NOV-01-1996 OCT-31-1997 129 0 2,778 27 47 3,102 3,695 2,733 4,707 2,309 0 0 0 23,291 (21,071) 4,707 12,736 12,736 5,337 12,628 0 0 21 87 0 87 0 0 0 87 0.01 0.01
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