U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-SB/A2
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
ONLINE PRODUCTION SERVICES INC.
(Name of Small Business Issuer in its Charter)
(Commission File No. 0-27111)
Nevada 91-1833963
(State of Incorporation) (IRS Employee Identification No.)
Suite 210-2323
Boundary Road
Vancouver, B.C. Canada V5M 4V8
(Address of Principal executive Offices)
(604) 205-5107
(Issuer's Telephone Number:)
Common Shares, $.001 par value per share
(Securities to be Registered Under Section 12(g) of the Act)
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TABLE OF CONTENTS
PAGE
Currency Exchange Rate Information 3
Item 1. Description of Business 3
Item 2. Management's Discussion and Analysis or Plan of Operation 22
Item 3. Description of Property 28
Item 4. Security Ownership of Certain Beneficial Owners and Management 29
Item 5. Directors, Executive Officers, Promoters and Control Persons 31
Item 6. Executive Compensation 33
Item 7. Certain Relationships and Related Transactions 34
Item 8. Legal Proceedings 34
Item 9. Market for Common Equity and Related Stockholder Matters 34
Item 10. Recent Sales of Unregistered Securities 35
Item 11. Description of Securities 39
Item 12. Indemnification of Directors and Officers 39
Item 13. Financial Statements 41
Item 14. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 54
Item 15. Financial Statements and Exhibits 54
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CURRENCY EXCHANGE RATE INFORMATION
The Company's accounts are maintained in United States dollars. However,
the Company's subsidiaries maintain their accounts in Canadian dollars. In this
Registration Statement all dollar amounts are expressed in United States dollars
except where otherwise indicated, To the extent such dollar amount refers to the
Subsidiaries' accounts, the US dollar amount was obtained by converting the
Canadian dollar account to US Dollars using average rates of exchange for each
period of operations, and end of period rates for balance sheet presentations.
As of August 31, 1999, the exchange rate for conversion to US dollars was
Cdn$1.00 = US$.6698. The following table sets forth, for each of the periods
indicated, the high and low rates of exchange of Canadian dollars into US
dollars, the average of such exchange rates during each period, and the end of
period rates. Exchange rates represent the noon buying rate in New York City for
cable transfers payable in foreign currencies as certified for customs purposes
by the Federal Reserve Bank of New York. The average rates presented in the
table below represent the average of the exchange rates on the last day of each
month during a year for the past five years.
<TABLE>
<CAPTION>
================================================================================
1999(1) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High $.66072 $.63111 $.69551 $.72348 $.70234 $.71033
- -------------------------------------------------------------------------------------------------------------
Low $.68283 $.68908 $.74239 $.73855 $.75272 $.76318
- -------------------------------------------------------------------------------------------------------------
Average for Period $.66374 $.68662 $.72463 $.73281 $.73051 $.72998
- -------------------------------------------------------------------------------------------------------------
End of Period $.66985 $.65040 $.69793 $.73367 $.71275 $.75443
=============================================================================================================
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(1) Through August 31, 1999.
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE ORGANIZATION
On Line Productions Services, Inc. ("ONPS" or the "Company") was organized
under the laws of the State of Nevada on February 18, 1999, for the purpose of
completing a reorganization and change of domicile of Earth Industries, Inc. a
corporation formed under the laws of the State of Texas on August 26, 1996.
Please also refer to "Item 1. Description of Business--Reorganization and
Acquisition of On-Line Film Services Inc."
ONPS, through its subsidiary Online, provides software applications for the
film, television and entertainment industry. Please also refer to "Item 1.
Description of Business--the Company's Business."
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Reorganization and Acquisition of On-Line Film Services, Inc.
The results of the Plan of Reorganization were:
Earth Industries completed a 30 to 1 "reverse split" of its 51,360,000
issued and outstanding shares; by doing so, it reduced the number of its
issued and outstanding shares to 1,712,000.
Earth Industries merged with and into ONPS thereby effecting a move
from Texas to Nevada and a change to its corporate name.
ONPS issued 1,711,926 post-reverse shares of its Class A Common Stock
to the shareholders of Earth Industries. Please also refer to "Item 11.
Description of Securities."
Following the Reorganization and in accordance with the terms and
conditions of the Plan of Reorganization, ONPS:
On March 4, issued 5,714,284 shares of Class A Common Stock in
consideration of the payment of an aggregate of $663,740, pursuant to
Regulation D, Rule 504, as promulgated by the Securities Exchange
Commission, pursuant to ss.3(b) of the Securities Act of 1933;
On March 3, issued 2,763,598 shares of Class A Common Stock, at a
deemed price of $1.00 per share, to shareholders of OnLine in exchange for
all of such shareholders shares of Online, pursuant to ss.4(2) of the
Securities Act;
On March 4, issued 3,673,292 Class B Special Non-Equity Voting Shares
(the "Class B Shares") to 4 shareholders of affiliates of OnLine in
connection with such shareholder's exchanging then common share of Online
for Preferred Equity Shares of Online. The Class B Shares are convertible
to shares of Class A Common Stock upon cancellation of the corresponding
Preferred Equity Shares of OnLine.
Upon completion of the Reorganization, and as at October 31, 1999, the
Company had 10,480,614 shares of Class A Common Stock and 3,673,292 Class B
Shares issued and outstanding. Please refer to "Item 10. Recent Sales of
Unregistered Securities."
On March 4, 1999 the then officers and directors of Earth Industries
resigned. Mr. Aerock Fox and Terry Roycroft were appointed directors of the
Company. Please refer to "Item 5. Directors, Executive Officers, Promoters and
Control Persons."
THE COMPANY'S BUSINESS
OnLine, the Company's operating subsidiary was formed in 1995 for the
purpose of developing effective software solutions for operations within the
film and television industry to replace time consuming, inefficient and costly
pre-internet models of operation. Since its formation, OnLine has focused its
efforts on the development of unique, proprietary, internet based technology,
which the Company believes will change the global production community's access
to available resources in the critical areas of casting, locations and
production.
Rights to use its software in specific applications in the entertainment
field and in specified geographical areas were sold in order to finance, in
part, OnLine's continuing activities in a manner that would minimize shareholder
dilution. Please refer to "Item 1. Description of Business - Other Products -
MailCard" and "Recent Financing Transactions." OnLine now helps casting
directors and
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talent agents fill roles for the film and television industry "online". It is a
technology permitting business to business communication, through the Internet,
thereby allowing for efficient searches and movement of data between
professionals.
As a complete turnkey solution, this new technology focuses all production
tasks into one system and allows industry personnel not only immediate access to
the widest possible choice of such resources but also the ability to interact
with selected resources within a secure, password protected electronic
environment from any Internet accessible computer. On-Line, through two
wholly-owned subsidiaries, On-Line Distributing, Inc. and Prairie On-Line
Management Services, Inc., provides computer distribution and management
services.
OnLine has implemented a three-stage development strategy to be completed
by the year 2000. The first stage ("Phase I") was to produce an online casting
database. This has been accomplished with the success of the Casting Workbook.
The second stage ("Phase II"), the production database is currently in beta
testing(1). The third stage ("Phase III") will be the execution of the Company's
existing locations database. The integration of these databases will form a
complete communication system.
o Phase I: The Casting Workbook
The first component of this communication system is the Casting Workbook,
containing the resumes and images of thousands of performing artists. The
Casting Workbook provides selective search techniques through which casting
directors can quickly locate and preview performers meeting predetermined
criteria. Broadcasts from e-mail and faxes go directly to hundreds of agents
instantly. Direct communication with a selected performer's agent can then be
established on the system's password secured network. Talent searches, which
traditionally might have required hours or days to complete, can now be
accomplished in a matter of minutes. Conversely, performance and technical
artists, whose exposure to casting directors and producers traditionally has
been restricted to their individual agency's limited contact base, now have an
opportunity to achieve a global presence.
Description of How the Casting Workbook Works
The Casting Workbook is a secure password protected computer network that
is connected to the Company's database, which contains casting information about
thousands of actors, models and entertainers. The in-house production crew at
OnLine developed the database and is using this technology to develop other
products.
The interactive system of the Casting Workbook is fast, easy and an
innovative means for casting directors to find and preview talent. It contains
text resume photographs and video and audio samples for actors. Once the desired
talent is located by using the database search techniques, the casting director
can communicate directly with agents over a secure network.
Direct Response
Casting directors from around the world can type their script breakdown
into the Casting Workbook, select the city or cities for transmission and press
send. The script breakdown which provides details about a project including
location dates and character descriptions is sent via the
- --------
(1) A beta test is the second phase of software testing in which a sampling of
the intended audience tries the product; it can be considered "pre release
testing".
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Internet, converted to faxes and transmitted to the over 300 talent agents in 15
cities in Canada and the United States currently subscribing to the Company's
services, for the purpose of auditioning actors for the roles described.
Agents with their roster of actors on the database use the fax as an alert
to go to the Casting Workbook and select actors' photos and resumes to send to
the corresponding casting director instantly over the Internet. The casting
director then has access to the current resume and photograph of each suggested
actor. The casting director simply needs to select the actor they wish to
audition and the agent is instantly informed. The Company attempts to limit
access to the database to bona fide casting directors and talent agents as
confirmed, in part, by industry and professional association membership (such as
(i) the Casting Society of America and the Association for Talent Agents in the
United States and (ii) Casting Directors of Canada and TAMAC in Canada). In
addition each must provide two reference letters. Each is given an individual
identification and password in order to access the database.
From the actors perspective not only does this system eliminate tedious and
costly tasks, such as sending materials by courier and updating binders for
agencies, it also provides them with potentially greater exposure.
A Comparison of the Casting Workbook with Existing Systems
Casting professionals around the world have been using the hand delivery
and facsimile relay system supported by the telephone to transport script
breakdown information, scripts, actor photographs, resumes, video cassettes,
audio cassettes and casting requests. All of this information is contained on
different mediums requiring constant and costly reproduction. All of this
information now can be contained digitally in the Casting Workbook allowing a
central information source.
Prior to the availability of the Casting Workbook, talent agents would have
to make up three ring binders that contained 8 x 10 photos and resumes of their
entire roster for each casting director as well as many of the production
companies. These were expensive to create due to duplication, assembly, courier
and maintenance charges involved and were constantly out of date as actors
change agencies or require resume updates frequently. In addition, casting
directors would have to thumb through hundreds of binders to find special skills
or traits that can now be searched efficiently on the Casting Workbook.
By digitizing(2) this collection of information and sorting it accordingly
in a searchable database, OnLine provides an affordable and highly efficient
alternative. Instead of duplicating text, images, audio and videocassette and
then shipping this information to multiple destinations across the city, country
or even planet, the Company is able to post the information once, in one place,
for casting professionals to access resulting in significant cost savings to
both the actors and talent agencies.
Breakdowns
Script breakdowns are created by or for casting directors for each project
they are involved in. The breakdowns include essential details such as project
description, characters information, shoot dates and audition times. The Pre
Casting Workbook system requires a casting director to send the script or a
completed breakdown to a separate company (for example, Breakdown Services in
- ----------
(2) The process of digitizing information involves taking all types of
information (print, sound, and image) and feeding it into a computer which in
turn, electronically changes it into a series of ones and zeroes that it can
efficiently read. This simple transformation enables a person to make material
changes to the information and to instantly transfer it across computer
networks.
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Los Angeles and Vancouver and Tracy Productions in Toronto) who, in turn, would
fax the information to each selected agent at a cost per month to those
receiving agents. These agents then respond by sending casting suggestions by
facsimile and/or courier to the original casting director. Subsequent
communications continue by telephone or facsimile at cost to both individuals.
Unlike electronic communication, the telephone demands both parties be available
simultaneously. Even e-mail has advantages over the facsimile process because of
the editing properties.
The old breakdown system is crude and full of redundancies that slow the
process. A script breakdown requires manipulation of highly detailed
information. By digitizing the content, ease of transfer via computers is
enabled. The old system involves a slow chain where each party is dependent on
the other's performance and availability. The Casting Workbook allows fast and
easy information manipulation and immediate transfer at a fraction of the
conventional cost.
Agency Representation
Currently, actors are only represented by agencies in their surrounding
area. That means when a Los Angeles or Vancouver actor, represented by a local
agency, works in Toronto for an extended period of time he/she will have to find
new representation through a Toronto agency. This limitation is due to an
agency's inability, generally, to physically exist in all places at once. The
Casting Workbook allows agencies to represent actors regardless of where they
are located. This prevents the agencies from losing valued clients and
eliminates the need for actors to find other agencies, which saves both parties
time and money.
Continuing Refinements to the Casting Workbook
The Casting Workbook is continuing to develop, as users request new
features. The Casting Workbook has become the industry standard for electronic
distribution of information in the Canadian casting industry.
EBinder
Traditionally, agents were required to produce photo album "binders" which
had photos and resumes for each of their actors. These were for the benefit of
casting directors, producers or any other professional who needed to view the
agent's roster. The binders quickly became out of date the minute they were
produced and were maintained only once or twice a year because of the time and
expense required to produce and courier them to every casting professional.
The EBinder replaces the traditional binder. Now, an agent need only
provide a password to any production professional who requests to see their
EBinder via the Internet. Having their information on the Internet, the agents
allow anyone in the world to access their information at any time, provided they
have been assigned a password.
Most importantly, the EBinder is tied to the agent's roster and is updated
as regularly as the agent updates his roster. Instead of the old style of
updating twice a year, this can now be done twice a day. In addition, the agents
can write personal messages on the front page of the EBinder to welcome viewers
and to draw attention to specific actors.
Now, producers also have the ability to quickly search and sort rosters in
a way that was never possible before. Controlled access of information via
passwords, gives the agents control and flexibility through the EBinder never
available through traditional hard copy binders.
Sides Online
Sides OnLine is a secure, fast and efficient way for casting directors to
distribute their scripts
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and sides to agents. Scripts contain the entire story line, the character lines
as well as the different settings. Sides are the specific parts of a script that
involve any one character. Any actor auditioning for a role in a script requires
the sides for that individual character.
Scripts OnLine replaces the tedious action of casting directors sending
scripts by courier and faxing to talent agents. Talent agents no longer have to
create cover sheets and distribute them to their appropriate actors.
With Sides OnLine, the Sides are integrated right into their Workbook. They
simply click on the word, "SIDES" to instantly download the Sides and Script.
Cover sheets no longer require typing. The information for each character is
automatically formatted by the database. Agents click on the word, "COVER
SHEETS" and a prewritten form is produced complete with all of the specific
breakdown elements.
Products in Development
Sound and Video Production Services
A voice-over database, which would include any form of recorded voice, is
anticipated to attract additional actors from across North America. One such
application would include live voice auditions over the Internet, which would
save long distance charges and courier costs. This is expected to be online by
the end of 1999.
In addition to sound, video production services will also be incorporated
into the service. Most professional agencies have videotapes for all of their
actors and would save the high-end cost of duplication and courier costs.
Digitally recorded sound and video is quickly gaining popularity due to the
editing efficiency and the convenience of transporting electronically.
Industry Advertising
Once the Casting Workbook has attained a significant level of acceptance in
the North American market, we intend to target industry advertisers, such as
acting schools, photographers, make-up artists, dance schools and production
crews. In addition, corporate advertisers from ancillary industries such as
travel, food and beverage, and sporting goods will be sought.
Market Analysis and Size
In 1995, OnLine began creating sophisticated communication tools and
databases for a film and television production Internet site in anticipation of
the rapid technological growth in this area. As OnLine began to market and
distribute these products, it became apparent that the production community was
eager to use computers and to get on the Internet, but required assistance and
support.
From constant industry communication, we have discovered that the
technological progression in this market follows a typical systematic evolution
as follows:
Businesses acquire computer systems for automating tasks.
Membership with an Internet Service Provider (ISP) is bought.
Internet skills are mastered and services are exercised (e.g. e-mail).
An Internet presence is obtained by creating a web page.
A domain name is secured, which assures a permanent presence.
The company optimizes their computer system to enhance communications
through a network.
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High speed Internet connections are utilized to transmit large files of
information between global locations.
The Casting Workbook was designed for and is currently being utilized by
casting industry members in Canada and the United States to electronically cast
actors and performers for their film, television, and commercial productions.
The system was created by working closely with industry professionals in order
to design software that reflects the needs of the most discerning audience. By
meeting the needs of the casting industry, the Company is positioning the
Casting Workbook as the industry standard.
The production aspects of the entertainment industry are large and global
in nature. The entertainment industry is one of the leading commercial export
sectors of the United States. OnLines' internet direct audience, including
professional and participant/subscriber market, is defined as those who are
employed or want to be employed in the entertainment industry. This includes,
but is not limited to, actors, models, musicians, dancers, extras and other
entertainers worldwide (collectively "Entertainers").
Marketing
Although OnLine has participated in local events and trade shows, the
market growth has taken place primarily by word of mouth. OnLine intends to
increase its profile in a widespread promotional campaign, which will include:
print advertising in industry publications; radio clips; trade-show exhibits;
seminars; and industry activities to network with industry professionals.
Advertisements have appeared in the Hollywood Reporter and other trade
related publications. Some examples of trade shows, events and exhibits that
OnLine has participated in to-date, include: The Stephen J. Cannell Golf
Classic; local film festivals; Cineposium; Cinexpo; and Locations Expo in Los
Angeles 1995, 1996 and 1998.
In addition, OnLine is working with several organizations in the community
through cross-promotional activities to enhance its corporate good will. Some of
these organizations like Film Union locals and Women in Film, and regional
organizations such as producer organizations and the Academy of Motion Picture
Arts and Sciences.
Security Consciousness
Employees and contractors are required to sign a confidentiality agreement
to prevent them from sharing company and/or product information with
competitors. Management protects the company's assets through special efforts in
concert with its technology advisors. The nature of the developing proprietary
knowledge based products, demand a high level of security to ensure market
leadership.
An external breach of OnLine's computer system is regarded as an important
concern. OnLine has incorporated Windows NT passwords and software/hardware
firewalls as primary and secondary security measures. The firewalls are special
software that is set up on a network to prevent intruders from stealing or
destroying confidential files or information.
By using the NT 4.0 Server, 128-bit(3) security is enhanced. The Company
monitors access to
- ----------
(3) A computer server uses a security system to prevent unauthorized access to
files on the computer. The security information is protected in the computer
with encryption. Encryption protects data by taking data, converting it with an
encryption algorithm (a mathematical formula) and saving or transmitting the
encrypted data. The greater the number of `bits' used in the encryption, the
stronger the protection. A bit is a small unit of computer data. 128-bit is the
biggest and strongest encryption commercially available in the United States and
Canada.
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the system and regularly conduct checks for unauthorized activity. Implementing
protection like hardware and software firewalls has increased protection of
sensitive information.
Intellectual Property Protection
The production and distribution of software has many benefits over other
conventional products. It can be constructed virtually anywhere and once
designed, it can be mass-produced very easily. These cost-effective factors for
production are also attractive to others who see the opportunity.
The products being produced at OnLine however, are unique in the fact that
they are highly complex software databases of information that are
interdependent and act as an information hub. Simply trying to copy the
information is of little use without the complex communication network.
The software that OnLine has produced is protected through authoring
rights. OnLine has also protected its proprietary digital assets such as images
by Using Watermarking Technology by Digimarc, Adobe.
A digital watermark is best described by comparing it to a traditional
watermark. Traditional watermarks are added to some types of paper to offer
proof of authenticity. They are imperceptible, except when the paper is held up
to the light for inspection. Similarly, Digimarc digital watermarks are added to
still images in a way that can only be seen by a computer but is imperceptible
to the human eye. A Digimarc watermark carries a message indicating the true
creator or distributor of the image.
Digital watermarking has provided OnLine with three main benefits:
Protects valuable images by communicating copyright information;
Tracks down uses of the images in the Web; and
Generates incremental revenue by embedding company information in
every image (in case of resale of the images).
Support
OnLine offers complete technical support to its customers. By so doing,
OnLine enables users to make a smooth transition from the conventional work
process.
OnLine believes that an essential factor for success is providing
networking consultation, software support and superior personal service. As a
pioneer in the Internet technology industry, OnLine has discovered that by
providing an appropriate level of service the company's products are quickly
becoming the communication standard for the film and television industry.
Database Development
Databases for models, dancers, extras, and musicians are under development
and expected to be completed in 1999.
Database for Extras
An "extra" is normally a person used in the background of television and
movie productions. Unlike actors, extras do not require acting skills. This
makes the extra profession open to anyone who has the interest. This has allowed
the extra market to grow enormously over the last few years.
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OnLine's new system will include automated telephone contact to indicate
availability to the extras' agent who would then fill the casting director
requests (breakdowns).
The extra business is much larger and therefor much faster paced than that
of principal actors. Since extras do not require the experience or training of
actors and are only used in non-essential positions, (usually in the scene
background) there is a large turnover. Most of the individuals doing extra work
only do so for a short time. However, the customer force is much larger and
potentially more profitable than principle actors and it's shear size is ideally
suited for computer database management.
Talent Scout
There is no system, digital or otherwise, that is currently available to
assist actors who are looking for agency representation. OnLine is working to
create an area in the database that will post actors' photographs and resumes
for agent perusal. For a fee of Cdn.$42 ($42US for listings in the United
States) per year, an actor can be located and short-listed by casting directors
as a self represented actor during their search for an agent. Representation is
simply transferred in the system once an agent has been secured for the actor.
Pricing and Entertainers using OnLine
ONPS charges each Canadian entertainer who wants to have his/her file
included in the Casting Workbook database a flat fee of Cdn.$42 ($42US for
listings in the United States), which entitles the actor to a resume and one
photograph. Additional services, such as, multiple photographs, an audit
voice-over tape, or video reel, each come with an additional charge. The fees
are paid by the entertainer either directly to the Company or through their
agents. Approximately one-third of the entertainers using the Casting Workbook
were placed on the system on a free "trial basis." The Company's current policy
permits a free trial period of up to 90 days. The Company's current marketing
strategy permits casting directors and talent agents access to this system at no
charge.
Currently there are approximately 15,000 entertainers using some or all of
OnLine's available services and products. Most of these are concentrated in the
Canadian marketplace. However, OnLine is poised to expand into the larger Los
Angeles market.
The Company believes that the Casting Workbook has emerged as a field
leader where it counts most, the number of roles cast. In August 1999, the
Casting Workbook posted 279 breakdowns with 36,621 agent submissions resulting
in 1,258 roles being cast in major films, television and commercial productions.
Expansion
OnLine currently has offices in Los Angeles, Vancouver and Toronto.
The entertainment internet technology sector is highly fragmented with
several internet entities providing various services. OnLine is aggressively
seeking market dominance by way of mergers and acquisitions of production based
software and internet related companies. These companies are in various stages
of development, some of which would be a perfect fit and value-added additions
to the OnLine vision. The Company has developed a long-term plan for acquiring
several of these companies. The Company plan is to acquire and integrate these
various other types of services into a comprehensive site for producers, agents,
directors, casting directors, actors and other production professionals. These
acquisitions will greatly enhance the company's revenue projections by enabling
it to grow more rapidly by expanding its internet audience and potential market.
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Strategic Alliances
OnLine and Columbus Entertainment, Inc. ("Columbus") recently signed a
Production Services Agreement whereby OnLine and Columbus will cross-promote and
consult toward joint efforts in production software. Columbus recently signed a
3 year deal with 20th Century Fox to provide software services to its
productions worldwide. The Company's agreement will place the Casting Workbook
before Hollywood Studio executives on a daily basis. Please also refer to Item
1. Description of Business - The Company's Business.
Competition
The Company's management is not aware of any other company in Canada that
has the same type of database and/or service to film and television
professionals as it is currently providing. There are several small companies
who offer various television and film services but they are without a direct
response element and accordingly do not, in the Company's view, present a
competitive risk to the Company's operations
Competitors who do offer services similar to the Company's include:
Breakdown Services Ltd., "The Link" and CastNet(EINI) ("Castnet").
Since neither Castnet for Breakdown Services has a reporting obligation
under the Securities Act of 1934, the information presented below regarding
Castnet and Breakdown Services is based on information derived primarily from
their respective web sites.
CASTNET
CastNet is a U.S. company that over the past 1.5 years has attempted to
develop a software and database technology similar to Online's Casting Workbook
having been developed over the past 4 years. CastNet has announced further
development of products which OnLine has are already completed or has in
advanced design
CastNet's software design is considerably less robust and interactive
compared to the Casting Workbook. For example, CastNet's breakdowns are "open
fields", so information in those fields is incapable of being retrieved,
organized and managed in as much detail and as easily as it can be with the
Casting Workbook. Furthermore, the CastNet breakdown is faxed during office
hours and redistribution to the agents by CastNet personnel, while with the
Casting Workbook, breakdowns can be sent instantly from the casting director's
computer 24 hours per day, 7 days per week. In addition, CastNet provides
limited security, as scripts and sides are distributed in mass to everyone, and
cannot be sent to pre-selected recipients, as is the case with the Casting
Workbook.
Another of the many differences between the two products is in searching.
When a search is performed on CastNet, the results can only be viewed one page
at a time and in a linear fashion, so a casting director who has 100 pages of
results and wants to read page 100 would have to go through the first 99 pages
to get there. With the Casting Workbook, the director can instantaneously go to
any page he chooses.
The CastNet system uses an expensive ISDN line and requires high
maintenance. In the Company's opinion, the CastNet database is not as easy to
use and lacks complexity.
BREAKDOWN SERVICES
Breakdown Services is a U.S. company, with a similar database software to
that of Online's Casting Workbook, but in the Company's view offering less
flexibility. Again, unlike the 4 years of development behind the Casting
Workbook, Breakdown Services has only developed their product for
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the past 1.5 years. More specifically, the software and database are not as user
friendly. Their software is "nonrelational" sitting on five different servers,
which means the user must go through considerably more steps in the program to
access certain information or perform a task. Like CastNet, casting directors
can only send breakdowns during office hours. Unlike the Casting Workbook,
Breakdown's technology lacks the flexibility to allow a casting director to
selectively choose which talent agents he wants his scripts and sides sent.
Equally important, and unlike the Casting Workbook, actors cannot immediately
update their information on the database, to ensure casting directors always
receive their most up to date profile.
Breakdown Services has offered a hand delivery system for script breakdowns
in the United States and Canada for more than four years.
Although CastNet and Breakdown Services may not be the Company's only
competitors, they are the only ones the Company is aware of that electronically
broadcast script breakdowns for use on the internet.
o Phase II: Production
OnLine has recently acquired, pursuant to an agreement with Columbus, dated
August 31, 1998 as amended on February 19, 1999, the worldwide rights to the
Columbus Software Suite for all aspects of commercial production pursuant to an
agreement dated as of August 31, 1998 with Columbus. The Software Suite is a
relational database application which is able to run locally or on a group of
computers located in a relatively limited area (like an office building) and
connected by a communications link that allows them to interact with each other
(a "Local Area Network" or "LAN"). Please also refer to "Item 2. Management's
Discussion and Analysis or Plan of Operation."
Production management has a requirement for up-to-date information on the
status of feature film, television and commercial productions. OnLine
specializes in the beginning-to-end management and delivery of that information.
Through its use of hardware, specially designed software, customer oriented
service and an intimate, hands-on knowledge of the production industry, we
believe that OnLine is positioned to deliver the only complete data management
service for the film and television industry. It includes hardware (where
necessary), software and management of data that delivers up-to-the minute
information directly from the production office to production management in the
commercial production sector.
This service provides everything the commercial production needs for
electronic communications:
The installation of hardware and software by Online ensures that
everything is fully functional from day one.
Specifically designed software mirrors the way the commercial
production office people work today. It just makes life easier by
eliminating the repeated capture of the same information.
The movement and formatting of data collected from the commercial
production office, through OnLines' own communications servers and
delivered directly into the corporate Internet is handled by Online.
Above all, Online takes responsibility for delivering the information
at a time and in the format demanded by senior commercial production
management. Such deliveries include: Cost Reports; Budgets; Hot Costs; Call
Sheets/Production Reports; Shooting Schedules; Deals/Start Close Paperwork;
Staff & Crew Lists; Purchase Orders; Travel Authorizations;
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Time Cards; Daily Labor Sheets; and much more. Basically, anything that is
generated by each department can be sent and tracked in the OnLine system.
The OnLine system is not designed to replace an existing accounting system.
Rather, it enables departmental coordinators to produce their cost reports for
use by the production accountant more efficiently and with less wasted time than
is possible today. Repetitive data entry is avoided and at the same time key
data is extracted and made available to the executives responsible for the show
in a more timely manner than is possible through the production accounting
system.
In addition, all of the reports that are generated out of a customer's
current accounting system are also made available, thus enabling easy trend
analysis and deal comparisons across productions.
The benefits of the OnLine system include: faster identification of trends,
schedule slip pages can be flagged, expenditures can be more tightly controlled
and above all clear, relevant and timely information can be shared across the
system; and the elimination of the need for paper reports and associated costs.
Competition
Competition for the production software is spotty at best, and consists of
the studios and production companies in house computer staff who have designed
pieces of the program to be used in house. There is no known competitor with a
package as comprehensive as the commercial suite.
o Phase III: Locations
The third phase of the Company's communications model for the film and
television industry is evolving with many of the characteristics that were
developed and learned in the development of the casting database. This new
database technology uses digital photography, archives and regularly updates
potential locations for film and television use.
Technical Description
OnLine developed a searchable database containing thousands of location
files that can be viewed by using the OnLine Internet site. Once the desired
images have been previewed, a hard copy of the file can be requested by e-mail
on a transaction basis.
Production companies spend thousands of dollars per week on scouts, film
development and couriers that send photographs around the country. By using
digital technology, OnLine is able to greatly reduce or eliminate film and
development costs, scout production time and courier fees. After the digital
camera takes the picture, it simply feeds the image into a computer without
having to produce a hard copy on paper.
The Location Database service allows directors, producers and location
managers to view an up-to-date library of files without leaving their office. If
a production company is unable to find the location they require from OnLine's
existing files, they can use the service as a communication tool to send the
criteria to a location scout, production company or film company. This is
especially effective for producers trying to access remote and hard to reach
locations.
o Other Products
MailCard
The MailCard is an application software computer program. It consists of
copyrightable sequences of computer instructions that enable its customers to
effectively access their personal
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mailboxes by way of an application program that resides on a floppy disk,
thereby allowing the user to access his or her e-mail from any location with a
PC or Windows PC computer and a modem and ISP. The MailCard is an integrated and
sophisticated product that focuses on providing e-mail services to a wide range
of users, including those who do not own a computer or have ISP service. The
MailCard may be customized to accommodate niche markets. The MailCard is capable
of running from either a floppy disk or a hard drive. It is self contained and
self running, having configuration information (i.e. in the "in" files) stored
within the application to allow it to be moved easily between computers. The
Program consists of approximately 15,000 lines of Pascal computer code.
Traditional e-mail allows people to exchange messages by computer with
employees, clients and potential customers anywhere in the world. It is a
flexible and rapid form of communication with only one drawback, you need a
configure base computer. The MailCard helps clients overcome this problem by
providing a portable e-mail client. Instead of trying to reconfigure another
computer, a user can simply insert the MailCard diskette into the drive and run
the program. Their e-mail will be downloaded to the disk with no trace of either
the program or their e-mail left on the computer.
In light of the many forms of competitive free Web based programs such as
"HOT MAIL" and "FREE MAIL," the Company is currently assessing the status of the
MailCard and its potential application to the film and television industries.
o Financing Transactions
MailCard
During the fiscal year ended August 31, 1998, OnLine entered into a
business transaction in connection with MailCard software. It sold, in separate
agreements with 5 individuals, worldwide territorial rights to the MailCard.
The permitted uses covered by the sale agreements include the following:
1. MailCard use by individuals and companies in the TV and motion picture
industry;
2. MailCard use by individuals and companies in the trucking industry;
3. MailCard use by individuals and companies that are clients of companies in
the financial services industry;
4. MailCard use by individuals and companies that are customers of companies
in the convenience store and chain retail store industry;
5. MailCard use by individuals and companies in the filed of education,
including schools and universities;
6. MailCard use be members of the general public for general non-industry
specific uses, accessing e-mail through public access facilities to be
found at financial institutions, convenience stores, chain retail stores,
markets, gas stations, restaurants, cyber cafes, etc.; and
7. MailCard use provided by large and medium size corporations for their
employees, customers or clients.
These agreements generated immediate revenues of $523,000 used to fund
operations of OnLine; it also generated contingent revenue of $2,828,000.
Except the purchase price, which varied from Cdn.$700,000 to
Cdn.$1,550,000, depending on the geographic areas covered by the sale
agreements, all of the sale agreements and have identical terms.
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Simultaneously, OnLine's wholly owned subsidiary On-Line Distributing, Inc.
("OLD") entered into a "Distribution Agreement" with each of these individuals
pursuant to which it received the right to distribute and market MailCard for
the listed uses in the geographic areas covered by the Distribution Agreement.
The initial term of the Distribution Agreement is 10 years (expiring December
31, 2007) and is renewable by OLD, in its sole discretion, for another 10 years
provided that it satisfies certain minimum sales criteria. Except of the sales
territories covered, each of the Distribution Agreements have identical terms.
Please refer to "Item 13. Financial Statements" and "Note 10 of the Notes to the
Audited Financial Statements."
Casting Workbook
In each of the fiscal years ended August 31, 1999 and 1998, OnLine entered
into a business transaction in connection with the Casting Workbook software. It
sold, in separate agreements, rights to 5 individuals for the use of the Casting
Workbook in certain geographical areas (excluding New Brunswick, Nova Scotia,
Arizona, California, Hawaii, Massachusetts, Michigan, New Hampshire, Washington
and Rhode Island).
The permitted uses covered by the Sales Agreement include use in the
entertainment industry in North America by members of the following groups:
(a) users seeking to present themselves to casting directors and agencies;
(b) individuals looking for talented people, such as talent agencies and
casting directors; and
(c) individuals from both of the above groups looking for value added
services as further described in the emc Valuation.
These Sale Agreements generated immediate revenues of $587,000 and $655,000
in fiscal 1998 and 1999 respectively; they also generated contingent revenue of
$ 2,476,000 and $2,912,000 in fiscal 1998 and 1999 respectively. Except for the
purchase price, which varied from Cdn.$645,000 to Cdn.$2,865,000, depending on
the geographic areas covered by the agreements, all of the Sale Agreements have
identical terms.
Simultaneously, OnLine's wholly owned subsidiary Prairie On-Line Management
Services, Inc. ("Prairie") entered into a "Facilities Management Agreement" with
each of these individuals pursuant to which it was retained to operate, promote
and manage computer facilities incorporating data generated by the Casting
Workbook in the geographic areas covered by the Sale Agreements for the purposes
of providing talent agencies, their actors, casting directors and others in the
designated geographic areas with access to casting requirements, talent
information and related services, by means of the Internet. The initial term of
the Facilities Management Agreements is 10 years and are renewable by Prairie,
in its sole discretion, for an additional 10 years provided that it satisfies
certain criteria. Except for the geographic areas covered, all of the Facilities
Management Agreements have identical terms. Please also refer to "Item 13.
Financial Statements" and "Note 10 of the Notes to the Audited Financial
Statements".
The foregoing transactions permitted OnLine to fund its operations without
further dilution to its shareholders and to retain effective control over the
distribution and use of each of the MailCard and Casting Workbook.
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o Risk Factors Associated With The Company's Business
Risks Associated Changing and Expanding Business.
The Company has experienced substantial changes in and expansion of the
Company's business and operations since it commenced operations, and expects to
continue to experience periods of change. The Company's past changes have
placed, and any future changes would place, significant demands on the Company's
administrative, operational, financial and other resources. The Company expects
operating expenses and staffing levels to increase in the future. In particular,
the Company intends to hire a number of additional skilled personnel, including
persons with experience in both the computer and film industries. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to attract, assimilate or retain additional highly qualified senior
managers and technical and production personnel in the future. The Company also
expects to expend resources with respect to future expansion of its technology,
accounting and internal management systems. This expansion will continue to
challenge the Company's ability to hire, train, motivate and manage its
personnel. If the Company's revenues do not increase in proportion to the
Company's operating expenses, the Company's management systems do not expand to
meet increasing demands, the Company fail to attract, assimilate and retain
qualified personnel, or the Company's management otherwise fails to manage the
Company's expansion effectively, there would be a material adverse effect on the
Company's business, financial condition and operating results. The
implementation of the Company's strategy for rapid growth in the use of the
Company's services may strain its ability to adequately expand technologically.
In addition, the Company relies on a number of third parties to process the
Company's transactions, including on-line and Internet service providers, all of
which will need to expand the scope of the operations they perform for the
Company. Any backlog or inability to use the Company's services caused by a
third party's inability to meet the Company's needs could have a material
adverse effect on the Company's business, financial condition and operating
results.
Risk of Error and of Systems Failure.
The Company's business is subject to various risks associated with systems
errors and malfunctions and employee errors. Heavy stress placed on the systems
during peak "breakdown" times could cause the Company's systems to operate at
unacceptably low speeds or systems could fail altogether.
The Company has experienced incidents of system failure in the past and
there can be no assurances that such incidents will not reoccur in the future.
If such system failure, or if access to the internet is disputed, it may
preclude the Company from conducting normal operation for an undetermined period
of time. The Company may also experience losses in connection with employee
errors. Although expenses incurred by the Company in connection with employee
errors have not been significant in the past, there can be no assurance that
these expenses will not increase in the future.
Significant Fluctuations in Quarterly Operating Results.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including the
following: the timing of introductions or enhancements of services and products
by the Company or the Company's competitors; changes in pricing policies by the
Company or the Company's competitors; changes in strategy; the success of or
costs associated with acquisitions or other strategic relationships; changes in
key personnel; seasonal trends; changes in the level of operating expenses to
support projected growth; and general economic conditions. In addition, the
Company has experienced fluctuations in the average number of customer
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transactions per day and expects that its rate of growth in customer
transactions at any given time is not necessarily indicative of future
transaction activity.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as any indication of future performance. It is likely
that the Company's future quarterly operating results from time to time will not
meet the expectations of securities analysts or investors, which may have an
adverse effect on the market price of the Company's Class A Common Stock.
Competition.
The Company's management is not aware of any other company in Canada that
has the same type of database and/or service to film and television
professionals as it is currently providing. There are several small companies
who offer various television and film services but they are without a direct
response element and accordingly do not, in the Company's view, present a
competitive risk to the Company's operations
There can be no assurance that the Company will be able to compete
effectively with current or future competitors or that the competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, financial condition and operating results.
Early Stage of Market Development; Dependence on the Internet.
As is typical for new and rapidly evolving industries, demand and market
acceptance for recently introduced services and products are subject to a high
level of uncertainty. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary infrastructure,
such as a reliable network backbone, or timely development of complementary
services and products, such as high speed modems and high speed
communication-lines. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In addition,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity or due to increased governmental regulation. Moreover, critical issues
concerning the commercial use of the Internet (including security, reliability,
cost, ease of use, accessibility and quality of service) remain unresolved and
may negatively affect the growth of Internet use or the attractiveness of
commerce and communication on the Internet. Because global commerce and on-line
exchange of information on the Internet and other similar open wide area
networks are new and evolving, there can be no assurance that the Internet will
prove to be a viable commercial marketplace. If critical issues concerning the
commercial use of the Internet are not favorably resolved, if the necessary
infrastructure is not developed, or if the Internet does not become a viable
commercial marketplace, the Company's retail business, financial condition and
operating results will be materially adversely affected. Adoption of on-line
commerce, particularly by those individuals that have historically relied upon
traditional means of commerce, will require a broad acceptance by such
individuals of new and substantially different methods of conducting business.
Technical Changes.
The information and financial services and communications industries are
characterized by rapid technological change, changes in customer requirements,
frequent new service and product introductions and enhancements, and emerging
industry standards. The introduction of services or products embodying new
technologies and the emergence of new industry standards and practices can
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render existing services or products obsolete and unmarketable. The Company's
future success shall depend, in part, on its ability to develop leading
technologies, enhance its existing services and products, develop new services
and products that address the increasingly sophisticated and varied needs of its
prospective customers, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. The
development of new services and products or enhanced versions of existing
services and products entails significant technical risks. There can be no
assurance that the Company will be successful in effectively using new
technologies, adapting its services and products to emerging industry standards,
developing, introducing and marketing service and product enhancements, or new
services and products, or that it will not experience difficulties that could
delay or prevent the successful development, introduction or marketing of these
services and products, or that its new service and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable to develop and introduce new services and
products or enhancements of existing services and products in a timely manner in
response to changing market conditions or customer requirements, or if new
services and products do not achieve market acceptance, the Company's business,
financial condition and operating results will be materially adversely affected.
Proprietary Rights and Risk of Infringement.
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology and on the proprietary technology licensed
by it. The Company relies primarily on copyright, trade secret and trade-mark
law to protect its technology and the technology licensed by it from third
parties. Notwithstanding the precautions taken by the Company, it may be
possible for a third party to copy or otherwise obtain and use the Company's
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of the Company's
technology is difficult, particularly because the global nature of the Internet
makes it difficult to control the ultimate destination or security of software
or other data transmitted.
The laws of other countries may afford the Company little or no effective
protection of its intellectual property. There can be no assurance that the
steps taken by the Company will prevent misappropriation of its technology or
that agreements entered into for that purpose would be enforceable. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources,
either of which could have a material adverse effect on the Company's business,
financial condition and operating results.
The Company may in the future receive notices of claims of infringement of
other parties' proprietary rights. There can be no assurance that claims for
infringement or invalidity (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against the Company. Any
such claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert the Company's management's attention and resources or
require the Company to enter into royalty or licensing agreements. There can be
no assurance that such licenses would be available on reasonable terms, if at
all, and the assertion or prosecution of any such claims could have a material
adverse effect on the Company's business, financial condition and operating
results.
Future Capital Needs; Uncertainty of Additional Financing.
The Company currently anticipates that its available cash resources and
credit facilities, will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements for
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at least the next 12 months. However, the Company may need to raise additional
funds in order to support more rapid expansion, develop new or enhanced services
and products, respond to competitive pressures, acquire complementary businesses
or technologies or take advantage of unanticipated opportunities. The Company's
future liquidity and capital requirements will depend upon numerous factors,
including the costs and timing of expansion of research and development efforts
and the success of such efforts, the success of the Company's existing and new
service offerings and competing technological and market developments.
The Company may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to shareholders, and debt financing, if available, may
involve restrictive covenants. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's
shareholders will be reduced, shareholders may experience additional dilution in
net book value per share, or such equity securities may have rights, preferences
or privileges senior to those of the holders of the Common Stock. If adequate
funds are not available on acceptable terms, the Company may be unable to
develop or enhance its services and products, take advantage of future
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on the Company's business, financial condition and
operating results.
Risks Associated with Acquisitions and Strategic Relationships.
The Company may make acquisitions of other companies or technologies in the
future, or may enter into strategic relationships, and the Company regularly
evaluate such opportunities. Acquisitions and the implementation of strategic
relationships entail numerous risks, including difficulties in the assimilation
of acquired operations and products, diversion of management's attention from
other business concerns, amortization of acquired intangible assets and
potential loss of key employees of acquired companies. No assurance can be given
that the Company will be able to integrate successfully any operations,
personnel, services or products that might be acquired in the future, and the
Company's failure to do so could have a material adverse effect on business,
financial condition and operating results.
The Company has established a number of relationships with on-line and
Internet service providers and software, information and financial service
providers. The Company will continue to seek out similar strategic opportunities
in the future. Examples of the Company's strategic relationships include its
relationships with Columbus. There can be no assurance that any such
relationships will be maintained, that if such relationships are maintained,
they will be successful or profitable, or that the Company will develop any new
such relationships. Further, the Company's success in any of its strategic
relationships is dependent on the reputation of its strategic partners. Should
any of the Company's strategic partners experience damage to their reputation,
the Company may be materially adversely affected.
Limited Operating History. The Company has not achieved profitability and
there is no guarantee that the Company will be able to achieve profitability in
the future. The Company has never paid a dividend on the Company's Class A
Common Stock and does not expect to do so in the foreseeable future.
Potential Future 144 Sales.
Of the 106,000,000 authorized shares of the Class A Common Stock, there are
presently issued and outstanding (or reserved for issuance) 14,153,906 shares;
all of which, except for 5,714,284 shares, are "restricted securities" as that
term is defined under the Securities Act of 1933, as amended
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(the "Act"), and in the future may be sold in compliance with Rule 144 of the
Act, pursuant to a registration statement filed under the Act, or other
applicable exemptions from registration thereunder. In addition, the Company has
an obligation to issue 1,000,000 Warrants (permitting the holder to purchase up
to 1,000,000 shares of the Company's common stock at $.50 per share) which may
be due to ACC Axis, an outside consulting firm.
The Company is presently assessing its arrangement with Axis.
Rule 144 provides, in essence, that a person holding restricted securities
for a period of one year may sell those securities in unsolicited brokerage
transactions or in transactions with a market maker, in an amount equal to one
percent of the Company's outstanding Class A Common Stock every three months.
Additionally, Rule 144 requires that an issuer of securities make available
adequate current public information with respect to the issuer. Such information
is deemed available if the issuer satisfies the reporting requirements of
Sections 13 or 15(d) of the Exchange Act and of Rule 15c2-11 thereunder. Rule
144 also permits, under certain circumstances, the sale of shares by a person
who is not an affiliate of the Company and who has satisfied a two year holding
period without any quantity limitation and whether or not there is adequate
current public information available. Investors should be aware that sales under
Rule 144, or pursuant to a registration statement filed under the Act, may have
a depressive effect on the market price of the Company's Class A Common Stock in
any market that may develop for such shares.
The restricted shares, currently outstanding, will not be subject to Rule
144 until at least March, 2000.
Limited Market For the Company's Class A Common Stock.
There is only a limited trading market for the Company's Class A Common
Stock on the National Association of Securities Dealers, Inc. ("NASD")
over-the-counter Bulletin Board (the "OTCBB"), which may limit the marketability
and liquidity of the shares of the Class A Common Stock. Please also refer to
"Item 9. Market for Common Equity and Related Stockholder Matters."
Penny Stock Rules.
Under Rule 15g-9 of the Exchange Act, a broker or dealer may not sell a
"penny stock" to, or effect the purchase of a penny stock by, any person unless:
(a) such sale or purchase is exempt from Rule 15g-9;
(b) prior to the transaction the broker or dealer has (1) approved the
person's account for transactions in penny stocks in accordance with
Rule 15g-9, and (2) received from the person a written agreement to
the transaction setting forth the identity and quantity of the penny
stock to be purchased; and
(c) the purchaser has been provided an propitiate disclosure statement as
to penny stock investment.
The United States Securities and Exchange Commission (the "Commission") has
adopted regulations that generally define a penny stock to be any equity
security other than a security excluded from such definition by Rule 3a51-1.
Such exemptions include, but are not limited to (1) an equity security issued by
an issuer that has (i) net tangible assets of at least $2,000,000, if such
issuer has been in continuous operations for at least three years, (ii) net
tangible assets of at least $5,000,000, if such issuer has been in continuous
operation for less than three years, or (iii) average revenue of at least
$6,000,000 for the preceding three years; (2) except for purposes of Section
7(b) of the Exchange Act
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and Rule 419, any security that has a price of $5.00 or more; and (3) a security
that is authorized or approved for authorization upon notice of issuance for
quotation on the NASDAQ Stock Market, Inc.'s Automated Quotation System.
Currently shares of the Company's Class A Common Stock will be subject to
the regulations on penny stocks; consequently, the market liquidity for the
Company's Class A Common Stock may be adversely affected by such regulations
limiting the ability of broker/dealers to sell the Company's Class A Common
Stock and the ability of shareholders to sell their securities in the secondary
market.
Moreover, the Company's shares may only be sold or transferred by its
stockholders in those jurisdictions in which an exemption for such "secondary
trading" exists or in which the shares may have been registered.
Adequate Labor and Dependence Upon Key Personnel; No Employment Agreements.
The Company will depend upon recruiting and maintaining qualified personnel
to staff the Company's operations. The Company believes that such personnel are
currently available at reasonable salaries and wages. There can be no assurance,
however, that such personnel will always be available in the future. Loss of the
services of any of this management team and key employees could have a material
adverse effect on the Company's operations. The Company does not have any
employment agreements with any of the Company's officers and/or employees.
Please also refer to "Item 5. Directors, Executive Officers, Promoters and
Control Persons."
Conflicts of Interest.
From time to time certain of the Company's directors and executive officers
may serve as directors or executive officers of other companies and, to the
extent that such other companies may participate in the industries in which the
Company may participate, such directors and officers may have a conflict of
interest. In addition, the Company's dependence on directors and officers who
devote time to other business interests may create conflicts of interest, i.e.
that the fiduciary obligations of an individual to the other company conflict
with the individual fiduciary obligations of the Company and visa versa.
Directors and officers must exercise their judgment to resolve all conflicts of
interest in a manner consistent with their fiduciary duties to the Company. In
the event that such a conflict of interest arises at a meeting of the directors
of the Company, a director who has such a conflict will abstain from voting for
or against the approval of such a participation or such terms. In appropriate
cases, the Company will establish a special committee of independent directors
to review a matter in which several directors, or management, may have a
conflict. The Company is not aware of the existence of any conflict of interest
as described herein.
Control by Management.
The Company's current officers and directors, as a group, beneficially own
4,323,292 or 31% of the then issued and outstanding common stock; and,
accordingly may be able to exercise effective control over the Company's
operations, including but not limited to, the election of directors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of the Company's and OnLine's
financial condition and results of operations should be read in conjunction with
the Company's financial statements and notes thereto included elsewhere.
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Overview
Prior to its acquisition of OnLine, the Company was virtually inactive and
had no revenues from operations. Please also refer to "Item 1. Description of
Business--Corporate Organization." Accordingly, the following discussion focuses
on the development of OnLine's business since its formation in 1995.
From inception through OnLine's fiscal year ended August 31, 1998 (Fiscal
1998) OnLine's primary focus was the development of software solutions,
specifically the Casting Workbook, Locations, Productions and the MailCard for
the film and television industry. See "Item 1. Description of Business-The
Company's Business." During this period, OnLine actively tested, redesigned and
refined its product lines, in smaller more controlled market environments, to
better suit industry requirements. The development of its business was financed,
in part, through the sale of certain rights to some "fields of use" of the
MailCard and Casting Workbook software it has developed.
OnLine's marketing and sales efforts to present have been toward a very
selected and narrow focus. The objective was, and continues to be, to secure the
majority of key professionals using the Casting Workbook on a daily basis for
television, commercial and feature film projects. When most of these
professionals use the Casting Workbook to cast roles it is anticipated that
performers will seek to avail themselves of OnLine's products and services.
OnLine is well under way to accomplishing its goal. In the month of May, 1999
more than 850 roles were cast through the Casting Workbook system.
OnLine now has approximately 12,000 entertainers (of which approximately
one-third are on a "free trial" or "test" basis and do not pay fees) using some
or all of its available Casting Workbook Products which has resulted in revenues
of approximately $209,000 through August 31, 1999. These entertainers are
situated primarily in Toronto and Vancouver, Canada.
OnLine is now poised to expand its plan of operations to encompass a larger
and more concentrated performer market in Los Angeles. In May of 1999 the
Company commenced its marketing efforts in the United States by hosting a
product demonstration and reception for casting directors and agents on the 20th
Century Fox Studios production lot.
OnLine is currently expanding operations in Los Angeles to support this
market. The staff that is currently being implemented in Los Angeles consists
of: a manager to oversee the development of the Los Angeles actor and modeling
database; reception, technical support for casting director turnkey equipment
installation and set up of agency accounts as well as second level support to
the sales team, a sales team capable of doing database seminars, and ongoing
first-line technical support and writers/scanners for handling script breakdowns
as well as incidental photo scans.
Results of Operations
August 31, 1999 Compared to August 31, 1998
In the year ended August 31, 1999 revenues from operations decreased to
$958,000 from $1,201,000 from the year ended August 31, 1998. The decreased
revenue of $243,00 was due primarily to the one time sale in 1998 of the
MailCard which generated revenues of $523,000, offset by an increase in revenues
of $174,000 from the Casting Workbook in 1999. Other income increased from
$238,000 to $388,000 due to an increase in interest income of $150,000. However,
the Company experienced a net loss of $328,000 as compared to a net loss of
$118,000 for the comparable period. This was due to increased direct costs of
$161,000 from $759,000 to $920,000, due in part to the exclusivity payment of
$203,000 for the Casting Workbook Agreement which was effective toward the end
of 1998, increases in direct subcontract and selling expenses offset by a
decrease of $227,000 in
23
<PAGE>
development costs. Increased and administrative expenses of $41,000 from
$796,000 to $755,000 was due to a decrease in management fees of $270,000 offset
by increases in other general and administrative expenses of $229,000.
Liquidity and Capital Resources
The Company's principal capital requirements are expected to be (a)
software development costs and purchase of computer hardware, (b) maintain and
improve our web servers and (c) provide continued customer support. To date,
funding has been provided through equity financing, sale of certain of its
software territories, and operations.
At the end of the prior fiscal year, the Company purchased software for use
in the production of commercials. The purchase price of the software was
$3,950,000. The payment of the purchase price consists of two payments of
$100,000 (paid), the issuance of 250,000 common shares at a value of $1 per
share (issued) and the issuance of a note payable of $3,500,000. In the current
year, the Company expended an additional $8,000 relating to this software
purchase. The agreement is with Columbus Software Inc. The note payable is due
only if the Company achieves specified sales objectives on or before August 31,
2008.
Due to the contingent nature of the note payable, Management has decided
that amortizing the cost of the software prior to any recognition of revenue
could result in a future material misstatement of the financial statements.
Therefore no amortization is being recorded against this software at this time.
The Company has available a $40,000 line of credit with the Royal Bank in
Vancouver, British Columbia. The line of credit bears interest at the rate of
Royal Bank prime plus 1.75% per annum. As at August 31, 1999 the Company had
used $30,000 of this available line of credit.
The Company has a mortgage payable to Vancity Credit Union bearing interest
at 8.75% per annum with monthly payments of $632. The Mortgage is renewable May
2001. The Mortgage is secured by real estate (office) at 208-2323 Boundary Road,
Vancouver, British Columbia. The balance at August 31, 1999 was $76,014. The
Company expensed $6,500 in interest relating to this loan in the year ended
August 31, 1999 versus $7,600 in the prior year. This was the only loan interest
paid in the year ended August 31, 1999. The Company expects to make principal
payments of $8,184 on this loan in the fiscal year ending August 31, 2000.
At August 31, 1999 the company had liquid assets of $578,000. Cash flow
from the Casting Workbook is expected to increase with the launch of the US
version in October, 1999.
Operating Plan
In the first quarter of the fiscal year ending August 31, 2000, the Company
plans to continue its recruiting drive for casting directors and talent agents.
As part of this drive, the Company will furnish computer hardware and software
to key casting directors in the Los Angeles market. The Company will install
additional servers in the Los Angeles office to support the launch of the
Casting Workbook in late October. In addition, the Company is planning to expand
its marketing efforts in Los Angeles to include trade shows, seminars and print
advertising. The Company will also launch its model and talent scout databases
in the Los Angeles area from which the Company anticipates further revenues.
Consequently, staffing the Los Angeles office will be a major priority in the
first quarter, with an emphasis on sales and marketing personnel.
Also in the first quarter the Company plans to complete its development and
release of the MasterCaster software for casting directors, finalize its
e-commerce development for automated registration and payment for its customers,
and finalize casting notices for non-represented actors.
24
<PAGE>
Towards the end of the first quarter the Company intends to begin closing
sales of its Production Workbook to commercial producers.
Efforts in the second quarter will focus on continued growth of the Casting
Workbook database, as well as the Model and Talent Scout databases in the Los
Angeles area. The Company believes that the integration of the Master Caster
software with the Casting Workbook will solidify wide casting director
acceptance in Los Angeles.
The third and fourth quarters will be focused on marketing its databases to
actors and agents, and promoting its additional revenue sources on the Casting
Workbook and Model database such as audio and video clips. It also intends to
actively search for a US Distribution partner, and expand its marketing efforts
to universities, acting schools, and performers in live theater. In addition,
the company anticipates adding a production crew and staff database, and
integrate its Talent Agent software into the Casting Workbook.
During the year, the Company intends to break into the New York market
initially by distributing breakdowns via fax even if it does not establish an
office facility there. The Company also plan to focus on promoting electronic
video reels to actors and models.
Financial Plan
The Company anticipates expenditures for the fiscal year ending August 31,
2000 to be:
General and Administrative $ 909,000
Computer Hardware 132,400
Computer Software/Development 108,700
Marketing and Promotion 550,000
General and Administrative expenses consist of payroll and related expenses
for executive, accounting, and administrative personnel, professional fees, and
other general corporate expenses. General and Administrative expenses for the
fiscal year ended August 31, 1999 were $755,000. These expenses are expected to
continue to increase as we expand our staff and support functions to support the
anticipated growth of the Company.
The Company is anticipating an increase in marketing and promotional
costs as it grows, and to maintain and expand its recognition in the
marketplace. These costs are expected to increase over the year to approximately
10% of revenues.
The Company anticipates revenue growth in the next 12 months to come from
the US Casting Workbook in Los Angeles, and revenues from the sales of the
commercial suite software.
Long Term Investments
Long term investments consists of British Columbia Savings Bonds in a
principal amount of $2,878,800 with, accrued interest of $38,800 unpaid at the
balance sheet date. These bonds earn interest at 6% per annum paid semi-annually
and are locked in to June 9, 2008. These bonds serve as registered collateral on
the MailCard contingent sales agreement dated September 17, 1997. The amount of
the collateral claim registered against these bonds is $2,878,800 which is
locked in until June 9, 2008. Also included in long term investments is the
amount of $2,491,600 of which $2,475,600 serves as registered collateral
relating to the Casting Workbook software contingent sales agreement dated
December 31, 1997, with the principal to be locked in until December 31, 2007.
From the agreement date to the balance sheet date, these funds have been placed
in seven day CIBC GIC's earning interest revenue at variable rates through the
period. Also included in long term investments is the amount of $2,931,000 of
which $2,912,300 serves as registered collateral relating to the Casting
Workbook software contingent sales agreement
25
<PAGE>
dated December 31, 1998, with the principal to be locked in until December 31,
2008. From the agreement date to the balance sheet date, these funds have been
placed in seven day CIBC GIC's earning interest revenue at variable rates
through the period.
o Financing Planned Expansion
Although the Company raised $663,740 in March, 1999 through a private
placement of 5,714,284 shares, there is no assurance that the Company will be
able to obtain additional financing as, if and when required. The company's
plans to expand the Los Angeles office and open an office in New York are
underway. If the company cannot meet its expansion needs through operations
and/or other financing methods, the Los Angeles expansion and any new area
expansion will be placed on hold until such time as the financing is available.
The company is launching its US Casting Workbook from Los Angeles on October 25,
1999. The results of the US Casting Workbook will determine the company's
expansion schedule.
Year 2000 Issues
The Year 2000 issue results from computer systems using two digits rather
than four to represent the year so that a date using "00" is recognized as the
year 1900 rather than the year 2000. This situation may disrupt the smooth
operation of both the Company and third party's computer systems.
The Company's State of Readiness
In order to reach the Company's internal Year 2000 readiness it is
proceeding through four phases. First it evaluated its IT computer systems and
non-IT systems for Year 2000 compliance. IT computer systems and non-IT systems
have been purchased in the last few years and most have been designed and built
with Year 2000 compliance in mind. As a result, a minimal number of computer
systems required software patches to third party software. The Company did not
discover any non-compliance in its non-IT systems and has not had to replace any
to date.
In the second phase the Company planned fixes in the form of software
patches created and tested by he third party software vendors. It then applied
the patches on test computer systems and evaluate their results. The Company is
scheduled to complete this phase by December 15, 1999.
In the third phase the Company will implement these patches on secondary
computer systems, test the results and then implement the third party software
patches as necessary to the primary computer systems and test those results.
This phase is scheduled for completion by December 10, 1999.
Year 2000 compliance software will be used to further verify the
reliability of the computer systems on an ongoing basis.
In the fourth phase the Company will finalize its Year 2000 contingency
plans. To date, initial contingency plans have been created. These are currently
being evaluated and are scheduled for final approval on December 10, 1999.
Most of the Company's key systems are built with redundancy to ensure that
its material
26
<PAGE>
services are supported by multiple vendors. Any material disruption by one
vendor will be automatically backed up by another vendor's services, minimizing
the Company's dependency on any one vendor. The Company has canvassed its
vendors to determine their year 2000 compliance. To date, the Company has not
identified any significant risks or material disruptions.
As the Company has assisted many of its clients with the recent
computerization of their businesses, their systems are also new and largely Year
2000 compliant with minimal legacy computer systems. Once the Company completes
its internal Year 2000 compliance the Company plans to assist its clients in
achieving their own Year 2000 compliance. On December 10, 1999, the Company will
provide its clients documentation to assist them with identifying any Year 2000
issues they may have and providing addresses of support material and third party
software patches.
The cost to the Company
The Company does not separately track the internal costs incurred for the
Year 2000 project, and these costs are principally the related payroll costs for
its information systems group. As its software has been developed recently, it
was originally developed with the Year 2000 issue in mind and thus has required
no modifications. The risks associated with updating the Company's system to
Year 2000 compliance are minimal. The normal redundancy of the Company's
internal staff computer systems ensures that any issues arising from the
staggered Year 2000 upgrades to the Company's staff computer systems can be
solved without resulting in loss of operations.
The Company's non-IT systems, equipment with embedded chips, have been
purchased in the last few years. The Company has not had to replace any non-IT
systems.
The risks to the Company's Year 2000 Issues
The most likely worst case Year 2000 scenarios that the Company expects to
face include unexpected disruptions to our internal computer systems or to those
of our vendors. These could cause material disruptions of the Company's
operations.
Other possible worst case Year 2000 scenarios include unexpected material
disruptions from one or more of the Company's clients. If a computer system or
fax machine of one of our clients fails to operate they could experience
difficulty accessing the Company's computer systems or faxing material to us.
Short term disruptions of this nature would not have a significant effect on the
Company's operations.
The Company's contingency plans
The Company's contingency plan to handle unexpected disruptions to its
computer systems or those of its vendor(s) is three fold.
Firstly, the Company has previously designed redundancy into our computer
systems and our key systems are supported by multiple vendors. If a given system
experiences and unexpected disruption many systems will automatically fall over
to back up systems.
Secondly, IT staff will be on the job to ensure the success of the final
data backups on 1999. On January 1st, 2000, IT staff will evaluate all systems
for any disruptions, and manually switch any necessary system to a backup system
and contact vendors as required to determine estimated repair times in the event
of any system failure(s). As the casting industry does not work until the first
week of January, most of the Company's clients will not be accessing its systems
during the first few days of January, 2000. This should give the Company enough
time to deal with any other problems.
Lastly, with trained staff in offices in Los Angeles, Vancouver and
Toronto, the Company
27
<PAGE>
will be able to shift workloads from one office to another as necessary to
assist with correcting any disruptions in any other Online office.
The Company is also taking a proactive approach to handling possible
disruptions to its clients operations. In November 1999 it will be providing
information and assistance to its clients to evaluate their Year 2000 readiness
and assist them in accomplishing their Year 2000 compliance. The Company will
also be dedicating technical and client support staff to assist its clients in
January 2000 with any disruptions they may encounter.
The Company intends to monitor the progress of its vendors, customers or
others with whom it transacts business, including financial institutions, in
becoming Year 2000 compliant. The Company has not formulated a contingency plan
to deal with the potential non-compliance of vendors, customers and others with
whom it transacts business, including financial institutions, but will be
considering whether such a plan would be feasible.
ITEM 3. DESCRIPTION OF PROPERTY
Real Property
Vancouver
The Company owns a 1,400 square foot commercial condominium unit (No. 208)
at 2323 Boundary Road, Vancouver, British Columbia which presently serves as the
Company's corporate headquarters. The Company purchased the unit on May 22, 1996
for $101,963. The Company has a $75,300 balance on an initial $79,148 mortgage
on the property. The Company's payments are $591 per month.
On July 1, 1999 we expanded the Company's corporate headquarters by leasing
the adjacent unit No. 207 at 2323 Boundary Road, Vancouver, British Columbia, on
the basis of a 6 month renewable term. The premises are approximately 1,300
square feet. The rent is $805 per month.
Toronto
As of March 1, 1999 the Company also lease approximately 677 square foot
office at #1303 of 2 Carlton Street, Toronto, Ontario. The Company's rent is
$663 per month. The term is for two years.
Los Angeles
As of May 7, 1999 the Company rented a 1,200 square foot office at #201
1529 S. Bundy Drive, LA CA 90025. The Company's rent is $1,250. The term is for
one year.
Equipment
The Company owns and/or leases a variety of office equipment consisting
primarily of photocopying machines, personal computers and telephone equipment.
28
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Class A Common Stock as of October 31, 1999, (1) each person
who is known by the Company to own beneficially more than five percent (5%) of
the Class A Common Stock; (2) each of the Company's directors and officers; and
(3) all of the Company's directors and officers as a group.
================================================================================
NO. OF
NAME AND ADDRESS OF BENEFICIAL OWNER VOTING
SHARES BENEFICIALLY %
OWNED
- --------------------------------------------------------------------------------
Aerock Fox (President & Director)
2390 W. Queens Ave.
Vancouver, BC Canada V6V 2Y6 2,488,316(1)(3) 18%
- --------------------------------------------------------------------------------
Terry Roycroft (Secretary-Treasurer & Director)
5120 Bessborough Drive 1,834,976(2)(4) 13%
Burmaby BC Canada V5B 4N9
- --------------------------------------------------------------------------------
Susan Fox
2390 W. Queens Ave. 2,488,316(3)(1) 18%
Vancouver, BC Canada V6V 2Y6
- --------------------------------------------------------------------------------
Sharon Fox
5120 Bessborough Drive 1,834,976(4)(2)
13%
Burmaby BC Canada V5B 4N9
- --------------------------------------------------------------------------------
Kirt W. James
34861 Spinnaker 1,381,000 13%
Dana point CA 92629
- --------------------------------------------------------------------------------
All Officers & Directors as a Group (2 persons) 4,323,292 31%
================================================================================
(1) The 2,488,316 shares of Class A Common Stock beneficially owned by Mr. Fox
consists of (i) 300,000 shares owned directly by his wife, Susan Fox, (ii)
1,967,516 shares of Class B Shares, owned directly by Mr. Fox, and (iii)
220,800 shares of Class B Shares owned by his wife, Susan Fox.
(2) The 1,834,976 shares of the Company's Class A Common Stock owned
beneficially by Mr. Roycroft consists of (i) 350,000 shares of Class A
Common Stock owned directly by Mr. Roycroft, (ii) 1,104,976 shares of Class
B Shares owned directly by Mr. Roycroft and (iii) 380,000 shares of Class B
Shares owned directly by his wife, Sharon Fox.
29
<PAGE>
(3) The 2,488,316 shares of Class A Common Stock beneficially owned by Susan
Fox, Mr. Fox's wife, consist of (i) 300,000 shares of Class A Common Stock
owned directly by Mrs. Fox; (ii) 220,800 shares of Class B Shares owned
directly by Mrs. Fox; and (iii) 1,967,516 shares of Class B Shares owned
directly by Mrs. Fox's husband, Aerock Fox. Susan Fox and Sharon Fox are
not related.
(4) The 1,834,976 shares of Class A Common Stock beneficially owned by Sharon
Fox consist of (i) 350,000 shares owned directly by her husband Terry
Roycroft; (ii) 380,000 shares of Class B Shares owned directly by Mrs. Fox;
and (iii) 1,104,976 shares of Class B Shares owned directly by her husband,
Terry Roycroft. Susan Fox and Sharon Fox are not related.
30
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following persons are the directors, executive officers and/or key
employees of the Company:
AEROCK FOX
President & Chief Executive Officer, Director since March 1999
Since December 1994 Mr. Fox, who is 53 years old, has served as President
and director of Online. Prior thereto Mr. Fox founded and served (and continues
to serve) as president of Fox Productions Inc., a privately owned production
company. Mr. Fox's degrees in Education and Business at McGill University; he
also received Masters Degree in Psychology while majoring in Business and
Education at the University of British Columbia. Aerock Fox is married to Susan
Fox.
TERRY ROYCROFT
Vice President Investor & Corporate Relations, Director since March 1999
Since December 1994 Mr. Roycroft, who is 43 years old, has served as a Vice
President and director of Online. Prior thereto Mr. Roycroft founded and served
(and continues to serve) as president and director of Croft Entertainment Inc. a
privately held company.
SUSAN FOX
Vice President of Marketing & Sales since March 1999
Since December 1994, Mrs. Fox, who is 42 years old, has served as a Vice
President of Online. Prior thereto she served as an executive producer of Fox
Productions Inc. Mrs. Fox is Aerock Fox' wife. Mrs. Fox has four years of post
secondary education that includes Arts and Literature from Douglas College,
Business, Architectural design and Contract Law from BCIT and Fine Arts from
Langara College. Susan Fox is married to Aerock Fox.
CHUCK BUCKLEY
Vice President of Information Systems since March 1999
Since December, 1995 Mr. Buckley, who is 34 years old, has served as a Vice
President of Online. Prior thereto Mr. Buckley's fifteen years of experience
with computers has given him the opportunity to work on mainframe, mini,
workstations, and personal computers. He has mastered operating systems such as
DOS, Windows, Windows NT, Macintosh System 7.x, UNIX and Linux. Some of the
software Mr. Buckley is competent with include MS Office (Word, Excel, etc.),
Word Perfect, Lotus 123, Ami Pro, Corel Draw, Page Maker, Quark Xpress, Adobe
PhotoShop, Strata Studio Pro, Paradox, Filmmaker Pro, Adobe SiteMill, WebStar,
Web Server, Tango ACGI, Fulcrum, Netscape and most Internet clients and
Protocols.
Prior thereto Mr. Buckley was employed by the West Coast Vitamin House,
where he was in charge of the networked accounting programs.
All directors and officers of the Company are elected annually to serve for
one year or until their successors are duly elected and qualified.
The Company currently has nine full time personnel and is supported to the
extent required by outside consultants. Additional staff will be recruited as
required to support the Company's growth and development. All of the full time
personnel are contracted consultants. Key personnel also have equity positions
and have executed confidentiality and non-competition agreements. Compensation
31
<PAGE>
levels are, and will continue to be commensurate with industry standards with
incentive programs extended to the key personnel.
During the past five years no director, executive officer, promoter or
control person of the Company:
(1) was the subject of any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time;
(2) was convicted in a criminal proceeding or is subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) was subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or
(4) was found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law.
32
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation, in
Canadian dollars, of the named executive officers from July 1, 1995 through
August 31, 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
----------------------------------- -----------------------------------------------
Awards Payments
---------------------- -----------------------
Other Securities All
Year Annual Restricted Under- other
Name And or Compen- Stock Lying LTIP Compen-
Principal Position Period Salary Bonuses sation Award(s) Options/ Payouts sation
Ended ($)(1) ($) ($) ($) SARs ($) ($)
- --------------------------------- --------- -------------- ----------- ------------ ------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aerock Fox 8/31/99 160,725
President and Director
- ------------------------------------------------------------------------------------------------------------------------------------
8/31/98 117,014 -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
8/31/97 23,672
--------------------------------------------------------------------------------------------------
8/31/96 59,358(2) -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Terry Roycroft 8/31/99 121,645
Secretary, Treasurer and
Director
- ------------------------------------------------------------------------------------------------------------------------------------
8/31/98 128,282(3) -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
8/31/97 10,808
--------------------------------------------------------------------------------------------------
8/31/96 7,328(4) -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Chuck Buckley 8/31/99 40,116
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
8/31/98 28,888 -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
8/31/97 21,470
--------------------------------------------------------------------------------------------------
8/31/96 22,900 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Susan Fox 8/31/99 62,800
Vice President
- ------------------------------------------------------------------------------------------------------------------------------------
8/31/98 41,152 -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
8/31/97 24,443
--------------------------------------------------------------------------------------------------
8/31/96 24,289
--------------------------------------------------------------------------------------------------
Total 900,761(5) -- -- -- -- --
====================================================================================================================================
</TABLE>
(1) These payments were made respectively as follows:
As to Mr. Fox, to Fox Productions, Inc., a corporation wholly owned by Mr.
Fox.
As to Mr. Roycroft, to Croft Entertainment, Inc., a corporation wholly
owned by Mr. Roycroft.
As to Mrs. Fox, to Snow Lions Entertainment, Inc., a corporation wholly
owned by Mrs. Fox.
As to Mr. Buckley, to Electric Sprocket, Inc., a corporation wholly owned
by Mr. Buckley.
(2) Includes $59,358 of restricted stock awards.
33
<PAGE>
(3) Includes $65,229 of restricted stock awards.
(4) Includes $7,328 of restricted stock awards.
(5) Includes $131,915 of restricted stock awards.
The Company does not have any employee stock option or other compensatory
plans.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There has been no transaction during the last two years, or proposed
transactions, to which the Company is or will be a party and in which any of its
officers, directors principal stockholders or any family member of such person
has a direct or indirect material interest.
ITEM 8. LEGAL PROCEEDINGS
The Company is not a party to any litigation, and has no knowledge of any
threatened or pending litigation against the Company.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock has been quoted on the OTC BB since March 4, 1999
(and prior thereto the common stock of the Company's predecessor, Earth
Industries,) under the symbol ONPS. The following table sets forth high and low
bid prices for the Class A Common Stock for the calendar quarters indicated as
reported by the OTC BB from November 27, 1998 through September 30, 1999. These
prices represent quotations between dealers without adjustment for retail
markup, markdown or commission and may not represent actual transactions.
1998: High Low Volume
- ---- ---- --- ------
November 27, 1998 through Unpriced No Sales
December 31, 1998
1999:
- -----
January-February $5 $1 14,500
March - (after $4 $2 2,953,600
1 for 30 reverse split)
April-June $3.28 $1.43 6,803,600
July $2.12 $1.50 950,646
August $1.43 $ .68 2,179,862
September $1.06 $ .68 1,376,341
34
<PAGE>
As of October 12, 1999 there were 131 registered holders of the Class A
Common Stock and 4 registered holders of Class B Shares.
The Company has paid no dividends to date and does not expect to pay any
dividends in the foreseeable future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the Plan of Reorganization, the Company issued 1,711,926 shares
to the shareholders of Earth Industries in reliance on Section 4(2) of the
Securities Act.
Following the Reorganization and in accordance with the terms and
conditions of the Plan of Reorganization:
On March 4, the Company issued 5,714,284 shares of Class A Common
Stock in consideration of the payment of an aggregate of $663,740, pursuant
to Regulation D, Rule 504, as promulgated by the SEC, pursuant to ss.3(b)
of the Securities Act of 1933; the shares were issued to 10 non US persons
(7 corporations, 2 individuals and one retirement account), none of whom
were or are affiliated with the Company, as follows:
- --------------------------------------------------------------------------------
Shareholder: # Shares % of Total(1)
- --------------------------------------------------------------------------------
Multi Million Investments Limited 857,143 8.74
Suite 805 Queens Place
74 Queens Road Central
Hong Kong
- --------------------------------------------------------------------------------
Reulcap International Limited 857,142 8.74
3 Trilogy Court
Paget Close, Paget Bermuda
- --------------------------------------------------------------------------------
Strand Management Corporation 285,714 2.91
2160-650 West Georgia Street
Vancouver, BC V6B 4N7 Canada
- --------------------------------------------------------------------------------
Pacific Growth Ventures Ltd. 857,143 8.74
1000-409 Granville Street
Vancouver, BC V6C 1T2 Canada
- --------------------------------------------------------------------------------
Neil Linder RRSP Acct. #200-0635-4 571,429 5.83
C/o Canaccord Capital Corp.
220-609 Granville Street
Vancouver, BC V7Y 1H2 Canada
- --------------------------------------------------------------------------------
1034706 Ontario Ltd. 571,429 5.83
3384 Four Bentall
1055 Dunsmuir Street
Vancouver, BC V7X 1L3 Canada
- --------------------------------------------------------------------------------
35
<PAGE>
- --------------------------------------------------------------------------------
Windsor Management Services Inc. 571,429 5.83
2001 Leeward Highway
P.O. Box 62
Providenciales
Turks and Caicos Islands, B.W.L.
- --------------------------------------------------------------------------------
Clarence and Brenda DeBelle As Joint Tenants 571,429 5.83
1872 Westview Drive
North Vancouver, BC V7M 3A8 Canada
- --------------------------------------------------------------------------------
Pan Star Capital Corp. 571,429 5.83
Craigmuir Chambers 571,426
Road Town, Tortola BVI
- --------------------------------------------------------------------------------
Sub-Total this Requested 504 Issuance 5,714,284 58.26
- --------------------------------------------------------------------------------
(1) These percentages are calculated upon the total expected issued after the
issuance requested herein, and concerns only Class A Common Stock, and not Class
B Special Voting Shares. The percentages are however calculated treating the
2,382,778 Class A reorganization shares as reserved for issuance.
On March 3, the Company issued 2,763,598 shares of Class A Common
Stock, at a deemed price (an agreed to value by the parties) of $1.00 to
the existing shareholders of Online, in exchange for all of such
shareholders shares of Online. The Company believes that the issuance of
these shares was exempt from registration under the Securities Act by
virtue of the exemption from registration provided by ss.4(2) of the
Securities Act and Rule 145 promulgated thereunder for offers and sales not
involving a public offering.
The Company issued 3,673,292 Class B Shares to 4 individual
shareholders (Messrs. Fox and Roycroft and their respective spouses) of
Online in consideration of the exchange by such shareholders of their
common shares of Online for Preferred Equity Shares of Online. The Class B
Shares are convertible to shares of Class A Common Stock at any time, upon
cancellation of the corresponding Preferred Equity Shares of OnLine. The
Company believes that the issuance of these shares was exempt from the
registration requirements of the Securities Act by virtue of the exemption
afforded by Section 4(2) of the Securities Act for offers and sales not
involving a public offering.
The Company also issued an additional 40,756 shares of Class A Common
Stock in settlement of debts (accrued and unpaid wages) in the aggregate
amount of approximately $27,600, to 6 persons who were employees (but not
officers or directors) of the Company. The Company believes that the
issuance of these shares was exempt from the registration requirements of
the Securities Act by virtue of the exemption afforded pursuant to ss.4(2)
of the Securities Act for offers and sales not involving a public offering.
36
<PAGE>
The Company also issued, in 1998, 250,000 shares of Class A Common
Stock, at a deemed value (an agreed to value by the parties) of $1.00 per
share, to purchase the commercial software suite from Columbus.
Upon completion of the Reorganization, and as at October 31, 1999 the
Company had 10,480,614 shares of Class A Common Stock and 3,673,292 Class B
Shares issued and outstanding.
37
<PAGE>
Table 1 summarizes the issuances of Class A Common Stock through October
31, 1999:
Table 1
Class A Common Stock
================================================================================
Issuance of Class A Common Stock to: No. of Shares Issued
================================================================================
1. Shareholders of Earth Industries 1,711,976(1)
================================================================================
2. Private Placement 5,714,284
================================================================================
3. Shares issued to OnLine shareholders 2,763,598
================================================================================
4. For debt settlement(2) 40,756
================================================================================
5. Asset Purchase(3) 250,000
================================================================================
TOTAL CLASS A COMMON STOCK 10,480,614
================================================================================
(1) The 1,712,000 shares of Class A Common Stock became 1,711,976 after
rounding off fractional shares.
(2) These shares were issued to unaffiliated individuals in settlement of debts
approximating $27,600.
(3) Please refer to "Item 1. Description of Business-- Recent Transactions."
Table 2 sets forth the Company's currently issued and outstanding voting
securities:
Table 2
All Issued and Outstanding Voting Securities
================================================================================
CLASS OF VOTING SHARES NO. SHARES % OF VOTING
SECURITIES
- --------------------------------------------------------------------------------
CLASS A COMMON STOCK 10,480,614 74
- --------------------------------------------------------------------------------
CLASS B SHARES 3,673,292 26
- --------------------------------------------------------------------------------
Total shares and issued and outstanding 14,153,906 100.00
================================================================================
The Company believes that all of the issuances of the Class A Common Stock
and the Class B Shares were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) of the Securities Act and/or Regulation
D or S under the Securities Act.
38
<PAGE>
ITEM 11. DESCRIPTION OF SECURITIES
The Company's Capital Authorized and Issued. The Company is authorized to
issue 100,000,000 shares of Class A COMMON EQUITY VOTING STOCK ("Class A Common
Stock"), and 6,000,000 shares of Class B SPECIAL NON-EQUITY VOTING STOCK ("Class
B Shares"), both of par value $0.001. Only the Class A Common Stock is being
registered.
Class A Common Stock. All issued shares of Class A Common Stock and Class A
Shares, when issued, were fully paid for and nonassessable. Each holder of Class
A Common Stock and Class B Shares is entitled to one vote per share on all
matters submitted for action by the stockholders. All shares of voting stock are
equal to each other with respect to the election of directors and cumulative
voting is not permitted; therefore, the holders of more than 50% of the
outstanding voting stock can, if they choose to do so, elect all of the
directors. The terms of the directors are not staggered. Directors are elected
annually to serve until the next annual meeting of shareholders and until their
successor is elected and qualified. There are no preemptive rights to purchase
any additional Class A Common Stock or other securities of the Company. The
owners of a majority of the voting stock may also take any action without prior
notice of or meeting which a majority of shareholders could have taken at a
regularly called shareholders meeting, giving notice to all shareholders
thereafter of the action taken. In the event of liquidation or dissolution,
holders of Class A Common Stock are entitled to receive, pro rata, the assets
remaining, after creditors, and holders of any class of stock having liquidation
rights senior to holders of shares of Class A Common Stock, have been paid in
full.
Class B Shares. Certain shareholders (the "Canadian Preference Holders") of
Online, did not convert their Common shares to Class A Common Stock, but rather
converted to Preferred Equity Shares of Online subsidiary. Class B Shares have
been issued to those shareholders, share for share so that Canadian Preferred
Holders might vote as the Company's shareholders. These shares of Class B Stock
have no equity or liquidation rights, other than voting rights, but upon
liquidation of the Company, these Class B Shares may enjoy preference with
respect to the assets of Online. The Class B Shares are the voting equivalent of
Preferred Equity Shares of OnLine. While no plan for conversion exists, the
Class B Shares may be exchanged for Class A Common Stock, at any time the
Canadian Preferred Holders might elect, and the Board of Directors may allow,
subject to the cancellation of the corresponding Preferred Equity Shares.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Except as hereinafter set forth there is no charter provision, bylaw,
contract, arrangement or statute under which any officer or director of the
Company is insured or indemnified in any manner against any liability which he
may incur in his capacity as such.
The Company's By-laws provides that that Company shall indemnify any
director, officer, employee or agent of the Company, or any person serving in
any such capacity of any other entity or enterprise at the request of the
Company, against any and all legal expenses (including attorney's fees),
39
<PAGE>
claims and/or liabilities arising out of any action, suit or proceeding, except
an action by or in the right of the Company.
Expenses incurred in defending any action, suit or proceeding may be paid
by the Company in advance of the final disposition, when authorized by the Board
of Directors.
The Company does not have nor does it anticipate obtaining any directors'
and officers' liability insurance.
Section 78.751 of the Nevada Revised Statutes permits the indemnification
of directors and officers of a corporation against certain liabilities, which
would include liabilities arising under the Securities Act.
The Securities and Exchange Commission's Policy on Indemnification
Insofar as indemnification for liabilities arising under the Act may be
permitted to any of the Company's directors, officers and controlling persons
pursuant to any provisions contained in the Company's Certificate of
Incorporation, or by-laws, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a directors, officers or controlling
persons in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
40
<PAGE>
ITEM 13. FINANCIAL STATEMENTS Page
----
Auditors Report dated October 29, 1999 39
Auditors Comments 40
Consolidated Audited Balance Sheet as at August 31, 1999 and 1998 41
Consolidated Audited Statement of Loss and Deficit for
the Years ended August 31, 1999 and 1998 42
Consolidated Audited Cash Flow Statement for the Years
ended August 31, 1999 and 1998 43
Notes to the Audited Consolidated Financial Statements 44
41
<PAGE>
Rains & Associates, LLC
Certified Public Accountants
Independent Auditor's Report
Board of Directors and Stockholders
OnLine Production Services, Inc.
We have audited the consolidated balance sheet of OnLine Production Services,
Inc. as of August 31, 1999, and the related consolidated statements of income,
retained earnings, and cash flows for the year then ended. 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 audit. The financial statements on OnLine Film Services, Inc. (the operating
subsidiary of OnLine Production Services, Inc.) as of August 31, 1998, were
audited by other auditors whose report dated July 15, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the financial position of OnLine Production Services,
Inc. as of August 31, 1999, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Rains & Associates, LLC
December 2, 1999
Costa Mesa, California
<PAGE>
BABCOCK & COMPANY
Certified General Accountant
AUDITORS REPORT
To the Shareholders of
ON-LINE FILM SERVICES INC.
I have audited the consolidated balance sheet of ON-LINE FILM SERVICES INC. as
at August 31, 1998 & August 31, 1997 and the consolidated statements of loss and
deficit and cash flow for the years then ended. These financial statements are
the responsibility of the company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform an audit to obtain reasonable
assurance whether the financial statements are free from 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 principals used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
In my opinion, these financial statements present fairly in all material
respects the financial position of the company as at August 31, 1998 and August
31, 1997, and the results of operations and changes in cash flow for the years
then ended in accordance with Canadian generally accepted accounting principals.
This auditors report replaces the auditors report dated July 15, 1999.
The July 15, 1999 auditors report has been withdrawn and the attached financial
statements have been revised. An adjustment relating to a material software
rights purchase has been made to the current year financial statements to remove
a contingent amount payable from liabilities and reduce the book value of the
related asset by the same amount (See note 7 for details). The July 15, 1999
report and financial statements, while conforming to Canadian GAAP, required
additional disclosure in certain areas to conform with the requirements of
United States GAAP. The revised financial statements have had additional
disclosure provided in order to support additional US GAAP reporting
requirements.
Jeff Babcock
CERTIFIED GENERAL ACCOUNTANT
Surrey, B.C.
July 15, 1999, except for revisions discussed above dated November 6, 1999
<PAGE>
OnLine Production Services, Inc.
Consolidated Balance Sheet
August 31, 1999 and 1998 (Note 15)
Amounts in 1,000's of Dollars US
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 514 $ 51
Accounts Receivable - Note 3 64 4
Current Portion of Deferred Taxes - Note 6 4 3
Accrued Interest - Note 5 39 37
------------------
Total Current Assets 621 95
Property, Plant and Equipment Net of Depreciation - Note 4 184 169
Other Assets
Investments - Note 5 8,303 5,130
Intangible Assets-Net of Amortization - Note 10(d)) 305 452
Other - Note 6 2 1
------------------
Total Other Assets 8,610 5,583
==================
Total Assets $ 9,415 $ 5,846
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Liabilities - Note 8 $ 169 $ 87
Bank Line of Credit - Note 7 30 --
Current Portion of Mortgage Payable 1 1
------------------
Total Current Liabilities 200 88
Mortgage Payable - Note 9 75 73
Other Liabilities
Contingent Revenue - Note 10 8,268 5,110
Payable Columbus Software, Inc. - Note 10(d) -- 450
Loan Payable - Shareholders -- 17
------------------
Total Other Liabilities 8,268 5,576
Stockholders' Equity - Note 11
Capital Stock
Class A Common Stock, $0.001 par, 100,000,000 shares authorized,
10,480,614 issued 7 4
Preference Shares, 10,000,000 shares authorized
3,673,292 issued 2 --
------------------
Total Capital Stock 9 4
Additional Paid in Capital
Issued price in excess of par value - Class A 1,318 567
Issued price in excess of par value - Preference Shares 180 --
------------------
Total Paid In Capital 1,498 567
Accumulated Deficit (635) (462)
------------------
Total Stockholders' Equity 872 109
==================
Total Liabilities and Stockholders' Equity $ 9,415 $ 5,846
==================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
OnLine Production Services, Inc.
Consolidated Statement of Loss and Accumulated Deficit
Years Ended August 31, 1999 and 1998 (Note 15)
Amounts in 1,000's dollars US
1999 1998
------------------------
Revenue
Sales $ 229 $ 91
Territory Sales 655 1,111
Other 74 --
------------------------
Total Revenue 958 1,202
Cost of Sales 920 759
------------------------
Gross Profit 38 443
General & Administrative Expenses 713 769
Depreciation/Amortization 195 27
------------------------
Loss From Operations (870) (353)
Other Income/Expense
Interest Income 388 238
------------------------
Loss Before Taxes (482) (115)
Deferred Taxes 1 (3)
------------------------
Net Loss Applicable to Common Stock $ (481) $ (118)
========================
Weighted Average Shares - Common Stock 10,170 5,994
------------------------
Loss Per Share of Common Stock $ (0.05) $ (0.02)
------------------------
Statement of Accumulated Deficit
Balance - Beginning of Year $ (462) $ (334)
Net Loss for Year (481) (118)
Translation Adjustment 308 (10)
========================
Balance - End of Year $ (635) $ (462)
========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
OnLine Production Services, Inc.
Consolidated Statement of Cash Flows
Years Ended August 31, 1999 and 1998 (Note 15)
Amounts in 1,000's of Dollars US
<TABLE>
<CAPTION>
1999 1998
------------------
<S> <C> <C>
OPERATING ACTIVITIES
Cash Used In Operations:
Net Loss $ (481) $ (118)
Add (deduct) charges to items not involving cash:
Expense settled for shares 27
Amortization 195 27
Deferred Taxes (1) 3
------------------
$ (260) $ (89)
Non-cash working capital items:
Accounts Receivable (64) (4)
Current Portion of Deferred Taxes (1) (1)
Accounts Payable & Accruals 82 69
Contingent Revenue Security Received 3,158 5,110
------------------
$ 2,915 $ 5,085
------------------
FINANCING ACTIVITIES
Change in Bank Operating Loan $ 30 $ (42)
Related Party Loans (17) 8
Capital Stock Issuances 5 57
Additional Paid In Capital 654 --
Note Payable (200) 450
Increase in Long Term Debt 3 --
Reduction in Openning Long Term Debt (1) (23)
------------------
$ 474 $ 451
------------------
INVESTING ACTIVITIES
Software Rights $ -- $ (450)
Change in Deferred Costs -- 232
Change in Long Term Investments (3,173) (5,167)
Proceeds of Ppty, Plant & Equip Sales 17 --
Capital Asset Purchases (77) (80)
------------------
$(3,233) $(5,465)
------------------
------------------
Translation Adjustment $ 307 $ (10)
------------------
Change In Cash $ 463 $ 59
Cash, start of year 51 (8)
------------------
Cash, end of year $ 514 $ 51
------------------
SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES:
Accrued Wages Settled for Shares (Note 11) $ 27 $ --
Reduction in Debt to Columbus Software through share issuance (Note 11) 250 --
------- -------
$ 277 $ --
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
OnLIne Production Services
Weighted Average Shares
1999
<TABLE>
<CAPTION>
Fraction of Yr Shares Times
Date Description Shares Outstanding Outstanding Fraction
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/31/98 Beginning Balance 6,118,910 1 6,118,910
Jan-99 Issue New Shares 228,000 7/12 133,000
12/31/98 Issue New Shares 90,000 2/3 60,000
2/19/99 Reorganization 1,711,926 1/2 855,963
3/1/99 Issue New Shares 250,000 1/2 125,000
3/4/99 Issue new shares 5,714,284 1/2 2,857,142
3/4/99 Issue New Shares 40,756 1/2 20,378
14,153,876
Weighted Average number of Common Shares Outstanding 10,170,393
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance Change Balance
Description 36,038 DR CR 36,403
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash 52 462 514
A/R 4 60 64
Def Taxes 3 1 4
Accrued Int 37 2 39
PPE 169 67 17 219
A/D 35 (35)
Investments 5,130 3,173 8,303
Software 3,952 10 3,962
Amort Software 4 (4)
Other 1 1
-------------------
13,067
-------------------
A/P (87) 82 (169)
Line of Credit 30 (30)
Curr Mtg (1) (1)
Mtg Payable (73) 2 (75)
Def Reve (5,110) 3,157 (8,267)
N/P Columbus (3,950) 450 (3,500)
L/P Shareholder (17) 17 --
-------------------
(12,042)
-------------------
Stock (4) 5 (9)
PIC (567) 931 (1,498)
R/E 431 431
TA 10 287 (277)
Income 286 286
Depreciation 42 42
-------------------
(1,025)
-------------------
(13,067)
Investing
New 3,173
New PPE 67
Software 10
-----------------------------------
-- 3,250
-----------------------------------
Financing
Sell PPE 17
Mtg 2
New Def 3,157
N/P Columbus 450
N/P SH 17
Stock 5
PIC 931
-----------------------------------
4,112 467
-----------------------------------
Operating
A/R 60
Other 3
A/P 82
LOC 30
Income 328
Non Cash 39
-----------------------------------
151 391
-----------------------------------
TA 307
Change in Cash 462
-----------------------------------
4,570 4,570
-----------------------------------
--
</TABLE>
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Foreign currency translation
All balances relating to On-Line Film Services Inc. (Canadian subsidiary) have
been converted to United States dollars using the current rate method of
currency conversion. The use of this method resulted in a cumulative translation
adjustment gain of $309,000 at the current balance sheet date and $10,000 loss
at the prior year balance sheet date.
(b) Investments
Investments are held to maturity investments and are recorded at their amortized
cost at the balance sheet date. These investments are strictly interest bearing
deposits in the form of savings bonds and guaranteed interest certificates at
the current and prior balance sheet dates. (Note 5) Subsidiaries are
consolidated in these financial statements (Note 2).
(c) Deferred Corporate Taxes
Deferred corporate taxes arise due to temporary timing differences arising from
depreciation rates used for financial statement purposes and the depreciation
rates prescribed for taxation purposes. Deferred taxes are divided into a
current portion, which is expected to be utilized within one fiscal year and a
non-current portion, which is expected to be utilized in a future period in
excess of one fiscal year. (See note 6)
(d) Revenue Recognition Policy
Sales (excludes Mailcard and Casting Software rights) revenue is recognized when
realized. Realization occurs when the earning process is complete, or virtually
complete and revenue is evidenced by the existence of an exchange transaction
which provides significant certainty as to the ultimate collectibility of the
revenue amount. This policy applies to all subscription and general revenue but
does not apply to the realization of Mailcard and Casting Software rights sales.
Revenue relating to Casting Workbook subscriptions is generated strictly from
actors and entertainers who wish to subscribe following the free trial period
(the free trial period varies at the discretion of the company management,
depending on the circumstances, but has tended to be 60 to 90 days with some
exceptions) provided by the company, at which time subscriptions are invoiced
for the next twelve month subscription period. Once invoiced, the invoiced
amount is recorded as subscription fee revenue.
The company also uses a digital watermarking system to protect its digitally
created images against unauthorized resale. In the event that an unauthorized
distribution of an image containing this watermark is found, the company may
charge a fee for the use of this image. In this scenario, collection of the fee
charged is very uncertain. As such, any revenue generated through charges for
unauthorized distribution of company images will be realized when collected. At
the balance sheet date, there has been no charges or collections relating to
unauthorized distribution of company images.
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
Mailcard and Casting Software rights revenue is recognized on the collection
method. The ultimate collection of agreed amounts relating to the mailcard and
casting software rights is contingent on future sales of the software by the
company. This contingency creates a significant degree of uncertainty
surrounding the ultimate collection of this contingent revenue, which is based
on the service of selling the software over a ten year period. As such, revenue
is only recognized at such time as the funds are collected. (See note 11 )
(e) Cash and cash equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks or
other high credit quality financial institutions and other highly liquid
investments which are readily convertible into cash within a one year period.
Due to the short term nature of these instruments, the carrying value
approximates fair value.
(f) Accounting impairment for long lived assets
The company considers impairment of value to occur when the book value of fixed
assets is determined not to be recoverable. If this happens, the company has a
policy of reducing the carrying value of the long lived asset to the recoverable
amount and recording this reduction loss amount on the income statement in the
year in which the write down has occurred. There has been no impairment of any
long lived assets in the current or prior year.
(g) Reorganization and reverse acquisition
The company, in fiscal year 1999, completed a reorganization and reverse merger.
At the time of the merger, neither OnLine Production Services Inc., or its
predecessor Earth Industries Inc., had any financial activity. With the
exception of the stock of Earth Industries, which had a book value of $0 at the
time of the merger, the only entity with activity was On-Line Film Services,
Inc., which became the operating subsidiary company as a result of the merger.
Therefore, the consolidated financial statements of On-Line Film Services Inc.
for the year ending August 31, 1998 are presented as comparable statements.
2. CONSOLIDATED FINANCIAL STATEMENTS
These financial statements show the consolidated results of operations for
OnLine Production Services Inc. and its wholly owned Canadian subsidiary On-Line
Film Services Inc..
3. ACCOUNTS RECEIVABLE
The accounts receivable balance at August 31, 1999 are shown net of allowance
for doubtful accounts of $ 1,688 . The 1998 accounts receivable balance is shown
net of allowance for doubtful accounts of $6,862
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Asset Accum. Depreciation
Description Amount Deprec. Net Method
----------- ------ ------- --- ------
<S> <C> <C> <C> <C>
Office Furn & Fixtures $19 $ 5 $ 14 20% Declining Balance
Computer Software 13 13 nil 100% Declining Balance
Computer Equipment 141 63 78 30% Declining Balance
Building 105 13 92 4% Declining Balance
--
$184
</TABLE>
5. INVESTMENTS
Long term investments consists of British Columbia Savings Bonds in a principal
amount of $2,878, 800 with an unamortized bond premium of $1,150 to be amortized
over the remaining eight year period of the bonds. Accrued interest of $38,800
was unpaid at the balance sheet date. These bonds earn interest at 6% per annum
(effective interest rate of 5.992%) paid semi-annually and are locked in to June
9, 2008. The accrued interest amount is calculated based on 6% of the principal
for an accrual period of 82 days. The last interest payment date was June 10,
1999. The next interest payment date is expected on or around December 9, 1999.
These bonds serve as registered collateral on the Mailcard contingent sales
agreement dated September 17 1997. The amount of the collateral claim registered
against these bonds is $2,878,000 which is locked in until June 9, 2008. All of
the interest earned on this bond during the current fiscal year ($171 000),
included in interest income line on the consolidated statement of loss and
accumulated deficit, was used to fund the minimum required Mailcard software
purchase guarantee for the year. (See notes 10 & 13).
Also included in long term investments is the guaranteed interest savings amount
of $5,422,700 held at the Canadian Imperial bank of Commerce, of which
$5,387,900 serves as registered collateral relating to the Casting Workbook
software contingent sales agreements dated December 31, 1997 and December 31,
1998, with the principal to be locked in until December 31, 2007 and 2008
respectively . From the agreement date to the balance sheet date, these funds
have been placed in seven day CIBC GICs earning interest revenue at variable
rates throughout the period. At he balance sheet date there was no accrued
interest relating to the GIC investments. For the current fiscal year, all
interest earned on these investments have been used to fund the Casting Workbook
exclusivity payments of $203,000 for the current year (See notes 10 & 13). The
funding of the exclusivity payments is included in interest income line on the
consolidated statement of loss and accumulated deficit
The above investments are considered to be held to maturity debt investments
where the principal will be fully recovered when the investments come due.
Included in interest expense is $143 which relates to bond premium amortization
on the BC Savings bonds over a ten year period.
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
6. DEFERRED TAXES - NON CURRENT
Total deferred corporate taxes $4,677
Less: Current Portion (3,934)
-------
Non current portion $ 743 included in "Other Assets"
-------
7. BANK LINE OF CREDIT
The company has available a $40,000 line of credit with the Royal Bank in
Vancouver, British Columbia. The line of credit bears interest at the rate of
Royal Bank prime plus 1.75% per annum. At the balance sheet date, the company
has used $30,000 of this available line of credit.
8. ACCOUNTS PAYABLE & ACCRUED LIABILITIES
Included in accounts payable and accruals is accrued distribution and
exclusivity fees of $73,000 relating to the Mailcard and Casting Workbook
contractual agreements . The remaining amount relates to trade payables and
operating accruals (Note 13).
9. MORTGAGE PAYABLE
Mortgage payable consists of the following:
Mortgage payable to Vancity Credit Union bearing interest at 8.75% per annum
with monthly payments of $632 (Renewal May 2001) Secured by real estate (office)
at 208-2323 Boundary Road, Vancouver, British Columbia. The balance at August
31, 1999 is $76,014. The company expensed $6 500 in interest relating to this
loan in the current year ($7 600 in prior year). This was the only loan interest
paid in the current fiscal year
Future principal payments are:
Fiscal Year Principal
- ----------- ---------
2000 $ 682
2001 $ 744
2002 $ 812
2003 $ 885
2004 $ 966
Thereafter $ 71,925
10. CONTINGENCIES
(a) In the 1998 fiscal year, the company entered into a contingent sale
agreement for the sale of Mailcard software territory rights to unrelated third
parties. The company received and realized $523,000 in revenue as well as
$2,878,000 in funds which are secured by the purchasing party as collateral
against the purchasers portion of the projected minimum sales guaranteed by the
company over a ten year period (See note 5). If and when the 3.2 million minimum
sales units over the ten year period is met by the company, it shall receive the
collateral funds as income at a rate of approx. 97% of the gross sales
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
amount for the units sold in excess of 3.2 million units. Once all of the
collateral funds have been released and realized as income by the company, it
will earn 100% of the Mailcard sales revenue less a perpetual fee of 3% - 5% of
gross revenue (depending on unit sale price) to the software rights purchasers.
In the event that the projected minimum sales over the ten year period is not
met, the company must make up this shortfall from the collateral funds and/or
revenue generated by the $2,878,000 held as collateral.
The amount of future revenue relating to this contingency agreement is not
determinable until its ten year expiration date or until such time as the
minimum required sales level is met. As a result, revenue is realized on the
collection method, whereby deferred revenue is realized as income when funds are
released from collateral. At the balance sheet date, the cumulative minimum
sales has not yet been obtained, resulting in $2,878,000 included in unrealized
contingent revenue relating to this agreement on the balance sheet.
The collateral funds are registered and are not accessible by the company until
such time as these funds (or portion thereof) are released by the secured
parties. The term ending date is December 28, 2007. The contingent (deferred)
revenue amount above is secured by a claim against the ten year BC Savings bonds
held by the company (See note 5).
(b) In the 1998 fiscal year, the company also entered into a contingent sale
agreement for the Casting Workbook software territories rights to unrelated
third parties. The company received and realized $587,000 in revenue as well as
$2,476,000 in funds which are secured by the purchasing party as collateral
against the purchasers portion of minimum projected revenue of approximately
$5.895 million provided by the company over a ten year period (See note 5). If
and when the minimum casting revenue over the ten year period is met by the
company, it shall receive the collateral funds as income at a rate of approx.
97% of the gross revenue amount for aggregate revenue generated in excess of the
approx. $5.895 million. Once all of the collateral funds have been released and
realized as income by the Company, the Company shall earn 100% of the Casting
software sales revenue less a perpetual fee of 3% to 5% of gross revenue
(depending on sales price) to the software rights purchasers. In the event that
the projected minimum revenue over the ten year period is not met, the company
must make up purchasers portion of these shortfall from the collateral funds
held as contingent revenue.
The amount of future revenue relating to this contingency agreement is not
determinable until its ten year expiration date or until such time as the
minimum required revenue level is met. As a result, revenue is realized on the
collection method, whereby deferred revenue is realized as income when funds are
released from collateral. At the balance sheet date, the cumulative minimum has
not yet been obtained, resulting in $2,476,000 included in unrealized contingent
revenue relating to this agreement at the balance sheet date.
The collateral funds are registered and are not able to be used by the company
until such time as these funds (or portion thereof) are released by the secured
parties. The term ending date is December 31, 2007. These collateral funds are
in the form of CIBC weekly GICs (See note 5)
(c) In the current fiscal year, the company also entered into a contingent sale
agreement for additional Casting Workbook software territories rights to
unrelated third parties. The company received and realized $655,000 in revenue
as well as $2,912,000 in funds which are secured by the purchasing party as
collateral against the purchaser's portion of the minimum projected revenue
amount of approximately $6.9 million provided by the company over a ten year
period (See note 5). If and when the minimum casting revenue over the ten year
period is met by the company, it shall receive the collateral funds as income at
a rate of approx. 97% of the gross revenue amount for aggregate revenue
generated in excess of the approx. $6.9 million. Once all of the collateral
funds have been released and realized as income by the Company, the Company
shall earn 100% of the Casting software sales revenue less a perpetual fee of 3%
to 5% of gross
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
revenue (depending on sales price) to the software rights purchasers. In the
event that the projected minimum revenue over the ten year period is not met,
the company must make up the purchaser's portion of the shortfall from the
collateral funds from the collateral funds held as contingent revenue.
The amount of future revenue relating to this contingency agreement is not
determinable until its ten year expiration date or until such time as the
minimum required revenue level is met. As a result, revenue is realized on the
collection method, whereby deferred revenue is realized as income when funds are
released from collateral. At the balance sheet date, the cumulative minimum has
not yet been obtained, resulting in $2,912,000 included in unrealized contingent
revenue relating to this agreement at the balance sheet date.
The collateral funds are registered and are not able to be used by the company
until such time as these funds (or portion thereof) are released by the secured
parties. The term ending date is December 31, 2008. These collateral funds are
in the form of CIBC weekly GICs (See note 5).
(d) At the end of the prior fiscal year, the company purchased the rights to
software for use in the production of commercials. The agreement gives the
company the right to the sale of commercial production service worldwide. The
total purchase price was $3,950,000 . The payment of the purchase price consists
of two payments of $100,000 (paid), the issuance of 250,000 common shares at a
value of $1 per share (issued) and the issuance of a note payable of $
3,500,000. In the current year, the company expended an additional $8,000
relating to this agreement. The agreement is with Columbus Software Inc. The
note payable is due only if the company achieves specified sales objectives on
or before August 31, 2008.
Due to the contingent nature of the note payable, the purchase price
attributable to the note amount of $3,500,000 is not presented in the financial
statements. Instead, the amount of the purchase price actually expended of $450
000 and the additional $8,000 cost is classified as an other asset and will be
amortized over the estimated useful life of three years. This resulted in a
charge for amortization of $152,667 in 1999, the first year of the purchase. The
remaining purchase price of $3,500,000 will be recognized dollar for dollar
against revenues generated by this service. The agreement also calls for a
percentage of gross revenues to be paid to Columbus Software, Inc., on revenues
generated over and above the purchase price.
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
11. STOCKHOLDERS' EQUITY
Statement of Changes in Stockholders' Equity (Including Accumulated Deficit
Statement)
<TABLE>
<CAPTION>
Class A Common Preference Shares
-------------- ----------------- Paid In
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance 8/31/98 6,158,910 $4,088 -- -- $540,998 ($452,074)
Shares Issued
Prior to
Reorganization 277,980 185 -- -- 19,680 --
Shares Issued
To Earth Ind
Shareholders 1,711,976 1,136 -- -- -- --
Reorganization (6,436,890) (4,276) -- -- (560,678) --
Issue Shares to
OnLine Film SH 2,763,598 1,835 -- --
380,889 --
Issue Class B
Common Shares -- -- 3,673,292 2,439 179,789 --
Private Placement
Shares Issued 5,714,284 3,793 -- -- 659,947 --
Shares Issued
For Debt 40,756 27 -- -- 27,024 --
Shares Issued
To Columbus
Software Inc. 250,000 250 -- -- 249,750 --
Net Loss
($481,120)
----------- ----------- ----------- ----------- ----------- -----------
Balance 8/3199 10,480,614 $7,041 3,673,292 $2,439 $1,497,399 ($933,194)
----------- ----------- ----------- ----------- ----------- -----------
Translation Adjustment Current Period $ 298,832
-----------
Balance In Retained Earnings(Deficit) August 31, 1999 ($634,362)
-----------
</TABLE>
The 40,756 Class A shares issued for Debt above, were issued to company
employees in lieu of certain wages accrued during the current fiscal year. These
shares were issued to employees who were neither officers nor directors of the
company.
The preference shares above are non-voting, redeemable and retractable on or
before March 1, 2004. These shares are non-cumulative and do not have a fixed
dividend rate. These preferred shares earn dividends at the same rate as the
class A common shares when a dividend on the class A common shares is declared.
These shares may be converted to common shares at the discretion of either the
company or the shareholders.
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
12. LEASE OBLIGATIONS
The company has the following estimated future lease obligations based on
current and projected lease agreements.
DESCRIPTION 2000 2001 2002 2003 2004
---------------------------------------------------------------------
Computer & Office Equip 63,000 66,000 68,000 70,000 72,000
Vancouver Office Lease 9,500 10,000 10,500 11,000 11,500
Toronto Office Lease 8,500 9,000 9,500 10,000 10,500
LA Office Lease 15,000 16,000 17,000 18,000 19,000
---------------------------------------------------------------------
TOTALS 96 000 101,000 105,000 109,000 113,000
In the current year computer and office equipment leases totaled $48 000 (1998
$34 000). Aggregate office rent totaled $ 24 000 (1998 $17 000).
13. OTHER OBLIGATIONS
(a)The company is obligated purchase a minimum of approximately $171 000 per
calendar year of Mailcard software for purposes of distribution on behalf of the
software vendors. This obligation remains in effect until at least December 28,
2007, at which time, the agreement may be terminated or renewed, depending on
circumstances at that time. The company is also required to purchase an
additional 2 560 000 copies at an estimated price of approximately $4 per copy
of the Mailcard Software on or before December 28, 2007. Included in accounts
payable and accruals is an accrual of $38 000 representing the portion of the
obligation payable but not yet due or paid at the balance sheet date. This
amount was based on the interest accrued on the collateralized BC Savings Bonds
Investment (Note 6) which is to be paid directly to the collateralized party to
cover the guaranteed purchase amount. This amount is paid semi-annually on or
around June 10 and December 9 of each calendar year. For the fiscal year ended
August 31, 1999, the company has paid $133 000 from interest generated by the
collateral amount with $38 000 remaining to be paid at the balance sheet date,
to be paid from the interest accrued on the collateral bonds.
(b)The company is also obligated to pay minimum exclusivity fees, which is the
interest earned on the CIBC weekly GICs (note 6), per calendar year for the
right to provide management services related to the Casting Workbook. This
minimum obligations remains in effect until December 28, 2007 and 2008 (note
10), at which time, the agreements may be terminated or renewed, depending on
the circumstances at that time. Included in accounts payable and accrued
liabilities is an accrual of approximately $35,000, which is the interest earned
on the collateralized GICs from July 1, 1999 to August 31, 1999, which has not
yet been paid to the Casting Workbook purchasers.
In the event that sales are not sufficient to meet the minimum requirements in a
& b above, any shortfall will be covered by interest generated by the security
held at the discretion of the company. See above.
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
14. INCOME TAXES
The company has approximate income tax losses in the Canadian subsidiary which
may in certain circumstances be applied against taxable income of the Canadian
subsidiary in future years to reduce taxes otherwise payable as follows:
Year of Expiry Amount of Loss
2002 10,000
2003 87,000
2004 138,000
2005 82,000
2006 148 000
--------
$465 000
The estimated net operating loss resulting from the operations of the American
parent company total approximately $180 000 which may in certain circumstances
be applied against taxable income of the parent company in future years. This
loss carryforward expires in 2019.
15. PRIOR YEAR COMPARATIVE FIGURES
The prior year comparative audited figures, previously in Canadian dollars, have
been restated to US dollars, with a translation loss adjustment of $10 US in the
prior year. Certain of the prior year comparative figures have been restated to
conform with current year presentation. Other than the results of the conversion
of the prior year comparative figures and the resulting currency translation
adjustment, there have been no other prior period adjustments.
16. DEVELOPMENT COSTS
Expenditures relating to Casting Workbook enhancements and refinements,
including Ebinder, Sides Online and Scripts Online are expensed in the period in
which they are incurred. These costs consist primarily personnel related costs
for programming work to maintain and improve the existing Casting Workbook
software. These costs are not believed to have any alternative future uses, as
such they are expensed as incurred and included in cost of sales as they relate
to continuing subscription revenue.
Costs relating to development of Casting Workbook enhancements which are still
in development at the balance sheet date, such as; a voice over database and a
database for models, dancers, extras, musicians and commercial modules are
considered to be unfinished enhancements to the Casting Workbook at the balance
sheet date. As such, these development costs (primarily personnel related) are
expensed in the period in which they are incurred. These enhancements are
thought to be necessary to keep the Casting Workbook software useful in the
current market. As such, these costs are included in cost of sales, as they
relate to the continuing usefulness of the Casting Workbook and the related
subscription revenue earned through the use of the Casting Workbook software.
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
August 31, 1999
17. RELATED PARTY TRANSACTIONS
During the current fiscal year, the company had the following related party
transactions included in General & Administrative Expenses on the Consolidated
Statement of Loss and Accumulated Deficit:
Management Fees: $255,700
========
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's acquistion of OnLine (the accounting acquiror) in the fiscal year
ending August 31, 1999 has required the engagement of a United States accounting
firm to perform the examination of the Company's financial statements as at
August 31, 1999 and for the year then ended. Accordingly, in October, 1999, the
Company's board of directors approved the retention of Rains & Associates, LLC.
to perform such examination in place of its prior auditor, Babcock & Company,
who had been the Company's auditor for the fiscal year ended August 31, 1998. In
connection with that audit and through October, 1999, there were no
disagreements between the Company, OnLine, and Babcock & Company on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Babcock & Company, would have caused them to make reference in
their report to the subject matter of the disagreements.
The Company requested Babcock & Company to furnish it with a letter addressed to
the Commission stating whether such firm agrees with the statements made above
and, if not, stating the respects in which they do not agree. Such letter is
attached as an exhibit hereto.
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
I. Financial Statements
Auditors Report dated October 29, 1999
Auditor Comments
Consolidated Audited Balance Sheet as at August 31, 1999 and 1998
Consolidated Audited Statement of Loss and Deficit for
the Years ended August 31, 1999 and 1998
Consolidated Audited Cash Flow Statement for the Years
ended August 31, 1999 and 1998
Notes to the Audited Consolidated Financial Statements
II Exhibits
2.1 Plan of Reorganization and Merger for Change of Status dated February
18, 1999*
2.2 Plan of Reorganization and Acquisition date February 19, 1999*
3(i).1 Articles of Incorporation of Earth Industries, Inc. dated August 7,
1996*
3(i).2 Articles of Correction of Earth Industries, Inc. *
3(i).3 Articles of Amendment of Earth Industries, Inc. dated August 22, 1996*
3(i).4 Articles of Incorporation of OnLine dated February 18, 1999*
3(ii) ByLaws of Online Production Services, Inc. *
10.1 Asset Purchase Agreement dated between OnLine and Columbus
Entertainment, Inc. August 31, 1998*
10.2 Amending Asset Purchase Agreement dated August 31, 1998*
10.3 Promissory Note dated August 31, 1998*
10.4 Management Agreement dated August 31, 1998*
10.5 Form of Asset Purchase Agreement - MailCard
10.6 Form of Distribution Agreement - MailCard
10.7 Form of Asset Purchase Agreement - Casting Workbook
10.8 Form of Facilities Management Agreement - Casting Workbook
16 Letter from Babcock & Company dated December 6, 1999
27 Financial Data Schedule*
- ---------------
* Previously Filed.
43
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant has caused this amendment to its registration statement to be
signed on its behalf by the undersigned, thereunder duly authorized.
Dated: December 6, 1999 ONLINE PRODUCTION SERVICES INC.
By: /s/ Aerock Fox
----------------------------
Aerock Fox
44
<PAGE>
ONLINE PRODUCTION SERVICES INC.
REGISTRATION STATEMENT
on Form 10SB/A
INDEX TO EXHIBITS
Exhibits
2.1 Plan of Reorganization and Merger for Change of Status dated February
18, 1999*
2.2 Plan of Reorganization and Acquisition date February 19, 1999*
3(i).1 Articles of Incorporation of Earth Industries, Inc. dated August 7,
1996*
3(i).2 Articles of Correction of Earth Industries, Inc. *
3(i).3 Articles of Amendment of Earth Industries, Inc. dated August 22, 1996*
3(i).4 Articles of Incorporation of OnLine dated February 18, 1999*
3(ii) ByLaws of Online Production Services, Inc. *
10.1 Asset Purchase Agreement dated between OnLine and Columbus
Entertainment, Inc. August 31, 1998*
10.2 Amending Asset Purchase Agreement dated August 31, 1998*
10.3 Promissory Note dated August 31, 1998*
10.4 Management Agreement dated August 31, 1998*
10.5 Form of Asset Purchase Agreement - MailCard
10.6 Form of Distribution Agreement - MailCard
10.7 Form of Asset Purchase Agreement - Casting Workbook
10.8 Form of Facilities Management Agreement - Casting Workbook
16 Letter from Babcock & Company dated December 6, 1999.
27 Financial Data Schedule*
- ----------
* Previously Filed.
Exhibit 10.5
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made September 17, 1997
BETWEEN:
ON-LINE FILM SERVICES INC., a company having an office at Suite 208, 2323
Boundary Road, Vancouver, British Columbia V5M 4V8 ("Vendor")
AND:
PURCHASER, Businessman, of the City of Vancouver, British Columbia
("Purchaser")
WHEREAS Vendor has developed and/or acquired, and is the owner of, all
rights, title and interest in the Work as hereinafter defined;
AND WHEREAS Purchaser desires to purchase an ownership interest in the Work
in order to exploit it and generate profits from such exploitation.
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual
representations and covenants herein, the parties agree as follows:
1. DEFINITIONS
1.1 In this Agreement, the following terms shall have the following meanings:
"Affiliate" has the meaning ascribed thereto by the Canada Business Corporations
Act.
"Bill of Sale" means the bill of sale of the Purchased Work to be delivered at
Closing to Purchaser, as set out in Schedule "C".
"Closing" means the completion of the purchase and sale of the Purchased Work
contemplated herein.
<PAGE>
-2
"Closing Date" means the date hereof, or such later date as agreed upon by the
parties.
"Derivative" means software derived in any manner in whole or in part from the
Program, and any Program improvements, enhancements, modifications or updates
thereto.
"Distribution Agreement" means the agreement entered into between Distributor
and Purchaser as of the Closing Date, appointing Distributor as the exclusive
distributor of copies of the Products.
"Distribution Territory" means the territory throughout which Distributor has
been appointed the exclusive distributor of Products pursuant to the
Distribution Agreement.
"Distributor" means On-Line Distributing Inc., a corporation formed pursuant to
the laws of British Columbia, all of the issued and outstanding shares of which
are beneficially owned by Vendor.
"External Valuation" means the Program valuation prepared for Purchaser by emc
partners of 228 Balmoral Ave., Toronto, Ontario M4V 1J9.
"Field of Use" means the particular applications and fields of use of the
Program with respect to which Purchaser is purchasing the Work, as described in
Schedule 11 B ".
"Guarantee" shall have the same meaning as that term is defined in the
Distribution Agreement.
"Ownership Territory" means the territory described in Schedule "D" throughout
which Purchaser has acquired ownership of the Purchased Work.
"Person" means any person, corporation or partnership.
"Products" means copies of the Program sold by, and supplied by or on behalf of,
Purchaser to Distributor under the Distribution Agreement for sale by
Distributor, directly or through sub-distributors, to end-users.
"Program" means the computer application software described in Schedule "A",
exclusive of that third party software or property incorporated in the Program
listed in Schedule "E".
"Program Design Specifications" means those Program specifications and technical
information which enable any person reasonably skilled in software
<PAGE>
-3
design, analysis or programming to maintain, support and further develop the
Program.
"Purchase Price" means the price which Purchaser shall pay to Vendor at Closing,
subject to the terms and conditions hereof, to purchase the Purchased Work.
"Purchased Work" means the Vendor's entire beneficial and legal interest in the
Work for the Field of Use throughout the Ownership Territory.
"Security" shall mean the Securities Pledge Agreement made between the Vendor
and the Purchaser, together with such other agreements or acknowledgements as
may be agreed between the parties prior to Closing.
"Source Code" means the human readable, high level language version of the
Program capable, upon compilation, of being translated into machine executable
object code.
"Work " means:
(a) the Program, and all its Derivatives;
(b) all trade-secrets, know-how, patents and copyrights in the Program, and all
intellectual property registrations and applications relating to the
Program and all its Derivatives;
(c) all Program Design Specifications, Source Code, user manuals and training
and marketing materials in support of the Program and all its Derivatives;
(d) Vendor's business plan for the development, marketing, distribution and
exploitation of the Program and all its Derivatives to earn income; and
(e) all rights with respect to the development, licensing, sale, support,
maintenance, distribution, supply or exploitation of the Program and all
its Derivatives.
2. WARRANTY OF OWNERSHIP
2.1 Vendor represents and warrants that;
(a) it is the sole legal and beneficial owner of, and has good and marketable
title to, the Purchased Work including, without
<PAGE>
-4
limitation, any and all copyright, know-how, trade secrets and patents
relating to the Program, free and clear of all liens, charges and
encumbrances, excluding that third party software or property incorporated
in the Program listed in Schedule "E";
(b) the Program has been acquired or developed by or on behalf of Vendor;
(c) to its knowledge, the Purchased Work does not and will not infringe upon or
violate any intellectual property right of any person;
(d) to its knowledge there are no claims made or actions pending or threatened
regarding the ownership of, or infringement of any third party rights by
the Purchased Work; any third party software incorporated into or used in
connection with the Purchased Work by Vendor is licensed to Vendor at no
additional cost to the Purchaser; and
(f) to its knowledge, after reasonable unit and integration testing, there are
no material programming errors or defects in the Program and in the event
that any programming errors or defects are discovered in the Program or any
Derivative, Vendor will forthwith correct all such programming errors or
defects.
3. SALE AND PURCHASE
3.1 Vendor agrees to sell, convey, assign and transfer to Purchaser, and
Purchaser agrees to buy, the Purchased Work at Closing, for the full
Purchase Price of $xxx,xxx.
4. PAYMENT OF PURCHASE PRICE
4.1 Purchaser agrees to make payment of the total Purchase Price to Vendor on
the Closing Date by certified cheque. It is the intention of the parties
that the Purchase Price shall be paid to Vendor in accordance with the
provisions of this Agreement on the Closing Date, and that no funds be
retained in escrow pending the completion of any registrations or post
Closing Date obligations, provided that all closing documents shall have
been delivered by Vendor on or before Closing as required by this
Agreement.
<PAGE>
-5
5 TAXES
5.1 Purchaser shall be responsible for and shall pay all sales, ad valorem and
excise tax, including goods and services tax and British Columbia social
services tax, payable with respect to the purchase of the Purchased Work.
Vendor agrees to co-operate with Purchaser in facilitating its applications
for waivers, exemptions and input tax credits with respect to such
payments.
6 VALUATION REPRESENTATIONS
6.1 Purchaser acknowledges that Vendor has assisted in providing information
for the External Valuation and that Purchaser has received the External
Valuation, which appraises the value of the Work as it applies to the Field
of Use in North America at not less than $5,400,000, and on which External
Valuation Purchaser has relied in part in agreeing to enter into this
Agreement.
6.2 Vendor represents and warrants that to the best of its knowledge, as of the
Closing Date:
(a) no data or information provided by it for the External Valuation contains
any material error, and
(b) Vendor has no information or reason to believe that any assumption used in
the preparation of the External Valuation is not reasonable or accurate in
all material respects.
7 PROGRAM MAINTENANCE
7.1 Throughout the term of the Distribution Agreement, Vendor shall maintain,
enhance and update the Program at Vendor's own expense and shall forward to
Purchaser copies of the updated Source Code and Program Design
Specifications from time to time as Derivatives are produced.
8 PRE-CLOSING CONDITIONS
8.1 It is a condition precedent to Purchaser's obligation to complete the
purchase contemplated herein that Vendor shall have, prior to the Closing
Date:
(a) allowed Purchaser to review all existing certificates of registration and
documents of title, if any, with respect to the Program;
(b) allowed Purchaser to review the Program's operation and use;
<PAGE>
-6
(c) maintained the Work in the ordinary course of business as would reasonably
be expected of a careful and prudent owner, and shall not have entered into
any agreement affecting any rights or interest in the Purchased Work other
than in the ordinary course of business without Purchaser's prior written
consent;
(d) maintained all registrations and applications for intellectual property
protection for the Program, if any, in good standing; and
(e) provided to Purchaser a copy of the Vendor's business plan with respect to
the Program; and that Purchaser shall be satisfied with respect thereto.
8.2 It is a condition precedent to Purchaser's obligation to complete the
purchase contemplated herein that Purchaser shall, prior to the Closing
Date, have obtained the External Valuation and be satisfied with respect
thereto and with respect to the viability of the Vendor's operations and
business plan as related to the Work.
8.3 It is a condition precedent to Closing that the Distribution Agreement and
the Guarantee and Security relating thereto shall have been executed and
delivered by the parties thereto.
9 TRANSFER OF TITLE AND POSSESSION
9.1 Vendor acknowledges and agrees that on Closing, Vendor shall deliver to
Purchaser the executed Bill of Sale and shall assign and convey to
Purchaser free and clear of all liens, charges and encumbrances, and
Purchaser shall thereupon acquire and own all rights, title and interest
existing in and to the Purchased Work. Vendor covenants that it shall not
thereafter, directly or indirectly, contest such ownership in any manner
whatsoever, or apply for any form of intellectual property protection
relating to the Purchased Work in the Ownership Territory without notice to
and written consent of Purchaser.
9.2 The Purchaser hereby directs the Vendor to and the Vendor hereby agrees to
make delivery to the Purchaser of possession of the Purchased Work in
Alberta as follows:
Purchaser
c/o McCarthy Tetrault
Suite 3200, 421 - Seven Avenue S.W.
Calgary, Alberta T2P 4K9
<PAGE>
-7
10 INTELLECTUAL PROPERTY RIGHTS
10.1 Vendor represents, warrants and acknowledges that any and all of the trade
secrets, copyrights, patents and other intellectual property rights
applying to or incorporated in the Purchased Work shall, upon the Closing,
vest in and become the sole property of Purchaser in the Ownership
Territory except as may result from any incapacity of Purchaser; and Vendor
shall not, directly or indirectly, at any time after the Closing in any way
dispute any such rights.
10.2 In the event that Derivatives are created or developed after the Closing
Date during the term of the Distribution Agreement, Vendor acknowledges and
agrees that the same shall, to the extent that they apply to the Purchased
Work, be deemed to be part of the Program and shall belong to Purchaser.
10.3 Vendor shall after the Closing Date not develop or distribute for itself or
for any third party, or permit any Affiliate to so develop or distribute,
any software which incorporates the Purchased Work, except pursuant to the
terms of the Distribution Agreement or any other agreement to which
Purchaser is a party.
10.4 Purchaser acknowledges that it is acquiring only the Purchased Work and
that Vendor or certain third parties shall own and have the right to
exploit the Work outside the Field of Use and also outside the Ownership
Territory without infringing Purchaser's rights hereunder.
11 REPRESENTATIONS AND WARRANTIES
11.1 Vendor represents and warrants that:
(a) it has all requisite authority, right and power to enter into this
Agreement;
(b) it has requisite shareholder and director approval to enter into this
Agreement;
(c) it is a valid and subsisting corporation duly incorporated and in good
standing under the laws of the jurisdiction in which it was
incorporated, continued or amalgamated;
(d) it is duly registered and licensed to carry on business in the
jurisdictions in which it carries on business or owns property;
(e) it is not insolvent, bankrupt or in receivership and there are no
bankruptcy proceedings threatened, pending or instituted against it;
<PAGE>
-8
(f) to the best of its knowledge, there are no judgements outstanding or
litigation pending, actual or threatened, against it;
(g) its entering into this Agreement does not and will not constitute a
breach of any of its obligations
(h) under any other agreement to which it is a party; it has no
information or reason to believe that copyright will not subsist in
the Program and in the items described in paragraph (c) of the
definition of Work hereinabove or in the Derivatives with the
Purchaser following the Closing, and the Vendor will do nothing to
place such rights in the public domain;
(i) neither it nor any third party has any pending registrations or
applications for any intellectual property rights in the Purchased
Work, except as disclosed in writing to Purchaser; any moral rights
which Vendor may have to the Purchased Work are hereby waived;
(k) the only products or proprietary information, including software,
owned by any third party that have been incorporated into the
Purchased Work are as set forth in Schedule "E" hereto and all
necessary consents or licences to or for the use of any products,
proprietary information or software incorporated into the Purchased
Work by Vendor have been obtained by Vendor and shall be provided to
Purchaser at no additional cost to Purchaser;
(1) Schedule"A" sets out a description of the Program, complete in all
material respects;
(m) it has used and will until the Closing Date continue to use
commercially reasonable efforts to keep the Purchased Work current and
marketable;
(n) no ownership interest in the Purchased Work has been sold,
transferred, assigned or optioned to any third party;
(o) it has received no notice of any infringement or piracy of the
Purchased Work by any third party;
(p) it is not a party to any non-competition agreement with respect to the
Purchased Work;
<PAGE>
-9
(q) the Purchased Work trade secrets and its Source Code have not been
disclosed to any person except on a confidential basis in Vendor's
normal course of business;
(r) it has no information or reason to believe that any data or
information provided by it for the External Valuation contains
material errors;
(s) it has no information or reason to believe that any assumptions used
in the preparation of the'External Valuation are not reasonable or
accurate in all material respects; and
(t) the Vendor has received the written unrestricted waiver of all moral
rights which any other person may have in respect of the Purchased
Work.
11.2 Nothing in this Agreement shall be construed as a representation or
warranty by Vendor as to the scope of any patent rights for the Program.
Except as expressly provided in this Section 11 and in Sections 2, 6, 7 and
10 hereof, there are no representations or warranties given by or on behalf
of Vendor of any kind, express or implied. No oral or written information
provided by Vendor or anyone on its behalf shall create any representation
or warranty in addition to, or shall in any way increase the express
representations and warranties contained in, Sections 2, 6, 7, 10 and 11
hereof. Neither Vendor nor its officers, directors, shareholders,
employees, attorneys, accountants or agents are providing any legal,
accounting or tax advice to Purchaser or anyone claiming through Purchaser,
and Purchaser is obtaining Purchaser's own independent advice on all such
matters.
11.3 Purchaser represents and warrants that:
(a) he has all requisite capacity, authority, right and power to enter into
this Agreement;
(b) he is not insolvent, bankrupt or in receivership and there are no
bankruptcy proceedings threatened, pending or instituted against him;
(c) to the best of his knowledge, there are no juftements outstanding or
litigation pending, actual or threatened, against him;
(d) his entering into this Agreement does not and will not constitute a breach
of any of his obligations under any other agreement to which he is a party;
and
(e) he is acquiring the Purchased Work as principal.
11.4 All of the covenants, representations and warranties of the Vendor and the
Purchaser under this Agreement shall survive the completion of the
transactions contemplated in this Agreement and the sale, conveyance,
assignment and transfer of the Purchased Work by the Vendor to the
Purchaser.
<PAGE>
-10
12 INDEMNITY
12.1 Vendor shall indemnify the Purchaser for all costs and damages incurred by
the Purchaser pursuant to any action or claims by any Person for
infringement of such Person's rights which action or claim is based upon
the purchase or exploitation of the Purchased Work by the Purchaser.
12.2 Purchaser shall indemnify and reimburse Vendor for any payments Vendor is
required to make on account of any sales tax which may be determined to be
payable hereunder in circumstances where Purchaser fails to remit such
payments where they are determined to be due and payable.
13 POST CLOSING OBLIGATIONS
13.1 After the Closing, Vendor shall not, directly or through a third
party-,-develop or distribute in the Ownership Territory for the Field of
Use any software which incorporates any of the Purchased Work, except as
permitted by any other agreement between the parties hereto or between the
Purchaser and the Distributor.
13.2 The Vendor shall not market in any manner, develop or sell any products
which are competitive with the Product in the Ownership Territory for the
Field of Use during the term of the Distribution Agreement, as may be
extended pursuant to its terms.
13.3 Each of the parties shall, as and when requested by the other, promptly
execute and deliver such further and other assurances and do or cause to be
done all such acts and things as may be reasonably necessary to implement
and give effect to the provisions of this Agreement.
14 ASSIGNMENT
14.1 Vendor may not assign this Agreement or any of its interests herein without
the written consent of Purchaser, such consent not to be unreasonably
withheld; provided, however, that any amalgamation, other than one which
does not result in a change of control of the Vendor, shall be considered
an assignment for the purposes of this Section 14.1.
15 NOTICE
15.1 Unless otherwise expressly provided in this Agreement, any notice, request,
direction, consent, waiver, extension, agreement or other communication
that is or may be given or made hereunder shall be in writing and either
personally delivered to the addressee or to a responsible officer of the
addressee or sent by
<PAGE>
-11
courier or facsimile transmission. The parties hereto may change their
respective address for notice given in the manner aforesaid. Any notice
given by facsimile transmission shall be deemed to have been received on
the next business day after transmission. Any notice given by personal
delivery shall be deemed to have been received on the business day on which
it is delivered and left with the recipient or a responsible officer of the
recipient at the recipient's address for notice.
16 GOVERNING LAW
16.1 This Agreement shall be governed by and interpreted in accordance with the
laws of British Columbia without regard to conflict of laws provisions, and
nonexclusive venue for any action or proceeding shall be in Vancouver. The
parties hereto agree to be subject to the non-exclusive jurisdiction of
such British Columbia courts as to the enforcement of the provisions of
this Agreement. The prevailing party in any action brought to enforce the
provisions of this Agreement shall be entitled to recover its reasonable
attorneys fees and costs.
17 CURRENCY
17.1 Any dollar amounts noted herein are represented in Canadian currency.
18 SUCCESSORS AND ASSIGNS
18.1 This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators and
other legal representatives, successors and permitted assigns.
19 SEVERABILITY
19.1 Each provision of this Agreement is intended to be severable, and if any
provision hereof is found by a court of competent authority to be illegal
or invalid, such illegality or invalidity shall not effect the validity of
the remainder of this Agreement.
20 TIME OF THE ESSENCE
20.1 Time shall be of the essence in this Agreement.
21 WAIVER
21.1 No waiver of any provision of this Agreement shall constitute a waiver of
any other provision nor shall any waiver of any provision of this Agreement
constitute a continuing waiver unless otherwise expressly provided.
<PAGE>
-12
22 ENTIRE AGREEMENT
22.1 This Agreement sets forth all. of the representations, promises, agreements
and understandings among the parties hereto with respect to the purchase
and sale of the Work, and there are no representations, promises,
agreements or understandings, oral or written express or implied, other
than as set forth, referred to, or incorporated herein.
23 EXECUTION
23.1 This Agreement may be executed in counterparts and delivered by facsimile
copy by any of the parties. Each executed counterpart shall. be deemed to
be an original and such counterparts shall together constitute one and the
same agreement.
Purchaser: Vendor:
ON-LINE FTLM SERVICES INC.
- ------------------------
Per:
----------------------
Date: September 17, 1997 Authorized Signatory
Date: September 17, 1997
<PAGE>
SCHEDULES
A. Program Description
B. Field of Use
C. Bill of Sale
D. Ownership Territory
E. Third Party Property Incorporated in the Work
<PAGE>
SCHEDULE"A"
PROGRAM DESCRIPTION
The MailCard is an applications software computer program. It consists of
copyrightable sequences of computer instructions that enable its customers to
effectively access their personal mailboxes by way of an application program
that resides on a floppy disk, thereby allowing the user to access his or her
e-mail from any location with a PC or Windows PC computer and a modem and ISP.
The Program is an integrated and sophisticated product that focuses on providing
e-mail services to a wide range of users, including those who do not own a
computer or have ISP service. The Program may be customized to accommodate niche
markets. The Program is capable of running from either a floppy disk or a hard
drive. It is self contained and self running, having configuration information
(ie. in the "ini" files) stored within the application to allow it to be moved
easily between computers. The Program consists of approximately 15,000 lines of
Pascal computer code.
<PAGE>
SCHEDULE"B",
FIELD OF USE
The Field of Use is:
1. MailCard use by individuals and companies in the TV and motion picture
industry worldwide;
2. MailCard use by individuals and companies in the trucking industry
worldwide;
3. MailCard use by individuals and companies that are clients of companies in
the financial services industry worldwide;
4. MailCard use by individuals and companies that are customers of companies
in the convenience store and chain retail store industry worldwide;
5. MailCard use by individuals and companies in the field of education,
including schools and universities, worldwide; and
6. MailCard use by members of the general public for general non-industry
specific uses, accessing e-mail through public access facilities to be
found at financial institutions, conveniences stores, chain retain stores,
markets, gas stations, restaurants, cyber cafes, etc.
7. MailCard use provided by large and medium size corporations for their
employees, customers or clients.
<PAGE>
SCHEDULE "C"
BILL OF SALE
THIS INDENTURE is made September 17, 1997.
BETWEEN:
(the " Vendor")
and
(the "Purchaser")
WHEREAS pursuant to Asset Purchase Agreement made September 17, 1997 (the
"Asset Purchase Agreement)" between the Vendor and the Purchaser, it was agreed
that the Vendor shall sell and the Purchaser shall purchase the assets described
in the Asset Purchase Agreement;
AND WHEREAS this Bill of Sale is made pursuant to the provisions of the
Asset Purchase Agreement;
AND WHEREAS it is intended that all capitalized terms used herein, unless
otherwise defined, shall have the meaning ascribed thereto in the Asset Purchase
Agreement;
NOW THIS INDENTURE WITNESSES that in consideration of the Purchaser having
entered into the Asset Purchase Agreement and having performed his obligations
thereunder, the Vendor hereby sells, assigns, transfers and sets over unto the
Purchaser, his successors and assigns, all of its interest in the Purchased
Work, as defined in the Asset Purchase Agreement, present or future, vested or
contingent, free and clear of all liens and encumbrances including, without
limiting the generality of the foregoing, all copies of the Program, relating to
the Ownership Territory, owned by and in the possession of the Vendor, whether
in source code, object code or otherwise and whether in written form, or
recorded on disc or other media.
The Vendor hereby covenants, promises and agrees with the Purchaser to make
delivery to the Purchaser of the Purchased Work in Alberta as follows:
<PAGE>
-2
Purchaser
c/o McCarthy Tetrault
Suite 3200, 421 - Seven Avenue S.W.
Calgary, Alberta, UP 4K9
The Vendor hereby covenants, promises and agrees with the Purchaser that
the Vendor is now rightfully possessed of and has the right to sell, assign and
transfer the Purchased Work to the Purchaser, his successors and assigns,
according to the true intent and meaning of these presents, and that the
Purchaser shall after the execution and delivery hereof have possession of, and
may from time to time at all times hereafter peaceably and quietly have, hold,
possess and use the same and every part thereof in the Ownership Territory, to
and for his own use and benefit and his licensees, without any manner of
hindrance, interruption, claim or demand whatsoever of, from or by the Vendor.
The Vendor covenants and agrees with the Purchaser, his successors and
assigns, that it will from time to time and at all times hereafter, upon every
reasonable request of and at the expense of the Purchaser, his successors and
assigns, make, do and execute, or cause to be made, done or executed all such
further acts, deeds, instruments or assurances as may be reasonably required by
the Purchaser, his successors and assigns, for more effectually and completely
vesting in the Purchaser, his successors and assigns, the assets hereby sold,
assigned and transferred, or for the purpose of registration or otherwise in the
Ownership Territory.
IN WITNESS WHERE this Indenture has been executed by an authorized
representative of the Vendor as of the day and year first above written.
ON-LINE FILM SERVICES INC.
Per:
----------------------
Authorized Signatory
<PAGE>
SCHEDULE"D"
OWNERSHIP TERRITORY
Canada: Quebec.
USA: North Dakota, South Dakota, Nebraska, Minnesota, Iowa,
Wisconsin, Michigan, Montana, Ohio, Illinois, Indiana,
Nevada, Arizona, Utah, Wyoming, Colorado, New Mexico,
Oregon, Idaho, Washington, Alaska and Hawaii.
Australasia
<PAGE>
SCHEDULE"E",
THIRD PARTY PROPERTY
INCORPORATED IN THE WORK
Programming Environment
Delphi 1.0 - Registered
Author: Borland
Purpose: Object Pascal language compiler.
Source: London Drugs
Contact: www.borland.com
Registered and Paid August 1, 1997
Third Party Shareware Components
Internet Mail Suite - Registered and Paid August 1997
Author: Argo Software
Purpose: POP3 and SMTP protocol for communications with POP3 & SMTP
servers. Used when sending and retrieving email messages.
Source: www.argosoft.com
Third Party Freeware Components
Custom Copy Control 1.0 - (TCCopyDIgBox)
Author: Arnt Kern
Purpose: Copies files. Used when running the Pocket MailCard to copy
MailCard and MailCard Help to temporary files on a hard disk.
Used when installing MailCard onto a hard drive and when
transferring messages from Pocket MailCard In and Out Boxes to
Desktop MailCard In and Out Boxes.
Contact: bm4@classic. min. uni-deidelberg. de
No fee applicable (Freeware)
TExec
Author: Dave Taylor
Purpose: Starts programs. When running the Pocket MailCard, TExec is used
when executing the temporary MailCard.exe on the hard disk.
Source: www.cdrom.com/pub/delphi - Delphi 1.0 Freeware InVisible
Components Section
No fee applicable (Freeware)
TExplorerButton Freeware Version 2.6 - (TOfficeButton)
Author: Fabrice DEVILLE
Purpose: Push button ob ect used within the ToolBar and Address Book Trash
buttons.
Source: www. tornado. be/ - fdev/ - Delphi 1. 0 & 2. 0 Freeware Section
No fee applicable (Freeware)
Aligrid (TStringAlignGrid 1.4)
Author: Andreas 116orstemeier
Purpose: Aligns text fields within a single row. Used when defining Mail
In and Mail Out box line item rows.
Source: www.cdrom.com/pub/delphi - Delphi 1.0 Freeware Improved
Components Section
No fee applicable (Freeware)
DTools - (TNeatoMeter)
Author: Tim Noonan
Purpose: Progress meter display bar used when displaying the status of
messages being sent and retrieved.
No fee applicable (Freeware)
Miniawk - (TAwkParser)
Author: Ken Irving
Purpose: String parser to read and convert user-inputted comma-separated
text strings into arrays. Used in the process of converting
Address lists into separate addresses in an outgoing email
message.
Source: www.cdrom.com/pub/delphi - Delphi 1.0 Freeware, Miscellaneous
Components Section
No fee applicable (Freeware)
Tprogram Version 1. 1 A
Author: Andrew McLean
Purpose: Provides links to Windows 3.1 Program Manager and Windows 95
Explorer. Used when installing shortcuts icons when installing
MailCard on a hard disk.
Source: www.aerosoft.com.au/delphi/progman/
No fee applicable (Freeware)
Exhibit 10.6
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made September 17, 1997
B E T W E E N:
Purchaser, Businessman, of the City of Vancouver in the Province of British
Columbia (hereinafter called the "Owner")
OF THE FIRST PART,
- - and -
ON-LINE DISTRIBUTING INC., a corporation formed under the laws of British
Columbia (hereinafter called the "Distributor")
OF THE SECOND PART.
WHEREAS pursuant to an agreement (the "Asset Purchase Agreement") dated as
of the date hereof between Owner and On-Line Film Services Inc. ("On-Line"), an
affiliate of Distributor, Owner purchased all rights, title and interest in and
to a computer software program commercially developed by or for On-Line and
known as "MailCard" and Derivatives related thereto for the Field of Use in the
Ownership Territory, as those terms are defined in the Asset Purchase Agreement,
a detailed description of which program is attached hereto as Schedule "A" (all
such purchased rights, title and interest in MailCard and all such Derivatives
being referred to collectively herein as the "Product");
AND WHEREAS Distributor wishes to purchase from time to time copies of the
Product from Owner for the purpose of distributing same;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual
representations and covenants herein, the parties agree as follows:
1. DEFINITIONS
1.1 In this Agreement the following terms shall have the following meanings:
"Annual Minimum" means the following number of Copies for each particular
calendar year specified below (each, a "Specified Year"), which numbers of
Copies are based on the projected Average Sale Price of $17.46; provided,
however, that the number of Copies constituting the Annual Minimum for a
particular Specified Year will vary from the numbers set out below in inverse
proportion to the ratio of (a) the actual Average
<PAGE>
-2-
Sale Price for that Specified Year, to (b) where the Specified Year is 1997,
$17.46, and for all other Specified Years the actual Average Sale Price for the
immediately preceding year.
(i) for 1997, 2,939 Copies;
(ii) for 1998, 10,218 Copies less 0.0252 multiplied by the number by which
the number of Copies purchased by Distributor in 1997 exceeds the
Annual Minimum for 1997; and
(iii) for 1999 and each subsequent year until the year in which the Annual
Minimum calculation equals zero, the Annual Minimum for the
immediately preceding year less 0.0252 multiplied by the number by
which the number of Copies purchased by Distributor in the immediately
preceding year exceeds the Annual Minimum for that year.
"Average Sale Price" means the average price of Copies sold by Distributor in a
calendar year, which is determined by dividing (a) total sales revenue
(excluding all sales, use, ad valorem, excise and goods and services taxes) from
sales of such Copies made during such calendar year by (b) the number of such
Copies sold during such calendar year. For greater certainty, sales revenue
shall refer to sales revenue as received by the Distributor, the Sub-Distributor
or any sub-distributor which is related to, associated or affiliated with the
Distributor or the Sub-Distributor, from any other sub-distributor (not related
to or associated or affiliated with the Distributor or the SubDistributor) or
End User, calculated without duplication.
"Bonds" means the Province of British Columbia bonds forming part of the
Guarantee Collateral.
"Copies" shall mean floppy disc copies of the Product including packaging,
printed enclosures and seals.
"Cost of Manufacturing" means the total of the prices charged by Manufacturers
for the production and delivery of all the components of a Copy, including all
sales, use, ad valorem, excise and goods and services taxes thereon.
"Cumulative Minimum" means the sum of:
(a) the aggregate of all the Annual Minimum numbers of Copies throughout the
term of this Agreement; and
(b) 405,545 Copies, which number is based on the projected Average Sale Price
of $17.46; this number will vary in inverse proportion to the ratio of:
(i) the Weighted Average of all Average Sale Prices throughout the term of
this Agreement to the time of calculation to;
<PAGE>
-3-
(ii) $17.46,
and for the purpose of this definition the Weighted Average of all the Average
Sale Prices will be determined at such time by ascertaining the sum of the
following amounts for each calendar year or portion thereof (the "Calculation
Period") completed before the time of calculation that is the amount obtained by
multiplying the Average Sale. Price for the Calculation Period by the amount
obtained by dividing the number of Copies sold in the Calculation Period by the
sum of all Copies sold prior to the time of calculation.
"Distribution Territory" means the geographic area described in Exhibit "B"
attached hereto.
"End Users" means purchasers of Copies for personal or commercial use by such
purchasers.
"Guarantee" means the guarantee given on September 17, 1997 to Owner by On-Line
of all of the financial obligations of Distributor hereunder with respect to
payment of the Purchase Price (net of Cost of Manufacturing) of the Annual
Minimum number of Copies, the Cumulative Minimum number of Copies and the Excess
Copies (to the extent the Cumulative Minimum number of Copies have not been
purchased), and of the Instalments, together with the Guarantee Collateral in
respect thereof.
"Guarantee Collateral" means Province of British Columbia bonds in a form
acceptable to the Owner in the face amount of $679,000, maturing on June 9,
2008, bearing interest at six percent (6%) per annum, held in accordance with
the Security and any interest accrued thereon which has not otherwise been paid
to On-Line in accordance with the terms of the Guarantee and the Security.
"Instalment" shall mean, with respect to each Instalment Date occurring in a
particular year, except where otherwise specified herein, the amount equal to
the product obtained by multiplying the Purchase Price (net of Cost of
Manufacturing) for the previous calendar year by one half of the Annual Minimum
in respect of the previous calendar year.
"Instalment Date" shall mean, with respect to each calendar year, the 8th day of
June and December, as applicable.
"Manufacturer" means each third party sub-contractor engaged by Owner to produce
and deliver all components of a Copy.
"Purchase Price" means the price per Copy in a calendar year to be paid by
Distributor to Owner, consisting of the Cost of Manufacturing plus:
(a) until the Cumulative Minimum has been attained, $4.00 per Copy based on a
projected Average Sale Price in that calendar year of $17.46; the $4.00 per
Copy amount will vary in direct proportion to the ratio of (i) the actual
Average Sale Price in each calendar year to (ii) $17.46; and
<PAGE>
-4-
(b) after the Cumulative Minimum has been attained, $0.50 per Copy based on a
projected Average Sale Price in that calendar year of $17.46; the $0.50 per
Copy amount will vary in direct proportion to the ratio of (i) the actual
Average Sale Price in such calendar year to (ii) $17.46.
"Security" shall have the same meaning as that term is defined in the Asset
Purchase Agreement.
2. APPOINTMENT OF DISTRIBUTOR
Upon and subject to the terms and conditions of this agreement, Owner
hereby appoints Distributor during the term of this Agreement as the sole and
exclusive distributor of Copies within the Distribution Territory, and
Distributor hereby accepts such appointment.
3. DISTRIBUTOR'S RESPONSIBILITIES
Distributor shall use its best efforts to (a) determine sales and marketing
strategies for Copies, (b) develop and promote sales of, and maximize profits
from, Copies, (c) secure appropriate distribution channels for the distribution
of Copies in the Distribution Territory, (d) maintain commercial acceptability
for Copies and write, update and maintain all user manuals, and (e) enter into
the Sub-Distribution Agreement (as hereinafter defined) with On-Line.
Distributor shall be responsible for preparing sales promotional materials in
order to facilitate advertising of Copies. Distributor agrees to use all
reasonable efforts to comply with all applicable laws (including, without
limitation, laws relating to product packaging and labelling). Distributor
represents, warrants and covenants with Owner that Distributor and the
SubDistributor collectively have, and will continue to have, sufficient
financial and other resources to fulfil its obligations hereunder.
4. APPOINTMENT OF SUB-DISTRIBUTOR
The parties hereto acknowledge and agree that Distributor will appoint
On-Line as subdistributor (the "Sub-Distributor") of Copies pursuant to a
sub-distribution agreement (the "SubDistribution Agreement") to be entered into
between Distributor and On-Line. Distributor hereby agrees that the
Sub-Distribution Agreement shall be subject to and will not conflict with the
terms and conditions hereof, and that there shall be no material amendment to
the SubDistribution Agreement without the prior written consent of Owner, which
consent will not be unreasonably withheld.
5. SALE AND DELIVERY OF COPIES
5.1 Distributor shall purchase from Owner and Owner shall sell to Distributor at
the Purchase Price for distribution directly or indirectly to End Users each
year the Annual Minimum number of Copies plus sufficient additional Copies so
that, by the end of the term of this Agreement, Distributor shall have purchased
from Owner and Owner shall have sold to Distributor not less than the Cumulative
Minimum number of Copies. Distributor shall purchase from Owner and Owner shall
sell to Distributor such additional Copies as Distributor may require from time
to time for distribution to End Users.
<PAGE>
-5-
5.2 Unless otherwise agreed by Owner and Distributor, Owner shall cause each
Manufacturer engaged by Owner to deliver on a C. 0. D. basis as described in
paragraph 6. 1 (b) all Copies or components thereof purchased hereunder by
Distributor to Distributor at the offices of Distributor identified in section
19 hereof for the delivery of notices.
5.3 Owner hereby authorizes Distributor to deliver, for and on behalf of Owner,
purchase orders on a C.O.D. basis to Manufacturers placing orders for components
and elements relating to Copies to be purchased by Distributor hereunder,
provided that Distributor is then able and willing to pay to such Manufacturer
on a C. 0. D. basis as described in paragraph 6. 1 (b), the Cost of
Manufacturing portion of the Purchase Price therefor. Distributor shall
forthwith deliver to Owner a copy of each such purchase order.
5.4 The Distributor acknowledges and agrees that all Manufacturers to be engaged
by the Owner to produce all components of a Copy will not be located in British
Columbia. Unless agreed to by the Owner, delivery of Copies will be made only to
locations outside of British Columbia.
6. TERMS OF PAYMENT OF PURCHASE PRICE
6.1 The consideration for all Copies purchased by Distributor from Owner in 1997
and in each subsequent calendar year shall be paid by Distributor in cash in an
amount equal to:
(a) the aggregate Purchase Price, net of the aggregate Cost of
Manufacturing, as determined hereunder, which shall be paid to Owner
within thirty (30) days after the end of 1997 and each such subsequent
calendar year; and
(b) the aggregate Cost of Manufacturing portion of the Purchase Price,
which shall be paid by Distributor directly to Manufacturers on
receipt by Distributor of copies of their respective invoices.
In the event that in any calendar year, Distributor orders more Copies than the
Annual Minimum for that year (herein called the "Excess Copies"), Distributor
shall, until such time as the Cumulative Minimum number of Copies shall have
been purchased, pay for that portion of the Purchase Price due under section
6.1(a) for such Excess Copies (the "Excess Copies Price") within thirty days
after the end of the year by a combination of:
i) delivery to the Owner of a written irrevocable direction in the form
attached as Schedule C hereto (the "Direction") from On-Line authorizing
the Owner to apply towards payment of the Excess Copies Price Guarantee
Collateral having a principal value equal to the portion of the Excess
Copies Price proposed to be paid in that manner, which amount shall be as
close to 42 % of the Excess Copies Price as possible taking into account
the denominations of the principal amount of the Bonds or other Guarantee
Collateral but which shall not, in any event, exceed 42% of the Excess
Copies Price; and
<PAGE>
-6-
(ii) cash for the balance of such portion of the Purchase Price which shall not,
in any event, be less than 5 8 % of the Excess Copies Price;
which combination of cash, Direction and delivery of the Bonds or other
Guarantee Collateral shall be accepted by Owner as full payment and satisfaction
of Distributor's obligation to Owner with respect to payment for Excess Copies
under this section 6. 1 (a) and in such circumstances the Owner and any assignee
of the Owner shall be deemed to have consented to the release of such Guarantee
Collateral from that Securities Pledge Agreement entered into between the Owner
and On-Line on September 17, 1997. Distributor covenants with Owner that it
will, and will cause On-Line to, do all things necessary to facilitate the
transfer of Guarantee Collateral to Owner.
After the Cumulative Minimum number of Copies shall have been purchased, the
Distributor shall pay the Excess Copies Price for any Excess Copies by Cash.
6.2 (a) On each Instalment Date Distributor shall pay an Instalment to Owner or
its nominee as an advance against the payment of the portion of the
Purchase Price due under section 6. 1 (a) hereof.
(b) If the sum of the Instalments paid by Distributor to Owner during a
particular calendar year exceeds the amount calculated and due pursuant to
section 6. 1 (a) for such year, then the excess shall be refunded within 30
days following the end of the year by the Owner to the Distributor.
(c) If the sum of the Instalments, paid by Distributor to Owner during a
particular calendar year is less than the amount calculated and due
pursuant to section 6. 1 (a) for such year, then the difference shall be
paid within 30 days following the end of such year by Distributor to Owner
or its nominee in accordance with section 6.1 hereof.
(d) Notwithstanding the definition of Instalment in section 1.1
hereinabove, the amount of the Instalment due on December 8, 1997 shall be
$9,182, on June 8, 1998 shall be $20,436 and on December 8, 1998 shall be
$20,436.
7. NON-COMTETITION
Distributor shall not, and shall obtain the written agreement of any other
sub-distributors appointed hereunder that they shall not, market in any manner,
develop or sell any products which are competitive with the Product in the
Distribution Territory for the Field of Use.
8. REPORTING
Distributor shall furnish to Owner semi-annual reports containing a
statement in reasonable detail setting forth all gross receipts from
Distributor's, the Sub-Distributor's and any other sub-distributor's sales of
Copies within the Distribution Territory, the number of Copies sold and the
Average Sale Price thereof. The report shall be provided by Distributor not
later than July 30 and January 30 of each year with the first such report due
January 30, 1998. Each report to be delivered on July 30 each year may be in
summary form. If Distributor, Sub
<PAGE>
-7-
Distributor or any sub-distributor have no sales during such period, Distributor
shall so state in such report.
9. OBLIGATION TO PROTECT COPYRIGHT AND TRADEMARKS
Distributor hereby acknowledges and will require the Sub-Distributor to
acknowledge that Owner owns the Product at all times including all intellectual
property rights and copyrights associated therewith. Copies shall be sold to
Distributor on condition that Distributor shall at all times protect the
interest of Owner in the Product. Owner shall have the right to review all
standard form contracts to be entered into between Distributor, the
Sub-Distributor and the End User and to require such changes as Owner may
reasonably request so as to protect the ownership interests of Owner in the
Product.
Owner shall have the right to take any action it deems necessary to protect
its intellectual property rights in the Product, including filing lawsuits in
the event of infringement and filing for copyright and trademark registrations.
If Owner fails to take any action regarding any alleged infringement of the
rights of Owner in the Product, Distributor may, at its own expense, take such
action after having obtained the written consent of Owner, which consent shall
not be unreasonably withheld.
10. APPOINTMENT OF ADDITIONAL SUB-DISTRIBUTORS
Distributor and On-Line shall have the right to appoint additional
sub-distributors only as set forth in the Sub-Distribution Agreement, provided
that any such sub-distributors shall distribute Copies subject to and in
accordance with the terms of written sub-distribution agreements which terms
shall not be inconsistent with the terms of this Agreement including, without
limitation, the provisions of sections 7 and 9.
11. USE OF INDEPENDENT CONTRACTORS
Distributor shall, at its expense and to the extent permitted in the
Sub-Distribution Agreement, have the right to use independent contractors to
perform such work as in its opinion may be convenient or necessary for the
maintenance, marketing, promoting and distribution of Copies, including computer
programmers, technicians? systems consultants, marketing consultants and
business consultants.
12. BUSINESS PLAN
Distributor agrees to provide Owner with an annual business plan and
marketing budget (the "Business Plan") by the 31st day of January in each year.
In respect of the year ended December 31, 1997, the Business Plan will be the
business plan previously submitted to Owner (the "Initial Business Plan"). Each
Business Plan shall set forth, among other things, the anticipated sales of
Copies (broken down by product category) including -the prices at which such
Copies and services shall be sold or provided by Distributor or any
sub-distributor to End-Users (the "List Prices"). Each Business Plan (other than
the Initial Business'Plan) shall specifically indicate and describe changes from
the previous Business Plan including, - without- limiting the generality of the
foregoing, planned or anticipated changes in the price of Copies and a
<PAGE>
-8-
comparison of the results achieved in the year just completed with the results
that had been anticipated for that year in the Business Plan for that year.
Within 30 days of receipt of a Business Plan, Owner, acting reasonably, may
suggest revisions to the Business Plan and Distributor will use its reasonable
best efforts to accommodate such suggested revisions. At the request of Owner,
acting reasonably, a representative of management for Distributor will attend at
Owner's offices to discuss the Business Plan.
13. TERM
This agreement shall become effective upon its execution by the parties
hereto and, unless terminated earlier in accordance with the provisions of
paragraph 14 hereof, shall remain in effect until December 28, 2007. Provided
that the Cumulative Minimum number of Copies have been purchased by Distributor
in accordance herewith, Distributor shall have the right to renew this Agreement
for a further 10 years upon the terms and conditions in existence at the end of
the term of this Agreement, such right of renewal to be exercised by giving
Owner at least 60 days' prior written notice.
14. EARLY TERMINATION
Owner may terminate this agreement upon 30 days' prior written notice to
Distributor in the event that:
14.1 Distributor or On-Line is declared bankrupt or becomes an insolvent
person, makes an assignment for the benefit of its creditors or attempts to
avail itself of any applicable statute relating to insolvent debtors;
14.2 Distributor or On-Line takes steps to wind-up, dissolve or liquidate,
except for internal corporate reorganizations, mergers or shareholder
reorganizations, or otherwise ceases to function as a going concern or is
prevented from performing its duties hereunder for a period greater than 30
days;
14.3 a trustee, receiver, receiver and manager or other custodian (interim
or permanent) of any of the assets of Distributor or On-Line is appointed
by private instrument or by court order or if any execution, sequestration,
or other analogous process of any court becomes enforceable against
Distributor or OnLine or the assets of either or if distress or process is
made against the assets or any part thereof of Distributor or On-Line,
unless within 30 days of such occurrence such process has been discharged;
14.4 Distributor or On-Line ceases to carry on the business carried on by
it pursuant to this Agreement at the date hereof for a period of one year;
or
14.5 Distributor does not comply with section 8 hereof within the time
prescribed therein for reasons other than events or occurrences beyond the
reasonable control of the Distributor which have not been caused by
Distributors' negligence and which Distributor was unable to prevent or
provide against by the exercise of reasonable diligence (including, for
example, an act of God, war, insurrection,
<PAGE>
-9-
industrial disturbance, government restraint or unusually severe weather)
provided that no termination shall occur as the result of such failure if
such failure is cured before the 30th day following the date of
notification by Owner to Distributor of the failure to comply with section
8 hereof.
14.6 Distributor fails to pay the Excess Copies Price within 30 days after
the end of a calendar year in circumstances where the Distributor has
ordered asfd paid for the Cumulative Minimum number of Copies, provided
that no termination shall occur as the result of such failure if such
failure is cured before the 30th day following the date of notification by
Owner to Distributor of such failure.
14.7 Distributor fails to pay the portion of the Excess Copies Price that
is payable in cash within 30 days after the end of a calendar year,
provided that no termination shall occur as the result of such failure if
such failure is cured before the 30th day following the date of
notification by Owner to Distributor of such failure.
Upon any such early termination: (a) the Purchase Price for the Cumulative
Minimum number of Copies and any Excess Copies calculated at such time less the
total of the Purchase Price paid by Distributor to Owner for Copies and
Instalments received in respect of the calendar year in which such event occurs
prior to such time shall be paid by Distributor to Owner forthwith; (b)
Distributor shall, if directed by Owner, assign all of its rights under the
Sub-Distribution Agreement to Owner and shall execute and deliver such further
and other assurances and do or cause to be done all such acts and things as may
be necessary to give effect to such assignment; and (c) Owner shall have the
right to assume or to direct any affiliate of Owner to assume any of the
obligations of Distributor under the Sub-Distribution Agreement.
15. FAILURE TO MEEET MEWvfUMS
15.1 If Distributor does not otherwise order and pay for at least the applicable
Annual Minimum number of Copies within 30 days of the end of any calendar year
(such end date called the "Annual Due Date") during the term of this Agreement,
then Distributor shall automatically be deemed to have ordered such Copies on
the Annual Due Date and payment for same shall be effected by Owner applying
Guarantee Collateral equal in value to the amount of the Purchase Price
(excluding Cost of Manufacturing) which remains unpaid provided that in such
instance Owner shall first apply any interest monies forming part of the
Guarantee Collateral to such payment before applying any of the Bonds to such
payment.
15.2 If Distributor does not pay an Instalment on or before the relevant
Instalment Date, then such Instalment shall be deemed to have been paid on the
Instalment Date by the Owner applying Guarantee Collateral equal in value to the
amount of the Instalment which remains unpaid provided that in such instance the
Owner shall only apply interest monies forming part of the Guarantee Collateral
to such payment.
15.3 If Distributor does not order and pay for the Cumulative Minimum number of
Copies within 30 days of the earlier of the end of the term of this Agreement or
December 28, 2007 (the "Cumulative Due Date") (whether arising upon early
termination or otherwise), then Distributor shall be deemed to have ordered such
number of copies on the Cumulative Due Date
<PAGE>
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and payment for same shall be effected by Owner applying Guarantee Collateral
equal in value to the amount of the Purchase Price (excluding Cost of
Manufacturing) for the Cumulative Minimum number of Copies which remains unpaid.
15.4 If Distributor does not pay the Excess Copies Price within 30 days of the
end of any calendar ear during the term of this Agreement, then, in
circumstances where the Distributor has not as yet ordered and paid for the
Cumulative Minimum number of Copies under this Agreement, payment under Section
6. 1(i) shall be effected by Owner applying Guarantee Collateral equal in face
value or principal amount to the amount of such portion of the unpaid Excess
Copies Price. Owner shall be entitled to enforce payment of the balance of the
Excess Copies Price in accordance with remedies and rights otherwise available
to him from time to time.
15.5 Deemed payment by the Distributor in the manner provided in sections 15.1,
15.2, 15.3 or 15.4 shall be accepted by Owner in full payment and satisfaction
of Distributor's obligations to Owner in respect of such payments to the extent
of the amount of Guarantee Collateral so applied.
15.6 Failure of Distributor to pay an Instalment on or before the relevant
Instalment Date shall not result in the termination of this Agreement or the
loss of the exclusive distribution rights by Distributor.
16. APPOINTMENT OF ADDITIONAL SUB-DISTRIBUTORS
Owner shall not have the right to appoint additional distributors in
respect of the Product during the tenn of this Agreement in the Distribution
Territory.
17. RIGHT TO INSPECT
Owner may at any time, at its own expense, inspect and audit Distributor's
financial and other records solely in respect of activities contemplated hereby.
Such inspection shall be made at Distributor's offices, unless otherwise agreed
by Distributor. A maximum of one such inspection may be made annually.
18. DISCLAIMER
EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH HEREIN, OWNER MAKES NO FURTHER
REPRESENTATIONS OR WARRANTIES, EITHER EXPRESSED OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING, WITHOUT LIMITATION, ANY CONDITION OR WARRANTY OF
MERCHANTABLE QUALITY OF COPIES OR THEIR FITNESS FOR ANY PARTICULAR PURPOSE AND
THOSE ARISING BY STATUTE OR OTHERWISE IN LAW OR FROM A COURSE OF DEALING OR
USAGE OF TRADE. IN NO EVENT WILL OWNER BE LIABLE FOR (i) DAMAGES CAUSED BY
DISTRIBUTOR'S OR ANY SUB-DISTRIBUTOR'S FAILURE TO PERFORM ITS COVENANTS AND
RESPONSIBILITIES TO THIRD PARTIES, BY REASON OF OWNER'S NEGLIGENCE OR OTHERWISE;
(ii) DAMAGES CAUSED BY REPAIRS OR ALTERATIONS DONE BY DISTRIBUTOR OR ANY
SUB-DISTRIBUTOR WITHOUT
<PAGE>
-11-
OWNER'S WRITTEN APPROVAL; (iii) DAMAGES DUE TO DETERIORATION DURING PERIODS OF
STORAGE BY DISTRIBUTOR, SUB-DISTRIBUTORS OR END USERS; (iv) LOST DATA; OR (v)
ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES. DISTRIBUTOR SHALL INDEMNIFY
OWNER AGAINST ALL SUCH CLAIMS ASSERTED BY THIRD PARTIES AS A RESULT OF
DISTRIBUTOR'S OR ANY SUB-DISTRIBUTOR'S ACTS OR OMISSIONS. DISTRIBUTOR WILL
CO-OPERATE WITH OWNER AND UNDERTAKE NECESSARY ACTION (INCLUDING ACTION WITH
RESPECT TO SUBDISTRIBUTORS, IF APPROPRIATE) REQUIRED BY APPLICABLE LAWS AND
REGULATIONS TO ENSURE THAT OWNER'S LIMITS OF RESPONSIBILITY AS SET FORTH ABOVE
ARE VALID AND ENFORCEABLE AGAINST WHOMEVER THEY ARE APPLICABLE. DISTRIBUTOR WILL
IMMEDIATELY INFORM OWNER AS SOON AS DISTRIBUTOR BECOMES AWARE OF LIABILITY
CLAIMS BY A THIRD PARTY WITH RESPECT TO COPIES. OWNER'S LIABILITY FOR DAMAGES TO
DISTRIBUTOR FOR ANY CAUSE, REGARDLESS OF THE FORM OF ACTION, SHALL NOT EXCEED
THE AGGREGATE PRICE PAID FOR COPIES UNDER THIS AGREEMENT WHICH CAUSED THE
DAMAGES OR ARE THE SUBJECT OF THE CLAIM.
19. NOTICES
The addresses for delivery of notices to each party are as follows: to the
Owner:
Purchaser
Vancouver, B. C.
V6K 1G7 to Distributor:
On-Line Distributing Inc.
Suite 208, 2323 Boundary Road
Vancouver, British Columbia V5M 4V8
Attention: Mr. Aerock Fox
Telecopy No.: (604)205-5134
Unless otherwise expressly provided in this Agreement, any notice, request,
direction, consent, waiver, extension, agreement or other communication that is
or may be given or made hereunder shall be in writing and either personally
delivered to the addressee or to a responsible officer of the addressee or sent
by courier or facsimile transmission. The parties hereto may change their
respective address for notice given in the manner aforesaid. Any notice given by
facsimile transmission shall be deemed to have been received on the next
business day after transmission. Any notice given by personal delivery shall be
deemed to have been received on the business day on which it is delivered and
left with the recipient or a responsible officer of the recipient at the
recipient's address for notice.
<PAGE>
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20. GOVERNING LAW
This Agreement shall be governed by and interpreted in accordance with the
laws of British Columbia without regard to conflict of laws provisions, and a
non-exclusive venue for any action or proceeding shall be in Vancouver, British
Columbia. The parties hereto agree to be subject to the non-exclusive
jurisdiction of such British Columbia courts as to the enforcement of the
provisions of this Distribution Agreement. The prevailing party in any action
brought to enforce the provisions of this Distribution Agreement shall be
entitled to recover its reasonable attorneys fees and costs.
21. RELATIONSHIP OF PARTIES
Nothing in this agreement shall constitute any of the parties the partner
or join t venturer or agent of another and the relationship of Distributor to
Owner shall be that of an independent contractor only.
22. ASSIGNMENT
22.1 Distributor may not assign this Agreement or any of its interests herein
without the written consent of Owner, such consent not to be unreasonably
withheld; provided, however, that any amalgamation, other than one which does
not result in a change of control of Distributor, shall be considered an
assignment for the purposes of this Section 22.1.
22.2 Owner may assign this Agreement to any person who purchases the Product
from Owner and agrees to be bound by the obligations of Owner hereunder and
under the Asset Purchase Agreement without the consent of Distributor.
23. CURRENCY
All dollar amounts noted herein are represented in Canadian currency.
24. SEVERABILITY
If any provision of this Agreement is determined to be invalid or
unenforceable in whole or in part, such invalidity or unenforceability will
attach only to such provision or part thereof and the remaining part of such
provision and all other provisions hereof will continue in full force and
effect.
25. BENEFIT OF AGREEMENT
This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators and other legal
representatives, successors and assigns.
<PAGE>
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26. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties hereto
with respect to the subject matter hereof and cancels and supersedes any prior
understandings and agreements between the parties hereto with respect thereto.
27. AMENDNIENTS
No amendments to this agreement will be valid or binding unless set forth
in writing and duly executed by both of the parties hereto.
28. WAIVER
No waiver of any breach of any provision of this agreement will be
effective or binding unless made in writing and signed by the party purporting
to give the same and, unless otherwise provided in writing in the written
waiver, will be limited to the specific breach waived.
29. ARBITRATION PROCEDURE
The parties shall attempt to settle all disputes arising out of this
Agreement through consultation and negotiation in good faith and in a spirit of
mutual co-operation. If those attempts to resolve a dispute within a reasonable
time, then such dispute shall be referred to and finally resolved by binding
arbitration. The place of any arbitration conducted hereunder shall be
Vancouver, British Columbia. The number of arbitrators shall be one. Distributor
and Owner shall use their reasonable best efforts to agree promptly, in light of
the time periods provided in paragraph 6 hereof, on the appointment of the
arbitrator, failing which Distributor and Owner shall arrange jointly for an
arbitrator to be appointed by The British Columb*
International Commercial Arbitration Centre. Any arbitration hereunder shall be
conducted in accordance with the laws of the Province of British Columbia and
Canada applicable therein. The costs of any arbitration hereunder shall be borne
equally by the parties hereto.
30. EXECUTION
This Agreement may be executed in counterparts and delivered by facsimile
copy by any one of the parties. Each executed counterpart shall be deemed to be
an original and such counterparts shall together constitute one and the same
agreement.
IN W`ITNESS WHEREOF the parties hereto have executed this agreement.
- ------------------------
PURCHASER
ON-LINE DISTRIBUTING INC.
Per:
---------------------
Authorized Signatory
<PAGE>
SCHEDULES
A. Program Description and Field of Use
B. Distribution Territory
C. Direction
<PAGE>
SCHEDULE "A"
PROGRAM DESCRIPTION AND FIELD OF USE
The MailCard is an applications software computer program. It -consists of
copyrightable sequences of computer instructions that enable its customers to
effectively access their personal mail boxes by way of an application program
that resides on a floppy disk, thereby allowing the user to access his or her
e-mail from any location with a PC or Windows PC computer and a modem and IDP.
The Program is an integrated and sophisticated product that focuses on providing
e-mail services to a wide range of users, including those who do not own a
computer or have IDP service. The Program may be customized to accommodate niche
markets. The Program is capable of running from either a floppy disk or a hard
drive. It is self contained and self running, having configuration information
(i.e. the "ini" files) stored within the application to allow it to be moved
easily between computers. The Program consists of approximately 15,000 lines of
Pascal computer code.
The Field of Use is:
i) Mail Card use by individuals and companies in the TV and motion picture
industry worldwide;
ii) MailCard use by individuals and companies in the trucking industry
worldwide;
iii) MailCard use by individuals and companies that are clients of companies in
the financial services industry worldwide;
iv) MailCard use by individuals and companies that are customers of companies
in the convenience store and chain retail store industry worldwide;
v) MailCard use by individuals and companies in the field of education,
including schools and universities, worldwide;
vi) MailCard use by members of the general public for general non-industry
specific uses, accessing e-mail through public access facilities to be
found at financial institutions, convenience stores, chain retail stores,
markets, gas stations, restaurants, cyber cafes, etc.; and
vii) MailCard use provided by large and medium size corporations for their
employees, customers or clients.
<PAGE>
SCHEDULE"B",
DISTRIBUTION TERRITORY
Canada: Quebec
USA: North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Wisconsin,
Michigan, Montana, Ohio, Illinois, Indiana, Nevada, Arizona,
Utah, Wyoming, Colorado, New Mexico, Oregon, Idaho, Washington,
Alaska and Hawaii.
Australasia, other than Australia and New Zealand
<PAGE>
SCHEDULE "C"
IRREVOCABLE DIRECTION
TO:
You are hereby irrevocably authorized and directed to release bonds having a
face value of $ (the "Bonds") from the Securities Pledge Agreement entered
into between the undersigned and you dated September 17, 1997 and to apply the
Bonds to your account, or an account designated by you, in full satisfaction of
the obligations of On-Line Distr ibuting Inc. existing as of the date hereof to
otherwise pay to you a portion of the Excess Copies Price in an amount equal to
the cash equivalent of the face value of the Bonds pursuant to the Distribution
Agreement dated September 17, 1997 between On-Line Distributing Inc. and you.
DATED at Vancouver, British Columbia, this day of 19
ON-LINE FILM SERVICES INC.
Per: (C/S)
Authorized Signatory
Exhibit 10.7
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made December 31, 1997
BETWEEN:
ON-LINE FILM SERVICES INC., a company having an office at Suite 208,
2323 Boundary Road, Vancouver, British Columbia, V5M 4V8 ("Vendor")
AND:
PURCHASER, Businessman, of ...................., Vancouver, British
Columbia, V6K 1G7
("Purchaser")
WHEREAS Vendor has developed and/or acquired, and is the owner of, all
rights, title and interest in the Work as hereinafter defined;
AND WHEREAS Purchaser desires to purchase for use in Alberta an ownership
interest in the Work in order to exploit it and generate profits from such
exploitation.
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual
representations and covenants herein, the parties agree as follows:
1. DEFINITIONS
1.1 In this Agreement, the following terms shall have the following
meanings:
"Affiliate" has the meaning ascribed thereto by the Canada Business
Corporations Act.
"Bill of Sale" means the bill of sale of the Purchased Work to be
delivered at Closing to Purchaser, as set out in Schedule "C".
"Closing" means the completion of the purchase and sale of the
Purchased Work contemplated herein.
"Closing Date" means the date hereof, or such later date as agreed
upon by the parties.
"Derivative" means software derived in any manner in whole or in part
from the Program, and any Program improvements, enhancements,
modifications or updates thereto.
"emc Valuation" means the Program valuation prepared by emc partners
of Toronto, Ontario.
"End Users" means talent agencies, their actors, casting directors and
others in the film and television industry who subscribe to Casting
Workbook Services, as defined in the Facilities Management Agreement.
"External Valuation" means the independent Program valuation prepared
for Purchaser by Evans
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& Evans Inc. of Vancouver, British Columbia.
"Facilities Management Agreement" means the agreement entered into
between Manager and Purchaser as of the Closing Date, appointing
Manager as the exclusive supplier of Casting Workbook Services to End
Users, as defined therein.
"Field of Use" means the particular applications and fields of use of
the Program with respect to which Purchaser is purchasing the Work, as
described in Schedule "B".
"Guarantee" shall have the same meaning as that term is defined in the
Facilities Management Agreement.
"Manager" means Prairie On-Line Management Services Inc. (formerly
known as 758113 Alberta Ltd.), a corporation formed pursuant to the
laws of Alberta, all of the issued and outstanding shares of which are
beneficially owned by Vendor.
"Ownership Territory" means the territory described in Schedule "D"
throughout which Purchaser has acquired ownership of the Purchased
Work.
"Person" means any person, corporation or partnership.
"Program" means the computer application software described in
Schedule "A", exclusive of that third party software or property
incorporated in the Program listed in Schedule "E".
"Program Design Specifications" means those Program specifications and
technical information which enable any person reasonably skilled in
software design, analysis or programming to maintain, support and
further develop the Program.
"Purchase Price" means the price which Purchaser shall pay to Vendor
at Closing, subject to the terms and conditions hereof, to purchase
the Purchased Work.
"Purchased Work" means the Vendor's entire beneficial and legal
interest in the Work for the Field of Use throughout the Ownership
Territory.
"Security" shall mean the Securities Pledge Agreement made between the
Vendor and the Purchaser, together with such other agreements or
acknowledgements as may be agreed between the parties prior to
Closing.
"Service Territory" means the territory throughout which Manager has
been appointed the exclusive supplier of Casting Workbook Services, as
defined and pursuant to the Facilities Management Agreement.
"Source Code" means the human readable, high level language version of
the Program capable, upon compilation, of being translated into
machine executable object code.
"Work" means:
(a) the Program, and all its Derivatives;
(b) all trade-secrets, know-how, patents and copyrights in the
Program, and all intellectual property registrations and
applications relating to the Program and all its
Derivatives;
(c) all Program Design Specifications, Source Code, user manuals
and training and
<PAGE>
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marketing materials in support of the Program and all its
Derivatives;
(d) Vendor's business plan for the development, marketing,
distribution and exploitation of the Program and all its
Derivatives to earn income; and
(e) all rights with respect to the development, licensing, sale,
support, maintenance, distribution, supply or exploitation
of the Program and all its Derivatives.
2. WARRANTY OF OWNERSHIP
2.1 Vendor represents and warrants that;
(a) it is the sole legal and beneficial owner of, and has good
and marketable title to, the Purchased Work including,
without limitation, any and all copyright, know-how, trade
secrets and patents relating to the Program, free and clear
of all liens, charges and encumbrances, excluding that third
party software or property incorporated in the Program
listed in Schedule "E";
(b) the Program has been acquired or developed by or on behalf
of Vendor;
(c) to its knowledge, the Purchased Work does not and will not
infringe upon or violate any intellectual property right of
any person;
(d) to its knowledge there are no claims made or actions pending
or threatened regarding the ownership of, or infringement of
any third party rights by the Purchased Work;
(e) any third party software incorporated into or used in
connection with the Purchased Work by Vendor is licensed to
Vendor at no additional cost to the Purchaser; and
(f) to its knowledge, after reasonable unit and integration
testing, there are no material programming errors or defects
in the Program and in the event that any programming errors
or defects are discovered in the Program or any Derivative,
Vendor will forthwith correct all such programming errors or
defects.
3. SALE AND PURCHASE
3.1 Vendor agrees to sell, convey, assign and transfer to Purchaser in
Calgary, Alberta, and Purchaser agrees to buy, the Purchased Work at
Closing, for the full Purchase Price of $x.xxx,xxx.
4. PAYMENT OF PURCHASE PRICE
4.1 Purchaser agrees to make payment of the Purchase Price to Vendor as
follows:
(a) $x,xxx,xxx on Closing, by certified cheque; and
(b) $xxx,xxx on April 30, 1998 by certified cheque
It is the intention of the parties that the Purchase Price shall be
paid to Vendor in accordance with the provisions of this Agreement and
that no funds be retained in escrow pending the completion of any
registrations or post Closing Date obligations, provided that all
closing documents shall have been delivered by Vendor on or before
Closing as required by this Agreement.
<PAGE>
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4.2 As evidence of the obligation of the Purchaser to pay the balance of
the Purchase Price shown above on April 30, 1998, Purchaser shall
deliver to the Vendor a non-interest bearing promissory note in the
amount of $208,587.50 due on April 30, 1998.
5 TAXES
5.1 Purchaser shall be responsible for and shall pay all sales, ad valorem
and excise tax, payable with respect to the purchase of the Purchased
Work. Vendor agrees to co-operate with Purchaser in facilitating its
applications for waivers, exemptions and input tax credits with
respect to such payments.
6 VALUATION REPRESENTATIONS
6.1 Purchaser acknowledges that Vendor has assisted in providing
information for the External Valuation and that Purchaser has received
the External Valuation, which appraises the value of the Work as it
applies to the Field of Use in North America at a range of $11,750,000
to $13,000,000 and on which External Valuation Purchaser has relied in
part in agreeing to enter into this Agreement.
6.2 Vendor represents and warrants that to the best of its knowledge, as
of the Closing Date:
(a) no data or information provided by it for the External Valuation
contains any material error, and
(b) Vendor has no information or reason to believe that any
assumption used in the preparation of the External Valuation is
not reasonable or accurate in all material respects.
7 PROGRAM MAINTENANCE
7.1 Throughout the term of the Facilities Management Agreement, Vendor
shall maintain, enhance and update the Program at Vendor's own expense
and shall forward to Purchaser at the address shown in Section 9.2
copies of the updated Source Code and Program Design Specifications
from time to time as Derivatives are produced.
8 PRE-CLOSING CONDITIONS
8.1 It is a condition precedent to Purchaser's obligation to complete the
purchase contemplated herein that Vendor shall have, prior to the
Closing Date:
(a) allowed Purchaser to review all existing certificates of
registration and documents of title, if any, with respect to the
Program;
(b) allowed Purchaser to review the Program's operation and use;
(c) maintained the Work in the ordinary course of business as would
reasonably be expected of a careful and prudent owner, and shall
not have entered into any agreement affecting any rights or
interest in the Purchased Work other than in the ordinary course
of business without Purchaser's prior written consent;
(d) maintained all registrations and applications for intellectual
property protection for the Program, if any, in good standing;
and
<PAGE>
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(e) provided to Purchaser a copy of the Vendor's business plan with
respect to the Program; and
that Purchaser shall be satisfied with respect thereto.
8.2 It is a condition precedent to Purchaser's obligation to complete the
purchase contemplated herein that Purchaser shall, prior to the
Closing Date, have obtained the External Valuation, be satisfied with
respect thereto and with respect to the viability of the Vendor's
operations and business plan as related to the Work and be satisfied
with the compatibility of the Program with the Casting Network as
defined in the Facilities Management Agreement.
8.3 It is a condition precedent to Closing that the Facilities Management
Agreement and the Guarantee and Security relating thereto shall have
been executed and delivered by the parties thereto.
9 TRANSFER OF TITLE AND POSSESSION
9.1 Vendor acknowledges and agrees that on Closing, Vendor shall deliver
to Purchaser the executed Bill of Sale and shall assign and convey to
Purchaser free and clear of all liens, charges and encumbrances, and
Purchaser shall thereupon acquire and own all rights, title and
interest existing in and to the Purchased Work. Vendor covenants that
it shall not thereafter, directly or indirectly, contest such
ownership in any manner whatsoever, or apply for any form of
intellectual property protection relating to the Purchased Work in the
Ownership Territory without notice to and written consent of
Purchaser.
9.2 The Purchaser hereby directs the Vendor to and the Vendor hereby
agrees to make delivery to the Purchaser of possession of the
Purchased Work in Alberta as follows:
Purchaser
c/o McCarthy Tetrault
Suite 3200, 421 - Seven Avenue S.W.
Calgary, Alberta
T2P 4K9
10 INTELLECTUAL PROPERTY RIGHTS
10.1 Vendor represents, warrants and acknowledges that any and all of the
trade secrets, copyrights, patents and other intellectual property
rights applying to or incorporated in the Purchased Work shall, upon
the Closing, vest in and become the sole property of Purchaser in the
Ownership Territory except as may result from any incapacity of
Purchaser; and Vendor shall not, directly or indirectly, at any time
after the Closing in any way dispute any such rights.
10.2 In the event that Derivatives are created or developed after the
Closing Date during the term of the Facilities Management Agreement,
Vendor acknowledges and agrees that the same shall, to the extent that
they apply to the Purchased Work, be deemed to be part of the Program
and shall belong to Purchaser.
10.3 Vendor shall after the Closing Date not develop or distribute for
itself or for any third party, or permit any Affiliate to so develop
or distribute in the Ownership Territory, any software which
incorporates the Purchased Work, except pursuant to the terms of the
Facilities Management Agreement or any other agreement to which
Purchaser is a party.
10.4 Purchaser acknowledges that it is acquiring only the Purchased Work
and that Vendor or certain third parties shall own and have the right
to exploit the Work outside the Field of Use and also
<PAGE>
-6-
outside the Ownership Territory without infringing Purchaser's rights
hereunder.
11 REPRESENTATIONS AND WARRANTIES
11.1 Vendor represents and warrants that:
(a) it has all requisite authority, right and power to enter into
this Agreement;
(b) it has requisite shareholder and director approval to enter into
this Agreement;
(c) it is a valid and subsisting corporation duly incorporated and in
good standing under the laws of the jurisdiction in which it was
incorporated, continued or amalgamated;
(d) it is duly registered and licensed to carry on business in the
jurisdictions in which it carries on business or owns property;
(e) it is not insolvent, bankrupt or in receivership and there are no
bankruptcy proceedings threatened, pending or instituted against
it;
(f) to the best of its knowledge, there are no judgements outstanding
or litigation pending, actual or threatened, against it;
(g) its entering into this Agreement does not and will not constitute
a breach of any of its obligations under any other agreement to
which it is a party;
(h) it has no information or reason to believe that copyright will
not subsist in the Program and in the items described in
paragraph (c) of the definition of Work hereinabove or in the
Derivatives with the Purchaser following the Closing, and the
Vendor will do nothing to place such rights in the public domain;
(i) neither it nor any third party has any pending registrations or
applications for any intellectual property rights in the
Purchased Work, except as disclosed in writing to Purchaser;
(j) any moral rights which Vendor may have to the Purchased Work are
hereby waived;
(k) the only products or proprietary information, including software,
owned by any third party that have been incorporated into the
Purchased Work are as set forth in Schedule "E" hereto and all
necessary consents or licences to or for the use of any products,
proprietary information or software incorporated into the
Purchased Work by Vendor have been obtained by Vendor and shall
be provided to Purchaser at no additional cost to Purchaser;
(l) Schedule"A" sets out a description of the Program, complete in
all material respects;
(m) it has used and will until the Closing Date continue to use
commercially reasonable efforts to keep the Purchased Work
current and marketable;
(n) no ownership interest in the Purchased Work has been sold,
transferred, assigned or optioned to any third party;
(o) it has received no notice of any infringement or piracy of the
Purchased Work by any third party;
<PAGE>
-7-
(p) it is not a party to any non-competition agreement with respect
to the Purchased Work;
(q) the Purchased Work trade secrets and its Source Code have not
been disclosed to any person except on a confidential basis in
Vendor's normal course of business;
(r) it has no information or reason to believe that any data or
information provided by it for the External Valuation contains
material errors or that the External Valuation was not prepared
by arm's length persons having no interest in the Purchased Work
or in the exploitation thereof;
(s) it has no information or reason to believe that any assumptions
used in the preparation of the External Valuation are not
reasonable or accurate in all material respects; and
(t) the Vendor has received the written unrestricted waiver of all
moral rights which any other person may have in respect of the
Purchased Work on or before the Closing Date, or for any waivers
which the Vendor has not received by the Closing Date, the Vendor
agrees to use reasonable efforts after the Closing Date to obtain
such waivers.
11.2 Nothing in this Agreement shall be construed as a representation or
warranty by Vendor as to the scope of any patent rights for the
Program. Except as expressly provided in this Section 11 and in
Sections 2, 6, 7 and 10 hereof, there are no representations or
warranties given by or on behalf of Vendor of any kind, express or
implied. No oral or written information provided by Vendor or anyone
on its behalf shall create any representation or warranty in addition
to, or shall in any way increase the express representations and
warranties contained in, Sections 2, 6, 7, 10 and 11 hereof. Neither
Vendor nor its officers, directors, shareholders, employees,
attorneys, accountants or agents are providing any legal, accounting
or tax advice to Purchaser or anyone claiming through Purchaser, and
Purchaser is obtaining Purchaser's own independent advice on all such
matters.
11.3 Purchaser represents and warrants that:
(a) he has all requisite capacity, authority, right and power to
enter into this Agreement;
(b) he is not insolvent, bankrupt or in receivership and there are no
bankruptcy proceedings threatened, pending or instituted against
him;
(c) to the best of his knowledge, there are no judgements outstanding
or litigation pending, actual or threatened, against him;
(d) his entering into this Agreement does not and will not constitute
a breach of any of his obligations under any other agreement to
which he is a party; and
(e) he is acquiring the Purchased Work as principal.
11.4 All of the covenants, representations and warranties of the Vendor and
the Purchaser under this Agreement shall survive the completion of the
transactions contemplated in this Agreement and the sale, conveyance,
assignment and transfer of the Purchased Work by the Vendor to the
Purchaser.
12 INDEMNITY
12.1 Vendor shall indemnify the Purchaser for all costs and damages
incurred by the Purchaser pursuant to any action or claims by any
Person for infringement of such Person's rights which action or claim
is based upon the purchase or exploitation of the Purchased Work by
the Purchaser.
12.2 Purchaser shall indemnify and reimburse Vendor for any payments Vendor
is required to make on
<PAGE>
-8-
account of any sales, ad valorem or excise tax which may be determined
to be payable pursuant to Section 5.1 herein in circumstances where
Purchaser fails to remit such payments where they are determined to be
due and payable.
13 POST CLOSING OBLIGATIONS
13.1 After the Closing, Vendor shall not, directly or through a third
party, develop or supply in the Ownership Territory for the Field of
Use any services or products which incorporates any of the Purchased
Work, except as permitted by any other agreement between the parties
hereto or between the Purchaser and the Manager.
13.2 The Vendor shall not market in any manner, develop or sell any
services or products which are competitive with the Purchased Works in
the Ownership Territory for the Field of Use during the term of the
Facilities Management Agreement, as may be extended pursuant to its
terms.
13.3 Each of the parties shall, as and when requested by the other,
promptly execute and deliver such further and other assurances and do
or cause to be done all such acts and things as may be reasonably
necessary to implement and give effect to the provisions of this
Agreement.
14 ASSIGNMENT
14.1 Vendor may not assign this Agreement or any of its interests herein
without the written consent of Purchaser, such consent not to be
unreasonably withheld; provided, however, that any amalgamation, other
than one which does not result in a change of control of the Vendor,
shall be considered an assignment for the purposes of this Section
14.1.
15 NOTICE
15.1 Unless otherwise expressly provided in this Agreement, any notice,
request, direction, consent, waiver, extension, agreement or other
communication that is or may be given or made hereunder shall be in
writing and either personally delivered to the addressee or to a
responsible officer of the addressee or sent by courier or facsimile
transmission. The parties hereto may change their respective address
for notice given in the manner aforesaid. Any notice given by
facsimile transmission shall be deemed to have been received on the
next business day after transmission. Any notice given by personal
delivery shall be deemed to have been received on the business day on
which it is delivered and left with the recipient or a responsible
officer of the recipient at the recipient's address for notice.
16 GOVERNING LAW
16.1 This Agreement shall be governed by and interpreted in accordance with
the laws of British Columbia without regard to conflict of laws
provisions, and non-exclusive venue for any action or proceeding shall
be in Vancouver. The parties hereto agree to be subject to the
non-exclusive jurisdiction of such British Columbia courts as to the
enforcement of the provisions of this Agreement. The prevailing party
in any action brought to enforce the provisions of this Agreement
shall be entitled to recover its reasonable attorneys fees and costs.
<PAGE>
-9-
17 CURRENCY
17.1 Any dollar amounts noted herein are represented in Canadian currency.
18 SUCCESSORS AND ASSIGNS
18.1 This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators
and other legal representatives, successors and permitted assigns.
19 SEVERABILITY
19.1 Each provision of this Agreement is intended to be severable, and if
any provision hereof is found by a court of competent authority to be
illegal or invalid, such illegality or invalidity shall not affect the
validity of the remainder of this Agreement.
20 TIME OF THE ESSENCE
20.1 Time shall be of the essence in this Agreement.
21 WAIVER
21.1 No waiver of any provision of this Agreement shall constitute a waiver
of any other provision nor shall any waiver of any provision of this
Agreement constitute a continuing waiver unless otherwise expressly
provided.
22 ENTIRE AGREEMENT
22.1 This Agreement sets forth all of the representations, promises,
agreements and understandings among the parties hereto with respect to
the purchase and sale of the Work, and there are no representations,
promises, agreements or understandings, oral or written express or
implied, other than as set forth, referred to, or incorporated herein.
23 EXECUTION
23.1 This Agreement may be executed in counterparts and delivered by
facsimile copy by any of the parties. Each executed counterpart shall
be deemed to be an original and such counterparts shall together
constitute one and the same agreement.
Purchaser: Vendor:
ON-LINE FILM SERVICES INC.
- ------------------------
PURCHASER
Per:
----------------------
Date: December 31, 1997 Authorized Signatory
Date: December 31, 1997
<PAGE>
SCHEDULES
A. Program Description
B. Field of Use
C. Bill of Sale
D. Ownership Territory
E. Third Party Property Incorporated in the Work
<PAGE>
SCHEDULE "A"
PROGRAM DESCRIPTION
The Casting Workbook is a client/server software application. The core of the
server side of the software is a Windows NT-based Structured Query Language
(SQL) Relational Database administered through the User Interface and Relational
Database Management Systems. Comprised of 25 Tables and 3 Views, the relational
database is accessible through an Open Database Connectivity (ODBC)
configuration. Data is stored in the SQL Database and in thousands of data files
in the Windows NT File System (NTFS). Currently the data files include Hyper
Text Markup Language (HTML) text files, JPEG images, Real Audio, Real Video and
up to 360 various word processor document formats. Programmed Tables in Fulcrum
Knowledge Network Search Server 2.0, index the data in both the SQL Database and
the NTFS-based data files to provide a layer for distributed searches of all
data stored in the Casting Workbook.
Additional specific custom configurations of the Servers and software provide an
environment for the Client side User Interface (UI) files to reside and complete
the Server side of the application. These configurations are specific Security
Limits on files and folders in the NTFS, Security Rights assigned to User Groups
and Users, and Home and Virtual Folders defined in Internet Information Server
in Windows NT. Also at the server side are the Domain Name System configuration
files stored on a Domain Name Server, in this case a Linux server, and the SMTP
and POP Servers and their corresponding configurations files also on the Linux
server. The Client side User Interface is stored in files within the NTFS.
Clients use a Web Browser on their own Personal Computer to create a Hyper Text
Transfer Protocol (HTTP) connection to access the public portion of the UI. The
remaining UI is provided to the User after Security has been met. The UI is
comprised of hundreds of HTML, Active Server Pages (ASP), Perl scripts, JPEG
images, Graphic Interchange Format (GIF) images, Animated GIF image, audio and
video files.
These files contain two basic components. First, programming in Microsoft Visual
Basic Script (VB Script) or Perl that is compiled at run-time and second, HTML
templates. During the run time phase the UI script programming interacts with
the SQL database and the Fulcrum tables to return data - unique by time and user
- - that is inserted into the HTML templates and returned to the User through the
HTTP connection. Through the UI, data is viewed, added, changed or deleted.
<PAGE>
SCHEDULE "B"
FIELD OF USE
The Field of Use is:
Use in the entertainment industry in North America by members of the following
groups:
(a) users seeking to present themselves to casting directors and agencies;
(b) individuals looking for talented people, such as talent agencies and
casting directors; and
(c) individuals from both of the above groups looking for value added
services as further described in the emc Valuation.
<PAGE>
SCHEDULE "C"
BILL OF SALE
THIS INDENTURE is made December 31, 1997.
B E T W E E N :
ON-LINE FILM SERVICES INC.
(the "Vendor")
and
PURCHASER
(the "Purchaser")
WHEREAS pursuant to an Asset Purchase Agreement made December 31, 1997 (the
"Asset Purchase Agreement)" between the Vendor and the Purchaser, it was agreed
that the Vendor shall sell and the Purchaser shall purchase the Purchased Work
as described in the Asset Purchase Agreement;
AND WHEREAS this Bill of Sale is made pursuant to the provisions of the
Asset Purchase Agreement;
AND WHEREAS it is intended that all capitalized terms used herein, unless
otherwise defined, shall have the meaning ascribed thereto in the Asset Purchase
Agreement;
NOW THIS INDENTURE WITNESSES that in consideration of the Purchaser having
entered into the Asset Purchase Agreement and having performed his obligations
thereunder, the Vendor hereby sells, assigns, transfers and sets over unto the
Purchaser, his successors and assigns, all of its interest in the Purchased
Work, as defined in the Asset Purchase Agreement, present or future, vested or
contingent, free and clear of all liens and encumbrances including, without
limiting the generality of the foregoing, all copies of the Program, relating to
the Ownership Territory, owned by and in the possession of the Vendor, whether
in source code, object code or otherwise and whether in written form, or
recorded on disc or other media.
The Vendor hereby covenants, promises and agrees with the Purchaser to make
delivery to the Purchaser of the Purchased Work in Alberta as follows:
<PAGE>
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Purchaser
c/o McCarthy Tetrault
Suite 3200, 421 - Seven Avenue S.W.
Calgary, Alberta, T2P 4K9
The Vendor hereby covenants, promises and agrees with the Purchaser that
the Vendor is now rightfully possessed of and has the right to sell, assign and
transfer the Purchased Work to the Purchaser, his successors and assigns,
according to the true intent and meaning of these presents, and that the
Purchaser shall after the execution and delivery hereof have possession of, and
may from time to time at all times hereafter peaceably and quietly have, hold,
possess and use the same and every part thereof in the Ownership Territory, to
and for his own use and benefit and his licensees, without any manner of
hindrance, interruption, claim or demand whatsoever of, from or by the Vendor.
The Vendor covenants and agrees with the Purchaser, his successors and
assigns, that it will from time to time and at all times hereafter, upon every
reasonable request of and at the expense of the Purchaser, his successors and
assigns, make, do and execute, or cause to be made, done or executed all such
further acts, deeds, instruments or assurances as may be reasonably required by
the Purchaser, his successors and assigns, for more effectually and completely
vesting in the Purchaser, his successors and assigns, the assets hereby sold,
assigned and transferred, or for the purpose of registration or otherwise in the
Ownership Territory.
IN WITNESS WHERE this Indenture has been executed by an authorized
representative of the Vendor as of the day and year first above written.
ON-LINE FILM SERVICES INC.
Per:
Authorized Signatory
<PAGE>
SCHEDULE "D"
OWNERSHIP TERRITORY
Canada:
British Columbia
Yukon
USA:
Arkansas
Colorado
Idaho
Kansas
Louisiana
Missouri
Montana
Nebraska
New Mexico
North Dakota
Oklahoma
South Dakota
Texas
Utah
Wyoming
<PAGE>
SCHEDULE "E"
THIRD PARTY PROPERTY
INCORPORATED IN THE WORK
Fulcrum Knowledge Network 2.1 from Fulcrum Technologies Inc., 785 Carling
Avenue, Ottawa, Ontario.
Exhibit 10.8
FACILITIES MANAGEMENT AGREEMENT
THIS AGREEMENT is made as of December 31, 1997
B E T W E E N:
PURCHASER, Businessman, of the City of Vancouver in the Province of
British Columbia
("Owner")
- and -
PRAIRIE ON-LINE MANAGEMENT SERVICES INC. (formerly known as 758113
Alberta Ltd.), a corporation formed under the laws of Alberta having
an office at Metronet 600 - 205 5th Avenue SW, Calgary, Alberta, T2P
2T7 ("Manager")
WHEREAS pursuant to an agreement (the "Asset Purchase Agreement")
dated as of the date hereof between Owner and On-Line Film Services Inc.
("On-Line"), an affiliate of Manager, Owner purchased all rights, title and
interest in and to a computer software program commercially developed by or
for On-Line and known as "Casting Workbook" and Derivatives related thereto
for the entertainment industry Field of Use, in the Ownership Territory, as
those terms are defined in the Asset Purchase Agreement, a detailed
description of which program is attached hereto as Schedule "A" (all such
purchased rights, title and interest in Casting Workbook and all such
Derivatives being referred to collectively herein as the "Casting
Workbook");
AND WHEREAS Manager and its affiliates have the expertise, facilities
and resources to provide computer and Internet based services for the
entertainment industry;
AND WHEREAS Owner desires to retain Manager to operate, promote and
manage on Owner's behalf, computer facilities incorporating data generated
by the Casting Workbook ("Casting Network"), for the purpose of providing
talent agencies, their actors, casting directors and others in the film and
television industries in the Service Territory with access to casting
requirements, talent information and related services, by means of the
Internet;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
mutual representations and covenants herein, the parties agree as follows:
<PAGE>
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1. DEFINITIONS
1.1 In this Agreement the following terms shall have the following meanings:
"Annual Exclusivity Payment" means the annual amount payable by Manager to
Owner in each calendar year in which the Annual Gross Operating Revenues
have not attained the applicable Annual Minimum for the exclusive right to
provide the Management Services, calculated as the amount by which 51% of
the Annual Minimum for such year exceeds the Owner's Gross Operating
Revenues for such year.
"Annual Gross Operating Revenues" means Gross Operating Revenues generated
in any calendar year during the Term.
"Annual Excess Gross Operating Revenues" means for any calendar year during
the Term, the amount by which the Owner's Gross Operating Revenues for such
year exceed 51% of the corresponding Annual Minimum.
"Annual Minimum" means for each calendar year of the Term or part thereof
prior to the Cumulative Excess Gross Operating Revenues reaching the Term
Minimum, the target minimum amount of Annual Gross Operating Revenues to be
achieved by Manager, calculated as set forth in the attached Schedule "C".
"Asset Purchase Agreement" means the agreement dated December 31, 1997
between Owner and On-Line pursuant to which Owner purchased all rights,
title and interest in and to the Casting Workbook.
"Bonds" means mutually acceptable bonds forming part of the Guarantee
Collateral.
"Business Plan" means the annual business plan, and operations and
marketing budget to be prepared by Manager for the Casting Workbook
Services, by the 31st day of January in each year of the Term, and in
respect of the year ended December 31, 1998 Business Plan shall mean the
initial business plan previously submitted to Owner by Manager.
"Casting Network" means the computer and telecommunications facilities to
be provided to Owner by Manager as part of the Management Services in order
to supply the Casting Workbook Services.
"Casting Workbook" means the computer software program commercially
developed by or for On-Line for use in the entertainment industry, the data
from which will be used with the Casting Network to provide Casting
Workbook Services to End Users.
"Casting Workbook Services" means services provided to End Users, through
the Casting Network, with respect to casting requirements, talent
information and related services, as described in the Business Plan and in
the talent agent's Casting Workbook manual and casting director's Casting
Workbook manual developed by On-Line for End Users.
<PAGE>
-3-
"Cumulative Excess Gross Operating Revenues" means the aggregate of the
Annual Excess Gross Operating Revenues actually generated during the Term.
"Cumulative Exclusivity Payment" means the amount payable at the
termination of this Agreement by the Manager to Owner, in addition to the
Annual Exclusivity Payments, for the exclusive right to provide the
Management Services over the whole of the Term, if on the date of such
termination the Term Minimum exceeds the Cumulative Excess Gross Operating
Revenues, and calculated as .42 of the amount by which the Term Minimum
exceeds the Cumulative Excess Gross Operating Revenues received by the
Owner during the Term.
"End Users" means talent agencies, actors, casting directors and other
persons in the film and television industry who subscribe to Casting
Workbook Services.
"Excess Revenue Direction" means the written irrevocable direction in the
form attached as Schedule "D" from On-Line authorizing the Owner to apply
towards the tendering and payment of the Owner's Gross Operating Revenues
pursuant to section 8.1, Guarantee Collateral having a principal value
equal to the portion of the Annual Excess Gross Operating Revenues proposed
to be paid in that manner, which amount shall be as close to 42% of the
Annual Excess Gross Operating Revenues as possible taking into account the
denominations of the principal amount of the Bonds or other Guarantee
Collateral but which shall not, in any event, exceed 42% of the Annual
Excess Gross Operating Revenues.
"Gross Operating Revenues" means the total revenues generated by the
provision of the Casting Workbook Services to End Users in the Service
Territory, including without limitation, actors listing revenues, extras
listing revenues and ancillary business revenues.
"Guarantee" means the guarantee given on December 31, 1997 to Owner by
On-Line of all of the financial obligations of Manager hereunder with
respect to payment of the Annual Exclusivity Payment, the Cumulative
Exclusivity Payment, and the Instalments, together with the Guarantee
Collateral in respect thereof.
"Guarantee Collateral" means bonds in a form acceptable to the Owner, or
other securities mutually acceptable to the parties, in the face amount of
$1,838,000, maturing on December 31, 2007, held in accordance with the
Security and any interest accrued thereon which has not otherwise been paid
to On-Line in accordance with the terms of the Guarantee and the Security.
"Instalments" means the two prepayments by Manager of the Owner's portion
of the Annual Minimum for a particular calendar year, the first Instalment
to be made in an amount equal to 25.5% of the Annual Minimum on the first
Instalment Date, and the second Instalment of 25.5% of the Annual Minimum
on the second Instalment Date, except where otherwise specified herein.
<PAGE>
-4-
"Instalment Dates" means two dates with respect to each calendar year, the
last day of June being the first Instalment Date, and the last day of
December being the second Instalment Date.
"Instalment Direction" means the written irrevocable direction in the form
attached as Schedule "E" from On-Line authorizing Owner to apply towards
the tendering of an Instalment, Guarantee Collateral interest having a
value equal to the Instalment proposed to be paid in that manner.
"Management Fee" means the fee payable on a commission basis by Owner to
Manager for the Management Services provided by Manager in each calendar
year of the Term, equal to 49% of the Annual Gross Operating Revenues,
until such time as the Cumulative Excess Gross Operating Revenues equal the
Term Minimum, on which date the Management Fee will become 97.5% of all
Annual Gross Operating Revenues .
"Management Services" means the services to be provided by Manager to Owner
during the Term to operate and manage the Casting Network as further
described in section 3.
"On-Line" means On-Line Film Services Inc., the original owner of the
Casting Workbook, and an affiliate of Manager.
"On-Line Business Plan" means the business plan originally developed by
On-Line for the exploitation and commercialization of the Casting Workbook.
"Owner's Gross Operating Revenues" means the Gross Operating Revenues
received by Owner in a calendar year during the Term less the applicable
Management Fees.
"Security" shall have the same meaning as that term is defined in the Asset
Purchase Agreement.
"Service Territory" means the geographic area described in Exhibit "B"
attached hereto.
"Subcontractor Agreement" means the agreement to be entered into between
Manager and On-Line, retaining On-Line to supply certain of the Management
Services to or on behalf of Manager.
"Term" means the term of this Agreement as set out in Section 16.
"Term Minimum" means the target minimum of the Cumulative Excess Gross
Operating Revenues during the Term, being the amount of $4,376,000.
<PAGE>
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2. APPOINTMENT OF MANAGER
2.1 Upon and subject to the terms and conditions of this Agreement, Owner
hereby appoints Manager during the term of this Agreement as its sole and
exclusive manager and operator of the Casting Workbook, to provide
Management Services to Owner and Casting Workbook Services to End Users
within the Service Territory, and Manager hereby accepts such appointment.
3. MANAGEMENT SERVICES
3.1 Manager shall during the Term, provide the following Management Services to
Owner:
(a) supply, develop, coordinate, maintain and upgrade the computer,
telecommunication and Internet facilities, and all other equipment and
services reasonably necessary, to provide the Casting Workbook
Services;
(b) provide sufficient personnel with the appropriate qualifications
necessary to utilize the data from the Casting Workbook, to operate
and manage the Casting Network;
(c) determine sales and marketing strategies for Casting Workbook
Services;
(d) develop, solicit and promote sales of Casting Workbook Services, and
invoice, collect and enforce payment of listing fees, charges and
other ancillary revenues therefrom ;
(e) maintain commercial acceptability for Casting Workbook Services,
write, update and maintain all End User manuals and provide facilities
to answer questions and provide assistance to End Users regarding
Casting Workbook Services;
(f) enter into the Subcontractor Agreement with On-Line;
(g) prepare sales promotional materials in order to facilitate advertising
of Casting Workbook Services; and
(h) operate the Casting Network on computer facilities located in Calgary,
Alberta or such other location as agreed to by the Parties.
3.2 Manager agrees to use all reasonable efforts to comply with all applicable
laws in the provision of Management Services and Casting Workbook Services.
Manager represents, warrants and covenants with Owner that Manager and
On-Line collectively have, and will continue to have, sufficient technical,
financial and other resources to fulfil Manager's obligations hereunder.
3.3 Manager shall not perform any services by, for or on behalf of any other
person to maintain, enhance or update the Casting Workbook with respect to
the Service Territory.
<PAGE>
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4. SUBCONTRACTOR
4.1 Manager will retain On-Line as a subcontractor to provide certain of the
Management Services and Casting Workbook Services pursuant to the
Subcontractor Agreement to be entered into between Manager and On-Line on
terms reasonably satisfactory to Owner within 30 days of the date hereof.
Manager hereby agrees that the Subcontractor Agreement shall be subject to
and will not conflict with the terms and conditions hereof, and that there
shall be no material amendment to the Subcontractor Agreement without the
prior written consent of Owner, which consent will not be unreasonably
withheld.
5. GROSS OPERATING REVENUES
5.1 Manager shall provide the facilities of the Casting Network to Owner, and
on behalf of Owner, using the data provided from the Casting Workbook,
provide the Casting Workbook Services to End Users, using all reasonable
efforts to maximize Gross Operating Revenues in order that the Annual Gross
Operating Revenues exceed the Annual Minimum in each calendar year, and the
Cumulative Excess Gross Operating Revenues exceed the Term Minimum during
the Term.
5.2 All Gross Operating Revenues collected by Manager shall be received and
held in trust on behalf of and shall accrue to the account of Owner, except
as otherwise provided in this Agreement.
6. MANAGEMENT FEES
6.1 The consideration for all Management Services provided by Manager to Owner
for any calendar year during the Term shall be the Management Fee, which
Manager shall be entitled to deduct proportionately from the Annual Gross
Operating Revenues during such year as they are received.
6.2 The Manager shall not charge Owner for any expenses incurred by Manager in
using the data from the Casting Workbook to operate the Casting Network or
in providing the Casting Workbook Services. Such expenses shall be for
Manager's account.
7. ANNUAL EXCLUSIVITY PAYMENT
7.1 If by the end of any calendar year of the Term, the Annual Gross Operating
Revenues are less than the applicable Annual Minimum for such year, then
Manager shall be liable for and pay the corresponding Annual Exclusivity
Payment for the exclusive right to provide the Management Services in such
year.
<PAGE>
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8. YEAR END PAYMENTS
8.1 Manager shall within 30 days of the end of each calendar year during the
Term, tender and pay to Owner the sum of:
(a) Owner's Gross Operating Revenues; and
(b) the Annual Exclusivity Payment for such year, if any, due in
accordance with section 7.1.
8.2 Manager shall be entitled to set off and credit against any amount due
under section 8.1 the full amount of all Instalments paid to Owner pursuant
to section 9.1 or 10.1 hereof in respect of such year.
8.3 The payment to be made pursuant to section 8.1 shall be made in cash or by
certified cheque, except as otherwise provided in section 10.2.
9. INSTALMENT PAYMENTS
9.1 On each Instalment Date, Manager shall pay the corresponding Instalment to
Owner or Owner's nominee, as an advance against the payment of the amounts
due under section 8.1.
10. PAYMENT BY DIRECTION
10.1 If Manager does not pay an Instalment on or before the relevant Instalment
Date, then such Instalment shall be deemed to have been paid on the
Instalment Date by the Owner applying Guarantee Collateral interest equal
in value to the amount of the Instalment, pursuant to the Instalment
Direction, which Instalment Direction and delivery of the Guarantee
Collateral interest shall be accepted by Owner as full satisfaction of
Manager's obligation to Owner with respect to tendering the Instalment
under section 9, and in such circumstances Owner and any assignee of the
Owner shall be deemed to have consented to the release of such Guarantee
Collateral interest from that Securities Pledge Agreement entered into
between the Owner and On-Line on December 31, 1997. Manager covenants with
Owner that it will, and will cause On-Line to, do all things necessary to
facilitate the transfer of Guarantee Collateral interest to Owner.
10.2 In the event that in any calendar year during the Term the Annual Gross
Operating Revenues exceed the applicable Annual Minimum, then Manager shall
tender the Annual Excess Gross Operating Revenues to Owner within thirty
days after the end of the year by a combination of:
(a) delivery to Owner of the Excess Revenue Direction, and
(b) cash or certified cheque for the balance of the Owner's Gross
Operating Revenues
<PAGE>
-8-
(having credited Instalments made for such year),
which combination of cash, Directions and delivery of the Guarantee
Collateral and Guarantee Collateral interest shall be accepted by Owner as
full satisfaction of Manager's obligation to Owner with respect to the
tender of the Owner's Gross Operating Revenues under section 8.1, and in
such circumstances the Owner and any assignee of the Owner shall be deemed
to have consented to the release of such Guarantee Collateral from that
Securities Pledge Agreement entered into between the Owner and On-Line on
December 31, 1997. Manager covenants with Owner that it will, and will
cause On-Line to, do all things necessary to facilitate the transfer of
Guarantee Collateral to Owner.
11. NON-COMPETITION
11.1 Manager shall not, and shall obtain the written agreement of any other
subcontractors appointed hereunder that they shall not, provide, market in
any manner, develop or sell any services which are competitive with the
Casting Workbook Services for End Users in the Service Territory.
12. REPORTING
12.1 Manager shall furnish to Owner semi-annual reports containing a statement
in reasonable detail setting forth all gross receipts from Manager's and
any subcontractor's sales of Casting Workbook Services within the Service
Territory, the number and kind of End Users and the revenues therefrom. The
report shall be provided by Manager not later than July 30 and January 30
of each year with the first such report due July 30, 1998. Each report to
be delivered on July 30 each year may be in summary form. If Manager or any
subcontractor have no sales during such period, Manager shall so state in
such report.
13. OBLIGATION TO PROTECT COPYRIGHT AND TRADEMARKS
13.1 Manager hereby acknowledges and will require all subcontractors to
acknowledge that Owner owns the Casting Workbook at all times including all
intellectual property rights and copyrights associated therewith, and that
Manager and End Users are not acquiring any proprietary rights, title,
license or interest in the Casting Workbook, all of which shall remain with
Owner. Manager is appointed to provide Management Services on condition
that Manager shall at all times protect the interests of Owner in the
Casting Workbook. Owner shall have the right to review all standard form
contracts to be entered into between Manager, each subcontractor and the
End Users with respect to Casting Workbook Services and to require such
changes as Owner may reasonably request so as to protect the ownership
interests of Owner in the Casting Workbook.
13.2 Owner shall have the right to take any action it deems necessary to protect
its intellectual property rights in the Casting Workbook, including filing
lawsuits in the event of infringement and filing for copyright and
trademark registrations. If Owner fails to take any action regarding any
alleged infringement of the rights of Owner in the Casting
<PAGE>
-9-
Workbook, Manager may, at its own expense, take such action after having
obtained the written consent of Owner, which consent shall not be
unreasonably withheld.
14. USE OF INDEPENDENT CONTRACTORS
14.1 Manager shall, at its expense, have the right to use independent
contractors to perform such work as in its reasonable opinion may be
convenient or necessary for the support, maintenance, marketing, promoting
and supply of Casting Workbook Services and Management Services, including
computer programmers, technicians, systems consultants, marketing
consultants and business consultants.
15. BUSINESS PLAN
15.1 Manager agrees to provide Owner with the annual Business Plan by the 31st
day of January in each year. In respect of the year ended December 31,
1998, the Business Plan will be the business plan previously submitted to
Owner. Each Business Plan shall set forth, among other things, the
anticipated sales of Casting Workbook Services (broken down by End User
category) including the prices at which such Casting Workbook Services
shall be sold or provided by Manager or any subcontractor to End-Users.
Each Business Plan (other than the Initial Business Plan) shall
specifically indicate and describe changes from the previous Business Plan
including, without limiting the generality of the foregoing, planned or
anticipated changes in the price of Casting Workbook Services and a
comparison of the results achieved in the year just completed with the
results that had been anticipated for that year in the Business Plan for
that year. Within 30 days of receipt of a Business Plan, Owner, acting
reasonably, may suggest revisions to the Business Plan and Manager will use
its reasonable best efforts to accommodate such suggested revisions. At the
request of Owner, acting reasonably, a representative of management for
Manager will attend at Owner's offices to discuss the Business Plan.
16. TERM
16.1 This Agreement shall become effective upon its execution by the parties
hereto and, unless terminated earlier in accordance with the provisions of
paragraph 17, shall remain in effect for an initial Term until December 28,
2007. Manager shall have the right to renew this Agreement for an
additional 10 years upon the terms and conditions in existence at the end
of the initial Term of this Agreement, such right of renewal to be
exercised by giving Owner at least 60 days' prior written notice.
17. EARLY TERMINATION
17.1 Owner may terminate this Agreement upon 30 days' prior written notice to
Manager in the event that:
(a) Manager or On-Line is declared bankrupt or becomes an insolvent
person, makes an assignment for the benefit of its creditors or
attempts to avail itself of any applicable statute relating to
insolvent debtors;
<PAGE>
-10-
(b) Manager or On-Line takes steps to wind-up, dissolve or liquidate,
except for internal corporate reorganizations, mergers or shareholder
reorganizations, or otherwise ceases to function as a going concern or
is prevented from performing its duties hereunder for a period greater
than 30 days;
(c) a trustee, receiver, receiver and manager or other custodian (interim
or permanent) of any of the assets of Manager or On-Line is appointed
by private instrument or by court order or if any execution,
sequestration, or other analogous process of any court becomes
enforceable against Manager or On-Line or the assets of either or if
distress or process is made against the assets or any part thereof of
Manager or On-Line, unless within 30 days of such occurrence such
process has been discharged;
(d) Manager or On-Line ceases to carry on the business carried on by it
pursuant to this Agreement at the date hereof for a period of four
months;
(e) Manager does not comply with section 12 within the time prescribed
therein for reasons other than events or occurrences beyond the
reasonable control of the Manager which have not been caused by
Manager's negligence and which Manager was unable to prevent or
provide against by the exercise of reasonable diligence (including,
for example, an act of God, war, insurrection, industrial disturbance,
government restraint or unusually severe weather), provided that no
termination shall occur as the result of such failure if such failure
is cured before the 30th day following the date of notification by
Owner to Manager of the failure to comply with section 12; or
(f) Manager fails to pay the amounts due under section 10.2 within 30 days
after the end of the applicable calendar year, provided that no
termination shall occur as the result of such failure if such failure
is cured before the 30th day following the date of notification by
Owner to Manager of the failure to comply with section 10.2.
17.2 Upon any such early termination pursuant to section 17.1:
(a) the Cumulative Exclusivity Payment, if any, shall be paid by Manager
to Owner forthwith;
(b) Manager shall, if directed by Owner, assign all of its rights under
the Subcontractor Agreement to Owner and shall execute and deliver
such further and other assurances and do or cause to be done all such
acts and things as may be necessary to give effect to such assignment;
and
(c) Owner shall have the right to assume or to direct any affiliate of
Owner to assume any of the obligations of Manager under the
Subcontractor Agreement.
<PAGE>
-11-
18. FAILURE TO MEET MINIMUMS
18.1 If the Annual Gross Operating Revenues do not reach the Annual Minimum and
Manager does not otherwise tender the applicable Annual Exclusivity Payment
within 30 days of the end of any calendar year during the Term as provided
by section 8, then payment for same shall be effected by Owner applying
Guarantee Collateral equal in value to the amount of the Owner's Annual
Exclusivity Payment which remains unpaid, provided that in such instance
Owner shall only apply interest monies forming part of the Guarantee
Collateral to such payment.
18.2 If Manager does not tender the applicable Cumulative Exclusivity Payment,
if any, within 30 days of the earlier of the end of the initial Term or
December 31, 2007 (whether arising upon early termination or otherwise),
then payment for same shall be effected by Owner applying Guarantee
Collateral equal in value to the amount of the Cumulative Exclusivity
Payment which remains unpaid.
18.3 Deemed payment by Manager in the manner provided in sections 18.1 and 18.2
shall be accepted by Owner in full payment and satisfaction of Manager's
obligations to Owner in respect of such untendered payments to the extent
of the amount of Guarantee Collateral so applied.
18.4 Failure of Manager to attain any Annual Minimum or to pay an Instalment on
or before the relevant Instalment Date shall not result in the termination
of this Agreement or the loss of the exclusive Management Services rights
of Manager.
19. APPOINTMENT OF OTHER MANAGERS
19.1 Owner shall not have the right to appoint additional managers in the
Service Territory in respect of the Casting Workbook Services during the
Term.
20. RIGHT TO INSPECT
20.1 Owner may at any time, at its own expense, inspect and audit Manager's
financial and other records solely in respect of activities contemplated
hereby. Such inspection shall be made at Manager's offices, unless
otherwise agreed by Manager. A maximum of one such inspection may be made
quarterly upon reasonable notice at a mutually agreed time.
<PAGE>
-12-
21. DISCLAIMER
21.1 EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH HEREIN, OWNER MAKES NO FURTHER
REPRESENTATIONS OR WARRANTIES, EITHER EXPRESSED OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING, WITHOUT LIMITATION, ANY CONDITION OR WARRANTY OF
MERCHANTABLE QUALITY OF THE DATA CREATED BY THE CASTING WORKBOOK OR ITS FITNESS
FOR ANY PARTICULAR PURPOSE AND THOSE ARISING BY STATUTE OR OTHERWISE IN LAW OR
FROM A COURSE OF DEALING OR USAGE OF TRADE. IN NO EVENT WILL OWNER BE LIABLE FOR
(I) DAMAGES CAUSED BY MANAGER'S OR ANY SUBCONTRACTOR'S FAILURE TO PERFORM ITS
COVENANTS AND RESPONSIBILITIES TO THIRD PARTIES, UNLESS CAUSED BY REASON OF
OWNER'S NEGLIGENCE OR DELIBERATE ACT; (II) LOST DATA; OR (III) ANY SPECIAL,
INDIRECT OR CONSEQUENTIAL DAMAGES. MANAGER SHALL INDEMNIFY OWNER AGAINST ALL
SUCH CLAIMS ASSERTED BY THIRD PARTIES AS A RESULT OF MANAGER'S OR ANY
SUBCONTRACTOR'S ACTS OR OMISSIONS. MANAGER WILL CO-OPERATE WITH OWNER AND
UNDERTAKE NECESSARY ACTION (INCLUDING ACTION WITH RESPECT TO SUBCONTRACTORS, IF
APPROPRIATE) REQUIRED BY APPLICABLE LAWS AND REGULATIONS TO ENSURE THAT OWNER'S
LIMITS OF RESPONSIBILITY AS SET FORTH ABOVE ARE VALID AND ENFORCEABLE AGAINST
WHOMEVER THEY ARE APPLICABLE. MANAGER WILL IMMEDIATELY INFORM OWNER AS SOON AS
MANAGER BECOMES AWARE OF LIABILITY CLAIMS BY A THIRD PARTY WITH RESPECT TO
CASTING WORKBOOK SERVICES. OWNER'S LIABILITY FOR DAMAGES TO MANAGER FOR ANY
CAUSE, REGARDLESS OF THE FORM OF ACTION, SHALL NOT EXCEED THE AGGREGATE PRICE
PAID FOR CASTING WORKBOOK SERVICES UNDER THIS AGREEMENT WHICH CAUSED THE DAMAGES
OR ARE THE SUBJECT OF THE CLAIM.
22. NOTICES
22.1 The addresses for delivery of notices to each party are as follows:
to Owner:
Purchaser
.................................
Vancouver, British Columbia
V6K 1G7
to Manager:
Prairie On-Line Management Services Inc.
Metronet 600 - 205 5th Avenue SW
Calgary, Alberta
T2P 2T7
<PAGE>
-13-
Attention: Mr. Aerock Fox
22.2 Unless otherwise expressly provided in this Agreement, any notice, request,
direction, consent, waiver, extension, agreement or other communication
that is or may be given or made hereunder shall be in writing and either
personally delivered to the addressee or to a responsible officer of the
addressee or sent by courier or facsimile transmission. The parties hereto
may change their respective address for notice given in the manner
aforesaid. Any notice given by facsimile transmission shall be deemed to
have been received on the next business day after transmission. Any notice
given by personal delivery shall be deemed to have been received on the
business day on which it is delivered and left with the recipient or a
responsible officer of the recipient at the recipient's address for notice.
23. GOVERNING LAW
23.1 Notwithstanding paragraph 3.1(f), this Agreement shall be governed by and
interpreted in accordance with the laws of British Columbia without regard
to conflict of laws provisions, and a non-exclusive venue for any action or
proceeding shall be in Vancouver, British Columbia. The parties hereto
agree to be subject to the non-exclusive jurisdiction of such British
Columbia courts as to the enforcement of the provisions of this Agreement.
The prevailing party in any action brought to enforce the provisions of
this Agreement shall be entitled to recover its reasonable attorneys fees
and costs.
24. RELATIONSHIP OF PARTIES
24.1 Nothing in this Agreement shall constitute any of the parties the partner
or joint venturer of another. The relationship of Manager to Owner shall be
that of an independent contractor.
25. ASSIGNMENT
25.1 Manager may not assign this Agreement or any of its interests herein
without the written consent of Owner, such consent not to be unreasonably
withheld. Any amalgamation, other than one which does not result in a
change of control of Manager, shall be considered an assignment for the
purposes of this Section 25.1.
25.2 Owner may assign this Agreement to any person who purchases the Casting
Workbook from Owner and agrees to be bound by the obligations of Owner
hereunder and under the Asset Purchase Agreement without the consent of
Manager.
<PAGE>
-14-
26. CURRENCY
26.1 All dollar amounts noted herein are represented in Canadian currency.
27. SEVERABILITY
27.1 If any provision of this Agreement is determined to be invalid or
unenforceable in whole or in part, such invalidity or unenforceability will
attach only to such provision or part thereof and the remaining part of
such provision and all other provisions hereof will continue in full force
and effect.
28. BENEFIT OF AGREEMENT
28.1 This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators and other
legal representatives, successors and assigns.
29. ENTIRE AGREEMENT
29.1 This Agreement constitutes the entire agreement between the parties with
respect to its subject matter and cancels and supersedes any prior
understandings and agreements between the parties with respect thereto.
30. AMENDMENTS
30.1 No amendments to this agreement will be valid or binding unless set forth
in writing and duly executed by both of the parties hereto.
31. WAIVER
31.1 No waiver of any breach of any provision of this agreement will be
effective or binding unless made in writing and signed by the party
purporting to give the same and, unless otherwise provided in writing in
the written waiver, will be limited to the specific breach waived.
<PAGE>
-15-
32. ARBITRATION PROCEDURE
32.1 The parties shall attempt to settle all disputes arising out of this
Agreement through consultation and negotiation in good faith and in a spirit of
mutual co-operation. If those attempts fail to resolve a dispute within a
reasonable time, then such dispute shall be referred to and finally resolved by
binding arbitration. The place of any arbitration conducted hereunder shall be
Vancouver, British Columbia. The number of arbitrators shall be one. Manager and
Owner shall use their reasonable best efforts to agree promptly, in light of the
time periods provided in sections 8 and 10, on the appointment of the
arbitrator, failing which Manager and Owner shall arrange jointly for an
arbitrator to be appointed by The British Columbia International Commercial
Arbitration Centre. Any arbitration hereunder shall be conducted in accordance
with the laws of the Province of British Columbia and Canada applicable therein.
The costs of any arbitration hereunder shall be borne equally by the parties
hereto.
33. EXECUTION
33.1 This Agreement may be executed in counterparts and delivered by facsimile
copy by any of the parties. Each executed counterpart shall be deemed to be an
original and such counterparts shall together constitute one and the same
agreement.
IN WITNESS WHEREOF the parties hereto have executed this agreement.
-----------------------------
PURCHASER PRAIRIE ON-LINE
MANAGEMENT SERVICES INC.
Per:
----------------------------
Authorized Signatory
<PAGE>
SCHEDULES
A. Program Description
B. Service Territory
C. Annual Minimum and Cumulative Exclusivity Payment
D. Excess Revenue Direction
E. Instalment Direction
<PAGE>
SCHEDULE "A"
PROGRAM DESCRIPTION
The Casting Workbook is a client/server software application. The core of the
server side of the software is a Windows NT-based Structured Query Language
(SQL) Relational Database administered through the User Interface and Relational
Database Management Systems. Comprised of 25 Tables and 3 Views, the relational
database is accessible through an Open Database Connectivity (ODBC)
configuration. Data is stored in the SQL Database and in thousands of data files
in the Windows NT File System (NTFS). Currently the data files include Hyper
Text Markup Language (HTML) text files, JPEG images, Real Audio, Real Video and
up to 360 various word processor document formats. Programmed Tables in Fulcrum
Knowledge Network Search Server 2.0, index the data in both the SQL Database and
the NTFS-based data files to provide a layer for distributed searches of all
data stored in the Casting Workbook.
Additional specific custom configurations of the Servers and software provide an
environment for the Client side User Interface (UI) files to reside and complete
the Server side of the application. These configurations are specific Security
Limits on files and folders in the NTFS, Security Rights assigned to User Groups
and Users, and Home and Virtual Folders defined in Internet Information Server
in Windows NT. Also at the server side are the Domain Name System configuration
files stored on a Domain Name Server, in this case a Linux server, and the SMTP
and POP Servers and their corresponding configurations files also on the Linux
server. The Client side User Interface is stored in files within the NTFS.
Clients use a Web Browser on their own Personal Computer to create a Hyper Text
Transfer Protocol (HTTP) connection to access the public portion of the UI. The
remaining UI is provided to the User after Security has been met. The UI is
comprised of hundreds of HTML, Active Server Pages (ASP), Perl scripts, JPEG
images, Graphic Interchange Format (GIF) images, Animated GIF image, audio and
video files.
These files contain two basic components. First, programming in Microsoft Visual
Basic Script (VB Script) or Perl that is compiled at run-time and second, HTML
templates. During the run time phase the UI script programming interacts with
the SQL database and the Fulcrum tables to return data - unique by time and user
- - that is inserted into the HTML templates and returned to the User through the
HTTP connection. Through the UI, data is viewed, added, changed or deleted.
<PAGE>
SCHEDULE "B"
SERVICE TERRITORY
Canada:
British Columbia
Yukon
USA:
Arkansas
Colorado
Kansas
Louisiana
Missouri
Montana
Nebraska
New Mexico
North Dakota
Oklahoma
South Dakota
Texas
Utah
Wyoming
<PAGE>
SCHEDULE "C"
ANNUAL MINIMUM PAYMENT
ANNUAL MINIMUM- shall be calculated for each calendar year as follows:
1997: $xxx
1998: $xxx,xxx
1999 and each subsequent year of the Term until the Cumulative Excess Gross
Operating Revenues equal the Term Minimum:
the Annual Minimum for the immediate preceding year less the product
of .0494 and the Annual Excess Gross Operating Revenues received by
the Owner for the preceding year
<PAGE>
SCHEDULE "D"
IRREVOCABLE DIRECTION (EXCESS REVENUE)
TO: PURCHASER
You are hereby irrevocably authorized and directed to release bonds
having a face value of $________ (the "Bonds") from the Securities Pledge
Agreement entered into between the undersigned and you dated December 31,
1997 and to apply the Bonds to your account no.________ at the Canadian
Imperial Bank of Commerce, or another account designated by you, in full
satisfaction of the obligations of Prairie On-Line Management Services Inc.
(formerly known as 758113 Alberta Ltd.) existing as of the date hereof to
otherwise pay to you a portion of the Annual Excess Gross Operating
Revenues in an amount equal to cash equivalent of the face value of the
Bonds pursuant to the Facilities Management Agreement dated December 31,
1997 between Prairie On-Line Management Services Inc. (formerly known as
758113 Alberta Ltd.) and you.
DATED this ____ day of ____________ , 19__.
ON-LINE FILM SERVICES INC.
Per: (c/s)
------------------------------
Authorized Signatory
<PAGE>
SCHEDULE "E"
IRREVOCABLE DIRECTION (INSTALMENT)
TO: PURCHASER
You are hereby irrevocably authorized and directed to release accrued
interest (the "Security") from the Securities Pledge Agreement entered into
between the undersigned and you dated December 31, 1997 and to apply the
Security to your account no.________ at the Canadian Imperial Bank of Commerce,
or another account designated by you, in full satisfaction of the obligations of
Prairie On-Line Management Services Inc. (formerly known as 758113 Alberta Ltd.)
to otherwise pay to you an Instalment in an amount equal to the interest monies
forming part of the Guarantee Collateral of the Security pursuant to the
Facilities Management Agreement dated December 31, 1997 between Prairie On-Line
Management Services Inc. (formerly known as 758114 Alberta Ltd.) and you.
DATED this _____ day of December, 19__.
ON-LINE FILM SERVICES INC.
Per: (c/s)
-----------------------------
Exhibit 16.0
To Amendment No. 2 to the Form 10SB
of
OnLine Production Services, Inc.
Babcock & Company
210-13711 72nd Avenue
Surrey, B.C., Canada V3W 2P2
(6o4) 597-9668
December 6, 1999
Office of the Chief Accountant
SECPS Letter File
Securities and Exchange Commission
Mail Stock 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
We would like to inform you that we have read the disclosures provided by OnLine
Production Services, Inc. (Comm. Number 0-2711) in its Amendment No. 2 dated
December 6, 1999 to the registration statement on Form 10SB and that there are
no disagreements regarding the statements made under "Item 14-Changes in and
Disagreements with Accountants on Accounting and Financial Disclosures."
Sincerely,
/s/ Babcock & Company.
By: "Jeff Babcock"
