U.S. Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-SB
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)
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 4
Item 2. Management's Discussion and Analysis or Plan of Operation 26
Item 3. Description of Property 32
Item 4. Security Ownership of Certain Beneficial Owners and Management 33
Item 5. Directors, Executive Officers, Promoters and Control Persons 34
Item 6. Executive Compensation 36
Item 7. Certain Relationships and Related Transactions 37
Item 8. Legal Proceedings 37
Item 9. Market for Common Equity and Related Stockholder Matters 37
Item 10. Recent Sales of Unregistered Securities 38
Item 11. Description of Securities 38
Item 12. Indemnification of Directors and Officers 39
Item 13. Financial Statements 40
Item 14. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 69
Item 15. Financial Statements and Exhibits 70-71
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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 June 30, 1999, the exchange rate for conversion to US dollars was
Cdn$1.00 = US$0.678656. 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
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<S> <C> <C> <C> <C> <C> <C>
High $.655222 $.631114 $.695507 $.723484 $.702346 $.71033
- ----------------------------------------------------------------------------------------
Low $.689085 $.689085 $.742390 $.738552 $.752729 $.76318
- ----------------------------------------------------------------------------------------
Average for Period $.671547 $.686625 $.724638 $.732815 $.730514 $.72998
- ----------------------------------------------------------------------------------------
End of Period $.678656 $.650407 $.697934 $.733676 $.712758 $.75443
========================================================================================
</TABLE>
(1) Through June 30, 1999.
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ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE ORGANIZATION
On Line Productions Services, Inc. ("ONPS") 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 (the "Reorganization") of Earth
Industries, Inc. a corporation formed under the laws of the State of Texas form
on August 26, 1996 ("Earth Industries"). The Reorganization was accomplished
pursuant to a Plan of Reorganization and Acquisition dated February 19, 1999
(the "Plan of Reorganization") by and among Earth Industries, On-Line Film
Services Inc. a corporation formed under the laws of British Columbia, Canada
("OnLine"), Intrepid International, S.A., the principal beneficial shareholder
of Earth Industries, and ACC Axis Capital Corp., a corporation formed under the
laws of British Columbia, Canada ("Axis"), as the consultant for OnLine. Please
also refer to "Item 1. Description of Business--Reorganization and Acquisition
of On-Line Film Services Inc."
Earth Industries was organized as a wholly-owned subsidiary of Fincom,
Inc., for the purpose of creating and marketing advertising opportunities on a
then to be established Internet Website. However, Earth Industries was unable to
implement its intended business purpose and in January 1997, Fincom Inc.
distributed its interest in Earth Industries, consisting of 51,200,000 shares of
the Company's common stock, to the Fincom, Inc. shareholders. Subsequently, in
October, 1997, Kirt W. James acquired in private transactions, from two of Earth
Industries' shareholders, an aggregate of 50,000,000 shares of Earth Industries
common stock. During January and February, 1998, Earth Industries completed a
limited offering of an additional 160,000 shares of common stock at $0.01 or
$1,600 in the aggregate.
ONPS, through its subsidiary Online (and Online's wholly-owned
subsidiaries, On-Line Distributing, Inc. and Prairie On-Line Management
Services, Inc., provides software applications for the film, television and
entertainment industry. Please also refer to "Item 1. Description of
Business--the Company's Business." ONPS, as the successor in interest to Earth
Industries, along with its directly and indirectly owned subsidiaries is for
convenience of reference, herein sometimes called the "Company").
Reorganization and Acquisition of On-Line Film Services, Inc.
Pursuant to the Plan of Reorganization:
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 (the
"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, the Company:
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On or about March 3, the Company issued 5,714,284 in consideration of the
payment of an aggregate of $999,999, pursuant to Regulation D, Rule
504, as promulgated by the Securities Exchange Commission, pursuant to
ss.3(b) of the Securities Act of 1933, as amended (the "Securities
Act");
On or about March 4, the Company issued 2,763,598 shares of Class A
Common Stock to shareholders of OnLine, pursuant to ss.4(2) of the
Securities Act;
The Company issued 3,673,292 Class B Special Non-Equity Voting Shares (the
"Class B Shares") to certain shareholders of affiliates of OnLine
Equity. The Class B Shares are convertible to shares of Class A Common
Stock upon cancellation of the corresponding Preferred Equity Shares
of OnLine.
ONPS also issued an additional 40,756 shares of Class A Common Stock, for
debt settlement, valued at $1.00 per share, to six persons who were employees
(but not officers or directors) of the Company, pursuant to ss.4(2) of the
Securities Act; and issued 250,000 shares of Class A Common Stock, at a deemed
value of $1.00 per share, to purchase assets from Columbus Entertainment, Inc.
("Columbus"). Please also refer to "Item 1. Description of Business - The
Company's Business."
Axis was engaged by OnLine to (i) locate an acceptable "public shell"
corporation and assist OnLine in effecting some form of business combination
with the public shell; (ii) raise any necessary funding, including but not
necessarily limited to $1,000,000 following consummation of such business
combination, through an equity offering by the combined entity; and (iii)
thereafter, provide ongoing investor relations services. In consideration for
its services in locating the public shell and raising the necessary funding,
Axis was to receive share purchase warrants (the "Warrants") to purchase up to
1,000,000 shares of the Company's common stock at an exercise price of $0.50 per
share. In addition, it was to receive payment of $5,000 per month in
consideration of the investor relations services it was to provide following the
consummation of the business combination. The Company has not yet issued the
Warrants.
Upon completion of the Reorganization, and as at June 30, 1999, the Company
had 10,480,614 shares of Class A Common Stock and 3,673,292 Class B Shares
issued and outstanding.
On or about 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 also refer to "Item 5. Directors, Executive Officers,
Promoters and Control Persons."
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Table 1 summarizes the issuances of Class A Common Stock through June 30,
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
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3. Shares issued to OnLine shareholders 2,763,598
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4. For debt settlement(2) 40,756
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5. Asset Purchase(3) 250,000
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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
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Total shares and issued and outstanding 14,153,906 100.00
================================================================================
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
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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.
Certain rights to some fields of use of its software were sold in order to
finance, in part, OnLine's continuing activities in a manner that would minimize
shareholder dilution. Please also refer to "Item. 1. Description of
Business--Recent Financing Transactions" and "Item. 2. Managements' Discussion
and Analysis or Plan of Operation." OnLine now helps Casting Directors and
Talent Agents fill roles for the film and television industry "online". It is a
business to business communication technology which allows 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.
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(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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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 (details about a project including location
dates and character descriptions) is sent via the Internet, converted to faxes
and transmitted to over the 300 talent agents in 15 cities in Canada and the
United States currently subscribing for the Company's services.
Agents with their roster (all of their actors) on the database use the fax
as an alert to go to the Casting Workbook and select actor's 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.
From the actors perspective not only does this system eliminate the tedious
and costly tasks, such as sending materials by courier and updating binders for
agencies, it also provides the entertainers with greater exposure.
A Comparison of the Casting Workbook with Existing Systems
Communication
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.
Binders & Material
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.
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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 are able to post the information once, in one place
for casting professionals to access resulting in significant cost savings to
both the entertainers 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
his/her completed breakdown to a separate company (for example, Breakdown
Services in 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 the
agency's inability 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.
- ----------
(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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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 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 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
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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.
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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.
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
leading 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 leading
professionals in order to design software that reflects the needs of the most
discerning audience. By meeting the needs of the casting industry, we are
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.
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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.
By using the NT 4.0 Server, 128-bit security is enabled. The Company
monitors access to the system and regularly conduct checks for unauthorized
activity.
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 however.
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.
Implementing protection like hardware and software firewalls has incurred
protection of sensitive information. Packet sniffing to breach the firewall is
virtually impossible (approximately 100th of a percent).
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,
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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, musicians and commercial modules 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.
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 $42 per year, an actor can be located and
short-listed by casting directors as a self represented actor during their
search for an agent.
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Representation is simply transferred in the system once an agent has been
secured for the actor.
Pricing and Entertainers using Online
Each entertainer, for example, who wants to have his/her file included in
the Casting Workbook database must pay a flat fee of $42, 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. Currently there are approximately 12,000 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
its plan of operations into the larger Los Angeles and New York markets.
Expansion
OnLine currently has offices in Los Angeles, Vancouver and Toronto. It
intends to expand to New York, Miami, Seattle, Chicago, London and Hong Kong and
other major production centers within the next 12 months.
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.
Strategic Alliances
Confirmations of the industry's need for the Casting Workshop is verified
by the wide array of professionals using the Company's services and products.
OnLine has formed an agreement with TAMAC (Talent Agents and Managers
Association of Canada) to join the Casting Workbook. TAMAC is comprised of the
top 27 casting agencies in Canada. The Company believes they represent 90% of
the casting industry and a substantial portion of the market.
OnLine and 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.
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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
International 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 4.0 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. The CastNet database is not as easy to use and lacks complexity.
BREAKDOWN SERVICES
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Breakdown Services is a U.S. company, with a similar database software to
that of Online's Casting Workbook, but considerably less powerful and flexible.
Again, unlike the 4 years of development behind the Casting Workbook, Breakdown
Services has only developed their product for 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.
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 LAN. It is
made up of a number of commercial production database documents that function
together as a separate modular application that generates reports. 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, television and commercial productions. OnLine specializes in
the end-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, the Company believe
that OnLine is positioned to deliver a complete data management service for the
film and television industry.
Online provides an end-to-end service. 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.
OnLine takes care of 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
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intranet 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; 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.
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
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for producers trying to access remote and hard to reach locations.
o 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 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 (ie. 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 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 Recent Financing Transactions
During the fiscal year ended August 31, 1998, OnLine entered into two
separate business transactions, one in connection with the Mailcard software,
the other in connection with the Casting Workbook software. These two agreements
generated immediate revenues of $1,221,365 ($540,358 from Mailcard and $681,013
from Casting Workbook), used to fund operations of OnLine; they also generated
contingent revenue of $5,623,324 ($2,795,419 Mailcard and $2,827,955 Casting
Workbook), net of an estimated fee of 3% to 5% of projected sales over certain
minimum amounts. OnLine retains complete control over every aspect of the
Mailcard software, including, but not limited to, upgrading to marketing. OnLine
also retains complete control of the Casting Workbook, and has sole discretion
to renew the related distribution agreement on the condition that the Company
meets agreed upon reporting requirements. Please also refer to "Item 2.
Management's Discussion and Analysis and Plan of Operation."
o Risk Factors Associated With The Company's Business
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Risks Associated with Management of a Changing 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 transactions per day
and expects that its rate of growth in customer transactions at any given time
is not necessarily indicative of
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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. Many of the Company's competitors offer a wider range of
services and products than the Company do, and thus may be able to respond more
quickly to new or changing opportunities, technologies and customer
requirements. Many current and potential competitors also have greater name
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. Such competitors may be able to
undertake more extensive promotional activities, offer more attractive terms to
customers than the Company and adopt more aggressive pricing policies, possibly
even sparking a price war. It is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
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.
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Rapid Technological Change; Delays in Introduction of New Services and
Products. 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 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.
Dependence on Intellectual Property Rights. 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.
Risk of Infringement. The Company may in the future receive notices of
claims of
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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 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 factors described earlier
in this paragraph will impact the Company's future capital requirements and the
adequacy of its available funds. 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 strategic 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
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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 do 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 (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 not yet issued the 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 Axis. 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.
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
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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 ppropriate 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 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
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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 and OnLine's financial statements and notes thereto included
elsewhere in this Prospectus.
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.
The completion of its software development activities in Fiscal 1998 and
the effect of the sale of certain rights to its MailCard and Casting Workbook
software resulted in revenues increasing from $93,459 in OnLine's fiscal year
ending August 31, 1997 ("Fiscal 1997") to $1,172,160 in Fiscal 1998. However,
the revenues attributed to the sale of the software are not expected to recur.
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.
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OnLine now has approximately 12,000 entertainers using some or all of its
available Casting Workbook Products which has resulted in revenues of
approximately $119,877 through June 30, 1999. These entertainers are situated
primarily in Toronto and Vancouver, Canada.
OnLine is now poised to expand its plan of operations to encompass larger
and more concentrated performer markets in Los Angeles and New York. The Company
estimates that performer market in the United States is estimated to be in
excess of 3,000,000 individuals with the performer market in the city of Los
Angeles being greater than that of the entire number of performers in the rest
of the continental United States. 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
June 30, 1999 Compared to June 30, 1998
In the six month period ended June 30, 1999 revenues from operations
increased to $119,877 from $53,017 from the comparable period ending June 30,
1998. The increased revenue of $66,860 was due to an increase in the number of
entertainers using some or all of OnLine's services and products. Other income
increased from $6,515 to $237,974 due to increase interest revenue of $235,662.
However, the Company experienced a net loss of $505,739 as compared to a net
loss of $304,589 for the comparable period doe to increase direct costs of
$276,168 from $201,690 to $477,858 and increases in Selling and Administrative
Expenses of $223,302 from $162,431 to $385,733.
Fiscal 1998 Compared to Fiscal 1997
Total revenues increased from $90,066 Cdn. in Fiscal 1997 to $1,172,160
Cdn. due to the sale by OnLine of certain use rights to its MailCard and Casting
Workbook software of $1,083,435 Cdn. These sales are not expected to recur.
Direct costs in the same period increased from $37,625 to $452,944 as a result
of a $224,332 increase in software development costs.
Selling and Administrative expenses also increased in Fiscal 1998 to
$373,012 from $195,825 Cdn. in Fiscal 1999. Net loss in Fiscal 1998 decreased by
$41,810 Cdn. to $115,209 from a net loss
27
<PAGE>
of $157,020 in Fiscal 1997.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund (a) software
developments costs and (b) working capital requirements. To date, funding has
been provided through equity financing and sale of certain territories to its
software.
Sale of Software
In Fiscal 1998, Online entered into a contingent sale agreement relating to
the sale of certain rights to the Mailcard software whereby Online received and
realized $540,423 in revenue as well as an additional $2,795,419 in funds which
are secured by the purchasing party as collateral against a minimum projected
sales amount (over a 10 year period) provided by Online. If and when the
projected minimum sales over the ten year period is met, the collateral amount
will be released and the contingent amount will be realized as income. In the
event that the projected minimum sales over the ten year period is not met,
Online must make up this shortfall from the collateral funds and/or revenue
generated by the amount held as security. Any collateral amount in excess of the
minimum sales shortfall shall be realized as income upon release of the
collateral amount by purchasers. The amount of future revenue relating to this
contingency agreement is not determined until its ten year term ending date
(December 28, 2007) or until such time as the minimum required sales level is
met. The collateral funds are registered and are not able to be used by Online
until such time as these funds (or portion thereof) are released by the secured
parties. The contingent revenue amount is secured by a claim against the 10 year
British Columbia savings bonds held by OnLine.
Online also entered into a contingent sale agreement relating to the sale
of the Casting Workbook software territories whereby Online received and
realized $681,013 in revenue as well as an additional $2,827,955 in funds which
are secured by the purchasing party as collateral against a minimum projected
sales amount (over a 10 year period) provided by Online. If and when the
projected minimum sales over the ten year period is met, the collateral amount
will be released and the contingent amount will be released as income. In the
event that the projected minimum sales over the 10 year period is not met,
OnLine must make upon this shortfall from the collateral funds/and or revenue
gathered by the amount held as security. Any collateral amount in excess of the
minimum sales shortfall shall be realized as income upon release of the
collateral amount by the purchasers. The amount of future revenue relating to
this contingency agreement is not determined until its 10 year term ending date
(December 31, 2007) or until such time as the minimum required sales level is
met. The collateral funds are registered and are not able to be used by the
OnLine until such time as these funds (or portion thereof) are released by the
secured parties. The collateral funds are in the form of CIBC weekly GIC's.
The net effect of both transactions was that OnLine financed itself without
giving up equity, and instead gave up a perpetual interest of 3%-5% of its
revenue over and above certain minimum amounts.
28
<PAGE>
Long Term Investments
Long term investments consists of British Columbia Savings Bonds in a
principal amount of $2,805,069 with, accrued interest of $37,551 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 $2,795,419 which is
locked in until June 9, 2008. Also included in long term investments is the
amount of $2,464,525 of which $2,403,878 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.
Purchase of Software and Related Commitments
During the year, Online 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 to be paid subsequent to
the balance sheet date, the issuance of 250,000 common shares of the Company,
and the issuance of a note payable of $3,500,000.
Expansion into Los Angeles and New York
Currently, OnLine operates servers for its network facilities in Toronto,
Vancouver, and Calgary and has provided for future growth. It is anticipated,
however, that our hardware equipment network will be expanded to serve the
future needs of, primarily, the Los Angeles and New York markets. The Company
believes that this will require further financing of an additional $3,000,000 to
$5,000,000 to cover the cost of equipment, further acquisitions, and operations.
Although the Company raised $999,999 in April, 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. If such financing
is not available to the Company, the Company's projected expansion into the Los
Angeles and New York markets would be substantially curtailed.
Year 2000 Issues
The "Year 2000 problem", as it has come to be known, refers to the fact
that many computer
29
<PAGE>
programs use only the last two digits to refer to a year, and therefore does not
recognize a change in the first two digits. For example, the year 2000 would be
read as being the year 1900. If not corrected, this problem could cause many
computer applications to fail or create erroneous results.
The Company has modified and tested all of the critical applications of its
information technology ("IT"), the result of which is that all such critical
applications are now Year 2000 compliant. The Company believes that virtually
all of the non-critical applications of the Company's IT are or will be made
Year 2000 compliant prior to January 1, 2000. The Company's analysis and program
is directed by the Company's internal IT personnel or others with whom the
Company transacts business. The total amount of the payments made to date and to
be made hereafter to any independent consultants, are not expected to be
material.
Based on the Company's analysis to date, the Company believes that the
Company's material non-IT systems are either Year 2000 compliant, or do not need
to be made Year 2000 compliant in order to continue to function in substantially
the same manner in the Year 2000. The Company intends to continue its analysis
of whether the Company's non-IT systems require any Year 2000 remediation. The
Company's Year 2000 compliance work has not caused, nor do the Company expect
that it will cause, a deferral of any material IT or non-IT projects.
However, there can be no assurance that any the Company's vendors or others
with whom the Company transacts business, will be Year 2000 compliant prior to
such date. The Company is unable to predict the ultimate effect that the Year
2000 problem may have upon the Company, in that there is no way to predict the
impact that the problem will have nation-wide or world-wide and how the Company
will in turn be affected; and, in addition, the Company cannot predict the
number and nature of its vendors, customers or others with whom it transacts
business, including financial institutions, who will fail to become Year 2000
compliant prior to January 1, 2000.
Significant Year 2000 difficulties on the part of vendors, customers or
others with whom it transacts business, including financial institutions, could
have a material adverse impact on the Company's operation.
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.
Forward Looking Statements
This registration statement includes "Forward-Looking Statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Any statements that express or involve discussions with respect to
predictions, expectations, beliefs, plans, projections, objectives, assumptions
or future events or performance (often, but not always, using words or phrases
such as "expects" or "does not expect", "is expected", "anticipates" or "does
not anticipate", "plans", "estimates" or "intends", or stating that certain
actions, events or results "may", "could", "would",
30
<PAGE>
"might" or "will" be taken, occur or be achieved) are not statements of
historical fact and may be "forward looking statements". Such statements are
included, among other places in this registration statement, in the sections
entitled "Management's Discussion and Analysis or Plan of Operation,"
"Description of Business" and "Description of Property." Forward-looking
statements are based on expectations, estimates and projections at the time the
statements are made that involve a number of risks and uncertainties which could
cause actual results or events to differ materially from those presently
anticipated. See "Risk Factors." Although the Company believe that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
31
<PAGE>
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 $74,265 CDN 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.
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<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 June 30, 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
Burmaby BC Canada V5B 4N9 1,876,976(2)(4) 13%
- --------------------------------------------------------------------------------
Susan Fox
2390 W. Queens Ave.
Vancouver, BC Canada V6V 2Y6 2,488,312(3)(1) 18%
- --------------------------------------------------------------------------------
Sharon Fox
5120 Bessborough Drive
Burmaby BC Canada V5B 4N9 1,834,976(4)(2) 13%
- --------------------------------------------------------------------------------
Kirt W. James
34861 Spinnaker
Dana point CA 92629 1,381,000 13%
- --------------------------------------------------------------------------------
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
33
<PAGE>
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.
(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.
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.
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<PAGE>
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.
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
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.
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<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the named executive officers from July1, 1995 through December 31, 1998.
<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 ($) ($) ($) ($) SARs ($) ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aerock Fox 12/31/98 62,969 -- -- -- -- 54,045 --
President and Director
-------------------------------------------------------------------------------------------------------
12/31/97 23,672
-------------------------------------------------------------------------------------------------------
12/31/96 -- -- 59,358 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Terry Roycroft 12/31/98 44,745 -- -- 65,229 -- 24,179 --
Secretary, Treasurer
and Director
-------------------------------------------------------------------------------------------------------
12/31/97 10,808
-------------------------------------------------------------------------------------------------------
12/31/96 -- -- 7,328 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Chuck Buckley 12/31/98 28,888 -- -- -- -- -- --
Vice President
-------------------------------------------------------------------------------------------------------
12/31/97 21,470
-------------------------------------------------------------------------------------------------------
12/31/96 22,900 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Susan Fox 12/31/98 41,152 -- -- -- -- -- --
Vice President and
Director
-------------------------------------------------------------------------------------------------------
12/31/97 24,443
-------------------------------------------------------------------------------------------------------
12/31/96 24,289
-------------------------------------------------------------------------------------------------------
Total 305,326 131,915 -- 81,224 --
===============================================================================================================================
</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.
The Company does not have any employee stock option or other compensatory plans.
36
<PAGE>
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
MARKET INFORMATION
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 June 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 Unpriced No Sales
through
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
37
<PAGE>
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:
Following the Reorganization and in accordance with the terms and
conditions of the Plan of Reorganization, the Company:
On or about March 3, the Company issued 5,714,284 in consideration of the
payment of an aggregate of $1999,999, pursuant to Regulation D, Rule
504, as promulgated by the Securities Exchange Commission, pursuant to
ss.3(b) of the Securities Act of 1933, as amended (the "Securities
Act");
On or about March 4, the Company issued 2,763,598 shares of Class A
Common Stock to shareholders of OnLine, pursuant to ss.4(2) of the
Securities Act;
The Company issued 3,673,292 Class B Shares to certain shareholders 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 also issued an additional 40,756 shares of Class A Common
Stock in the aggregate amount of approximately $27,600 per share, to
six persons who were employees (but not officers or directors) of the
Company, pursuant to ss.4(2) of the Securities Act; and
The Company also issued 250,000 shares of Class A Common Stock, at a
deemed value of $1.00 per share, to purchase assets from Columbus.
Upon completion of the Reorganization, and as at June 30, 1999 the Company
had 10,480,614 shares of Class A Common Stock and 3,673,292 Class B Shares
issued and outstanding.
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 Regulation D and/or S under the Securities Act.
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
38
<PAGE>
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 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 have 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.
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<PAGE>
ITEM 13. FINANCIAL STATEMENTS
PAGE
----
A. Audited Financial Statements
(1) EARTH INDUSTRIES, INC.
Audited Report dated January 19, 1999 41
Balance Sheets at December 31, 1998 and 1997 42
Statement of Operations for the Years ended
December 31, 1998 and 1997 43
Statement of Stockholders Equity for the
Years ended December 31, 1998 and 1997 44
Statement of Cash Flows for the Years ended
December 31, 1998 and 1997 45
Notes to Financial Statements 46-47
(2) ONLINE FILM SERVICES INC.
Auditors Report dated July 15, 1999 48
Commentary by Auditor dated July 15, 1999 48
Consolidated Balance Sheet as at August 31, 1998 and 1997 49
Consolidated Statement of Loss and Deficit for
the Years ended August 31, 1998 and 1997 50
Consolidated Cash Flow Statement for the Year
ended August 31, 1998 and 1997 51
Notes to Consolidated Financial Statements 52-58
B. Pro Forma Financial Statements as at December 31, 1998
Introducing Paragraph to Pro forma Financial Information 59
Pro forma Balance Sheet 60
Pro forma Statement of Operations 61
Pro forma Statement of Stockholders Equity 62
Notes to Pro forma Statements 63
C. Unaudited Interim Financial Statements as at June 30, 1999
Interim Balance Sheet as at June 30, 1999 64
Interim Statement of Cash Flow for the Six Months
Ended June 30, 1998 65
Interim Statement of Operations for the Six Months
Ended June 30, 1998 66
Interim Statement of Stockholders Equity for the
Six Months Ended June 30, 1999 67
Notes to Interim Financial Statements 68
40
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Earth Industries, Inc.
We have audited the accompanying balance sheets of Earth Industries, Inc. (a
Development Stage Company) as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1998 and 1997 and from inception on August 21, 1996 through
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Earth Industries, Inc. (a
Development Stage Company) as of December 31, 1998 and 1997 and the results of
its operations and cash flows for the years ended December 31, 1998 and 1997,
and from inception on August 21, 1996 through December 31, 1998, in conformity
with generally accepted accounting principles.
"Crouch, Bierwolds, Chisholm"
Salt Lake City, Utah
January 19, 1999
41
<PAGE>
Earth Industries, Inc.
(a Development Stage Company)
Balance Sheets
Assets
December 31
1998 1997
Current Assets
Cash $ 1,368 $ 1,487
Total Current Assets 1,368 1,487
Total Assets $ 1,368 $ 1,487
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable 500 500
Total Current Liabilities 500 500
Stockholders' Equity
Common Stock, authorized
100,000,000 shares of $.0001 par value,
issued and outstanding 51,360,000
and 51,200,000 shares respectively $ 5,136 $ 5,120
Additional Paid in Capital 2,464 880
Deficit Accumulated During the
Development Stage (6,732) (5,013)
Total Stockholders' Equity 868 987
Total Liabilities and Stock holders' Equity $ 1,368 $ 1,487
The accompanying notes are an integral part of these financial statements
42
<PAGE>
Earth Industries, Inc.
(a Development Stage Company)
Statement of Operations
For the Year Ended
December 31 Cumulative Total
1998 1997 Since Inception
Revenues: $ -- $ -- $ --
Expenses:
Amortization -- -- 1,667
General and administrative 1,719 2,482 18,912
Total Expenses 1,719 2,482 20,579
Net (Loss) $ (1,719) $ (2,482) $ (20,579)
Net Loss Per Share $ (0.000) $ (0.000) $ (0.000)
Weighted average shares
outstanding 51,360,000 51,200,000 46,084,000
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
Earth Industries, Inc.
(a Development Stage Company)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
Shares Amount Additional Deficit
Paid in Accumulated
Capital During the
Development
Stage
<S> <C> <C> <C> <C>
Balance at inception on
August 21, 1996 -- $ -- $ -- $ --
Shares issued organizational
cost at $.001 25,000,000 25,000 -- --
Shares issued for cash at $.001 600,000 600 65,400 --
Net loss for year ended -- -- -- (16,378)
December 31, 1996
Balance, December 31, 1996 25,600,000 25,600 65,400 (16,378)
Reorganization of Company
and change in par value 25,600,000 (20,480) (64,520) 13,847
Net loss for year ended
December 31, 1997 -- -- -- (2,482)
Balance, December 31, 1997 51,200,000 5,120 880 (5,013)
Shares issued for services at
$.01 160,000 16 1,584 --
Net loss for year ended
December 31, 1998 -- -- -- (1,719)
Balance December 31, 1998 51,360,000 $ 5,136 $ 2,464 $ (6,732)
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
Earth Industries, Inc.
(a Development Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
August 21, 1996
(inception of the
For the Year Ended development
December 31, stage) to
December
1998 1997 31, 1998
<S> <C> <C> <C>
Cash Flows from Operating
Activities
Net Loss $ (1,719) $ (2,482) $(20,579)
Adjustments to reconcile
Net loss to net cash provided by
operations:
Amortization -- -- 1,667
Issued common stock for services 1,600 -- 1,600
Net cash flows provided
(used) by operating activities (119) (2,482) (17,312)
Cash Flows from Investment
Activities: -- -- --
Cash Flows from Financing
Activities:
Cash received from financing -- 500 500
Cash taken by parent in
reorganization -- (47,820) (47,820)
Issued common stock for cash -- -- 66,000
Net cash flows provided
by financing activities -- (47,320) 18,680
Net Increase (decrease) in cash (119) (49,802) 1,368
Cash, beginning of year 1,487 51,289 --
Cash, end of year $ 1,368 $ 1,487 $ 1,368
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
Earth Industries, Inc.
(a Development Stage Company)
Notes to the Financial Statements
December 31, 1998 and 1997
NOTE 1-Summary of Significant Accounting Policies
Organization
Earth Industries, Inc. was incorporated on August 21, 1996, in the state of
Texas, by its parent corporation Fincom, Inc. and later reorganized with its
parent such that the shareholders of the parent became shareholders of the
issuer, share for share. The company was organized with the intent of creating a
commercial Web-site on the internet designed for marketing business
advertisements for other business. The company is now searching for other
business opportunities.
Accounting Method
The Company recognizes income and expense on the accrual basis of
accounting.
Earnings (Loss) Per Share
The computation of earnings per share of common stock is based on the
weighted average number of shares outstanding at the date of the financial
statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
Provision for Income Taxes
No provision for income taxes has been recorded due to net operating loss
carryforwards totaling approximately $6,732 that will be offset against future
taxable income. These NOL carryforwards begin to expire in the year 2012 No tax
benefit has been reported in the financial statements because the Company
believes there is a 50% or greater chance the carryforward will expire unused.
Deferred tax assets and the valuation account is as follows at December 31,
1998 and 1997:
December 31, 1998 December 31, 1997
Deferred tax asset:
NOL carryforward $ 1,010 $ 752
Valuation allowance (1,010) (752)
Total $ -- $ --
46
<PAGE>
Earth Industries, Inc.
(a Development Stage Company)
Notes to the Financial Statements
December 31, 1998 and 1997
NOTE 2-Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a growing concern. The Company has few tangible assets
and has had recurring operating losses and is dependent upon financing to
continue operations. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. It is management's plan
to find an operating company to merge with, thus creating necessary operating
revenue.
NOTE 3 - Development Stage Company
The company is a development stage company as defined in Financial
Accounting Standards Board Statement No. 7. It is concentrating substantially
all of its efforts in raising capital and developing its business operations in
order to generate significant revenues.
NOTE 4 - Reorganization
On January 7, 1997 the Company completed a plan of reorganization and
tender, where Fincom, Inc. the parent became a private closely held company and
Earth Industries, Inc. became the successor in interest of the parent.
Earth Industries, Inc. issued 25,600,000 shares of its common stock for
each of the 25,600,000 shares of Fincom, Inc. stock outstanding at January 7,
1997.
NOTE 5 - Subsequent Events
Effective February 19, 1999 the Company negotiated a reorganization and
acquisition of On-Line Film Services, Inc., a private British Columbia
Corporation. The agreement provides of a 30 for 1 reverse stock split, and the
issuance of certain post reverse shares in connection with the acquisition. The
shares to be issued will fall into two groups: (1) shares to be issued to new
investors pursuant to Regulation D, Rule 504; and (2) shares to be issued to
On-Line Film Services, Inc. shareholders for the acquisition.
47
<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 generally accepted accounting principals.
This revised auditors report replaces the original qualified auditors report
dated February 1, 1999. The February 1, 1999 auditors report has been withdrawn
and the attached financial statements have been revised. The February 1, 1999
report was qualified on the basis that the prior year comparative figures were
not audited. The revised financial statements have had the prior year
comparative (and current year opening) figures audited. These revised statements
show the effects of adjustments found to be necessary as a result of the prior
year financial statement figures being audited, as well as some revision to the
notes to the financial statements as required.
"Jeff Babcock"
CERTIFIED GENERAL ACCOUNTANT
Surrey, B.C.
July 15, 1999
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA - U.S. REPORTING CONFLICT
This audit has been prepared in accordance with Canadian reporting standards
which do not permit a reference to uncertainties in the auditor's report when
the uncertainties are adequately disclosed in the financial statements (notes 1,
2, 3 & 14).
"Jeff Babcock"
CERTIFIED GENERAL ACCOUNTANT
Surrey, B.C.
July 15, 1999
48
0<PAGE>
CONSOLIDATED BALANCE SHEET
as at August 31, 1998
With comparative figures as at August 31, 1997
ASSETS
1998 1997
Current
Cash and short term deposits $ 80,815 $ --
Accounts receivable (Note 5) 5,284 8,886
Net Sales Taxes Recoverable 8,672 --
Deferred Taxes-Current (Notes 1&9) 4,755 3,873
$ 99,526 $ 12,759
Deposits -- 991
Capital Assets (Notes 1,6) 6,446,381 179,626
Long Term Investments (Note 8) 8,083,217 --
Software Development Costs (Note 1) -- 333,067
Incorporation Costs 303 303
Deferred Taxes-Non Current (Notes 1&9) 1,277 6,033
$14,630,704 $ 532,779
LIABILITIES
Current
Cash and overdrafts $ -- $ 12,125
Bank Account Operating Loan (Note 10) -- 60,000
Accounts payable and accrued liabilities (Note 11) 145,341 38,722
Net Sales Taxes Payable -- 288
Payable to related parties (Note 12) 26,000 --
Current Portion Long Term Debt (Note 13) 923 910
$ 172,264 $ 112,045
LONG TERM DEBT
Loans Payable (Note 13) $ 113,610 $ 149,557
Payable on Software Purchase (Note 7) 6,179,775 --
Contingent Revenue Unrealized (Note 14) 7,994,000 --
Shareholder Loans (Note 15) -- 12,887
$14,459,649 $ 274,489
SHAREHOLDERS EQUITY
Share Capital (Notes 16) $ 819,730 $ 737,204
Deficit (648,675) (478,914)
171,055 258,290
$14,630,704 $ 532,779
The accompanying notes are an integral part of these statements
49
<PAGE>
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
FOR THE YEAR ENDED August 31, 1998
With comparative figures for the year ended August 31, 1997
1998 1997
REVENUE
Sales $ 130,737 $ 132,713
Mailcard Software Sales 752,000 --
Casting Software Sales 844,442 --
1,727,179 132,713
DIRECT COSTS
Software Development Costs (Note 1) $ 326,717 $ --
Agency Fees 165,833 --
ISP &Web Service Fees 59,582 7,686
Subcontract 130,080 35,278
Mailcard Software Purchases (Note 18) 241,277 --
Casting Workbook Exclusivity Payments (Note 18) 96,729 --
Other Direct Costs 47,294 37,826
1,067512 80,790
GROSS PROFIT $ 659,667 $ 51,923
SELLING, GENERAL AND ADMINSTRATIVE EXPENSES
Professional Fees 43,394 25,164
Advertising & Promotions 22,501 2,350
Amortization (Notes 1 & 6) 38,113 22,098
Bad Debts 11,169 --
Location & Travel Costs 22,776 6,954
Telephone, Fax, ISDN 33,078 43,508
Bank Charges & Interest 3,065 4,317
Loan Interest 10,942 9,983
Equipment Lease & Rentals (Note 17) 48,579 43,146
Consultants 20,196 4,883
Casual Labour 13,796 2,483
Wages & Benefits 208,271 101,012
Miscellaneous 8,870 241
Property Taxes 1,555 3,723
Rent & Office Expenses 57,451 16,699
Repairs & Maintenance 5,878 1,988
549,634 288,549
NET OPERATING INCOME 110,033 (236,626)
Management Fees (Note 20) (617,872) --
Interest Revenue (Note 8) 341,951 64
Deferred Corporate Tax (Note 1) (3,873) 5,193
NET LOSS (169,761) (231,369)
DEFICIT, beginning of year (478,914) (247,545)
DEFICIT, end of year $ (648,675) $(478,914)
Profit (Loss) per share $ (0.03) $ (0.04)
The accompanying notes are an integral part of these statements
50
<PAGE>
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED August 31, 1998
With comparative figures for the year ended August 31, 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Cash used in operations
Net Loss $ (169,761) $ (231,369)
Add (deduct) charges to income not involving Cash 38,113 22,098
Amortization 3,873 (5,193)
Deferred taxes (127,775) (214,464)
Net change in non-cash working capital
Balances related to operations* 102,253 34,954
(Decrease) increase in bank loans (60,000) 60,000
Contingent Revenue Security Received 7,994,000 --
Financing Activities
Related party payables 26,000 --
Capital Stock issuance 82,526 301,141
Increase (Reduction) in loans payable 6,143,841 34,000
Increase (Reduction) in Shareholder Loans (12,887) 575
------------ ------------
6,239,480 335,716
------------ ------------
INVESTING ACTIVITIES
Reduction (Increase) In Deferred Software
Development Costs 333,067 (186,521)
Net increase in long-term investments (8,083,217) --
Capital Asset Purchases (6,304,868) (11,229)
(14,055,018) (197,750)
INCREASE IN CASH 92,940 18,456
CASH, beginning of year (12,125) (30,581)
CASH, end of year $ 80,815 $ (12,125)
</TABLE>
* Consisting of changes in accounts receivable, accounts payable and accrued
liabilities
The accompanying notes are an integral part of these statement
51
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Foreign currency translation
Any foreign monetary assets and liabilities are translated into Canadian
dollars at the rate of exchange in effect at the balance sheet date.
Nonmonetary items are translated at historical rates. Revenue and expense
items are translated using the rate in effect on the date of the
transaction.
(b) Amortization
Capital assets are amortized at rates estimated to reflect the useful life
of these assets. Amortization has been taken at the following rates:
Computer equipment 30% p.a. on diminishing balance basis
Office furniture & fixtures 20% p.a. on diminishing balance basis
Computer Software 100% p.a. on diminishing balance basis
Building 4% p.a. on diminishing balance basis
(c) Software development costs
The amounts shown for software development costs represent the lower of
costs incurred to date and estimated fair market value. These amounts do
not necessarily reflect present or future values of the expenditures. These
costs are written off against sales of the developed software at such time
as it occurs. In the current year, the company has expensed $470,717
against sales of these software projects.
(d) Investments
Investments are recorded at the lower of cost or fair market value at the
balance sheet date. Subsidiaries are consolidated in these financial
statements. (See note 8)
(e) Deferred Corporate Taxes
Deferred corporate taxes arise due to temporary timing differences arising
from amortization rates used for financial statement purposes and the CCA
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 9)
2. NATURE OF OPERATIONS
The recoverability of amounts shown as software development costs is
dependent upon the sale of software rights. In the current year, the company has
incurred sales of these software rights and has recorded the related software
development expenses accordingly.
3. GOING CONCERN CONSIDERATIONS
These financial statements have been prepared in accordance with generally
accepted accounting principles on the assumption that the company will be able
to realize its assets and discharge liabilities in the normal course of
business, rather than through a process of forced liquidatio.
52
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1998
As of August 31, 1998 the company had a deficit of $648,675 and a working
capital shortfall of $(72,738). As of August 31, 1997, the company had a deficit
of $478,914 and a working capital shortfall of $(99,286). The operations of this
company were primarily funded by sales, the issuance of share capital and bank
financing.
The continued operations of this company are dependent on its ability to obtain
equity financing or generate profitable operations in the future.
4. CONSOLIDATED FINANCIAL STATEMENTS
These financials statements show the consolidated results of operations for
On-Line Film Services Inc. and its wholly owned subsidiary companies On-Line
Distributing Inc. and Prairie On-Line Management Services Inc.
5. ACCOUNTS RECEIVABLE
The accounts receivable balance at August 31, 1998 are shown net of
allowance for doubtful accounts of $10,735.
6. CAPITAL ASSETS
COST Accumulated NET NET
Amortization 1998 1997
Computer Equipment $ 159,517 $47,169 $ 112,348 $ 23,019
Software (Note 7) 6,198,218 15,575 6,182,643 5,287
Building 156,770 14,457 142,313 148,243
Office Furnishings 12,141 3,064 9,077 3,077
$6,526,646 $80,265 $6,446,381 $179,626
7. SOFTWARE PURCHASE
During the year, the company purchased software for use in the production
of commercials. The purchase price of the software was $ 3 950 000 US ($6 179
775 Cdn). The payment of the purchase price consists of two payments of $100 000
US to be paid subsequent to the balance sheet date, the issuance of 250 000
common shares of the company, and the issuance of a note payable of $ 3 500 000
US. At the balance sheet date, the company was involved in ongoing negotiations
relating to the software management terms relating to the purchase of the
software. The negotiation is with Columbus Entertainment Inc., of Santa Monica,
California.
8. LONG TERM INVESTMENTS
Long term investments consists of British Columbia Savings Bonds in a
principal amount of $4,300,149, with accrued interest of $57,935 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
53
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1998
sales agreement dated September 17 1997. The amount of the collateral claim
registered against these bonds is $4,298,000 which is locked in until June 9,
2008. Also included in long term investments is the amount of $3,725,133 of
which $3,696,000 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 GICs
earning interest revenue at variable rates throughout the period. (See note 14).
9. DEFERRED TAXES - NON CURRENT
Total deferred corporate taxes $ 6,032
Less: Current Portion (4,755)
Non current portion $ 1,277
10. BANK OVERDRAFT
The company has available a $60 000 line of credit with the Royal Bank. The
line of credit bears interest at rate of Royal Bank prime plus 1.75% per annum.
At the balance sheet date, the company has the full $60 000 of this line of
credit available.
11. ACCOUNTS PAYABLE & ACCRUED LIABILITIES
Included in accounts payable and accruals is accrued distribution and
management fees of $83,326 relating to contractual agreements (See note 18 ).
The remaining amount of $62,015 relates to trade payables and operating
accruals.
12. PAYABLE TO RELATED PARTIES
The amount of $26,000 payable to a director of the company, to be settled
subsequent to the balance sheet date via a shares for debt issuance.
54
<PAGE>
NOTES TO THE FINANCIAL STATEMENT
AUGUST 31, 1998
13. LOANS PAYABLE
Loans payable consists of the following:
(a) Mortgage payable to Vancity Credit Union bearing interest at 8.75% per
annum with monthly payments of $909 (Renewal May 2001) Secured by real
estate (office) at 208-2323 Boundary Road, Vancouver.
Total Payable $114,533
Current Portion (923)
Long Term Portion $113,610
Estimated annual payments on this loan are $10 908 per year for the next five
years and subsequent.
14. CONTINGENT REVENUE
During the fiscal year, the Company entered into two separate business
transactions, one in connection with the Mailcard software, the other in
connection with the Casting Workbook software. These two agreements generated
immediate revenue of $1 596 442 ($752 000 from Mailcard and $844 442 from
Casting Workbook), used to fund operations of the company, and contingent
revenue of $7 994 000 ($4 298 000 Mailcard and $3 696 000 Casting Workbook), net
of an estimated fee of 3% to 5% of projected sales over certain minimum amounts.
The Company retains complete control over every aspect of the Mailcard software,
from upgrading to marketing etc. The Company also retains complete control of
the Casting Workbook, and has sole discretion to renew the distribution
agreement on the condition that the Company meets agreed upon reporting
requirements. (See a & b below for further details)
(a) The company entered into a contingent sale agreement relating to the
sale of Mailcard software whereby the company received and realized $752 000 in
revenue as well as an additional $4 298 000 in funds which are secured by the
purchasing party as collateral against a minimum projected sales amount provided
by the company. If and when the projected minimum sales over the ten year period
is met, the collateral amount will be released and the contingent amount will be
realized as income. 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 amount held as security. Any
collateral amount in excess of the minimum sales shortfall shall be realized as
income upon release of the collateral amount by the purchasers. The amount of
future revenue relating to this contingency agreement is not determinable until
its ten year term ending date or until such time as the minimum required sales
level is met. 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 28, 2007.
The contingent revenue amount is secured by a claim against the ten year BC
Savings bonds held by the company (See note 8).
55
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
August 31,1998
(b) The company entered into a contingent sale agreement relating to the
sale of the Casting Workbook software territories whereby the company received
and realized $844 442 in revenue as well as an additional $3 696 000 in funds
which are secured by the purchasing party as collateral against a minimum
projected sales amount provided by the company. If and when the projected
minimum sales over the ten year period is met, the collateral amount will be
released and the contingent amount will be realized as income. 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 amount held as security. Any collateral amount in excess of the minimum
sales shortfall shall be realized as income upon release of the collateral
amount by the purchasers. The amount of future revenue relating to this
contingency agreement is not determinable until its ten year term ending date or
until such time as the minimum required sales level is met. 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 8)
15. SHAREHOLDER LOANS
Amounts are non-interest bearing, with no fixed terms of repayment. No
interest was accrued or paid relating to shareholder loan in the current fiscal
year.
16. SHARE CAPITAL
Authorized:-
100,000,000 common, voting, no par-value shares
10,000,000 non voting preference shares, no par value
Issued & Outstanding Capital:-
Shares Consideration
Balance August 31, 1997 5,828,814 $737,204
Issued from treasury for year 428,900 107,227
Repurchased during year (98,804) (24,701)
--------- --------
Balance August 31, 1998 6,158,910 $819,730
--------- --------
17. LEASE OBLIGATIONS
The company has the following estimated future lease obligations
Danka Financial Services for Fiery 2001 color server
Yr 1 $5 184; Yr 2 Nil =$5 184 Total
Danka Financial Services for Kodak Color Copier
Yr 1 $11 412; Yr 2 Nil =$11 412 Total
AT & T Capital (Computer Equip) Yr 1 $2 124; Yr 2 $354 =$2 478 Total
AT & T Capital (Computer Equip) Yr 1 $2 028; Yr 2 $676 =$2 704 Total
AT & T Capital (Computer Equip) Yr 1 $6 024; Yr 2 $1 506 =$7 530 Total
56
<PAGE>
NOTES TO THE FINANCIAL STATEMENS
August 31, 1998
IBM (Computer Equip) Yr 1 $9 336; Yr 2 $9 336; Yr 3 $9 336;
Yr 4 $3 890=Total $31 898
IBM (Computer Equip) Yr 1 $5 364; Yr 2 $5 364; Yr 3 $5 364
Yr 4 $1 341=Total $17 433
IBM (Computer Equip) Yr 1 $20 160; Yr 2 $20 160 Yr 3 $20 160
Yr 4 $5 040=Total $65 520
18. OTHER OBLIGATIONS
(a) The company is obligated purchase a minimum of approximately $258 000
per calendar year of Mailcard software copies 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
distribute an additional 2 560 000 copies of the Mailcard Software on or before
December 28, 2007. Included in accounts payable and accruals is an accrual of
$57 935 representing the portion of the obligation payable but not yet due or
paid at the balance sheet date.
(b) The company is also obligated to pay a minimum of approximately $221
000 per calendar year for the right to provide management services related to
the Casting Workbook. This minimum obligation remains in effect until December
28, 2007, at which time, the agreement may be terminated or renewed, depending
on the circumstances at that time. The company is also required to generate an
additional aggregate revenue amount of approximately $8 800 000 by the end of
the management term. Included in accounts payable and accruals is an accrual of
$25 391 representing the portion of the obligation payable but not yet due or
paid at the balance sheet date. 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
19. INCOME TAXES
The company has approximate income tax losses which may in certain circumstances
be applied against taxable income in future years to reduce taxes otherwise
payable as follows:
Year of Expiry Amount of Loss
2002 14,558
2003 129,830
2004 206,705
2005 117,848
-------
$468,941
20. RELATED PARTY TRANSACTIONS
The following amounts on the statement of loss and deficit were paid or payable
to related parties in the form of cash and/or capital stock in the company:-
Management Fees: $617,872
57
<PAGE>
NOTES TO THE FINANCIAL STATEMENT
August 31,1998
Management fees are broken down as follows:
Deferred (since 1995) fees declared and paid out in current year $318 972
Shares issued to directors & ex-directors in current year 95 000
Prior year development costs expensed (shares) 144 000
Distribution & Promotion Fees (cash) 59 900
--------
$617 872
21. SUBSEQUENT EVENTS
Subsequent to the balance sheet date, the company completed a share for share
exchange with On-Line Production Services Inc., a Nevada State incorporated
company. Shareholders of the company exchanged their common shares in the
company for a like number of common or preference shares of On-Line Production
Services Inc., thereby giving On-Line Productions Services Inc. control of
On-Line Film Services Inc.
58
<PAGE>
Online Production Services, Inc.
(Successor Corporation to Earth Industries, Inc.)
(a Development Stage Company)
Introductory Paragraph to Proforma Financial Information
For the Period Ended December 31, 1998
(Unaudited)
The following is pro forma financial information for the Company consisting of
1) a pro forma balance sheet as at December 31, 1998 including a separate
proforma statement of stockholders' equity for the period from inception of the
Company up to and including December 31, 1998, and 2) a statement of income for
the year ended December 31, 1998.
This pro forma financial information is provided in order to show how the
transactions carried out in the Plan of Reorganization dated February 19, 1999
might have affected the historical financial statements of the Company had that
Plan of Reorganization been consummated at the beginning of the period ended
December 31, 1998 being the most recent audited financial statements of the
Company presented herein as Item 13.I.A.1.
The Plan of Reorganization is described in detail under Item 1. "Description of
Business", and further described in the pro forma statement of shareholders'
equity set out herein.
In order to prepare this pro forma financial information the Company has made
the following assumptions:
1. Readers of this information are better informed by way of presenting pro
forma financial information on the Company and its subsidiary OnLine Film
Services, Inc. (the "Subsidiary") on a fully consolidated basis for the period
covered by the information. Thus, all intercompany transactions have been
removed and the transactions of the subsidiary are presented as if they were
transactions of the Company.
2. The Company has developed and tested in Canada its principal products for the
film industry and is currently establishing its basis of operation, marketing,
and promotion in the United States. Thus, all transactions of the Subsidiary
consolidated herein are presented in US dollars converted from the Canadian
dollar currency as originally transacted in by the Subsidiary as a basis for the
reader to better estimate the future operations of the Company in the larger US
market area. The rates of conversion of transactions from Canadian dollars to US
dollars used to produce this pro forma information is set out in the notes
appended hereto.
The accompanying notes are an integral part of these financial statements.
59
<PAGE>
Online Production Services, Inc.
(Successor Corporation to Earth Industries, Inc.)
(a Development Stage Company)
Pro Forma Balance Sheet
As At December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Condensed
Historical Pro forma Pro forma
Statements Adjustments Results
----------- ----------- -----------
<S> <C> <C> <C>
Assets
Current Assets
Cash $ 1,368 $ 1,398,294 $ 1,399,662
Accounts Receivable -- 468,567 468,567
Deferred Income Taxes -- 3,093 3,093
----------- ----------- -----------
Total Current Assets $ 1,368 $ 1,869,954 $ 1,871,322
----------- ----------- -----------
Fixed Assets, Net of Amortization
Columbus Suite Software $ -- $ 3,950,000 $ 3,950,000
Computer Equipment -- 66,388 66,388
Office Furniture and Equipment -- 5,510 5,510
Building -- 91,326 91,326
----------- ----------- -----------
Total Fixed Assets, Net of Amortization $ -- $14,113,224 $14,113,224
=========== =========== ===========
Long-term Investments $ -- $ 8,098,292 $ 8,098,292
----------- ----------- -----------
Non-current Deferred Income Taxes (Canada) $ -- $ 831 $ 831
----------- ----------- -----------
Total Assets $ 1,368 $14,082,301 $14,083,669
=========== =========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Trade Accounts Payable and Accruals $ 500 $ 326,950 $ 327,450
Line of Credit -- 35,772 35,772
Short-term loan -- 19,512 19,512
Sales taxes payable -- 243,288 243,288
----------- ----------- -----------
Total Current Liabilities $ 500 $ 625,522 $ 626,022
----------- ----------- -----------
Long-term Debt
Mortgage payable $ -- $ 73,888 $ 73,888
Note payable, Columbus Entertainment -- 3,500,000 3,500,000
----------- ----------- -----------
Total Long-term Debt $ -- $ 3,573,888 $ 3,573,888
----------- ----------- -----------
Contingent Deferred Revenues $ -- $ 8,027,252 $ 8,027,252
----------- ----------- -----------
Total Liabilities $ 500 $12,226,662 $12,227,162
----------- ----------- -----------
Stockholders' Equity
Class A Common Stock $ 5,136 $ 10,391 $ 15,527
Authorized 100,000,000 shares of $.001 par value
(Predecessor 100,000,000 shares of $.0001 par value)
Issued 10,480,614 (predecessor 51,360,000)
Class B Convertible "Special Voting Stock"
Authorized 6,000,000 shares of $.001 par value $ -- $ 3,673 $ 3,673
(Predecessor Nil)
Additional Paid in Capital 2,464 12,755 1,831,284
Retained Earnings (Deficit) Accumulated During the
Development Stage (6,732) 1,855,639 6,023
----------- ----------- -----------
Total Stockholders' Equity $ 868 $ 1,855,639 $ 1,856,507
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 1,368 $14,082,301 $14,083,669
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
60
<PAGE>
OnLine Production Services, Inc.
(Successor Corporation to Earth Industries, Inc.)
(a Development Stage Company)
Pro forma Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 Cumulative Total Since Inception
----------------------------------------- -----------------------------------------
Condensed Condensed
Historical Pro Forma Pro Forma Historical Pro Forma Pro Forma
Statements Adjustments Results Statements Adjustments Results
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Sales $ -- $ 106,033 $ 106,033 $ -- $ 399,839 $ 399,839
Mailcard Software Sales -- -- -- -- 540,423 540,423
Casting Software Sales -- 677,657 677,657 -- 1,287,869 1,287,869
----------- ----------- ----------- ----------- ----------- -----------
Total Revenues $ -- $ 783,690 $ 783,690 $ -- $ 2,228,131 $ 2,228,131
----------- ----------- ----------- ----------- ----------- -----------
DIRECT COSTS
Agency Fees $ -- $ 33,036 $ 33,036 $ -- $ 152,375 $ 152,375
Software Development Costs -- -- -- -- 234,795 234,795
ISP & Web Services Fees -- 40,750 40,750 -- 63,727 63,727
Subcontracts -- 141,598 141,598 -- 202,664 202,664
Mailcard Software Purchase -- 169,380 169,380 -- 232,624 232,624
Casting Workbook Exclusivity Payments -- 70,865 70,865 -- 96,234 96,234
Other Direct Costs -- 30,787 30,787 -- 120,533 120,533
----------- ----------- ----------- ----------- ----------- -----------
Total Direct Costs $ -- $ 486,415 $ 486,415 $ -- $ 1,102,952 $ 1,102,952
----------- ----------- ----------- ----------- ----------- -----------
GROSS PROFIT $ -- $ 297,275 $ 297,275 $ -- $ 1,125,179 $ 1,125,179
----------- ----------- ----------- ----------- ----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Professional Fees/Account/Legal $ 1,719 $ 28,567 $ 30,286 $ 18,912 $ 73,477 $ 92,389
Advertising & Promotion -- 26,116 26,116 -- 49,719 49,719
Amortization -- 16,869 16,869 1,667 86,475 88,142
Bad Debts -- 3,628 3,628 -- 11,673 11,673
Location & Travel Costs -- 12,073 12,073 -- 35,006 35,006
Telephone, Fax, ISDN -- 18,971 18,971 -- 96,970 96,970
Bank Charges & Interest -- 2,644 2,644 -- 13,676 13,676
Loan Interest -- 8,079 8,079 -- 20,514 20,514
Equipment Lease & Rentals -- 38,818 38,818 -- 104,400 104,400
Consultants -- 22,532 22,532 -- 47.586 47,586
Casual Labour -- 8,022 8,022 -- 20,033 20,033
Wages & Benefits -- 155,874 155,874 -- 391,192 391,192
Property Taxes -- 1,779 1,779 -- 5,758 5,758
Rent & Office Expense -- 35,365 35,365 -- 119,167 119,167
Repairs & Maintainance -- 3,514 3,514 -- 7,498 7,498
----------- ----------- ----------- ----------- ----------- -----------
Total Selling, General and Administrative
Expenses $ 1,719 $ 382,851 $ 384,570 $ 20,579 $ 1,083,144 $ 1,103,723
----------- ----------- ----------- ----------- ----------- -----------
NET OPERATING INCOME (LOSS) $ (1,719) $ (85,576) $ (87,295) $ (20,579) $ 42,035 $ 21,456
----------- ----------- ----------- ----------- ----------- -----------
MANAGEMENT FEES AND OTHER INCOME
AND EXPENSES
Management Fees $ -- $ (308,358) $ (308,358) $ -- $ (505,628) $ (505,628)
Interest Fees -- 301,432 301,432 -- 391,431 391,431
Non-repayable grants -- 19,956 19,956 -- 19,957 19,957
Currency Exchange Gain -- -- -- -- 62,768 62,768
Deferred Corporate Tax (Canada) -- (1,773) (1,773) -- 2,193 2,193
----------- ----------- ----------- ----------- ----------- -----------
Total Management Fees and Other Income
and Expense $ -- $ 11,257 $ 11,257 $ -- $ (29,279) $ (29,279)
----------- ----------- ----------- ----------- ----------- -----------
NET GAIN (LOSS) $ (1,719) $ (74,319) $ (76,038) $ (20,579) $ 12,756 $ (7,823)
=========== =========== =========== =========== =========== ===========
EARNINGS (LOSS) per SHARE 0.00 (0.01) (0.01) 0.00 0.00 0.00
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
61
<PAGE>
OnLine Production Services, Inc.
(Successor Corporation to Earth Industries, Inc.)
(a Development Stage Company)
Pro forma Statement of Stockholders' Equity
For the Period from Inception to December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Class B Convertible
Class A Common Stock "Special Voting Stock"
-------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at Inception -- $ -- -- $ --
Shares issued organization cost at $.001 25,000,000 25,000 -- --
Shares issued for cash at $.001 600,000 600 -- --
Net loss for period ended December 31, 1996 -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1996 25,600,000 $ 25,600 -- --
Reorganization of Company and change in par value 25,600,000 (20,480) -- --
Net loss for year ended December 31, 1997 -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1997 51,200,000 $ 5,120 $ -- $ --
Shares issued for services at $.01 160,000 16 -- --
Pro forma Adjustments
under Plan of Reorganization, February/March 1999
Reverse split (30 to 1) (49,648,024) (3,424) -- --
Private Placement/Limited Offering (Ref.D,Rule 5,714,284 5,714 -- --
504) at $0.175
Share Exchange (issued to shareholders of
OnLine Film Services, Inc.) 2,763,598 2,764 -- --
Debt Settlement at $1.00 40,756 41 -- --
Purchase of Software Asset (from Columbus
Entertainment Inc.) at $1.00 250,000 250 -- --
Issue of Class B Convertible "Special Voting Stock" -- -- 3,673,292 3,673
Net loss for year ended December 31, 1998 -- -- --
----------- ----------- ----------- -----------
Pro forma Balance, December 31, 1998 10,480,614 $ 10,481 3,673,292 $ 3,673
=========== =========== =========== ===========
<CAPTION>
Deficit Accumulated During
the Development Stage
-----------------------------------------
Additional Condensed
Paid-in Historical Pro forma Pro forma
Capital Statements Adjustments Results
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at Inception $ -- $ -- $ -- $ --
Shares issued organization cost at $.001 -- -- -- --
Shares issued for cash at $.001 65,400 -- -- --
Net loss for period ended December 31, 1996 -- (16,378) (320,138) (336,516)
----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 65,400 $ 6,378) $ (320,138) $ (336,516)
Reorganization of Company and change in par value (64,520) 13,847 -- 13,847
Net loss for year ended December 31, 1997 -- (2,482) 407,212 404,730
----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 880 $ (5,013) $ 87,074 $ 82,061
Shares issued for services at $.01 1,584 -- -- --
Pro forma Adjustments
under Plan of Reorganization, February/March 1999
Reverse split (30 to 1) (2,464) -- -- --
Private Placement/Limited Offering (Ref.D,Rule 994,286 -- -- --
504) at $0.175
Share Exchange (issued to shareholders of
OnLine Film Services, Inc.) 543,979 -- -- --
Debt Settlement at $1.00 40,715 -- -- --
Purchase of Software Asset (from Columbus
Entertainment Inc.) at $1.00 249,750 -- -- --
Issue of Class B Convertible "Special Voting Stock" -- -- -- --
Net loss for year ended December 31, 1998 -- (1,719) (74,319) (76,038)
----------- ----------- ----------- -----------
Pro forma Balance, December 31, 1998 $ 1,828,730 $ (6,732) $ 12,755 $ 6,023
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
62
<PAGE>
OnLine Production Services, Inc.
(Successor Corporation to Earth Industries, Inc.)
(a Development Stage Company)
Notes to Pro forma Financial Information
For the Period Ended December 31, 1998
(Unaudited)
1. Summary of Significant Accounting Policies
a) Basis of Consolidation
This pro forma financial information for the Company is presented herein on
a fully consolidated basis with that of its subsidiary, OnLine Film Services,
Inc. (the "Subsidiary"). The fiscal year end of each of the Company and its
Subsidiary is December 31 and August 31 respectively. However, in order to
provide a fully consolidated presentation for the reader, pro forma financial
information of the Subsidiary is presented herein combined with that of the
Company, using the Subsidiary's actual historical financial information for
periods January 1 to December 31 of each year.
b) Notes to the Audited Financial Statements of the Subsidiary
The pro forma financial information provided herein should be read by also
referencing the Notes to Financial Statements as appended to the Audited
Financial Statements of OnLine Film Services, Inc. and set out in this filing as
Item 13.A.2 except as otherwise set out or with adjustment therefore by these
more specific Notes to Pro forma Financial Information or the specific dollar
information set out in the body of these pro forma financial statements.
2. Foreign Currency Transactions
Further to information provided in the Introductory Paragraph to this Pro
forma Financial Information, the Company has combined, on a fully consolidated
basis, the transactions of the Subsidiary, by converting the Canadian dollar
transactions of the Subsidiary to US dollar presentations using average rates of
exchange for each period of operation, and end of period rates of exchange for
balance sheet presentations. The rates of exchange used are set out in the
following table of exchange rates being the noon buying rates in New York City
for cable transfers for customs proposed by the Federal Reserve Bank of New
York. The average rate means the average of the exchange rates on the last date
of each month during a year.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
High 65.5222 63.1114 69.5507 72.3484 70.2346
Low 68.9085 68.6012 74.2390 73.8552 75.2729
Average for Period 67.1547 68.6625 72.4638 73.2815 73.0514
End of Period 67.8656 65.0407 69.7934 73.3676 71.2758
</TABLE>
63
<PAGE>
ONLINE PRODUCTION SERVICES, INC.
(Successor Corporation to Earth Industries, Inc.)
(A Development Stage Company)
Unaudited Interim Balance Sheet At June 30, 1999
(with comparative pro forma figures at June 30, 1998)
(Unaudited)
<TABLE>
<CAPTION>
Pro forma
June 30, 1999 June 30, 1998
<S> <C> <C>
Assets
Current Assets
Cash $ 723,851 $ 154,051
Accounts Receivable 41,058 27,721
Deferred Income Taxes 3,227 --
------------ ------------
Total Current Assets $ 768,136 $ 181,772
------------ ------------
Fixed Assets, net of Amortization
Columbus Suite Software $ 3,950,000 $ --
Computer Equipment 182,714 76,916
Office Furniture and Equipment 10,351 7,027
Building 93,369 101,784
------------ ------------
Total Fixed Assets, net of Amortization $ 4,236,434 $ 185,727
------------ ------------
Long-term Investment $ 8,837,991 $ 5,493,492
------------ ------------
Non-current Deferred Income Taxes (Canada) $ 867 $ --
------------ ------------
Total Assets $ 13,393,428 $ 5,860,992
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Trade Accounts Payable and Accruals $ 87,090 $ 68,848
Line of Credit 3,394 --
Short-term loan -- --
Sales taxes payable 5,986 318
------------ ------------
Total Current Liabilities $ 96,469 $ 69,166
------------ ------------
Long-term Debt
Mortgage Payable $ 77,259 $ 78,056
Note Payable to Columbus Entertainment 3,500,000 --
------------ ------------
Total Long-term Debt $ 3,577,259 $ 78,056
------------ ------------
Contingent Deferred Revenues $ 8,376,532 $ 5,488,680
------------ ------------
Total Liabilities $ 12,050,260 $ 5,635,903
------------ ------------
Stockholders' Equity
Class A Common Stock
Authorized 100,000,000 shares of $.001 par value,
(1997 100,000,000 shares of $.0001 par value)
Issued 10,480,614 (1997 - 51,360,000) $ 10,391 $ 5,136
Class B Convertible "Special Voting Stock"
Authorized 6,000,000 shares of $.001 par value,
(1997 - Nil) 3,673 --
Additional Paid in Capital 1,828,820 449,940
Retained Earnings (Deficit) Accumuated During the
Develpment Stage (499,716) (229,987)
------------ ------------
Total Stockholders' Equity $ 1,343,168 $ 225,089
------------ ------------
Total Liabilities and Stockholders' Equity $ 13,393,428 $ 5,860,992
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
64
<PAGE>
OnLine Production Services, Inc.
(Successor Corporation to Earth Industries, Inc.)
(A Development Stage Company)
Unaudited Interim Statement of Cash Flows
For the Six Months Ended June 30, 1999
(with comparative pro forma information for the six months ended June 30, 1998)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Cumulative
Total
For the Six Month Since Inception (1995)
Period Ended June 30, to
1999 1998 June 30, 1999
----------- ----------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (505,739) $ (317,618) $ (513,563)
Adjustment to reconcile net loss to net cash provided by operations
Amortization 13,944 8,435 102,086
Currency Exchange Gains (90,329) -- (153,097)
Issued common stock for services 40,715 -- 42,315
----------- ----------- -----------
Net cash flows provided (used) by operating activities $ (541,409) $ (309,183) $ (522,259)
----------- ----------- -----------
Cash Flows from Investment Activities:
Cash applied to acquisition of Assets $ (132,756) $ (69,984) $ (340,405)
Cash flows from Financing Activities:
Cash received from financing -- -- 88,751
Cash applied to the reduction of debts (278) (251) (5,544)
Cash taken by parent in reorganization -- 47,820 (47,820)
Issued common stock for cash 1,000,000 -- 1,551,128
----------- ----------- -----------
Net cash flows provided by financing activities $ 866,966 $ (118,055) $ 1,246,110
----------- ----------- -----------
Net increase (decrease) in cash $ 325,557 $ (427,238) $ 723,851
Cash, beginning of period 398,294 581,289 --
----------- ----------- -----------
Cash, end of period $ 723,851 $ 154,051 $ 723,851
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
65
<PAGE>
OnLine Production Services, Inc.
Successor Corporation to Earth Industries, Inc.
(a Development Stage Company)
Interim Statement of Operations
Six Months Ended June 30, 1999
(with comparitive pro forma figures for the six months ended June 30, 1998)
(Unaudited)
<TABLE>
<CAPTION>
Pro forma Pro forma
Results of Cumulative
Operations - Total Since
Six Months Six Months Inception
Ended June Ended June (1995) to
30, 1999 30, 1998 June 30, 1999
<S> <C> <C> <C>
REVENUE
Sales $ 119,877 $ 53,017 $ 519,716
Mailcard Software Sales -- -- 540,423
Casting Software Sales -- -- 1,287,869
----------- ----------- -----------
Total Revenue $ 119,877 $ 53,017 $ 2,348,008
----------- ----------- -----------
DIRECT COSTS
Agency Fees $ 17,397 $ -- $ 169,772
Software Purchases 16,741 -- 251,536
ISP & Web Services Fees 34,426 14,375 98,153
Subcontracts 127,030 60,799 329,694
Mailcard Software Purchases 86,583 84,690 319,207
Casting Workbook Exclusivity
Payments 187,345 35,432 283,579
Other Direct Costs
8,334 6,394 128,867
----------- ----------- -----------
Total Direct $ 477,858 $ 201,690 $ 1,580,808
----------- ----------- -----------
Costs
GROSS PROFIT $ (357,980) $ (148,673) $ 767,200
----------- ----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Professional
Fees/Account/Legal $ 76,340 $ 27,699 $ 168,729
Advertising & Promotion 70,528 16,000 120,247
Amortization 13,944 8,435 102,086
Bad Debts -- -- 11,673
Location & Travel Costs 15,706 6,036 50,712
Telephone, Fax ISDN 15,832 8,486 112,802
Bank Charges & Interest 3,558 1,322 17,234
Loan Interest 3,927 -- 24,441
Equipment Lease & Rentals 21,798 16,409 126,198
Consultants 30,500 6,266 78,086
Casual Labour 5,651 1,011 25,684
Wages & Benefits 93,725 55,937 484,917
Property Taxes 1,164 890 6,922
Rent & Office Expenses 30,412 12,683 149,579
Repairs & Maintenance 2,648 1,257 10,146
----------- ----------- -----------
Total Selling, General and
Administrative Expenses $ 385,733 $ 162,431 $ 1,489,456
----------- ----------- -----------
NET OPERATING INCOME (LOSS)
$ (743,713) $ (311,104) $ (722,256)
----------- ----------- -----------
MANAGEMENT FEES AND OTHER
INCOME AND EXPENSES
Management Fees $ (131,490) $ (154,179) $ (637,118)
Interest Expenses 235,662 150,716 627,091
Non-repayable grants 43,473 9,978 63,430
Currency Exchange Gain 90,329 -- 153,097
Deferred Corporate Tax
(Canada) -- -- 2,193
----------- ----------- -----------
Total Management Fees And
Other Income and Expenses $ 237,974 $ 6,515 $ 208,693
----------- ----------- -----------
NET GAIN (LOSS) $ (505,739) $ (304,589) $ (513,563)
----------- ----------- -----------
EARNINGS (LOSS) per SHARE $ (0.05) $ (0.03) $ (0.05)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
66
<PAGE>
OnLine Production Services, Inc.
(Successor Corporation to Earth Industries, Inc.)
(a Development Stage Company)
Pro forma Statement of Stockholders' Equity
For the Period from Inception to December 31, 1998
<TABLE>
<CAPTION>
Class B Convertible
Class A Common Stock "Special Voting Stock"
---------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at Inception -- $ -- -- $ --
Shares issued organization cost at $.001 25,000,000 25,000 -- --
Shares issued for cash at $.001 600,000 600 -- --
Net loss for period ended December 31, 1996 -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1996 25,600,000 $ 25,600 -- --
Reorganization of Company and change in par value 25,600,000 (20,480) -- --
Net loss for year ended December 31, 1997 -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1997 51,200,000 $ 5,120 -- $ --
Shares issued for services at $.01 160,000 16 -- --
Net Loss for year ended December 31, 1998 -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1998 51,360,000 $ 5,136 -- $ --
REORGANIZATION, FEBRUARY/MARCH 1999
Reverse split (30 to 1) (49,648,024) (3,424) -- --
Private Placement/Limited Offering (Reg.D,Rule
504) at $0.175 5,714,284 5,714 -- --
Share Exchange (issued to shareholders of
OnLine Film Services, Inc.) 2,763,598 2,764 -- --
Debt Settlement at $1.00 40,756 41 -- --
Purchase of Software Asset (from Columbus
Entertainment Inc.) at $1.00 250,000 250 -- --
Issue of Class B Convertible "Special Voting Stock" -- -- 3,673,292 3,673
Net loss for six months ended June 30, 1999 -- -- --
------------ ------------ ------------ ------------
10,480,614 $ 10,481 3,673,292 $ 3,673
============ ============ ============ ============
<CAPTION>
Deficit Accumulated During
the Development Stage
--------------------------------------------
Additional Condensed
Paid-in Historical Pro forma Pro forma
Capital Statements Adjustments Results
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at Inception $ -- $ -- $ -- $ --
Shares issued organization cost at $.001 -- -- -- --
Shares issued for cash at $.001 65,400 -- -- --
Net loss for period ended December 31, 1996 -- (16,378) (320,138) (336,516)
------------ ------------ ------------ ------------
Balance, December 31, 1996 $ 65,400 $ (16,378) $ (320,138) $ (336,516)
Reorganization of Company and change in par value (64,520) 13,847 -- 13,847
Net loss for year ended December 31, 1997 -- (2,482) 407,212 404,730
------------ ------------ ------------ ------------
Balance, December 31, 1997 $ 880 $ (5,013) $ 87,074 $ 82,061
Shares issued for services at $.01 1,584 -- -- --
Net Loss for year ended December 31, 1998 -- (1,719) (74,319) (76,038)
------------ ------------ ------------ ------------
Balance, December 31, 1998 $ 2,464 $ (6,732) $ 12,755 $ 6,023
REORGANIZATION, FEBRUARY/MARCH 1999
Reverse split (30 to 1) (2,464) -- -- --
Private Placement/Limited Offering (Reg.D,Rule
504) at $0.175 994,286 -- -- --
Share Exchange (issued to shareholders of
OnLine Film Services, Inc.) 543,979 -- -- --
Debt Settlement at $1.00 40,715 -- -- --
Purchase of Software Asset (from Columbus
Entertainment Inc.) at $1.00 249,750 -- -- --
Issue of Class B Convertible "Special Voting Stock" -- -- -- --
Net loss for six months ended June 30, 1999 -- (505,739) -- (505,739)
------------ ------------ ------------ ------------
$ 1,828,730 $ (512,471) $ 12,755 $ (499,716)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
67
<PAGE>
OnLine Production Services, Inc
(Successor Corporation to Earth Industries, Inc.)
(a Development Stage Company)
Notes to Pro Forma Financial Information
For the Interim Period Ended June 30, 1999
(Unaudited)
1. Summary of Significant Accounting Policies
a) Basis of Consolidation
This pro forma financial information for the Company is presented herein on
a fully consolidated basis with that of its subsidiary, OnLine Film Services,
Inc (the "Subsidiary"). The fiscal year end of each of the Company and its
Subsidiary is December 31 and August 31 respectively. However, in order to
provide a fully consolidated presentation for the reader, pro forma financial
information of the Subsidiary is presented herein combined with that of the
Company, using the Subsidiary's actual historical financial information for
periods January 1 to December 31 of each year.
b) Notes to the Audited Financial Statements of the Subsidiary
The pro forma financial information provided herein should be read by also
referencing the Notes to Financial Statements as appended to the Audited
Financial Statements of OnLine Film Services, Inc. and set out in this filing as
Item 13.A.2 except as otherwise set out or with adjustment therefore by these
more specific Notes to Pro forma Financial Information or the specific dollar
information set out in the body of these pro forma financial statements.
2. Foreign Currency Transactions
Further to information provided in the Introductory Paragraph to this Pro
forma Financial Information, the Company has combined, on a fully consolidated
basis, the transactions of the Subsidiary, by converting the Canadian dollar
transactions of the Subsidiary to US dollar presentations using average rates of
exchange for each period of operation, and end of period rates of exchange for
balance sheet presentations. The rates of exchange used are set out in the
following table of exchange rates being the noon buying rates in New York City
for cable transfers for customs proposed by the Federal Reserve Bank of New
York. The average rate means the average of the exchange rates on the last date
of each month during a year.
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
High 65.5222 63.1114 69.5507 72.3484 70.2346
Low 68.9085 68.6012 74.2390 73.8552 75.2729
Average for Period 67.1547 68.6625 72.4638 73.2815 73.0514
End of Period 67.8656 65.0407 69.7934 73.3676 71.2758
68
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's auditors.
69
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
A. Audited Financial Statements
(1) EARTH INDUSTRIES, INC.
Audited Report dated January 19, 1999
Balance Sheets at December 31, 1998 and 1997
Statement of Operations for the Years ended
December 31, 1998 and 1997
Statement of Stockholders Equity for the
Years ended December 31, 1998 and 1997
Statement of Cash Flows for the Years ended
December 31, 1998 and 1997
Notes to Financial Statements
(2) OnLine Film Services Inc.
Auditors Report dated July 15, 1999
Commentary by Auditor dated July 15, 1999
Consolidated Balance Sheet as at August 31, 1998 and 1997
Consolidated Statement of Loss and Deficit for
the Years ended August 31, 1998 and 1997
Consolidated Cash Flow Statement for the Year
ended August 31, 1998 and 1997
Notes to Consolidated Financial Statements
B. Pro Forma Financial Statements as at December 31, 1998
Introducing Paragraph to Pro forma Financial Information
Pro forma Balance Sheet
Pro forma Statement of Operations
Pro forma Statement of Stockholders Equity
Notes to Pro forma Statements
C. Unaudited Interim Financial Statements as at June 30, 1999
Interim Balance Sheet as at June 30, 1999
Interim Statement of Cash Flow for the Six Months
Ended June 30, 1998
Interim Statement of Operations for the Six Months
Ended June 30, 1998
Notes to Interim Financial Statements
70
<PAGE>
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
27 Financial Data Schedule
71
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has caused this registration statement to be signed on its behalf by
the undersigned, thereunder duly authorized.
Dated: August 20, 1999 ONLINE PRODUCTION SERVICES INC.
By: /s/ Aerock Fox
-----------------------------
Aerock Fox, President
72
<PAGE>
ONLINE PRODUCTION SERVICES INC.
REGISTRATION STATEMENT
on Form 10SB
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page
----
<S> <C>
2.1 Plan of Reorganization and Merger for Change of Status dated February 18, 1999 74
2.2 Plan of Reorganization and Acquisition date February 19, 1999 76
3(i).1 Articles of Incorporation of Earth Industries, Inc. dated August 7, 1996 83
3(i).2 Articles of Correction of Earth Industries, Inc. 85
3(i).3 Articles of Amendment of Earth Industries, Inc. dated August 22, 1996 86
3(i).4 Articles of Incorporation of OnLine dated February 18, 1999 87
3(ii) ByLaws of Online Production Services, Inc. 89
10.1 Asset Purchase Agreement dated between OnLine and
Columbus Entertainment, Inc. August 31, 1998 98
10.2 Amending Asset Purchase Agreement dated August 31, 1998 108
10.3 Promissory Note dated August 31, 1998 114
10.4 Management Agreement dated August 31, 1998 116
27 Financial Data Schedule 128
</TABLE>
73
Exhibit 2.1
PLAN OF REORGANIZATION AND MERGER
FOR CHANGE OF SITUS
BY WHICH
Earth Industries, Inc.
(A TEXAS CORPORATION)
WILL MERGE WITH AND INTO
OnLine Production Services Inc.
(A NEVADA CORPORATION)
FOR THE PURPOSE OF CHANGING THE PLACE OF INCORPORATION
This Plan of Reorganization is made effective and dated this day of
February 18, 1999, by and between the above referenced corporations, sometimes
referred to herein as "the Public Company" and "the Private Company",
respectively.
A. The Parties to this Agreement
1. EARTH INDUSTRIES, INC. ("the Public Company") is a Texas Corporation.
2. ONLINE PRODUCTION SERVICES, LTD. ("the Private Company") is a Nevada
Corporation, having been created (or to be created) on behalf of Earth
Industries, Inc. for the purpose of changing the place of incorporation from
Texas to Nevada.
B. The Capital of the Parties:
1. The Capital of the Public Company consists of Earth Industries, Inc.
shares of common voting stock of $0.001 par value authorized, of which 1,712,000
shares are issued and outstanding.
2. The Capital of the Private Company consisted of shares of common voting
stock of $0.001 par value authorized, of which no shares have been or are issued
or outstanding.
C. The Decision to Reorganize to Change Situs:
The Parties have resolved, accordingly, to merge and relocated the place of
incorporation, by means of the following reorganization, by which the Public
Company will merge with and into the Private Company move to Nevada.
I. Plan of Reorganization
A. Change of Situs: The Public Company (Texas) and the Private Company (Nevada)
are hereby reorganized for the sole and singular purpose of changing the place
of incorporation of Earth Industries, Inc.; such that immediately following the
Reorganization the Texas Public Company will move to Nevada.
1. THE PUBLIC COMPANY: Earth Industries, Inc. of Texas will merge with and
into and
74
<PAGE>
thereafter be OnLine Production Services Inc. of Nevada. The Public Company will
retain its corporate personality and status, and will continue its corporate
existence uninterrupted, in and through, and only in and through the Nevada
Corporation.
2. Conversion of Outstanding Shares: Forthwith upon the effective date
hereof, each and every one share of stock of the Public Texas Company shall be
converted to one share of the Nevada Company. Any such holders of shares may
surrender them to the transfer agent for common stock of the Public Texas
Company, which transfer agent shall remain and continue as transfer agent for
the Nevada Company.
3. EFFECTIVE DATE: This Plan of Reorganization shall become effective
immediately upon approval and adoption by Corporate parties hereto, in the
manner provided by the law of its place of incorporation and its constituent
corporate documents, the time of such effectiveness being called the effective
date hereof.
4. SURVIVING CORPORATIONS: The Nevada Company shall survive the
Reorganization after Reorganization, with the operational history of the Texas
Company before the Reorganization, and with the management, duties and
relationships to its shareholders unchanged by the Reorganization and with all
of its property and with its shareholder list unchanged.
5. FURTHER ASSURANCE, GOOD FAITH AND FAIR DEALING: The Directors of each
Company shall and will execute and deliver any and all necessary documents,
acknowledgments and assurances and do all things proper to confirm or
acknowledge any and all rights, titles and interests created or confirmed
herein; and both companies covenant hereby to deal fairly and good faith with
each other and each others shareholders.
THIS REORGANIZATION AGREEMENT is executed on ehalf of each Company by its
duly authorized representatives, and attested to, pursuant to the laws of its
respective place of incorporation and in accordance with its constituent
documents.
Earth Industries, Inc. OnLine Production Services Inc.
(a Texas corporation) (a Nevada corporation)
by by
Kirt W. James Kirt W. James PRESIDENT,
SOLE DIRECTORPRESIDENT, SOLE DIRECTOR
75
Exhibit 2.2
Plan of Reorganization and Acquisition
BY WHICH
Earth Industries, Inc.
(A TEXAS CORPORATION)
SHALL ACQUIRE
On-Line Film Services, Inc.
(A BRITISH COLUMBIA CORPORATION)
This Plan of Reorganization and Acquisition is made and dated this day of
February 19, 1998 by and between the above referenced corporations, and shall
become effective on "the Effective Date" as defined herein.
I. THE INTERESTED PARTIES
1. EARTH INDUSTRIES, INC. ("Earth" also "the Issuer") is a public Texas
Corporation.
2. On-Line Film Services, Inc. ("On-Line") is a private British Columbia
Corporation.
3. Intrepid International, S.A. ("Intrepid") is the principal beneficial
shareholder of Earth Industries, through its Executive Officer, Kirt W. James.
4. ACC Axis Capital Corp. ("Axis" and sometimes the "Axis Group") is
consultant to the Canadian company, and agent for the purchasers of certain
private placements mentioned hereinafter.
II. DESCRIPTIVE SUMMARY
This descriptive summary is presented, by way of introduction, to provide
an overview of the Corporate Reorganization agreed to herein.
Earth Industries, Inc. of Texas (the Public Company) will become OnLine
Production Services Inc., of Nevada. In this process Earth will acquire 100% of
On-Line Film Services, Inc. of British Columbia, Canada.
Earth will reverse-split its present common stock 30 to 1, and will issue
certain post-reverse shares in connection with the acquisition. The shares to be
issued will fall into two groups: (1) shares to be issued to new investors
pursuant to Regulation D, Rule 504; and (2) shares to issued to the Canadian
company shareholders for the acquisition. The shares to be issued to the
Canadian company will be of two classes: (a) Common Voting Equity Stock; and (B)
Special Voting Non-Equity Stock.
The Voting Non-Equity stock shall be issued to those Canadian company
shareholders who convert their Canadian company common stock to Canadian company
preferred stock. The Voting Equity stock shall be issued to those Canadian
company shareholders who convert their Canadian company common stock to the
common stock of the Public Company.
76
<PAGE>
PLAN OF REORGANIZATION AND ACQUISITION
Earth Industries, Inc. / On-Line Film Services, Inc.
February 19, 1998 Page 2
III. RECITALS
A. The Capital of the Parties:
1. THE CAPITAL OF EARTH consists of 100,000,000 shares of common voting
stock of $0.001 par value authorized, of which 51,360,000 shares are issued and
outstanding. This Agreement contemplates a 30 to 1 Reverse split which would
result in approximately 1,712,000 shares; this number is subject to minor
adjustment such that no shareholder shall be reversed below 100 shares, and
further that no shareholder of less than 100 shares shall be reversed.
2. THE CAPITAL OF ON-LINE of Canada consists of shares of common voting
stock of which 6,706,070 shares are issued and outstanding.
3. THE CAPITAL OF THE NEVADA "Resulting Company" and/or the "Reorganized
Company" shall consist of 106,000,000 shares of par value $0.001, in two
classes: 100,000,000 shares of common equity voting stock; and 6,000,000 shares
of special non-equity voting stock, of which no shares are issued and
outstanding immediately preceding this Reorganization.
B. The Background for the Acquisition: Earth desires to acquire On-Line and the
shareholders of On-Line wish to be acquired by a public company.
C. The Boards of Directors of both Corporations respectively have determined
that it is advisable and in the best interests of each of them and both of them
to proceed with the acquisition by the public company, in accordance with IRS
ss. 368 (B) and (C).
D. The Shareholders of Earth, having approved the acquisition, this agreement
was approved and adopted by the Board of Directors of Earth in a manner
consistent with the laws of its Jurisdiction and its constituent documents.
E. The Board of Directors of On-Line, having represented that is empowered to
approved the acquisition, without formal shareholder approval, this agreement
was approved and adopted by the Board of Directors of On-Line in a manner
consistent with the laws of its Jurisdiction and its constituent documents.
F. Conditions of Closing are intended to describe and define the steps to be
taken by the parties before and after closing.
1. REVERSE SPLIT/CHANGE OF SITUS. As a condition of Closing Earth shall
have obtained shareholder approval or authority, pursuant to the laws of Texas
and its constituent organic documents for: (a) a Reverse Split of the Issuer's
Common Stock 30 shares to 1 share, provided that no shareholder shall be
reversed below 100 shares, and further that no shareholder of less than 100
shares shall be reversed; and (b) a change of the situs of the Corporation from
the State of Texas to the State of Nevada, with the new corporate name of OnLine
Production Services Inc.
77
<PAGE>
PLAN OF REORGANIZATION AND ACQUISITION
Earth Industries, Inc. / On-Line Film Services, Inc.
February 19, 1998 Page 3
2. $1,000,000 PRIVATE PLACEMENT. As a condition of Closing, Axis, as
consultant to the Canadian company and agent for the purchasers, shall have
secured the funding, in escrow, of a private placement/limited offering of
approximately 5,714,287 (post-reverse) shares of the Issuer's common stock, at
US$0.175 per share. Intrepid has agreed independently of this Agreement to
provide such services as are necessary to support the placement by preparation
of such documents, and issuance of such certificates as are reasonable and
necessary, and required in good faith, to carry forth the intent of the parties,
to give effect to this funding, before and after the closing. It is contemplated
and previously agreed that subscription monies, and certificates issued, shall
each and both be deposited into an escrow, contingent upon closing.
3. TRANSFER OF CONTROL SHARES. This Agreement contemplates the transfer of
a control block of common stock from Intrepid to the order of Axis, as agent for
the ultimate purchasers, as a condition subsequent of closing. This agreement
contemplates the closing of the acquisition of On-Line as a condition precedent
to such transfer of control. Accordingly 1,381,000 (post-reverse) shares (the
former "Control Shares") of common stock of the Issuer shall be transferred to
the order of Axis Group, or to the ultimate purchasers, on or before 91 days
following closing. This transfer is agreed to be a sale of that stock from
Intrepid for the sum of US$100.00. These control shares are owned by Kirt W.
James, an affiliate of the issuer, and if acquired in less than 90 days
following closing, they shall be and become "Restricted Securities" as defined
by Rule 144(a), Regulation ss.230.144(a), as promulgated by the Commission
pursuant to ss.3 of the Securities Act of 1933.
4. TRANSFER OF CONTROL. Immediately upon closing, the Board of Directors of
Earth shall appoint the nominees of On-Line to become the Directors of the
Reorganized Company, and then, such appointing Directors shall resign in favor
of such appointed Directors.
5. NO FURTHER REVERSE STOCK SPLIT. As a mutual covenant and condition of
closing, there shall be no further reverse stock split of the Reorganized
Company's common stock within 18 months of the date of the transfer of the
Control Shares, without the prior written consent of Intrepid.
IV. PLAN OF ACQUISITION
A. Reorganization and Acquisition: Earth Industries, Inc. and the On-Line Film
Services, Inc. are hereby reorganized, such that (i) Earth shall acquire all
assets, businesses and common stock of the On-Line Film Services, Inc.; (ii)
On-Line Film Services, Inc. corporation shall become a subsidiary of Earth
Industries, Inc.; and (iii) Earth Industries, Inc., the Texas public company
shall become OnLine Production Services Inc., a Nevada public company (the
"Resulting Company" and/or the "Reorganized Company")
78
<PAGE>
PLAN OF REORGANIZATION AND ACQUISITION
Earth Industries, Inc. / On-Line Film Services, Inc.
February 19, 1998 Page 4
1. CONVERSION OF OUTSTANDING STOCK: Forthwith upon the effective date
hereof, Earth Industries, Inc. shall issue new investment shares (post-reverse)
of its common stock and/or its special non-equity voting stock, to or for the
shareholders of On-Line Film Services, Inc., as follows:
(a) Class A Common Equity Voting Stock ("common stock") shall be issued to
On-Line common stock who elect to exchange their common shares of On-Line
for common stock of Earth, and each and every common share of On-Line held
by such shareholders shall be converted into one share of Earth Industries,
Inc. (which shall have become the Reorganized Nevada company).
(b) Class B Special Non-Equity Voting Stock ("special voting stock") shall
be issued, share for share, to On-Line shareholders who have elected to
have issued to them On-line exchangeable preferred shares in exchange for
their common shares of On-Line, so that such shareholders may vote.
(c) United States Securities issued to Canadian shareholders for the
acquisition of the Canadian company shall be "Restricted Securities" as
defined by Rule 144(a), Regulation ss.230.144(a), with reference to Rule
145, Regulation ss.230.145, as promulgated by the Commission pursuant to
ss.3 of the Securities Act of 1933.
(d) The election to be made as to which class of stock shall be made by the
Canadian company and its shareholders and shall be communicated to the
Issuer.
2. SURVIVING CORPORATIONS: Both the Reorganized Nevada public company and
the Canadian private company shall survive the Reorganization herein
contemplated and shall continue to be governed by the laws of its respective
State or Province of Incorporation. However, the Texas public company shall not
survive its change of situs to Nevada, and the Texas public company shall
continue to exist as the Reorganized Nevada public company.
3. SURVIVING ARTICLES OF INCORPORATION AND BY-LAWS: the Articles of
Incorporation and By-Laws of the Reorganized public company and the Canadian
company shall remain in full force and effect, unchanged.
B. Effective Date: This PLAN OF REORGANIZATION AND ACQUISITION shall become
effective immediately upon approval and adoption by the parties hereto, in the
manner provided by the law of the places of incorporation and constituent
corporate documents, and the time of such effectiveness shall be called the
effective date hereof.
Rights of Dissenting Shareholders: The Reorganized public company is the
entity responsible for the rights of dissenting shareholders.
79
<PAGE>
PLAN OF REORGANIZATION AND ACQUISITION
Earth Industries, Inc. / On-Line Film Services, Inc.
February 19, 1998 Page 5
C. Further Assurance, Good Faith and Fair Dealing: the Directors of each Company
shall and will execute and deliver any and all necessary documents,
acknowledgments and assurances and to do all things proper to confirm or
acknowledge any and all rights, titles and interests created or confirmed
herein; and both companies covenant hereby to deal fairly and in good faith with
each other and each others shareholders.
D. General Mutual Representations and Warranties. The purpose and general import
of the Mutual Representations and Warranties, are that each party has made
appropriate full disclosure to the others, that no material information has been
withheld, and that the information exchanged is accurate, true and correct.
Representations and warranties of Earth Industries are joined in, and are also
the representations and warranties of Intrepid International, the retiring
principal shareholder.
1. ORGANIZATION AND QUALIFICATION. Each Corporation warrants and represents
that it is duly organized and in good standing, and is duly qualified to conduct
any business it may be conducting, as required by law or local ordinance.
2. CORPORATE AUTHORITY. Each Corporation warrants and represents that it
has Corporate Authority, under the laws of its jurisdiction and its constituent
documents, to do each and every element of performance to which it has agreed,
and which is reasonably necessary, appropriate and lawful, to carry out this
Agreement in good faith.
3. OWNERSHIP OF ASSETS AND PROPERTY. Each Corporation warrants and
represents that it has lawful title and ownership of it property as reported to
the other, and as disclosed in its financial statements.
4. ABSENCE OF CERTAIN CHANGES OR EVENTS. Each Corporation warrants and
represents that there are no material changes of circumstances or events which
have not been fully disclosed to the other party, and which, if different than
previously disclosed in writing, have been disclosed in writing as currently as
is reasonably practicable.
5. ABSENCE OF UNDISCLOSED LIABILITIES. Each Corporation warrants and
represents specifically that it has, and has no reason to anticipate having, any
material liabilities which have not been disclosed to the other, in the
financial statements or otherwise in writing.
6. LEGAL PROCEEDINGS. Each Corporation warrants and represents that there
are no legal proceedings, administrative or regulatory proceeding, pending or
suspected, which have not been fully disclosed in writing to the other.
7. NO BREACH OF OTHER AGREEMENTS. Each Corporation warrants and represents
that this Agreement, and the faithful performance of this agreement, will not
cause any breach of any other existing agreement, or any covenant, consent
decree, or undertaking by either, not disclosed to the other.
80
<PAGE>
PLAN OF REORGANIZATION AND ACQUISITION
Earth Industries, Inc. / On-Line Film Services, Inc.
February 19, 1998 Page 6
8. CAPITAL STOCK. Each Company warrants and represents that the issued and
outstanding share and all shares capital stock of such corporation, is as
detailed herein, that all such shares are in fact issued and outstanding, duly
and validly issued, were issued as and are fully paid and non-assessable shares,
and that, other than as represented in writing, there are no other securities,
options, warrants or rights outstanding, to acquired further shares of such
Corporation.
9. BROKERS' OR FINDER'S FEES. Each Corporation warrants and represents that
is aware of no claims for brokers' fees, or finders' fees, or other commissions
or fees, by any person not disclosed to the other, which would become, if valid,
an obligation of either company.
E. Miscellaneous Provisions
1. Except as required by law, no party shall provide any information concerning
any aspect of the transactions contemplated by this Agreement to anyone other
than their respective officers, employees and representatives without the prior
written consent of the other parties hereto. The aforesaid obligations shall
terminate on the earlier to occur of (a) the Closing, or (b) the date by which
any party is required under its articles or bylaws or as required by law, to
provide specific disclosure of such transactions to its shareholders,
governmental agencies or other third parties. In the event that the transaction
does not close, each party will return all confidential information furnished in
confidence to the other.
2. This Agreement may be executed simultaneously in two or more counterpart
originals. The parties can and may rely upon facsimile signatures as binding
under this Agreement, however, the parties agree to forward original signatures
to the other parties as soon as practicable after the facsimile signatures have
been delivered.
3. The Parties to this agreement have no wish to engage in costly or lengthy
litigation with each other. Accordingly, any and all disputes which the parties
cannot resolve by agreement or mediation, shall be submitted to binding
arbitration under the rules and auspices of the American Arbitration
Association. Arbitration, if any there be, shall be conducted in Orange County,
California. As a further incentive to avoid disputes, each party shall bear its
own costs, with respect thereto, and with respect to any proceedings in any
court brought to enforce or overturn any arbitration award. This provision is
expressly intended to discourage litigation and to encourage orderly, timely and
economical resolution of any disputes which may occur.
4. If any provision of this Letter Agreement or the application thereof to any
person or situation shall be held invalid or unenforceable, the remainder of the
Agreement and the application of such provision to other persons or situations
shall not be effected thereby but shall continue valid and enforceable to the
fullest extent permitted by law.
5. No waiver by any party of any occurrence or provision hereof shall be deemed
a waiver of any other occurrence or provision.
81
<PAGE>
PLAN OF REORGANIZATION AND ACQUISITION
Earth Industries, Inc. / On-Line Film Services, Inc.
February 19, 1998 Page 7
6. The parties acknowledge that both they and their counsel have been provided
ample opportunity to review and revise this agreement and that the normal rule
of construction shall not be applied to cause the resolution of any ambiguities
against any party presumptively. The Agreement shall be governed by and
construed in accordance with the laws of the State of Nevada.
THIS PLAN OF REORGANIZATION AND MERGER is executed on behalf of each
Company by its duly authorized representatives, and attested to, pursuant to the
laws of its respective place of incorporation and in accordance with its
constituent documents.
Earth Industries, Inc. On-Line Film Services, Inc.
(a Texas corporation) (A BRITISH COLUMBIA CORPORATION)
by by
- --------------------------------- --------------------------------
Kirt W. James Aerock Fox
President President
- ---------------------------------
Kirt W. James
Secretary
Intrepid International, S.A. ACC Axis Capital Corp.
(A PANAMANIAN CORPORATION) (A BRITISH COLUMBIA CORPORATION)
by by
- --------------------------------- --------------------------------
Kirt W. James Michael Harrison
President President
- ---------------------------------
J. Dan Sifford
Secretary
82
Exhibit 3(i).1
ARTICLES OF INCORPORATION
OF
Earth Industries, Inc.
(OF TEXAS)
ARTICLE ONE
Name, Purpose and Period of Duration
Section 1. The name of the corporation is Earth Industries, Inc.
Section 2. The period of its duration is perpetual.
Section 3. The purpose for which the corporation is organized is the transaction
of any and all lawful business for which corporations may be incorporated under
the Texas Business Corporation Act.
ARTICLE TWO
The Capital Shares of the Corporation
Section 1. The terms Shares and Stock shall, unless the context indicates
otherwise, be used interchangeable to mean Shares of Stock in this Corporation.
Section 2. The corporation will not commence business until it has received for
the issuance of its shares consideration of the value of not less than One
Thousand Dollars ($1,000.00) consisting of money, labor done or property
actually received.
Section 3. The Corporation shall be authorized to issue the following classes of
stock in such series thereof as the Board of Directors shall determine: Class A
Common Voting Equity Stock: 100,000,000 Shares: Par Value $.001; and such shares
to carry the short title "Common" Shares.
Section 4. The Board of Directors shall be vested with authority to establish,
within each Class Stock, such Series as it may deem appropriate, by fixing and
determining the preferences, limitations and relative rights, including, without
limitation, rights to convert to other classes or series of shares, specific
equity, income and voting rights, and rights to representation by class or
series on the Board of Directors for general or specific purposes.
Section 5. No Shares of Stock shall carry and no shareholder shall possess or
enjoy any preemptive rights to acquire additional or treasury shares of the
Corporation.
Section 6. No Shares of Stock shall carry and no shareholder shall possess or
enjoy any cumulative voting rights in the election of Directors of the
Corporation.
83
<PAGE>
Earth Industries, Inc.
ARTICLES OF INCORPORATION
August 7, 1996 Page 2
ARTICLE FOUR
Initial and Transitional Provisions
Section 1. The initial and current Registered Agent/Office of the Corporation
shall be DAN SIFFORD, 3131 Southwest Freeway, Number 42, Houston TX 77098.
Section 2. The number of directors constituting the Initial Board of directors
shall be two or more. The Attorney/Incorporator shall serve as Sole Initial
Interim Director until the Next Meeting of Shareholders or until his successors
are elected and qualified: WILLIAM STOCKER, ATTORNEY AT LAW, 219 Broadway, Suite
261, Laguna Beach CA 92651.
Section 3. The name and address of the incorporator is: WILLIAM STOCKER,
ATTORNEY AT LAW, 219 Broadway, Suite 261, Laguna Beach CA 92651.
ARTICLE FIVE
Amendment of These Articles
These Articles of Incorporation, including and Restatement thereof and
Amendments thereto which shall have been duly adopted and filed, may be amended
or further amended in any manner consistent with Article 9.10 of the Texas
Business and Corporations Act, including without limitation, by action without
meeting, prior notice or vote, upon written consent setting forth such action,
signed by the holders of shares having not less that the minimum number of votes
that would have been necessary to take such action at a meeting at which the
holders of all shares entitled to vote were present and voted.
Dated and signed this day August 7, 1996.
WILLIAM STOCKER
Attorney at Law
INCORPORATOR
84
Exhibit 3(i).2
ARTICLES OF CORRECTION
(pursuant to TEXAS BUSINESS CORPORATION ACT art. 1302-7.01)
Earth Industries, Inc.
(OF TEXAS)
(1) The Name of the Texas Corporation: Earth Industries, Inc.
(2) The Instrument to be corrected: Original Articles of Incorporation, as
filed August 21, 1996 shall be further changed and amended as follows:
(3) The Error to be corrected: The Par Value of the common stock was
mistakenly written as $0.001.
(4) Accordingly the former Section 3 should read as set forth immediately
following:
Section 3. The Corporation shall be authorized to issue the following
classes of stock in such series thereof as the Board of Directors
shall determine: Class A Common Voting Equity Stock: 100,000,000
Shares: Par Value $.0001; and such shares to carry the short title
"Common" Shares.
WILLIAM STOCKER
Attorney at Law
INCORPORATOR/SOLE INITIAL DIRECTOR
85
Exhibit 3(i).3
ARTICLES OF AMENDMENT
BEFORE ISSUANCE OF STOCK
(pursuant to TEXAS BUSINESS CORPORATION ACT art. 4.01-.05)
Earth Industries, Inc.
(OF TEXAS)
(1) The original Articles of Incorporation, as filed August 21, 1996 shall
be further changed and amended as follows:
Amendment
ARTICLE TWO, SECTION 3, OF THE ARTICLES OF INCORPORATION is hereby
amended, for the sole purpose of changing the par value of the common stock from
$0.001 to $0.0001. Accordingly the former Section 3 is superseded by, and is
hereafter to read as set forth immediately following:
Section 3. The Corporation shall be authorized to issue the following
classes of stock in such series thereof as the Board of Directors
shall determine: Class A Common Voting Equity Stock: 100,000,000
Shares: Par Value $.0001; and such shares to carry the short title
"Common" Shares.
(2) Adoption of the Amendment occurred by action of the Incorporator/Sole
Initial Director before the issuance of stock on August 22, 1996, and in a
manner consistent with its constituent documents.
Dated and signed this day, August 22, 1996.
WILLIAM STOCKER
Attorney at Law
INCORPORATOR
86
Exhibit 3(i).4
ARTICLES OF INCORPORATION
OF
OnLine Production Services Inc.
Article I. The name of the Corporation is OnLine Production Services Inc.
Article II. Its principal office in the State of Nevada is 774 Mays Blvd.
#10, Incline Village NV 89452. The initial resident agent for services of
process at that address is N&R Ltd. Group, Inc.
Article III. The purposes for which the corporation is organized are to
engage in any activity or business not in conflict with the laws of the State of
Nevada or of the United States of America. The period of existence of the
corporation shall be perpetual.
Article IV. The corporation shall have authority to issue an aggregate of
One Hundred Six Million (106,000,000) shares of par value one mil ($0.001) per
share, for a total capitalization of One Hundred Six Thousand ($106,000.00). The
Board of Directors shall be vested with discretion to issue and allocate these
shares among the following two classes, within the following stated limitations:
Class A, Common Equity Voting Stock (hereafter to be called "Common Stock"), not
to exceed 100,000,000 shares; Class B, Special Non-Equity Voting Stock ("Special
Voting Stock") not to exceed 6,000,000 shares; and no other class or classes of
stock. The corporation's capital stock may be sold from time to time for such
consideration as may be fixed by the Board of Directors, provided that no
consideration so fixed shall be less than par value.
Article V. The name and address of the Incorporator of the corporation is
WILLIAM STOCKER, Attorney at Law, 34700 Pacific Coast Highway, Suite 303,
Capistrano Beach CA 92624, PHONE (949) 248-9561, FAX (949) 248-1688. The affairs
of the corporation shall be governed by a Board of Directors of not less than
one (1) nor more than (7) persons. The Incorporator shall act as Sole Initial
Director.
Article VI. No shareholder shall be entitled to any preemptive or
preferential rights to subscribe to any unissued stock or any other securities
which the corporation may now or hereafter be authorized to issue, nor shall any
shareholder possess cumulative voting rights at any shareholders meeting, for
the purpose of electing Directors, or otherwise.
Article VII. The affairs of the corporation shall be governed by a Board of
Directors of not less than one (1) nor more than seven (7) persons. The Initial
Director of the corporation, whose name and address is KIRT W. JAMES, 34700
Pacific Coast Highway, Suite #303, Capistrano Beach CA 92624, to serve until the
next regular meeting of shareholders or until their successors are elected.
Article VIII. The Capital Stock, after the amount of the subscription price
or par value, shall not be subject to assessment to pay the debts of the
corporation, and no stock issued, as paid up, shall ever be assessable or
assessed.
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ARTICLES OF INCORPORATION OF
OnLine Production Services Inc.
Page 2
Article IX. The initial By-laws of the corporation shall be adopted by its
Board of Directors. The power to alter, amend or repeal the By-laws, or adopt
new By-laws, shall be vested in the Board of Directors, except as otherwise may
be specifically provided in the By-laws.
Article X. The Capital Stock, after the amount of the subscription price or
par value, shall not be subject to assessment to pay the debts of the
corporation, and no stock issued, as paid up, shall ever be assessable or
assessed.
I THE UNDERSIGNED, being the Incorporator hereinbefore named for the
purpose of forming a corporation pursuant the General Corporation Law of the
State of Nevada, do make and file these Articles of Incorporation, hereby
declaring and certifying that the facts herein stated are true, and accordingly
have set my hand hereunto this Day.
Dated: February 18, 1999
WILLIAM STOCKER
ATTORNEY AT LAW
INCORPORATOR
88
Exhibit 3 (ii)
By-Laws
OF
OnLine Production Services Inc.
A NEVADA CORPORATION
Article I
CORPORATE OFFICES
The principal office of the corporation in the State of Nevada shall be
located at 774 Mays Blvd. Suite 10, Incline Village NV 89451. The corporation
may have such other offices, either within or without the State of incorporation
as the board of directors may designate or as the business of the corporation
may from time to time require.
Article II
SHAREHOLDERS' MEETINGS
Section 1. Place of Meetings
The directors may designate any place, either within or without the State
unless otherwise prescribed by statute, as the place of meeting for any annual
meeting or for any special meeting called by the directors. A waiver of notice
signed by all stockholders entitled to vote at a meeting may designate any
place, either within or without the State unless otherwise prescribed by
statute, as the place for holding such meeting. If no designation is made, or if
a special meeting be otherwise called, the place of meeting shall be the
principal office of the corporation.
Section 2. Annual Meetings
The annual meeting of the shareholders shall be held on the second Monday
of March in each year, if not a holiday, at Ten o'clock A.M., at which time the
shareholders shall elect a Board of Directors and transact any other proper
business. If this date falls on a holiday, then the meeting shall be held on the
following business day at the same hour.
Section 3. Special Meetings
Special meetings of the shareholders may be called by the President, the
Board of Directors, by the holders of at least ten percent of all the shares
entitled to vote at the proposed special meeting, or such other person or
persons as may be authorized in the Articles of Incorporation.
Section 4. Notices of Meetings
Written or printed notice stating the place, day and hour of the meeting
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (l0) days nor more than
twenty (20) days before the date of the meeting, either personally or by mail,
by the direction of the president, or secretary, or the officer or persons
calling the meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the stockholder at his address
as it appears on the stock transfer books of the corporation, with postage
thereon prepaid.
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BY-LAWS page 2
Section 5. Closing of Transfer Books or Fixing Record Date.
For the purpose of determining stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or stockholders
entitled to receive payment of any dividend, or in order to make a determination
of stockholders for any other proper purpose, the directors of the corporation
may provide that the stock transfer books shall be closed for a stated period
but not to exceed, in any case twenty (20) days. If the stock transfer books be
closed for the purpose of determining stockholders entitled to notice or to vote
at a meeting of stockholders, such books shall be closed for at least twenty
(20) days immediately preceding such meeting. In lieu of closing the stock
transfer books, the directors may fix in advance a date as the record date for
and such determination of stockholders, such date in any case to be not more
than twenty (20) days and, in case of a meeting of stockholders, not less than
ten (l0) days prior to the date on which the particular action requiring such
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders, or stockholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the directors declaring such dividend is adopted, as the case may
be, shall be the record date for such determination of stockholders. When a
determination of stockholders entitled to vote at any meeting of stockholders
has been made as provided in this section, such determination shall apply to any
adjournment thereof.
Section 6. Voting List.
The officer or agent having charge of the stock transfer books for the
shares of the corporation shall make, at least ten (l0) days before each meeting
of stockholders, a complete list of stockholders entitled to vote at such
meeting, or any adjournment thereof, arranged in alphabetical order, with the
address of and number of shares held by each, which list, for a period of ten
(l0) days prior to such meeting, shall be kept on file at the principal office
of the corporation and shall be subject to inspection by any stockholder at any
time during usual business hours. Such list shall also be produced and kept open
at the time and place of the meeting and shall be subject to the inspection of
any stockholder during the whole time of the meeting. The original stock
transfer book shall be prima facie evidence as to who are the stockholders
entitled to examine such list or transfer books or to vote at the meeting of
stockholders.
Section 7. Quorum.
At any meeting of stockholders fifty-one (5l) percent of the outstanding
shares of the corporation entitled to vote, represented in person or by proxy,
shall constitute a quorum at a meeting of stockholders. If less than said number
of the outstanding shares are represented at a meeting, a majority of the
outstanding shares so represented may adjourn the meeting from time to time
without further notice. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting originally notified. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
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BY-LAWS page 3
Section 8. Proxies.
At all meetings of the stockholders, a stockholder may vote by proxy
executed in writing by the stockholder or by his duly authorized attorney in
fact. Such proxy shall be filed with the secretary of the corporation before or
at the time of the meeting.
Section 9. Voting.
Each stockholder entitled to vote in accordance with the terms and
provisions of the certificate of incorporation and these by-laws shall be
entitled to one vote, in person or by proxy, for each share of stock entitled to
vote held by such shareholder. Upon the demand of any stockholder, the vote for
directors and upon any question before the meeting shall be by ballot. All
elections for directors shall be decided by plurality vote; all other questions
shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation or the laws of Nevada.
Section 10. Order of Business.
The order of business at all meetings of the stockholders, shall be as
follows:
a. Roll Call.
b. Proof of notice of meeting or waiver of notice.
c. Reading of minutes of preceding meeting.
d. Reports of Officers.
e. Reports of Committees.
f. Election of Directors.
g. Unfinished Business.
h. New Business.
Section 11. Informal Action by Stockholders.
Unless otherwise provided by law, any action required to be taken, or any
other action which may be taken, at a meeting of the stockholders, may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the stockholders entitled to vote with respect to the
subject matter thereof. Unless otherwise provided by law, any action required to
be taken, or any other action which may be taken, at a meeting of the
stockholders, may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by a Majority of all of the
stockholders entitled to vote with respect to the subject matter thereof at any
regular meeting called on notice, and if written notice to all shareholders is
promptly given of all action so taken.
Section 12. Books and Records.
The Books, Accounts, and Records of the corporation, except as may be
otherwise required by the laws of the State of Nevada, may be kept outside of
the State of Nevada, at such place or places as the Board of Directors may from
time to time appoint. The Board of Directors shall determine whether and to what
extent the accounts and the books of the corporation, or any of them, other than
the stock ledgers, shall be open to the inspection of the stockholders, and no
stockholder shall have any right to inspect any account or book or document of
this Corporation,
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BY-LAWS page 4
except as conferred by law or by resolution of the stockholders or directors. In
the event such right of inspection is granted to the Stockholder(s) all fees
associated with such inspection shall be the sole expense of the Stockholder(s)
demanding the inspection. No book, account, or record of the Corporation may be
inspected without the legal counsel and the accountants of the Corporation being
present. The fees charged by legal counsel and accountants to attend such
inspections shall be paid for by the Stockholder demanding the inspection.
Article III
BOARD OF DIRECTORS
Section 1. General Powers.
The business and affairs of the corporation shall be managed by its board
of directors. The directors shall in all cases act as a board, and they may
adopt such rules and regulations for the conduct of their meetings and the
management of the corporation, as they may deem proper, not inconsistent with
these by-laws and the laws of this State.
Section 2. Number, Tenure, and Qualifications.
The number of directors of the corporation shall be a minimum of one (l)
and a maximum of nine (9). Each director shall hold office until the next annual
meeting of stockholders and until his successor shall have been elected and
qualified.
Section 3. Regular Meetings.
A regular meeting of the directors, shall be held without other notice than
this by-law immediately after, and at the same place as, the annual meeting of
stockholders. The directors may provide, by resolution, the time and place for
holding of additional regular meetings without other notice than such
resolution.
Section 4. Special Meetings.
Special meetings of the directors may be called by or at the request of the
president or any two directors. The person or persons authorized to call special
meetings of the directors may fix the place for holding any special meeting of
the directors called by them.
Section 5. Notice.
Notice of any special meeting shall be given at least one day previously
thereto by written notice delivered personally, or by telegram or mailed to each
director at his business address. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail so addressed, with postage
thereon prepaid. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
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BY-LAWS page 5
Section 6. Quorum.
At any meeting of the directors fifty (50) percent shall constitute a
quorum for the transaction of business, but if less than said number is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice.
Section 7. Manner of Acting.
The act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the directors.
Section 8. Newly Created Directorships and Vacancies.
Newly created directorships resulting from an increase in the number of
directors and vacancies occurring in the board for any reason except the removal
of directors without cause may be filled by a vote of the majority of the
directors then in office, although less than a quorum exists. Vacancies
occurring by reason of the removal of directors without cause shall be filled by
vote of the stockholders. A director elected to fill a vacancy caused by
resignation, death or removal shall be elected to hold office for the unexpired
term of his predecessor.
Section 9. Removal of Directors.
Any or all of the directors may be removed for cause by vote of the
stockholders or by action of the board. Directors may be removed without cause
only by vote of the stockholders.
Section 10. Resignation.
A director may resign at any time by giving written notice to the board,
the president or the secretary of the corporation. Unless otherwise specified in
the notice, the resignation shall take effect upon receipt thereof by the board
or such officer, and the acceptance of the resignation shall not be necessary to
make it effective.
Section 11. Compensation.
No compensation shall be paid to directors, as such, for their services,
but by resolution of the board a fixed sum and expenses for actual attendance at
each regular or special meeting of the board may be authorized. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
Section 12. Executive and Other Committees.
The board, by resolution, may designate from among its members an executive
committee and other committees, each consisting of one (l) or more directors.
Each such committee shall serve at the pleasure of the board.
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BY-LAWS page 6
Article IV
OFFICERS
Section 1. Number.
The officers of the corporation shall be the president, a secretary and a
treasurer, each of whom shall be elected by the directors. Such other officers
and assistant officers as may be deemed necessary may be elected or appointed by
the directors.
Section 2. Election and Term of Office.
The officers of the corporation to be elected by the directors shall be
elected annually at the first meeting of the directors held after each annual
meeting of the stockholders. Each officer shall hold office until his successor
shall have been duly elected and shall have qualified or until his death or
until he shall resign or shall have been removed in the manner hereinafter
provided.
Section 3. Removal.
Any officer or agent elected or appointed by the directors may be removed
by the directors whenever in their judgement the best interest of the
corporation would be served thereby, but such removal shall be without prejudice
to contract rights, if any, of the person so removed.
Section 4. Vacancies.
A vacancy in any office because of death, resignation, removal,
disqualification or otherwise, may be filled by the directors for the unexpired
portion of the term.
Section 5. President.
The president shall be the principal executive officer of the corporation
and, subject to the control of the directors, shall in general supervise and
control all of the business and affairs of the corporation. He shall, when
present, preside at all meetings of the stockholders and of the directors. He
may sign, with the secretary or any other proper officer of the corporation
thereunto authorized by the directors, certificates for shares of the
corporation, any deeds, mortgages, bonds, contracts, or other instruments which
the directors have authorized to be executed, except in cases where the
directors or by these by-laws to some other officer or agent of the corporation,
or shall be required by law to be otherwise signed or executed; and in general
shall perform all duties incident to the office of president and such other
duties as may be prescribed by the directors from time to time.
Section 6. Chairman of the Board.
In the absence of the president or in the event of his death, inability or
refusal to act, the chairman of the board of directors shall perform the duties
of the president, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the president. The chairman of the board of
directors shall perform such other duties as from time to time may be assigned
to him by the directors.
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BY-LAWS page 7
Section 7. Secretary.
The secretary shall keep the minutes of the stockholders' and of the
directors' meetings in one or more books provided for that purpose, see that all
notices are duly given in accordance with the provisions of these by-laws or as
required, be custodian of the corporate records and of the seal of the
corporation and keep a register of the post office address of each stockholder
which shall be furnished to the secretary by such stockholder, have general
charge of the stock transfer books of the corporation and in general perform all
the duties incident to the office of secretary and such other duties as from
time to time may be assigned to him by the president or by the directors.
Section 8. Treasurer.
If required by the directors, the treasurer shall give a bond for the
faithful discharge of his duties in such sum and with such surety or sureties as
the directors shall determine. He shall have charge and custody of and be
responsible for all funds and securities of the corporation; receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these by-laws and in general perform all of the duties incident to the
office of treasurer and such other duties as from time to time may be assigned
to him by the president or by the directors.
Section 9. Salaries.
The salaries of the officers shall be fixed from time to time by the
directors and no officer shall be prevented from receiving such salary by reason
of fact that he is also a director of the corporation.
Article V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts.
The directors may authorize any officer or officers, agent or agents to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation, and such authority may be general or confined to
specific instances.
Section 2. Loans.
No loans shall be contracted on behalf of the corporation and no evidences
of indebtedness shall be issued in its name unless authorized by a resolution of
the directors. Such authority may be general or confined to specific instances.
Section 3. Checks, Drafts, etc.
All checks, drafts or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the corporation, shall be signed
by such officer or officers,
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BY-LAWS page 8
agent or agents of the corporation and in such manner as shall from time to time
be determined by resolution of the directors.
Section 4. Deposits.
All funds of the corporation not otherwise employed shall be deposited from
time to time to the credit of the corporation in such banks, trust companies or
other depositories as the directors may select.
Article VI
FISCAL YEAR
The fiscal year of the corporation shall begin on the lst day of January in
each year, or on such other day as the Board of Directors shall fix.
Article VII
DIVIDENDS
The directors may from time to time declare, and the corporation may pay,
dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law.
Article VIII
SEAL
The directors may provide a corporate seal which shall have inscribed
thereon the name of the corporation, the state of incorporation, year of
incorporation and the words, "Corporate Seal".
Article IX
WAIVER OF NOTICE
Unless otherwise provided by law, whenever any notice is required to be
given to any stockholder or director of the corporation under the provisions of
these by-laws or under the provisions of the articles of incorporation, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice.
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OnLine Production Services Inc.
BY-LAWS page 9
Article X
AMENDMENTS
These by-laws may be altered, amended or repealed and new by-laws may be
adopted in the same manner as their adoption, by the Board of Directors if so
adopted; by a vote of the stockholders representing a majority of all the shares
issued and outstanding, if so adopted or adopted by the Board of Directors; or,
in any case, at any annual stockholders' meeting or at any special stockholders'
meeting when the proposed amendment has been set out in the notice of such
meeting.
CERTIFICATION
The Secretary of the Corporation hereby certifies that the foregoing is a
true and correct copy of the By-Laws of the Corporation named in the title
thereto and that such By-Laws were duly adopted by the Board of Directors of
said Corporation on the date set forth below.
Executed, and Corporate Seal affixed, this day of March 4, 1999.
--------------------------------------------
Terry Roycroft, Secretary
97
Exhibit 10.1
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made August 31, 1998
BETWEEN:
COLUMBUS ENTERTAINMENT INC., a company having an office at 1223 - 22nd Street,
Santa Monica, California 90404, U.S.A.
("Vendor")
AND:
ON-LINE FILM SERVICES INC., a company having an office at 208 - 2323 Boundary
Rd, Vancouver, British Columbia, Canada V5M 4V8
("Purchaser")
WHEREAS Vendor has developed and is the owner of all rights, title and interest
in the Work as hereinafter defined;
AND WHEREAS Purchaser desires to purchase the ownership interest in the Work, in
order to use it in its business operations in Alberta and generate profits from
such exploitation in the field of production of commercials.
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 "B".
"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.
"Columbus Suite Services" has the meaning given to that term in the Management
Agreement.
"Derivative" means a subsequent version of the Program, or software otherwise
derived in any manner in whole or in part from the Program, and any Program
improvements, enhancements, modifications or updates thereto.
"Dollar" and "$" means dollars in United States currency.
"End Users" means production companies, their producers and executive, and all
production personnel and executives in the film and television industry who
subscribe to Columbus Suite Services, as defined in the Management Agreement.
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"External Valuation" means the independent Program valuation prepared by Evans &
Evans Inc. of Vancouver, British Columbia, Canada.
"Field of Use" means the particular applications and fields of use of the
Program with respect to which Purchaser is purchasing the Work, which is all
aspects of the production of commercials.
"Management Agreement" means the agreement entered into between Manager and
Purchaser. appointing Manager as the exclusive supplier of marketing and other
services to Purchaser with respect to the Columbus Suite Services provided to
End Users.
"Manager" means the corporation, all of the issued and outstanding shares of
which are beneficially owned by Vendor, which has entered into the Management
Agreement with Purchaser.
"Ownership Territory" means the territory throughout which Purchaser is
acquiring ownership of the Purchased Work, which is the whole of the world.
"Person" means any person, corporation or partnership.
"Program" means the computer application software described in Schedule "A".
"Program Design Specifications" means those Program specifications and the
technical information which enable any person reasonably skilled in software
design, analysis or programming to use, operate, maintain, support and further
develop the Program.
"Promissory Note" means the non-contingent promissory note issued by Purchaser
(as maker) to Vendor (or holder) as part consideration of the Purchase Price, in
the form set forth in Schedule "C".
"Purchase Price" means the price set forth in Section 4 which Purchaser shall
pay to Vendor 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, solely for the Field of Use, throughout the Ownership Territory.
"Service Territory" means the area throughout which Manager has been appointed
the exclusive supplier of services to Purchaser, as defined and pursuant to the
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 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 revenue; and
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(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;
(b) the Program has been acquired or developed by 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
Purchaser; and
(f) to its knowledge 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 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 $3,950,000.
4. PAYMENT OF PURCHASE PRICE
4.1 Purchaser agrees to make payment of the Purchase Price to Vendor as follows:
(a) payment to the Vendor of the cash portion of the Purchase Price, namely
$200,000.00 by certified check, in two installments;
(i) $100,000.00 on September 30, 1998, and
(ii) $100,000.00 on March 30, 1999,
(b) the issuance and delivery to the Vendor on September 30, 1998 of 250,000
shares of the common stock of the Purchaser, which shall be issued as fully paid
and non-assessable stock at $ 1.00 per share for a total of $250,000, such stock
being free and clear of all encumbrances of every nature and kind whatsoever;
and
(c) with respect to the balance of the Purchase Price, delivery to Vendor of the
Promissory Note on September 30, 1998, which shall provide for the payment of
the principal amount of $3,500,000, payable in accordance with its terms.
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5. VENDORS USE OF FUNDS
5.1 Vendor shall not be required to apply the funds received by it from
Purchaser towards any specific use provided that Vendor will expend reasonable
funds as necessary to support, maintain and enhance the Purchased Work to ensure
that it is, and remains throughout the term of the Management Agreement,
compatible with the software programs commercialized and exploited by Vendor in
the feature film industry.
6. TAXES
6.1 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, refunds and tax credits with respect to such payments.
7. VALUATION REPRESENTATIONS
7.1 Purchaser acknowledges that Vendor has assisted in providing information for
the External Valuation and that Purchaser has reviewed the External Valuation,
which appraises the value of the Work as it applies to the Field of Use in the
order of approximately $7,000,000, and on which External Valuation Purchaser has
relied in part in agreeing to enter into this Agreement.
7.2 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 use in 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.
8. PROGRAM SUPPORT
8.1 Throughout the term of the Management Agreement, Vendor shall forward to
Purchaser copies of the updated Source Code and Program Design Specifications
from time to time, as Derivatives are produced as a result of Vendor's
maintenance, support and enhancement of
the Work.
9. PRE-CLOSING CONDITIONS
9.1 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;
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(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
other 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 reasonably satisfied with respect thereto.
9.2 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 reasonably satisfied with respect
to the External Valuation, the viability of the Vendor's operations and business
plan as related to the Purchased Work, and the compatibility of the Program with
Purchaser's "Casting Network" business.
9.3 It is a condition precedent to Closing that the Facilities Management
Agreement, and the Guarantee relating thereto, shall have been executed and
delivered by the parties thereto.
10. TRANSFER OF TITLE AND POSSESSION
10.1 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.
10.2 The Purchaser hereby directs the Vendor to and the Vendor hereby agrees to
make delivery of the Source Code and Program Design Specifications, and
possession of the Purchased Work, to the Purchaser in Alberta, Canada as
follows:
Suite 184,
3359 27th St., N. E.
Calgary, Alberta,
T1Y 5E4
11. INTELLECTUAL PROPERTY RIGHTS
11.1 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.
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11.2 In the event that Derivatives are created or developed after the Closing
Date during the term of the 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 also belong to Purchaser.
11.3 Vendor shall not after the Closing Date use, develop or distribute, or
permit any Affiliate to so use, develop or distribute in the Ownership
Territory, the Purchased Work or any software which incorporates the Program,
with respect to the Field of Use, except pursuant to the terms of the Management
Agreement or any other agreement to which Purchaser is a party.
11.4 Purchaser acknowledges that it is acquiring only the Purchased Work, and
that Vendor and its licensees shall own and have the right to exploit the Work
outside the Field of Use without infringing Purchaser's rights hereunder.
12. REPRESENTATIONS AND WARRANTIES
12.1 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 section 1(c), or in the Derivatives
delivered to 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) 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 by Vendor
at no additional cost to Purchaser;
(l) Schedule"A" sets out a description of the Program, complete in all material
respects;
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(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;
(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 on or before the Closing Date, the written
assignment of copyright and waiver of all moral rights which any other person
may have had in respect of the Purchased Work, or for any assignments and
waivers which the Vendor has not received by the Closing Date, the Vendor agrees
to obtain such assignments and waivers within 30 days of the Closing Date.
12.2 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.
12.3 Purchaser represents and warrants that:
(a) it has all requisite capacity, authority, right and power to enter into this
Agreement;
(b) it is not insolvent, bankrupt or in receivership and there are no bankruptcy
proceedings threatened, pending or instituted against it;
(c) to the best of his knowledge, there are no judgements outstanding or
litigation pending, actual or threatened, against it; and
(d) 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.
12.4 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.
13. INDEMNITY
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13.1 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.
13.2 Purchaser shall indemnify and reimburse Vendor for any payments Vendor is
required to make on account of any sales, ad valorem or excise tax which may be
determined to be payable pursuant to Section 6.1, in circumstances where
Purchaser fails to remit such payments when they are determined to be due and
payable.
14. POST CLOSING OBLIGATIONS
14.1 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 use or incorporate the Program or any of the Purchased Work,
except as permitted by any other agreement between the parties hereto or between
Purchaser and Manager.
14.2 The Vendor shall not market in any manner, develop or sell any services or
products which are competitive with the Purchased Work in the Ownership
Territory, for the Field of Use, during the term of the Management Agreement, as
may be extended pursuant to its terms.
14.3 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.
15. ASSIGNMENT
15.1 Vendor may not assign this Agreement or any of its interests herein without
the written consent of Purchaser.
16. NOTICE
16.1 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 sent by courier, facsimile transmission or e-mail
to the addresses of the parties as set forth herein. The parties hereto may
change their respective address for notice, given in the manner aforesaid. Any
notice given by facsimile or e-mail 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.
17. SUCCESSORS AND ASSIGNS
17.1 This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective legal representatives, successors and
permitted assigns.
18. SEVERABILITY
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18.1 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 void,
unenforceable, illegal or invalid, then it shall be severed and shall not affect
the validity of the remainder of this Agreement.
19. TIME OF THE ESSENCE
19.1 Time shall be of the essence in this Agreement.
20. WAIVER
20.1 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.
21. ENTIRE AGREEMENT
21.1 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 Purchased 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.
22. EXECUTION
22.1 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: On-Line Film Services Inc.
By:
Authorised Signatory
Date: August 31, 1998
Vendor: Columbus Entertainment Inc.
By:
Authorised Signatory
Date: August 31, 1998
SCHEDULES
A. Program Description
B. Bill of Sale
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C. Promissory Note
SCHEDULE "A"
Columbus Commercial Suite
Columbus Commercial Suite Software Description
Its a relational database application utilizing Filemaker Pro 4.0 as its engine
which is able to run locally or on a LAN. Its made up of a number of Filemaker
Pro database documents that function together as a separate modular application
and generate reports.,
It is software specifically designed to mirror the way production office people
work today and it utilizes some software owned and under license from Columbus
Systems Inc.
The software delivers a mechanism for creating purchase orders, call sheets,
production reports, time cards, start close paperwork, deal memos and staff and
crew lists, travel authorizations, as well as project tracking.
The Columbus suite consists of software modules specifically tailored for use by
companies and individuals producing television commercials.
The VFX module is designed specifically for Visual Effects Producers. Tracks
shots, elements, storyboards, vendors, costs, and more. The perfect solution for
generating Call Sheets and Production reports and either printing them hard copy
for signature, or saving as an Acrobat PDF file to e-mail back to the office or
studio.
It enables departmental co-ordinators to produce their cost reports for use by
the production accountant more efficiently.
DATE August 31, 1998
107
Exhibit 10.2
ASSET PURCHASE AMENDING AGREEMENT
THIS ASSET PURCHASE AMENDING AGREEMENT (this "Agreement") is made as of August
31, 1998.
BETWEEN:
COLUMBUS ENTERTAINMENT, INC., a company having an office at 1223 - 22nd Street,
Santa Monica, California 90404, U.S.A. ("Vendor")
AND:
ON-LINE FILM SERVICES INC., a company having an office at 208 - 2323 Boundary
Rd, Vancouver, British Columbia, Canada V5M 4V8 ("Purchaser")
WHEREAS pursuant to an agreement made on August 31, 1998 (the "Asset Purchase
Agreement")Vendor sold to Purchaser its ownership interest in the Purchased Work
as therein defined;
AND WHEREAS Purchaser and Vendor desire to clarify and amend certain provisions
of the Asset Purchase Agreement, and thereby confirm their mutual understanding
of its scope and intent.
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual
representations and covenants herein, the parties agree to amend the Asset
Purchase Agreement as follows. All section numbers used in this Agreement
reference the corresponding section numbers in the Asset Purchase Agreement.
1. DEFINITIONS
All terms shall have the meanings as defined in the Asset Purchase Agreement,
except to the extent otherwise expressly defined in this Agreement.
"Columbus Suite Services" has the meaning given to the term "Columbus Commercial
Suite Services" in the Management Agreement.
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"Dollar" and "$" and all references to any currency shall mean dollars payable
in United States currency.
"External Valuation" means the independent valuation of the Purchased Work,
prepared by Evans & Evans of Vancouver, British Columbia, Canada.
"Gross Operating Revenues" has the meaning given to that term in the Management
Agreement.
"Guarantee" means the Guarantee to be given by Vendor in favor of Purchaser in
respect of the obligations of Manager under the Management Agreement.
"Manager" means Cinesource Inc., a California corporation which shall enter into
the Management Agreement with Purchaser.
"Purchased Work" means the Vendor's entire beneficial and legal interest in the
Work, solely for the Field of Use, throughout the Ownership Territory, and
referred to in the Management Agreement as the "Columbus Commercial Suite".
"Purchaser" means On-Line Film Services Inc, a British Columbia corporation.
"Service Territory" means the area throughout which Manager will be appointed
the exclusive supplier of certain services to Purchaser, as defined and pursuant
to the Management Agreement.
"Vendor" means Columbus Entertainment Inc., a California corporation.
WARRANTY OF OWNERSHIP
2.1(b) Vendor represents and warrants that the Program has been acquired by
Vendor pursuant and subject to Vendor's agreement with Columbus Systems, Inc.
2.1(e) Purchaser understands, acknowledges and agrees that third party software
is required to be licensed in order to operate the Program.
2.1(f) To Vendor's knowledge 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 within 180 days of the date hereof,
Vendor will correct all such programming errors or defects at no cost to
Purchaser.
PAYMENT OF PURCHASE PRICE
4.1 Purchaser agrees to make payment of the Purchase Price to Vendor as follows:
(a) payment to the Vendor of the cash portion of the Purchase Price, namely
$200,000.00 in two installments;
(i) $100,000.00 on February, 26, 1999, by wire transfer and
(ii) $100,000.00 on March 30, 1999,
(b) the issuance and delivery to the Vendor on March 30, 1999 of 250,000
shares of the common stock of the Purchaser, which shall be issued as fully paid
and non-assessable stock., such stock being free and clear of all encumbrances
of every nature and kind whatsoever; and
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with respect to the balance of the Purchase Price, delivery to Vendor of the
Promissory Note on February, 19, 1999, which shall provide for the payment of
the principal amount of $3,500,000.00, together with interest calculated at 3%
per annum, payable in accordance with its terms.
VENDOR'S USE OF FUNDS
5.1 Vendor shall not be required to apply the funds received by it from
Purchaser towards any specific use; provided, however, so long as Purchaser is
not in default under the Promissory Note, Vendor will expend reasonable funds,
not to exceed the amounts paid to Vendor hereunder, as Vendor deems necessary,
to support, maintain and enhance the Purchased Work during the term of the
Management Agreement.
TAXES
6.1 All amounts of monies payable to Vendor hereunder are exclusive of all
Canadian taxes.
7. VALUATION REPRESENTATIONS
Vendor has assisted in providing information regarding the External Valuation,
which sets forth an appraisal value of the Purchased Work as it applies to the
Field of Use of at least $ 5,000,000.00.
PRE-CLOSING CONDITIONS
Purchaser hereby confirms that the conditions of section 9.1 have either been
satisfied or waived.
Purchaser hereby confirms that the conditions of section 9.2 have either been
satisfied or waived.
Purchaser and Vendor hereby confirm that the conditions of section 9.3 have
either been satisfied or waived.
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10. TRANSFER OF TITLE
Vendor acknowledges and confirms that on August 31,1998, Vendor assigned and
conveyed to Purchaser, free and clear of all liens, charges and encumbrances,
and Purchaser acquired and became the owner of all rights, title and interest
existing in and to, the Purchased Work. The Bill of Sale shall be delivered by
the Vendor to the Purchaser on a mutually acceptable date.
11. INTELLECTUAL PROPERTY RIGHTS
Vendor shall not knowingly or intentionally after the Closing Date use, develop
or distribute, or permit any Affiliate to so use, develop or distribute in the
Ownership Territory, the Purchased Work or any software which incorporates the
Program, which has been developed and designed for the Field of Use, except
pursuant to the terms of the Management Agreement or any other agreement to
which Purchaser is a party or with regard to any activities by Columbus Systems,
Inc. (or its successors or assigns) regarding Columbus DC (a/k/a Columbus Suite)
including any Derivatives of such software in any application outside the Field
of Use.
Purchaser acknowledges that it is acquiring only the Purchased Work, and that
Vendor and its Affiliates and its licensees shall own and have the right to
exploit, license and sell the Work outside the Field of Use without infringing
Purchaser's rights hereunder.
REPRESENTATIONS AND WARRANTIES
12.1(h)Vendor represents and warrants that it has no information or reason to
believe that copyright will not subsist in the Program and in the items
described in section 1.1 "Work: definition par. (c), or in the Derivatives
delivered to the Purchaser following the Closing, and the Vendor will do nothing
to place such rights in the public domain.
12.3(e)Purchaser represents and warrants that it has not and will not take any
action which would encumber, diminish, dilute or otherwise negatively impact any
of the rights and interests granted to Vendor hereunder and under the Promissory
Note.
12.3(f) Purchaser represents and warrants that all corporate or other acts and
proceedings required for the proper authorization, issuance, and delivery of the
shares of stock and the Promissory Note, being issued to Vendor hereunder have
been duly, properly, lawfully and validly taken or will have been taken prior to
the issuance of such shares of stock.
13. INDEMNITY
All the provisions of section 13 are hereby deleted and revoked.
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POST CLOSING OBLIGATIONS
The Vendor shall not market in any manner, develop or sell any services or
products which are competitive with the Purchased Work in the Ownership
Territory, for the Field of Use, during the term of the Management Agreement, or
any extended term pursuant to its terms; provided, however, nothing contained
herein is intended nor shall be construed as limiting Columbus Systems, Inc. (or
its successors or assigns) from engaging in any type of activity, including the
sale and/or license, regarding Columbus DC (a/k/a Columbus Suite) and any
Derivatives of such software outside the Field of Use.
23. REMEDIES OF VENDOR
If prior to the payment of the full Purchase Price to Vendor in accordance with
this Agreement and the Asset Purchase Agreement;
Purchaser 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, undergoes a winding-up,
dissolution or is liquidated,( except for internal corporate reorganizations,
mergers or shareholder reorganizations), and thereby fails to make payment of
any portion of the Purchase Price when due;
No Gross Operating Revenues are received by Purchaser during any continuous
period of 18 months; or
Purchaser fails to allow Vendor or its auditor to review annually, on a
confidential basis and reasonable notice, during normal business hours, the
books and records of Purchaser relating solely to its Columbus Suite Services,
then Vendor shall be deemed to have received a perpetual royalty free, exclusive
license to use the Purchased Work in any way that it sees fit, provided that
such event was not due to the fault or breach of Vendor.
23.2 If, Purchaser fails to make payment of any portion of the Purchase
Price when due in accordance with this Agreement and the Asset Purchase
Agreement, and has not remedied such default within 30 days of receipt of
written notice of default from Vendor, then subject to the Management Agreement
and the Guarantee, Vendor shall be deemed to have received a perpetual royalty
free, exclusive license to use the Purchased Work in any manner that it sees
fit, provided that such event was not due to the fault or breach of Vendor. .
24. ENTIRE AGREEMENT
24.1 This Agreement, the Asset Purchase Agreement, and the documents referenced
therein, set forth all of the representations, promises, agreements and
understandings among the parties hereto with respect to the purchase and sale of
the Purchased 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 therein.
EXECUTION
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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.
INTERPRETATION
If there is any conflict or inconsistency between the provisions of this
Agreement and those of the Asset Purchase Agreement, then the provisions of this
Agreement shall prevail.
All provisions in the Asset Purchase Agreement shall remain in full force and
effect except as expressly amended by this Agreement, or as impliedly amended to
the degree required to give effect to the provisions of this Agreement.
Purchaser: On-Line Film Services Inc.
- ---------------------------
By: Authorized Signatory
Vendor: Columbus Entertainment, Inc.
- ---------------------
By:
Authorized Signatory
Purchase Amending Final
113
Exhibit 10.3
PROMISSORY NOTE
(NON-CONTINGENT/NON-NEGOTIABLE)
DATE: US$3,500,000.00
MATURITY DATE: August 31, 2008
FOR VALUE RECEIVED the undersigned (the "Maker") acknowledges itself indebted to
and promises to pay to Columbus Entertainment, Inc. (the "Holder") on the dates
specified below at Los Angeles, California, USA (or at such other places as the
Holder may from time to time designate in writing to the Maker) the principal
sum of three million and five hundred thousand US Dollars (US$3,500,000.00) (the
"Principal Sum"), together with interest thereon as set forth herein.
Unless paid in full earlier as set forth below, the then outstanding Principal
Sum shall be due and payable in lawful money of the United States of America by
the Maker to the Holder on the earlier of the Maturity Date and the termination
of the Management Agreement between the Maker and Cinesource Inc. dated the 19th
day of February, 1999.
This Note shall bear interest from and after the 1st day of January, 1999 at the
rate of three percent ( 3 %) per annum, which interest shall be calculated
yearly on the 31st day of each December, not in advance, on the outstanding
balance of the Principal Sum, both before and after demand, default, maturity
and judgement, with interest on overdue principal at the same rate, until the
date of payment in full, and such yearly interest shall be payable within 30
days of the end of each calendar year.
In the event that the Maker receives for any calendar year during the
continuance of this security Incremental Revenues (as defined in said Management
Agreement), then 14% of the Incremental Revenues shall be paid by the Maker to
the Holder within 30 days of the end of such calendar year (or if received in
the last year of the term of the Management Agreement, then to be paid within 30
days of its date of expiration or termination) and shall be applied on account
of the Principal Sum then outstanding.
All payments made prior to the Maturity Date shall be applied as follows;
firstly on account of interest outstanding under this Promissory Note and
secondly as a prepayment towards the Principal Sum payable on the Maturity Date.
In addition, the Maker shall have the right to prepay at any time and from time
to time all or any part of the Principal Sum then outstanding, and any interest
thereon, without notice, bonus or penalty.
In the event that the Maker defaults in the payment of any sum due hereunder,
and fails to correct the default or otherwise satisfy such payment as permitted
by law, within ninety (90) days of receiving written notice from the Holder, the
outstanding balance of the Principal Sum together with accrued but unpaid
interest may, at the Holder's option, be accelerated and immediately become due
and payable in full.
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The provisions of this Promissory Note shall inure to the benefit of the Holder
(who may not transfer, assign, pledge or otherwise encumber this Promissory Note
or the payment obligation without the express written consent of the Maker), and
shall be binding upon the Maker and its successors and assigns. The Maker hereby
waives presentment, protest, demand, notice of protest and notice of dishonour
of this Promissory Note and expressly agrees that this Promissory Note and any
payment due hereunder may be extended from time to time by the Holder without in
any way affecting the liability of the Maker.
This Promissory Note shall be governed by and construed in accordance with the
laws of British Columbia and the laws of Canada applicable thereto.
Executed at Vancouver, British Columbia, Canada, on the 19th day of February,
1999.
ON-LINE FILM SERVICES INC.
by ____________________________________
(Name and Title)
Promissory Note Final
115
Exhibit 10.4
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this Agreement) is made as of the 19th day of
February, 1999
BETWEEN:
On-Line Film Services Inc., a corporation formed under the laws of British
Columbia, having an office at 208 - 2323 Boundary Road, Vancouver, British
Columbia, Canada,V5M 4V8
("Owner")
AND
CINESOURCE INC., a corporation formed under the laws of California having an
office at 1223 - 22nd Street, Santa Monica, California, 90404, U.S.A.
("Manager")
WHEREAS, pursuant to an agreement (the "Asset Purchase Agreement") made August
31, 1998 between Owner and Columbus Entertainment, Inc. ("Columbus"), Owner
purchased all rights, title and interest in and to a computer software program
developed by or for Columbus and known as the "Columbus Commercial Suite" and
Derivatives related thereto, for a Field of Use consisting of the production of
commercials, in the Ownership Territory, as those terms are defined in the Asset
Purchase Agreement; and
AND WHEREAS, Owner desires to retain Manager to provide certain marketing and
management services to assist Owner in providing services to production
companies, their producers, executives and all production personnel and others
in the Field of Use in the Service Territory, as those terms are defined herein.
NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which is hereby acknowledged, and 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 Exclusivity Payment" means the annual amount payable by Manager to Owner
for the exclusive right to provide the Management Services, which amount shall
be calculated as set forth in Schedule "B" attached hereto.
"Annual Gross Operating Revenues" means the amount of Gross Operating Revenues
actually received during a particular calendar year (or part year on
termination) during the Term.
"Annual Incremental Revenues" means that portion of the Annual Gross Operating
Revenues which exceeds the corresponding Annual Minimum.
"Annual Minimum" means the targeted minimum amount of Annual Gross Operating
Revenues to be achieved in a particular calendar year during the Term,
calculated as set forth in Schedule "B" attached hereto.
"Asset Purchase Agreement" means that certain agreement made August 31, 1998, by
and between Owner and Columbus Entertainment, Inc., pursuant to which Owner has
purchased all rights, title and interest in and to the Columbus Commercial Suite
for the Field of Use in the Ownership Territory, as such terms are
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defined in the Asset Purchase Agreement, on the terms, conditions and provisions
set forth in the Asset Purchase Agreement.
"Business Marketing Plan" means the business marketing plan which shall be
prepared jointly each year by Manager and Owner and which shall serve as Owner's
marketing plan regarding the Management Services.
"Columbus" means Columbus Entertainment, Inc., the original owner and developer
of the Columbus Commercial Suite, and which beneficially owns all of the issued
and outstanding shares of the Manager.
"Columbus Commercial Suite" means the computer software program described in
Schedule "A" attached hereto, and which was developed by or for Columbus, and
which will be used to provide Columbus Commercial Suite Services to End Users
for compiling data in connection with the management of the production of
commercials in the entertainment industry, which software is the subject matter
of the Asset Purchase Agreement, and which Owner intends on including as part of
the Production Network for fees consistent with the Business Marketing Plan, and
which should allow Owner to collect the Annual Minimum.
"Columbus Commercial Suite Services" means the services to be provided by Owner
to End Users through the Production Network utilising the Columbus Commercial
Suit, with respect to the production of commercials.
"Cumulative Incremental Revenues" means the total amount of all Annual
Incremental Revenues calculated from the effective date of this Agreement until
the expiration or earlier termination of this Agreement.
"Dollar" and "$" means dollars in United States currency.
"End Users" means any entity, person, and/or production company who has
contracted for the Columbus Commercial Suite Services in the Service Territory.
"Gross Operating Revenues" means the total revenues actually received by Owner
resulting from the provision of the Columbus Commercial Suite Services in the
Service Territory during the Term.
"Management Fee" means the fee to be paid by Owner to Manager in each calendar
year of the Term, which fee shall equal one percent (1%) of the Annual Gross
Operating Revenues for such year, until the Cumulative Incremental Revenues
equal the Term Minimum at which time the Management Fee shall become fifteen
percent (15%) of the Annual Gross Operating Revenues for each year thereafter.
"Management Services" means the marketing and management services to be provided
by Manager to Owner during the Term, as further described in Schedule "C"
attached hereto.
"Owner's Gross Operating Revenues" means the Annual Gross Operating Revenues in
a calendar year less the Management Fee for such year.
"Production Network" means the computer and telecommunications facilities and
service bureau operated by Owner, through which Owner will provide "online
services" including but not limited to the Columbus Commercial Suite Services.
"Service Territory" means the whole world excluding Chile.
"Term" means ten (10) years commencing on August 31, 1998 and continuing until
August 31, 2008.
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"Term Exclusivity Payment" means the amount calculated as set out forth in
Schedule "B" attached hereto, which is payable by Manager to Owner pursuant to
Section 16 if the Cumulative Incremental Revenues do not reach the Term Minimum.
"Term Minimum" means the amount of $25,000,000.
2. APPOINTMENT OF MANAGER
2.1 Upon and subject to the terms and conditions of this Agreement, Owner hereby
retains Manager on an exclusive basis during the Term of this Agreement to
provide the Management Services to Owner within the Service Territory, and
Manager hereby accepts such appointment and agrees to provide the Management
Services to Owner.
3. MANAGEMENT SERVICES
3.1 Manager shall during the Term, provide the Management Services to Owner
consistent with the objectives and activities contemplated by the Business
Marketing Plan, and as jointly agreed upon by the parties from time to time.
3.2 Manager shall to use all reasonable efforts to comply with all applicable
laws in the provision of Management Services. Manager represents, warrants and
covenants with Owner that Manager has and will continue to have, sufficient
technical, financial and other resources to fulfil Manager's obligations
hereunder.
4. SUBCONTRACTOR
4.1 Manager shall have the right to retain an affiliate as a subcontractor or
supplier, to assist in providing the Management Services, provided that any such
subcontract or supply agreement shall not be in conflict or inconsistent with
this Agreement, and shall be subject to the prior consent of Owner not to be
unreasonably withheld.
5. GROSS OPERATING REVENUES
5.1 In support of Owner's provision of Columbus Commercial Suite Services to End
Users, Manager shall provide the Management Services with the objective, and
using all reasonable efforts, to maximise Gross Operating Revenues, in order
that the Annual Gross Operating Revenues equal or exceed the corresponding
Annual Minimum in each calendar year, and the Cumulative Incremental Revenues
during the Term exceed the Term Minimum.
All Gross Operating Revenues shall be collected by and shall accrue to the
account of Owner.
Owner represents and warrants that it will use its reasonable best efforts to
exploit the Columbus Commercial Suite and provide Columbus Commercial Suite
Services to maximise Gross Operating Revenues in order that the Annual Gross
Operating Revenues equal or exceed the corresponding Annual Minimum in each
calendar year, and the Cumulative Incremental Revenues during the Term exceed
the Term Minimum
Owner shall during the Term offer the Columbus Commercial Suite Services to End
Users only as a separate product with its own pricing, even when it is provided
through the Production Network, provided that Owner shall have the right to
offer the Columbus Commercial Suite Services as part of a group product offering
with one price if Owner can give assurances to Manager that the portion of the
group price which Owner allocates to the Columbus Commercial Suite Services is
reasonable.
6. MANAGEMENT FEES
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6.1 The consideration for all Management Services provided by Manager to Owner
for each calendar year during the Term shall be the Management Fee, which Owner
shall pay to Manager within 30 days of the end of such calendar year.
6.2 Manager shall not charge Owner for any expenses or costs incurred by Manager
in providing the Management Services. Such expenses and costs shall be for
Manager's account. Owner shall have no liability to Manager for any other fees
or charges, under this Agreement.
7. ANNUAL EXCLUSIVITY PAYMENT
7.1 If at the end of any calendar year during the Term (or part year upon expiry
or earlier termination), the Annual Gross Operating Revenues are less than the
applicable Annual Minimum for such year or part year, then there shall become
due and owing, and Manager shall be liable for, an Annual Exclusivity Payment to
Owner for the exclusive rights that it had received to provide the Management
Services in such year, calculated as set out in Schedule "B" hereto.
7.2 Manager shall pay each Annual Exclusivity Payment within 30 days of the end
of the calendar year, or part year, to which it applies.
8. GUARANTEE
8.1 Manager shall arrange for Columbus to guarantee to Owner the payment by
Manager of all payments required to be made pursuant to this Agreement, by
Columbus entering on the effective date of this Agreement into a guarantee in
form and substance satisfactory to Owner.
9. NON-COMPETITION
9.1 Manager shall not, and shall obtain the agreement of its directors and
shareholders that they shall not, provide, market in any manner, develop or sell
any products or services which are competitive with the Columbus Commercial
Suite or Columbus Commercial Suite Services, for End Users in the Field of Use.
10. REPORTING
10.1 Manager shall furnish to Owner quarterly reports containing a statement in
reasonable detail setting forth a summary of its activities.
10.2 Periodic meetings shall be arranged between Manager and Owner, on a
mutually acceptable schedule, to review the progress of the Management Services.
11. OBLIGATION TO PROTECT COPYRIGHT AND TRADEMARKS
11.1 Manager hereby acknowledges that Owner owns the Columbus Commercial Suite
in the Field of Use including copyrights and all other intellectual property
rights associated therewith, and that Manager, its directors, shareholders and
affiliates are not acquiring any proprietary rights, title, license or interest
in the Columbus Commercial Suite, 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 Columbus Commercial Suite.
11.2 Owner shall have the right to review all marketing and advertising plans
and strategies to be executed by Manager with respect to Columbus Commercial
Suite Services, and to require such changes as Owner may reasonably request so
as to protect the interests of Owner.
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11.3 Owner shall have the right to take any action it deems necessary to protect
its intellectual property rights in the Columbus Commercial Suite, 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 Columbus Commercial Suite, Manager
may, at its own expense, take such action only after having obtained the written
consent of Owner, which consent shall not be unreasonably withheld.
USE OF INDEPENDENT CONTRACTORS
12.1 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
Management Services, including computer programmers, technicians, systems
consultants, marketing consultants and business consultants, provided that it
first notifies and receives the approval of Owner, which shall not be
unreasonably withheld.
13. BUSINESS PLAN
13.1 Manager agrees to prepare with Owner an annual Business Marketing Plan by
the 28th day of February in each year, which shall be followed by Manager in
providing the Management Services. Owner, acting reasonably, may suggest
revisions to the Business Marketing Plan, and Manager will use its reasonable
best efforts to accommodate such suggested revisions.
14. TERM
14.1 This Agreement shall become effective upon its execution by the parties
hereto and, unless terminated earlier in accordance with its provisions, shall
remain in effect for an initial Term until August 31,2008.
14.2 Manager shall have the right to renew this Agreement for an additional 10
years at a Management Fee of 15%, and 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, provided that;
(a) Manager is not in breach of this Agreement at either the date of notice of
renewal, or the date of renewal, and
(b) as of the date of renewal, the Cumulative Incremental Revenues equal or
exceed the Term Minimum.
15. EARLY TERMINATION
15.1 Owner may terminate this Agreement upon 30 days' prior written notice to
Manager in the event that:
(a) Manager or Columbus 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;
(b) Manager or Columbus takes steps to wind-up, dissolve or liquidate, except
for internal corporate reorganisations, mergers or shareholder reorganisations,
or otherwise ceases to function as a going concern or is prevented from
performing its duties hereunder for a period greater than 30 days;
a trustee, receiver, receiver and manager or other custodian (interim or
permanent) of any of the assets of Manager or Columbus is appointed by private
instrument or by court order or if any execution,
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sequestration, or other analogous process of any court becomes enforceable
against Manager or Columbus or the assets of either or if distress or process is
made against the assets or any part thereof of Manager or Columbus, unless
within 30 days of such occurrence such process has been discharged;
(d) Manager or Columbus ceases to carry on the business carried on by it
pursuant to this Agreement for a period of 120 days;
(e) Manager ceases to provide the Management Services, or is otherwise in
material breach of this Agreement, 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 by the exercise of
reasonable diligence, 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 such failure to comply.
15.2 Failure to attain any Annual Minimum shall not be sufficient reason to
result in the termination of this Agreement or the loss of the exclusive
Management Services rights of Manager.
16. TERM EXCLUSIVITY PAYMENT
On the expiry of the initial Term, or on any earlier termination of this
Agreement for any cause or reason whatsoever, if the Cumulative Incremental
Revenues are less than the Term Minimum, then there shall become due and owing,
and Manager shall be liable for, the Term Exclusivity Payment, for the exclusive
rights that it had received to provide the Management Services, calculated as
set out in Schedule "B" hereto, and together with all outstanding Exclusivity
Payments, if any, they shall be paid in full by Manager to Owner within 30 days
of such date of expiration or termination.
17. APPOINTMENT OF OTHER MANAGERS
17.1 Owner shall not have the right to appoint additional independent managers
to provide the same Management Services in the Service Territory in respect of
the Columbus Commercial Suite Services for the Field of Use during the Term,
without the prior written consent of Manager.
18. RIGHT TO REVIEW
18.1 Owner may at any time, at its own expense, review the performance by
Manager of the Management Services, and provide recommendations with respect
thereto.
DISCLAIMER
19.1 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 COLUMBUS COMMERCIAL SUITE 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 FAILURE TO PERFORM ITS COVENANTS; (II) DAMAGES
CAUSED BY UPDATES OR ALTERATIONS DONE TO THE COLUMBUS COMMERCIAL SUITE BY
MANAGER WITHOUT OWNER'S WRITTEN APPROVAL; OR (III) ANY SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES INCURRED BY MANAGER. MANAGER SHALL INDEMNIFY OWNER AGAINST
ALL CLAIMS ASSERTED BY THIRD PARTIES AS A RESULT OF SUCH ACTS OR OMISSIONS OF
MANAGER. OWNER'S LIABILITY FOR DAMAGES TO MANAGER FOR ANY CAUSE, REGARDLESS OF
THE FORM OF ACTION, SHALL NOT EXCEED THE AGGREGATE FEES PAID FOR MANAGEMENT
SERVICES UNDER THIS AGREEMENT.
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20. NOTICES
20.1 The addresses for delivery of notices to each party are as follows:
to Owner: On-Line Film Services Inc.
208 - 2323 Boundary Road
Vancouver, British Columbia,
V5M 4V8, Canada
to Manager: Cinesource Inc.
1223 - 22nd Street
Santa Monica, California
90404, U.S.A.
20.2 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 or e-mail transmission. The parties hereto may change
their respective address for notice given in the manner aforesaid. Any notice
given by facsimile transmission or e-mail 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 at the recipient's address for notice.
21. RELATIONSHIP OF PARTIES
21.1 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.
22. ASSIGNMENT
22.1 Manager may not assign this Agreement or any of its interests herein
without the prior written consent of Owner.
23. SEVERABILITY
If any provision of this Agreement is determined to be void, 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.
24. BENEFIT OF AGREEMENT
24.1 This Agreement will inure to the benefit of and be binding upon the parties
hereto and their respective legal representatives, successors and assigns.
25. ENTIRE AGREEMENT
25.1 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.
26. AMENDMENTS
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26.1 No amendments to this Agreement will be valid or binding unless set forth
in writing and duly executed by both of the parties hereto.
27. WAIVER
27.1 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.
28. EXECUTION
28.1 This Agreement may be executed in counterparts and delivered by facsimile
copy by either 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.
ONLINE FILM SERVICES INC. CINESOURCE INC.
By: ______________________________ By: ______________________________
Its President Its President
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SCHEDULES
A. Columbus Commercial Suite
B. Minimum and Exclusivity Payments
Management Services
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SCHEDULE "A"
Columbus Commercial Suite
Columbus Commercial Suite Software Description
Its a relational database application utilizing Filemaker Pro 4.0 as its engine
which is able to run locally or on a LAN. Its made up of a number of Filemaker
Pro database documents that function together as a separate modular application
and generate reports.,
It is software specifically designed to mirror the way production office people
work today and it utilizes some software owned and under license from Columbus
Systems Inc.
The software delivers a mechanism for creating purchase orders, call sheets,
production reports, time cards, start close paperwork, deal memos and staff and
crew lists, travel authorizations, as well as project tracking.
The Columbus suite consists of software modules specifically tailored for use by
companies and individuals producing television commercials.
The VFX module is designed specifically for Visual Effects Producers. Tracks
shots, elements, storyboards, vendors, costs, and more. The perfect solution for
generating Call Sheets and Production reports and either printing them hard copy
for signature, or saving as an Acrobat PDF file to e-mail back to the office or
studio.
It enables departmental co-ordinators to produce their cost reports for use by
the production accountant more efficiently.
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SCHEDULE "B"
MINIMUM AND EXCLUSIVITY PAYMENTS
Annual Minimum
1999- $750,000.00
2000 and thereafter-for any such year (the Subject Year);
if the Annual Gross Operating Revenues in the prior calendar year did not exceed
such year's corresponding Annual Minimum, then the Annual Minimum for the
Subject Year shall be equal to the prior year's Annual Minimum, and if the
Annual Gross Operating Revenues in the prior calendar year (Prior AGOR ) did
exceed such year's corresponding Annual Minimum (Prior AM), then the Annual
Minimum for the Subject Year shall be an amount calculated as follows = (1.03 x
Prior AM) - (0.03 x Prior AGOR ).
Annual Exclusivity Payments
For any calendar year ;
if the Annual Gross Operating Revenues equal or exceed the Annual Minimum for
such year, then the Annual Exclusivity Payment is $0.
if the Annual Gross Operating Revenues for such year (AGOR) are less than the
Annual Minimum for such year (AM), then the Annual Exclusivity Payment shall be
an amount calculated as follows = 0.14 x (AM-AGOR).
Term Exclusivity Payment
The Term Exclusivity Payment shall be an amount calculated as follows =
0.14 x (Term Minimum-Cumulative Incremental Revenue)
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SCHEDULE "C"
MANAGEMENT SERVICES
1. Programming Consultation
Provide a mutually agreed level of consultation for any modifications to the
Columbus software as it applies the Commercial production business. Particularly
with respect to the contribution of expertise in the business of commercial
production and programming of Filemaker Pro. Cinesource will consult in the
integration and functionality of the Casting Workbook into the Columbus
software.
2. Cross-promotion
Cinesource and Online will mutually cross promote the Columbus software and the
Casting Workbook at public events like trade shows and seminars. Cinesource will
make reference to the Casting Workbook in support materials circulated by
Cinesource. Such examples to include but not limited to providing space on
distribution information materials of its software for the Casting Workbook
logo, a brief "one-liner" and contact information. Cinesource and Online will in
good faith actively promote respective software programs.
3. Columbus software functionality
Pop-up help or directions to the Casting Workbook topics will be placed in the
Columbus software on content related to the casting process.
4. Investment Seminar Participation
Cinesource will assist, as mutually agreed, in the presentation of the Columbus
software at investment seminars presented by OnLine for purposes of promoting
the company.
5. Casting Workbook integration with Columbus
Online and Cinesource will mutually agree upon the construction and design of a
casting module that is homogeneous with the Columbus software. Online will be
responsible for the first prototype of this module that will be designed to join
producers and casting directors with specific project information. Some
information could consist of deal memos, contracts and agreements; suggestion
lists for actors; resumes, photos, audio clips and video clips; casting director
short lists; script and various versions (specifically "sides" for actors and
casting director breakdowns); final cast lists to the producers; and any other
casting related functions.
6. Links to Website
Where practical, links to the Casting Workbook at Canadafilm.com will be placed
in the Columbus software.
Management Final
127
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,399,662
<SECURITIES> 0
<RECEIVABLES> 468,567
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,871,322
<PP&E> 0
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<BONDS> 0
0
0
<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 14,083,669
<SALES> 0
<TOTAL-REVENUES> 399,839
<CGS> 2,228,131
<TOTAL-COSTS> 2,228,131
<OTHER-EXPENSES> 1,103,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 391,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 12,756
<EPS-BASIC> 0.00
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</TABLE>
