UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2000
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER
OnLine Production Services, Inc
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 91-1833963
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION
NUMBER)
Suite 210-2323 Boundary Road Vancouver, B.C. Canada V5M 4V8
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(604) 205-5107
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------------------------------------------------------------------
Securities registration pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value OTC Bulletin Board
--------------------------------------------------------------------------------
(Title of Class)
OnLine Production Services, Inc.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED MAY 31, 2000
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
PART II
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. CHANGES IN SECURITIES & USE OF PROCEEDS
ITEM 5. DEFAULTS UPON SENIOR SECURITIES
ITEM 6. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 7. EXHIBITS & REPORTS ON FORM 8-K
Page 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
OnLine Production Services, Inc.
Balance Sheet
As at May 31, 2000 and 1999(Note 15)
Unaudited
Amounts in 1,000's of Dollars US
ASSETS
<TABLE>
<CAPTION>
2000 1999
------------------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 55 $ 854
Accounts Receivable - Note 3 510 68
Current Portion of Deferred Taxes - Note 6 4 3
Accrued Interest - Note 5 86 83
------------------
Total Current Assets 655 1,008
Property, Plant and Equipment Net of Depreciation - Note 4 176 147
Other Assets
Investments - Note 5 8,552 8,397
Intangible Assets-Net of Amortization - Note 10(d)) 191 317
Other - Note 6 7 1
------------------
Total Other Assets 8,750 8,715
------------------
Total Assets $ 9,582 $ 9,870
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Liabilities - Note 8 $ 439 $ 58
Bank Line of Credit - Note 7 63 --
Current Portion of Mortgage Payable 1 1
------------------
Total Current Liabilities 503 59
Debts Payable - Note 9 116 73
Other Liabilities
Contingent Revenue - Note 10 8,268 8,268
Payable Columbus Software, Inc. - Note 10(d) -- 100
Loan Payable - Shareholders 82 --
------------------
Total Liabilities 8,969 8,500
Stockholders' Equity - Note 11
Capital Stock
Class A Common Stock, $0.001 par, 100,000,000 shares authorized,
10,480,614 issued 7 7
Preference Shares, 10,000,000 shares authorized
3,673,292 issued 2 2
------------------
Total Capital Stock 9 9
Additional Paid in Capital
Issued price in excess of par value - Class A 1,318 1,318
Issued price in excess of par value - Preference Shares 180 180
------------------
Total Paid In Capital 1,507 1,507
Accumulated Deficit (1,346) (717)
Accumulated Other Comprehensive Income (Loss) 452 580
------------------
Total Stockholders' Equity 613 1,370
------------------
Total Liabilities and Stockholders' Equity $ 9,582 $ 9,870
==================
</TABLE>
Page 3
<PAGE>
OnLine Production Services, Inc.
Income Statement
Three Months Ended May 31, 2000 and 1999 (Note 15)
and
Nine Months Ended May 31, 2000 and 1999
Unaudited
Amounts in 1,000's dollars US
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31 May 31
2000 1999 2000 1999
------------------------ ------------------------
<S> <C> <C> <C> <C>
Revenue
Sales $ 250 $ 82 $ 678 $ 138
Territory Sales / Licensing 0 0 0 655
Other 5 1 115 35
------------------------ ------------------------
Total Revenue 255 83 793 828
Cost of Sales 228 463 737 690
------------------------ ------------------------
Gross Profit (Loss) 27 (380) 56 138
General & Administrative Expenses 172 205 677 513
Depreciation/Amortization 41 27 139 174
------------------------ ------------------------
Loss From Operations (186) (612) (760) (549)
Other Income/Expense
Interest Income 132 104 357 284
------------------------ ------------------------
Net Loss Applicable to Common Stock $ (54) $ (508) $ (403) $ (265)
======================== ========================
Weighted Average Shares - Common Stock 10,170 10,170 10,170 10,170
(stated in 1,000's)
------------------------ ------------------------
Loss Per Share of Common Stock $ (.05) $ (.05) $ (.04) $ (.03)
------------------------ ------------------------
Statement of Accumulated Deficit
Balance - Beginning of Period $ (1,292) $ (209) $ (943) $ (452)
Net Loss for Period (54) 508 (403) (265)
------------------------ ------------------------
Balance - End of Period $ (1,346) $ (717) $ (1,346) (717)
======================== ========================
</TABLE>
Page 4
<PAGE>
OnLine Production Services, Inc.
Consolidated Statement of Cash Flows
Six Months Ended May 31, 2000 and 1999 (Note 15)
Unaudited
Amounts in 1,000's of Dollars US
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Cash Used In Operations:
Net Loss $ (403) $ (265)
Add (deduct) charges to items not involving cash:
Amortization 139 174
$ (264) $ (91)
Non-cash working capital items:
Accounts Receivable (446) (64)
Accounts Payable & Accruals 352 (396)
Contingent Revenue Security Received 0 3,158
$ (94) $ 2,698
FINANCING ACTIVITIES
Change in Bank Operating Loan $ 33 $ 0
Issue of Company Shares for cash 0 936
$ 33 $ 936
INVESTING ACTIVITIES
Change in Long Term Investments (249) (3,313)
Capital Asset Purchases (29) (17)
$ (278) $(3,330)
Translation Adjustment $ 144 $ 590
Change In Cash $ (459) $ 803
Cash, start of period 514 51
Cash, end of period $ 55 $ 854
</TABLE>
Page 5
<PAGE>
OnLine Production Services, Inc.
Consolidated Statement of
Changes in Equity
Nine Months Ended May 31, 2000
Unaudited
Amounts in 1,000's dollars US
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive
Total Income Earnings Income
----- ------ -------- ------
<S> <C> <C> <C> <C>
Beginning Balance $ 872 $(943) $ 308
Comprehensive Income
Net Income (Loss) (403) (403) (403) --
Other comprehesive income: -- --
Foreign currency translation adjustments 144 144 -- 144
-----
Total Comprehensive Income (259) -- --
=====
----- ----- -----
$ 613 $(1,346) $ 452
===== ===== =====
</TABLE>
Page 6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Unaudited Financial Statements - Opinion of Management
The May 31, 2000 and 1999 amounts included herein are unaudited. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly, the financial position, results of operations, cash
flows and changes in shareholders' equity have been made.
(b) Foreign currency translation
All balances relating to On-Line Film Services Inc. (Canadian subsidiary) have
been converted to United States dollars using the current rate method of
currency conversion. The use of this method resulted in a translation adjustment
gain of 144,000 in the current nine month period due primarily to the effect of
currency exchange fluctuations on long-term investments held by the Company. The
investments are collateral against portions of projected minimum sales
guaranteed by the Company over a ten year period to certain purchasers of the
Company's software (See Notes 5 and 10).
(c) Investments
Investments are held to maturity and are recorded at their amortized cost at the
balance sheet date. These investments are strictly interest bearing deposits in
the form of savings bonds and guaranteed interest certificates at the current
and prior balance sheet dates. (Note 5) Subsidiaries are consolidated in these
financial statements (Note 2).
(d) Deferred Corporate Taxes
Deferred corporate taxes arise due to temporary timing differences arising from
depreciation rates used for financial statement purposes and the depreciation
rates prescribed for taxation purposes. Deferred taxes are divided into a
current portion, which is expected to be utilized within one fiscal year and a
non-current portion, which is expected to be utilized in a future period in
excess of one fiscal year. (See note 6). Corporate taxes are calculated on an
annual basis and as such no adjustment for Deferred Corporate Taxes has been
calculated or reported for the interim periods of these financial statements.
(e) Revenue Recognition Policy
Sales (excludes Mailcard and Casting Software rights) revenue is recognized when
realized. Realization occurs when the earning process is complete, or virtually
complete and revenue is evidenced by the existence of an exchange transaction
which provides significant certainty as to the ultimate collectibility of the
revenue amount. This policy applies to all fee and general revenue but does not
apply to the realization of Mailcard and Casting Software rights sales.
Revenue relating to Casting Workbook fees is generated strictly from actors and
entertainers who wish to advertise on the system following the free trial period
(the free trial period varies at the discretion of the company management,
depending on the circumstances, but has tended to be 60 to 90 days with some
exceptions) provided by the company, at which time the fee (non refundable) is
invoiced for the next twelve month period. Once invoiced, the invoiced amount is
recorded as fee revenue.
Mailcard and Casting Software rights revenue is recognized on the collection
method. The ultimate collection of agreed amounts relating to the mailcard and
casting software rights is contingent on future sales of the software by the
company. This contingency creates a significant degree of uncertainty
surrounding the ultimate collection of this contingent revenue, which is based
on the service of selling the software over a ten year period. As such, revenue
is only recognized at such time as the funds are collected. (See note 11 )
(f) Cash and cash equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks or
other high credit quality financial institutions and other highly liquid
investments which are immediately convertible into cash. Due to the short term
nature of these instruments, the carrying value approximates fair value.
(g) Accounting impairment for long lived assets
The company considers impairment of value to occur when the book value of fixed
assets is determined not to be recoverable. If this happens, the company has a
policy of reducing the carrying value of the long lived asset to the recoverable
amount and recording this reduction loss amount on the income statement in the
year in which the write down has occurred. There has been no impairment of any
long lived assets in the current or prior year.
(h) Reorganization and reverse acquisition
The company, in fiscal year 1999, completed a reorganization and reverse merger.
At the time of the merger, neither OnLine Production Services Inc., or its
predecessor Earth Industries Inc., had any financial activity. With the
exception of the stock of Earth Industries, which had a book value of $0 at the
time of the merger, the only entity with activity was On-Line Film Services,
Inc., which became the operating subsidiary company as a result of the merger.
Therefore, the consolidated financial statements of On-Line Film Services Inc.
for the nine month period ended May 31, 1999 are presented as comparable
statements.
Page 7
<PAGE>
2. CONSOLIDATED FINANCIAL STATEMENTS
These financial statements show the consolidated results of operations for
OnLine Production Services Inc. and its wholly owned Canadian subsidiary On-Line
Film Services Inc..
3. ACCOUNTS RECEIVABLE
The accounts receivable balance at May 31, 2000 is shown net of allowance for
doubtful accounts of $ 1,688 . The 1999 accounts receivable balance is shown net
of allowance for doubtful accounts of $6,862.
4. PROPERTY, PLANT AND EQUIPMENT
Asset Accum. Depreciation
Description Amount Deprec. Net Method
----------- ------ ------- --- ------
Office Furn & Fixtures $ 22 $11 $11 20% Declining Balance
Computer Software 56 56 0 100% Declining Balance
Computer Equipment 110 44 66 30% Declining Balance
Building 113 17 99 4% Declining Balance
$176
5. INVESTMENTS
Long term investments consists of British Columbia Savings Bonds in a principal
amount of $2,941,072(August 31, 1999 - $2,878,800) with an unamortized bond
premium of $1,162 (August 31, 1999 - $1,150) to be amortized over the remaining
eight year period of the bonds. Accrued interest of $86,387(August 31, 1999 -
$38,800) was unpaid at the balance sheet date. These bonds earn interest at 6%
per annum (effective interest rate of 5.992%) paid semi-annually and are locked
in to June 9, 2008. The accrued interest amount is calculated based on 6% of the
principal for an accrual period of 92 days (August 31, 1999 - 82 days). The last
interest payment date was December 10, 1999. The next interest payment date is
expected on or around June 10, 2000. 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 $2,904,054 which is
locked in until June 9, 2008. All of the interest earned on this bond during the
reported nine month period ($130,407), included on the interest income line on
the consolidated statement of loss and accumulated deficit, will be used to fund
the minimum required Mailcard software purchase guarantee relating to the three
month period. (See notes 10 & 13).
Also included in long term investments is the guaranteed interest savings amount
of $5,509,901(August 31, 1999 - $5,422,700) held at the Canadian Imperial bank
of Commerce, of which $5,342,037(August 31, 1999 - $5,387,900) serves as
registered collateral relating to the Casting Workbook software contingent sales
agreements dated December 31, 1997 and December 31, 1998, with the principal to
be locked in until December 31, 2007 and 2008 respectively . From the agreement
date to the balance sheet date, these funds have been placed in seven day CIBC
GICs earning interest revenue at variable rates throughout the period. At the
balance sheet date there was no accrued interest relating to the GIC
investments. For the current three month period, all interest earned on these
investments offsets the Casting Workbook exclusivity payments of $228,280 for
the current six month period (See notes 10 & 13). The funding of the exclusivity
payments is included in interest income line on the consolidated statement of
loss and accumulated deficit.
The above investments are considered to be held to maturity debt investments
where the principal will be fully recovered when the investments come due. The
difference in the reported values of the investments between the current interim
balance sheet date and August 31, 1999 (the fiscal year end of the Company) is
due to fluctuations in the currency exchange rate as the investments are held in
Canadian Dollars.
Page 8
<PAGE>
6. DEFERRED TAXES - NON CURRENT
Total deferred corporate taxes $4,677
Less: Current Portion (3,934)
Non current portion $ 743 included in "Other Assets"
7. BANK LINE OF CREDIT
The company has available a $80,000 line of credit with the Royal Bank in
Vancouver, British Columbia. The line of credit bears interest at the rate of
Royal Bank prime plus 1.75% per annum. At the balance sheet date, the company
has used $63,000 of this line of credit.
8. ACCOUNTS PAYABLE & ACCRUED LIABILITIES
Included in accounts payable and accruals is accrued distribution and
exclusivity fees of 259,000(August 31, 1999 - $73,000) relating to the Mailcard
and Casting Workbook contractual agreements . The remaining amount relates to
trade payables and operating accruals (Note 13).
9. LONG-TERM DEBT
Mortgage payable consists of the following:
Mortgage payable to Vancity Credit Union bearing interest at 8.75% per annum
with monthly payments of $614 (Renewal May 2001) Secured by real estate (office)
at 208-2323 Boundary Road, Vancouver, British Columbia. The balance at May 31
2000 is $74,700(August 31, 1999 - $76,014). The company expensed $4,119 in
interest relating to this loan in the current period. This was the only loan
interest paid in the current fiscal year.
Future principal payments are:
Fiscal Year Principal
2000 (remaining) $ 225
2001 $ 744
2002 $ 812
2003 $ 885
2004 $ 966
Thereafter $ 71,068
Page 9
<PAGE>
10. CONTINGENCIES
(a) In the 1998 fiscal year, the company entered into a contingent sale
agreement for the sale of Mailcard software territory rights to unrelated third
parties. The company received and realized $523,000 in revenue as well as
$2,878,000 in funds which are secured by the purchasing party as collateral
against the purchasers portion of the projected minimum sales guaranteed by the
company over a ten year period (See note 5). If and when the 3.2 million minimum
sales units over the ten year period is met by the company, it shall receive the
collateral funds as income at a rate of approx. 97% of the gross sales amount
for the units sold in excess of 3.2 million units. Once all of the collateral
funds have been released and realized as income by the company, it will earn
100% of the Mailcard sales revenue less a perpetual fee of 3% - 5% of gross
revenue (depending on unit sale price) to the software rights purchasers. In the
event that the projected minimum sales over the ten year period is not met, the
company must make up this shortfall from the collateral funds and/or revenue
generated by the collateral funds.
The amount of future revenue relating to this contingency agreement is not
determinable until its ten year expiration date or until such time as the
minimum required sales level is met. As a result, revenue is realized on the
collection method, whereby deferred revenue is realized as income when funds are
released from collateral. At the balance sheet date, the cumulative minimum
sales has not yet been obtained, resulting in unrealized contingent revenue
relating to this agreement on the balance sheet.
The collateral funds are registered and are not accessible by the company until
such time as these funds (or portion thereof) are released by the secured
parties. The term ending date is December 28, 2007. The contingent (deferred)
revenue amount is secured by a claim against the ten year BC Savings bonds held
by the company (See note 5).
(b) In the 1998 fiscal year, the company also entered into a contingent sale
agreement for the Casting Workbook software territories rights to unrelated
third parties. The company received and realized $587,000 in revenue as well as
$2,476,000 in funds which are secured by the purchasing party as collateral
against the purchasers portion of minimum projected revenue of approximately
$5.895 million provided by the company over a ten year period (See note 5). If
and when the minimum casting revenue over the ten year period is met by the
company, it shall receive the collateral funds as income at a rate of approx.
97% of the gross revenue amount for aggregate revenue generated in excess of the
approx. $5.895 million. Once all of the collateral funds have been released and
realized as income by the Company, the Company shall earn 100% of the Casting
software sales revenue less a perpetual fee of 3% to 5% of gross revenue
(depending on sales price) to the software rights purchasers. In the event that
the projected minimum revenue over the ten year period is not met, the company
must make up the purchasers' portions of these shortfall from the collateral
funds held as contingent revenue.
The amount of future revenue relating to this contingency agreement is not
determinable until its ten year expiration date or until such time as the
minimum required revenue level is met. As a result, revenue is realized on the
collection method, whereby deferred revenue is realized as income when funds are
released from collateral. At the balance sheet date, the cumulative minimum has
not yet been obtained, resulting in unrealized contingent revenue relating to
this agreement at the balance sheet date.
The collateral funds are registered and are not able to be used by the company
until such time as these funds (or portion thereof) are released by the secured
parties. The term ending date is December 31, 2007. These collateral funds are
in the form of CIBC weekly GICs (See note 5)
Page 10
<PAGE>
(c) In the 1999 fiscal year, the company also entered into a contingent sale
agreement for additional Casting Workbook software territories rights to
unrelated third parties. The company received and realized $655,000 in revenue
as well as $2,912,000 in funds which are secured by the purchasing party as
collateral against the purchaser's portion of the minimum projected revenue
amount of approximately $6.9 million provided by the company over a ten year
period (See note 5). If and when the minimum casting revenue over the ten year
period is met by the company, it shall receive the collateral funds as income at
a rate of approx. 97% of the gross revenue amount for aggregate revenue
generated in excess of the approx. $6.9 million. Once all of the collateral
funds have been released and realized as income by the Company, the Company
shall earn 100% of the Casting software sales revenue less a perpetual fee of 3%
to 5% of gross revenue (depending on sales price) to the software rights
purchasers. In the event that the projected minimum revenue over the ten year
period is not met, the company must make up the purchaser's portion of the
shortfall from the collateral funds from the collateral funds held as contingent
revenue.
The amount of future revenue relating to this contingency agreement is not
determinable until its ten year expiration date or until such time as the
minimum required revenue level is met. As a result, revenue is realized on the
collection method, whereby deferred revenue is realized as income when funds are
released from collateral. At the balance sheet date, the cumulative minimum has
not yet been obtained, resulting unrealized contingent revenue relating to this
agreement at the balance sheet date.
The collateral funds are registered and are not able to be used by the company
until such time as these funds (or portion thereof) are released by the secured
parties. The term ending date is December 31, 2008. These collateral funds are
in the form of CIBC weekly GICs (See note 5).
(d) At the end of the prior fiscal year, the company purchased the rights to
software for use in the production of commercials. The agreement gives the
company the right to the sale of commercial production service worldwide. The
total purchase price was $3,950,000 . The payment of the purchase price consists
of two payments of $100,000 (paid), the issuance of 250,000 common shares at a
value of $1 per share (issued) and the issuance of a note payable of $
3,500,000. In the 1999 fiscal year, the company expended an additional $8,000
relating to this agreement. The agreement is with Columbus Software Inc. The
note payable is due only if the company achieves specified sales objectives on
or before August 31, 2008.
Due to the contingent nature of the note payable, the purchase price
attributable to the note amount of $3,500,000 is not presented in the financial
statements. Instead, the amount of the purchase price actually expended of $450
000 and the additional $8,000 cost is classified as an other asset and will be
amortized over the estimated useful life of three years. This resulted in a
charge for amortization of $38,167 in the current interim period ($152,667 in
the 1999 fiscal year, the first year of the purchase). The remaining purchase
price of $3,500,000 will be recognized dollar for dollar against revenues
generated by this service. The agreement also calls for a percentage of gross
revenues to be paid to Columbus Software, Inc., on revenues generated over and
above the purchase price.
Page 11
<PAGE>
11. STOCKHOLDERS' EQUITY
Statement of Changes in Stockholders' Equity (Including Accumulated Deficit
Statement)
<TABLE>
<CAPTION>
Class A Common Preference Shares Paid In
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance 8/31/98 6,158,910 $4,088 -- -- $540,998 ($462,074)
Shares Issued
Prior to
Reorganization 277,980 185 -- -- 19,680 --
Shares Issued
To Earth Ind
Shareholders 1,711,976 1,136 -- -- -- --
Reorganization (6,436,890) (4,276) -- -- (560,678) --
Issue Shares to
OnLine Film SH 2,763,598 1,835 -- -- 380,889 --
Issue Class B
Pref. Shares -- -- 3,673,292 2,439 179,789 --
Private Placement
Shares Issued 5,714,284 3,793 -- -- 659,947 --
Shares Issued
For Debt 40,756 27 -- -- 27,024 --
Shares Issued
To Columbus
Software Inc. 250,000 250 -- -- 249,750 --
Fiscal 1999 Comprehensive Income ($172,288)
Balance 8/3199 10,480,614 $7,041 3,673,292 $2,439 $1,497,399 ($634,362)
3rd Quarter Fiscal 2000 Comprehensive Income (259,000)
Balance 5/31/2000 10,480,614 $7,041 3,673,292 $2,439 $1,497,399 ($893,362)
</TABLE>
The 40 756 Class A shares issued for Debt above, were issued to company
employees in lieu of certain wages accrued during the 1999 fiscal year. These
shares were issued to employees who were neither officers nor directors of the
company.
The preference shares above are non-voting, redeemable and retractable on or
before
March 1, 2004. These shares are non-cumulative and do not have a fixed dividend
rate. These preferred shares earn dividends at the same rate as the class A
common shares when a dividend on the class A common shares is declared. These
shares may be converted to common shares at the discretion of either the company
or the shareholders at a conversion rate of one common share for each preference
share converted.
Page 12
<PAGE>
12. LEASE OBLIGATIONS
The company has the following estimated future lease obligations based on
current and projected lease agreements.
DESCRIPTION 2000 2001 2002 2003 2004
Computer & Office Equip 63,000 66,000 68,000 70,000 72,000
Vancouver Office Lease 9,500 10,000 10,500 11,000 11,500
Toronto Office Lease 8,500 9,000 9,500 10,000 10,500
LA Office Lease 15,000 16,000 17,000 18,000 19,000
TOTALS 96,000 101,000 105,000 109,000 113,000
In the current period computer and office equipment leases totaled $29,656
(Fiscal 1999 - $48 000). Aggregate office rent totaled $13,362 (Fiscal 1999 -
$24,000).
13. OTHER OBLIGATIONS
(a) The company is obligated purchase a minimum of approximately $171 000 per
calendar year of Mailcard software for purposes of distribution on behalf of the
software vendors. This obligation remains in effect until at least December 28,
2007, at which time, the agreement may be terminated or renewed, depending on
circumstances at that time. The company is also required to purchase an
additional 2 560 000 copies at an estimated price of approximately $4 per copy
of the Mailcard Software on or before December 28, 2007. Included in accounts
payable and accruals is an accrual of $74,511 representing the portion of the
obligation payable but not yet due or paid at the balance sheet date. This
amount was based on the interest accrued on the collateralized BC Savings Bonds
Investment (Note 6) which is to be paid directly to the collateralized party to
cover the guaranteed purchase amount. This amount is paid semi-annually on or
around June 10 and December 10 of each calendar year. For the nine months ended
May 31, 2000, the company has paid $87,122 from interest generated by the
collateral amount with $74,511 remaining to be paid at the balance sheet date,
to be paid from the interest accrued on the collateral bonds.
(b) The company is also obligated to pay minimum exclusivity fees, which is the
interest earned on the CIBC weekly GICs (note 6), per calendar year for the
right to provide management services related to the Casting Workbook. This
minimum obligation remains in effect until December 28, 2007 and 2008 (note 10),
at which time, the agreements may be terminated or renewed, depending on the
circumstances at that time. Included in accounts payable and accrued liabilities
is an accrual $184,489, which is the interest earned on the collateralized GICs
from December 1, 1999 to May 31, 2000, which has not yet been paid to the
Casting Workbook purchasers.
In the event that sales are not sufficient to meet the minimum requirements in a
& b above, any shortfall will be covered by interest generated by the security
held at the discretion of the company. See above.
Page 13
<PAGE>
14. INCOME TAXES
The company has approximate income tax losses in the Canadian subsidiary which
may in certain circumstances be applied against taxable income of the Canadian
subsidiary in future years to reduce taxes otherwise payable as follows:
Year of Expiry Amount of Loss
2002 10,000
2003 87,000
2004 138,000
2005 82,000
2006 148 000
$465 000
The estimated net operating loss in Fiscal 1999 resulting from the operations of
the American parent company total approximately $180 000 which may in certain
circumstances be applied against taxable income of the parent company in future
years. This loss carryforward expires in 2019.
15. PRIOR PERIOD COMPARATIVE FIGURES
The 1999 comparative un-audited figures are those of the Canadian subsidiary
only and are a financial report of a period prior to the execution of the plan
of reorganization wherein the Company became the parent corporation. The 1999
figures have thus been restated to US dollars with a translation adjustment.
Certain of the prior period comparative figures have been restated to conform
with current presentation. Other than the results of the exchange conversion and
presentation of the prior period comparative figures there are no other
adjustments to the prior period figures of the subsidiary.
16. DEVELOPMENT COSTS
Expenditures relating to Casting Workbook enhancements and refinements,
including Ebinder, Sides Online and Scripts Online are expensed in the period in
which they are incurred. These costs consist primarily of personnel related
costs for programming work to maintain and improve the existing Casting Workbook
software. These costs are not believed to have any alternative future uses, as
such they are expensed as incurred and included in cost of sales as they relate
to continuing advertising revenues from actor and model subscriptions to the
Casting Workbook system.
Costs relating to development of Casting Workbook enhancements which are still
in development at the balance sheet date, such as; a voice over database and a
database for dancers, extras, musicians and commercial production modules are
considered to be unfinished enhancements to the Casting Workbook at the balance
sheet date. As such, these development costs (primarily personnel related) are
expensed in the period in which they are incurred. These enhancements are
thought to be necessary to keep the Casting Workbook software useful in the
current market. As such, these costs are included in cost of sales, as they
relate to the continuing usefulness of the Casting Workbook and the related
advertising subscription revenue earned through the use of the Casting Workbook
software.
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
Foreign Total Accumulated
Currency Other Comprehensive
Items Income
----- ------
Beginning balance $ 308 $ 308
Current Period change 144 144
Ending balance $ 452 $ 452
18. RELATED PARTY TRANSACTIONS
During the current period, the company had the following related party
transactions included in General & Administrative Expenses on the Consolidated
Statement of Loss and Accumulated Deficit:
Management Fees: $36,872
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
OnLine Production Services Inc., by way of its Canadian subsidiary, OnLine Film
Services, Inc., is an internet based, e-commerce, business to business services
provider of software and computer systems solutions to entertainment industry
professionals.
During the three month period March 2000 through to the end of May 2000 the
Company increased its previously established principal business activity of
providing its proprietary software and services to Talent Agents and Casting
Directors. As an integral part of providing its services to Talent Agents and
Casting Directors the Company hosts computerized / digital photographs and/or
resumes and/or audio clips ("Portfolios") for actors and models ("Performers")
for an annual fee (see also "Revenue Recognition Policy" and "advertise" Note
1(d) to the Financial Statements).
The Company provides its proprietary software and services free to Talent Agents
and Casting Directors as an incentive for them to use the Company's database of
Performers. The fact that Talent Agents and Casting Directors use the Company's
software and systems provides incentive for Performers to subscribe to the
services of the Company and thus pay the fees that the Company charges them for
that service.
Fees are now collected directly from Performers using internet e-commerce which
improves the billing and collection processes of the Company compared to prior
periods.
Performers' annual subscriptions to the Company's services provide each of them
with the exposure of their Portfolios to casting directors who actively audition
and hire Performers for jobs in film, television, and commercials. To ensure
exposure for the performers, the Company provides casting directors and talent
agents (Performer representatives) with personalized access to the Company's
"Casting Workbook" database that facilitates the hiring of the participating
Performers. The Performers' Portfoliosare viewed, extracted, sorted, and
manipulated by participating talent agents and casting directors in a manner
that increases the speed, accuracy and ease with which they carry out their day
to day business and operating functions. Improvements to the Company's software
and systems are continuous, adding more time saving features that ensure
entertainment professionals continue to increase their use of the Company's
software and systems.
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The Company's core software and systems were developed and tested in Canada
primarily in Vancouver and Toronto (the centers for the Canadian film and
television industry) between June 1995 and the spring of 1999. Development and
testing was done with the assistance of Canadian Talent Agents and Casting
Directors who used the system to actively caste roles in film and television and
commercial productions. During that period approximately 15,000 Canadian actors
were entered into the Company's databases and were provided varying trial
periods without charge.
In April 1999 approximately 8,000 of the original 15,000 actors on file were
still actively seeking work in the industry and in agreement with the Talent
Agents and Managers Association of Canada that portion of those 8,000 actors who
were represented by Canadian Talent Agents were billed the annual fee for the
service that the Company now provides them on a continuing basis.
The Company began a marketing and promotion campaign in Los Angeles California
starting in the spring of 1999. The Company now provides professional,
personalized, consultative and supporting services to Casting Directors and
Talent Agents in the Los Angeles area. The Company has also made contacts in
order to provide supporting informational services to professional associations
regarding the use of the internet, computers, the Company's software and
business to business solutions that improve day to day business functions for
the industry.
As a result of its historical activity, the Company now reports statistical
increases in all areas of its computerized business to business transactions as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
May 31, 2000 May 31, 1999 % Increase
----------------- ----------------- ----------
<S> <C> <C> <C>
Film Projects Processed 2,158 1,011 113
Roles (Acting Jobs) Cast 10,761 4,795 124
Audition Suggestions Processed 317,787 114,499 178
</TABLE>
During this third reported quarter of Fiscal 2000 the Company also continued to
increase its business relations with industry professionals in other centers of
the American, Latin American, British, and Asian film, television and commercial
industries thus providing the Company with increasing information that would
ultimately establish the timing necessary to deploy its software and systems in
those demographic areas.
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<PAGE>
In addition to increasing its business activities in the Los Angeles market in
respect to actors presently represented by Talent Agents, the Company also
continued to deploy its software and systems in order to provide services to
talented people through out North America and world-wide who are not presently
represented by a Talent Agent. The system now deployed allows anyone, for a fee,
to submit electronically their resume and other information (e.g. photos and/or
sound and video clips) to the Company using access to the Company over the
internet. The Company began to collect fees from these people using a now
commonly used method called e-commerce where by credit card information is
collected and processed and money deposited to the Company's bank account(s). In
December 1999 the systems infrastructure necessary to carry out this process
using the Canadian banking system was fully established and an agressive
marketing and promotional campaign continues to be developed. The Company
estimates that many more people world-wide could subscribe to this new service
of the Company than is represented by actors who are represented by
Talent Agents. Both aspiring acting and modeling talent are offered this service
whereby individuals are given an opportunity to be advertised by the Company in
front of professional Talent Agents and Casting Directors who use the Company's
software and services. Many individuals are thereby provided a chance to be
discovered by Talent Agents and/or immediately obtain work from Casting
Directors seeking that particular talent.
During the period the Company also continued to design, develop and program
software and systems that provide increasing computer automation to Talent
Agents, Casting Directors and other professionals in the film, television,
commercials and modeling industries. All of the Company's present products and
services are planned for continuing and future marketing and deployment.
During the third quarter of Fiscal 2000 the Company improved its resource for
internet marketing and commercial advertising campaigns to promote individuals
to sign up and pay for its service methods of advertising individuals for work
in the film, television, commercials, and modeling industries throughout North
America, sell its commercials production management software into the North
American market, and develop software programming links for the automation of
integrated scheduling functions between Talent Agents, Casting Directors, and
actors using the Company's centralized computer infrastructure and internet
technology.
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<PAGE>
REVENUES
Revenues during the first quarter of Fiscal 2000 ($49,000 US) was received in
Canadian Dollars from Canadian actors nearly all of whom are represented by
Canadian Talent Agents. This represents a 33% increase from this customer group
over the same period in Fiscal 1999.
Many of the free trial periods extended to actors expired during the second
quarter of Fiscal 2000 resulting in a substantial increase in Performers
billings by February 29, 2000. Collections of these fees, using the Company's
newly deployed e-commerce capabilities, will continue throughout the fourth
quarter. During the third quarter the Company extended the free trial periods
granted to actors and models represented by agents in the Los Angeles area. The
Company intends to increase the number of script breakdowns that it processes
from Casting Directors in the Los Angeles area as a competitive strategy prior
to pursuing collection of fees billed to performers in the Los Angeles area. The
Company's historical experience indicates that the collectability of these
accounts is high due to the importance of the Company's service to the
Performers in regards to their job audition opportunities and collection of
accounts will be pursued during the remainder of the fiscal year.
The Company has not pursued, during the current period, and it has no intention
of pursuing in the future, the sale of Territorial Rights as in prior periods
the nature of which is disclosed in Notes to Financial Statements. However, the
Company will continue to pursue international licensing and/or joint venture
agreements in Latin America, the United Kingdom, Europe and Asia during the up
coming fourth quarter.
Three Months Ended
May 31, 2000 May 31, 1999 % Increase
----------------- ---------------- ----------
Talent Portfolio Hosting $ 250,000 $ 82,000 205
Territory Sales / Licensing $ 0 $ 0
Only Nominal revenues have yet to be received from that group of North American
customers who are not represented by Talent / Model Agents. Full operation of
the e-commerce fee collection capabilities has been deployed and design of a
marketing campaign is in substantial completion. Revenues from this customer
base are expected to increase during the fourth quarter.
The Company has not entered into, nor does it have an intention to enter into
any further sales of any fields of rights to its software products as such has
provided sales revenue to the Company during Fiscal 1999. However the Company
discusses openly the potential for Licensing its software and computer systems
for use in other countries, concentrating discussions in Latin America, the
United Kingdom, Europe and Asia. The results of these discussions are presently
unpredictable.
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<PAGE>
Cost of Sales
Of the reported Cost of Sales for the six month period, $299,000 is accrued, and
directly offset by interest earned on collateralized long-term investments, in
respect of CastingWorkbook exclusivity payments.
The remaining amount ($438,000) is incurred to continue the direct activities of
programming competitive improvements to the Company's software and systems that
are used by Talent Agents and Casting Directors as well as other industry
professionals as well as maintaining the computer and communications equipment /
infrastructure that is necessary to deploy that software. Software and systems
programming costs are expected to continue into the future in order to maintain
a competitive technology position. However, the availability of communications
infrastructure is a competitive environment and the Company seeks opportunities
to decrease its costs of that infrastructure component.
During the comparative nine month period in Fiscal 1999 the Company received
non-recurring revenue from the sale of certain Territory Rights (see Notes 10
and 13 to the Financial Statements). When this non-recurring revenue is factored
out of both reported Fiscal Years, the Company's gross margin relative to Fees
Realized from Performers shows a favourable improvement (Fiscal 2000 a positive
gross margin of 45% versus Fiscal 1999 with a negative gross margin of 68%)
indicating expected improvement as a result of increased business to business
transactions as set out in the General Discussion above. As sales increase gross
margin is expected to continue to improve.
Other costs of goods sold are non-recurring start-up costs in respect to
specific Talent Agents and Casting Directors in the Los Angeles area who were
included onto the Company's systems during the period. That portion of cost of
goods sold that is specific to the provision of service to certain Casting
Directors and Talent Agents includes direct subcontracts and equipment and
communications connections between those industry professionals and the Company.
However not all revenue from actors of those Talent Agents has yet been realized
due to free trial periods for actors. The offering of free trial periods is a
marketing approach that the Company will continue to extend to first time talent
agent subscribers during the remainder of Fiscal 2000 and opportunities to
increase gross profit margins by reduction of these specific costs are expected
thereafter.
The costs of improvements to software programming may now be spread over a
larger customer base in the future thus providing an expectation of a reduced
cost of goods sold to revenue ratio as the Company progresses in its
implementation of service to represented actors in additional geographic areas,
as well as extending the use of that programming to service the self represented
talent and models throughout North America using the Company's e-commerce web
sites that are accessible world-wide.
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<PAGE>
Operating Expenses
Operating Expenses increased when comparing the first nine months of Fiscal 2000
to the same period the previous year due primarily to the continuing
establishment of both corporate and market operations in the Los Angeles area.
The core Canadian operations saw a 6% increase in operating expenses which may
be explained by general economic conditions in British Columbia Canada as well
as some improved working conditions in Canadian rental office space.
The core Canadian operations included the payment of $37,000 to executive
management who are also officers, directors, and major shareholders of the
Company.
The continuing establishment of Los Angeles operations has impacted Canadian
head office operations by increasing staffing skills and volume requirements and
the ancillory internal communications costs of a head office / branch
organizations design representing a further 9% increase in Canadian head office
operating expenses.
The core operating expenses of the Los Angeles branch office (approx. $30,000
per month) reflects the current level of business activity currently at 107
Casting Directors and 47 Talent Agents on line. This level of monthly
expenditure would be sufficient to reasonably obtain and sustain service to more
than twice as many Casting Directors and Talent Agents during the remainder of
Fiscal 2000. Increases in this level of activity is dependent on competitive
technology and marketing factors in addition to the competency of the Company's
Los Angeles staff. The increase in core operating expenses over the prior
quarter report is due in part to the recent hiring of additional professional
management on-site and dedicated to the Los Angeles area.
The establishment of Corporate operations in the United States has required
added expenses including the hiring of consultants, accountants and lawyers
resulting in expenditure of $40,300 that the Company executive is expecting to
reduce as a ratio or portion of operating expenses relative to size of
operations.
The Company expended $50,400 in direct promotion of its services to industry
professionals in the Los Angeles area. The remaining half of Fiscal 2000 will
include the implementation of marketing strategies that reduce these direct
promotional expenses as a ratio of total business carried out in the Los Angeles
area, focusing attention directly on the actor and model customer base and on
advertising and web marketing techniques that have a more direct relationship to
revenues realized.
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OTHER INCOME
Other income consists entirely of interest earned on long-term investments that
are collateral to secure contingent future revenues that may be realized under
terms of agreements entered into in prior fiscal periods (see Financial
Statements - Notes 5 and 10).
LIQUIDITY AND CAPITAL RESERVES
Long-term investments are held as collateral security under agreements (see
Financial Statements Notes 5 and 10) and are not money available for use in
current operations, nor are they expected to be available during the course of
Fiscal 2000.
CASH FLOW AND WORKING CAPITAL
Accounts Payable and Accruals reported as at May 31, 2000 ($439,000) includes
$258,000 of accrued distribution and exclusivity payments under the field of use
agreements referred to above. The $259,000 would subsequently be paid from
interest portions of long-term investments that will come due approximately June
10, 2000 to June 30, 2000. Thus reported cash and cash equivalents of $55,000 is
not sufficient to meet current demands on cash represented by the remaining
$180,000 of Accounts Payable and Accruals (a $59,600 deficiency). The Company
intends to finance its fourth quarter of operations by way of revenue receipt
(e.g. collection of the reported $510,000 of accounts receivable) and new
revenue generation.
The Company requires an increase in revenue realization as well as investment
inflows in order to provide for working capital requirements during the fourth
quarter of Fiscal 2000.
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PART II
ITEM 3. LEGAL PROCCEDINGS.
No legal proceedings were ongoing or planned during the period.
ITEM 4. CHANGES IN SECURITIES & USE OF PROCEEDS.
None
ITEM 5. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 6. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 7. EXIBITS & REPORT ON FORM 8-K
Not filed during reporting period.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OnLine Production Services, Inc.
Date July 11, 2000 s/ Aerock Fox
---------------------------- ----------------------------
Aerock Fox, President
________________________________________________________________________________
