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 NOVEMBER 30, 1999
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)
<PAGE>
OnLine Production Services, Inc.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED November 30, 1999
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 AND USE OF PROCEEDS
ITEM 5. DEFAULTS UPON SENIOR SECURITIES
ITEM 6. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
<PAGE>
OnLine Production Services, Inc.
Balance Sheet
As at November 30, 1999 and 1998(Note 15)
Unaudited
Amounts in 1,000's of Dollars US
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 196 $ 62
Accounts Receivable - Note 3 49 4
Current Portion of Deferred Taxes - Note 6 4 3
Accrued Interest - Note 5 83 37
------------------
Total Current Assets 332 106
Property, Plant and Equipment Net of Depreciation - Note 4 224 166
Other Assets
Investments - Note 5 8,345 5,130
Intangible Assets-Net of Amortization - Note 10(d)) 267 339
Other - Note 6 3 1
------------------
Total Other Assets 8,615 5,636
------------------
Total Assets $ 9,171 $ 5,742
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Liabilities - Note 8 $ 379 $ 221
Bank Line of Credit - Note 7 -- 41
Current Portion of Mortgage Payable 1 1
------------------
Total Current Liabilities 380 263
Mortgage Payable - Note 9 75 73
Other Liabilities
Contingent Revenue - Note 10 8,268 5,110
Payable Columbus Software, Inc. - Note 10(d) -- 450
Loan Payable - Shareholders -- 17
------------------
Total Other Liabilities 8,268 5,577
Stockholders' Equity - Note 11
Capital Stock
Class A Common Stock, $0.001 par, 100,000,000 shares authorized,
10,480,614 issued 7 4
Preference Shares, 10,000,000 shares authorized
3,673,292 issued 2 --
------------------
Total Capital Stock 9 4
Additional Paid in Capital
Issued price in excess of par value - Class A 1,318 567
Issued price in excess of par value - Preference Shares 180 --
------------------
Total Paid In Capital 1,498 567
Accumulated Deficit (1,285) (732)
Accumulated Other Comprehensive Income (Loss) 226 (10)
------------------
Total Stockholders' Equity 439 (175)
------------------
Total Liabilities and Stockholders' Equity $ 9,171 $ 5,742
==================
</TABLE>
<PAGE>
OnLine Production Services, Inc.
Income Statement
Three Months Ended November 30, 1999 and 1998 (Note 15)
Unaudited
Amounts in 1,000's dollars US
1999 1998
------------------------
Revenue
Sales $ 49 $ 33
Other 4 3
------------------------
Total Revenue 53 36
Cost of Sales 217 149
------------------------
Gross Profit (Loss) (164) (113)
General & Administrative Expenses 272 137
Depreciation/Amortization 57 120
------------------------
Loss From Operations (493) (370)
Other Income/Expense
Interest Income 151 90
------------------------
Net Loss Applicable to Common Stock $ (342) $ (280)
========================
Weighted Average Shares - Common Stock 10,170 5,994
------------------------
Loss Per Share of Common Stock $ (34) $ (47)
------------------------
Statement of Accumulated Deficit
Balance - Beginning of Year $ (943) $ (452)
Net Loss for Year (342) (280)
------------------------
Balance - End of Year $ (1,285) $ (732)
========================
<PAGE>
OnLine Production Services, Inc.
Consolidated Statement of Cash Flows
Three Months Ended November 30, 1999 and 1998 (Note 15)
Unaudited
Amounts in 1,000's of Dollars US
1999 1998
OPERATING ACTIVITIES
Cash Used In Operations:
Net Loss $ (342) $ (280)
Add (deduct) charges to items not involving cash:
Amortization 57 120
$ (285) $ (160)
Non-cash working capital items:
Accounts Receivable 15 --
Accounts Payable & Accruals 166 134
$ 181 $ 134
FINANCING ACTIVITIES
Change in Bank Operating Loan $ (30) $ 40
INVESTING ACTIVITIES
Change in Long Term Investments (42) --
Capital Asset Purchases (60) (3)
$ (102) $ (3)
Translation Adjustment $ (82) $ --
Change In Cash $ (318) $ 11
Cash, start of year 514 51
Cash, end of year $ 196 $ 62
SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES: $ -- $ --
<PAGE>
OnLine Production Services, Inc.
Consolidated Statement of
Changes in Equity
Three Months Ended November 30, 1999
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 $ 863 $ (943) $ 308
Comprehensive Income
Net Income (Loss) (342) $(342) (342) --
Other comprehesive income: -- --
Foreign currency translation adjustments (82) (82) -- (82)
-----
Total Comprehensive Income $(488) -- --
=====
----- ------- -----
$ 439 $(1,285) $ 226
===== ======= =====
</TABLE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Foreign currency translation
All balances relating to On-Line Film Services Inc. (Canadian subsidiary) have
been converted to United States dollars using the current rate method of
currency conversion. The use of this method resulted in a translation adjustment
loss of $82,000 in the current three 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).
(b) 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).
(c) Deferred Corporate Taxes
Deferred corporate taxes arise due to temporary timing differences arising from
depreciation rates used for financial statement purposes and the depreciation
rates prescribed for taxation purposes. Deferred taxes are divided into a
current portion, which is expected to be utilized within one fiscal year and a
non-current portion, which is expected to be utilized in a future period in
excess of one fiscal year. (See note 6). 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.
<PAGE>
(d) Revenue Recognition Policy
Sales (excludes Mailcard and Casting Software rights) revenue is recognized when
realized. Realization occurs when the earning process is complete, or virtually
complete and revenue is evidenced by the existence of an exchange transaction
which provides significant certainty as to the ultimate collectibility of the
revenue amount. This policy applies to all 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 )
(e) Cash and cash equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks or
other high credit quality financial institutions and other highly liquid
investments which are immediately convertible into cash.. Due to the short term
nature of these instruments, the carrying value approximates fair value.
(f) Accounting impairment for long lived assets
The company considers impairment of value to occur when the book value of fixed
assets is determined not to be recoverable. If this happens, the company has a
policy of reducing the carrying value of the long lived asset to the recoverable
amount and recording this reduction loss amount on the income statement in the
year in which the write down has occurred. There has been no impairment of any
long lived assets in the current or prior year.
(g) Reorganization and reverse acquisition
The company, in fiscal year 1999, completed a reorganization and reverse merger.
At the time of the merger, neither OnLine Production Services Inc., or its
predecessor Earth Industries Inc., had any financial activity. With the
exception of the stock of Earth Industries, which had a book value of $0 at the
time of the merger, the only entity with activity was On-Line Film Services,
Inc., which became the operating subsidiary company as a result of the merger.
Therefore, the consolidated financial statements of On-Line Film Services Inc.
for the three month period ended November 30, 1998 are presented as comparable
statements.
2. CONSOLIDATED FINANCIAL STATEMENTS
These financial statements show the consolidated results of operations for
OnLine Production Services Inc. and its wholly owned Canadian subsidiary On-Line
Film Services Inc..
3. ACCOUNTS RECEIVABLE
The accounts receivable balance at November 30, 1999 are shown net of allowance
for doubtful accounts of $ 1,688 . The 1998 accounts receivable balance is shown
net of allowance for doubtful accounts of $6,862.
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Asset Accum. Depreciation
Description Amount Deprec. Net Method
Office Furn & Fixtures $ 19 $ 7 $ 12 20% Declining Balance
Computer Software 56 22 34 100% Declining Balance
Computer Equipment 150 70 80 30% Declining Balance
Building 113 15 98 4% Declining Balance
$224
5. INVESTMENTS
Long term investments consists of British Columbia Savings Bonds in a principal
amount of $2,923,213 (August 31, 1999 - $2,878, 800) with an unamortized bond
premium of $1,169 (August 31, 1999 - $1,150) to be amortized over the remaining
eight year period of the bonds. Accrued interest of $82,887 (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 173 days (August 31, 1999 - 82 days). The
last interest payment date was June 10, 1999. The next interest payment date is
expected on or around December 10, 1999. These bonds serve as registered
collateral on the Mailcard contingent sales agreement dated September 17 1997.
The amount of the collateral claim registered against these bonds is $2,923,213
which is locked in until June 9, 2008. All of the interest earned on this bond
during the reported three month period ($43,485), 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 $5,609,311 (August 31, 1999 - $5,422,700) held at the Canadian Imperial bank
of Commerce, of which $5,565,838 (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 $59,442 for the
current three 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.
6. DEFERRED TAXES - NON CURRENT
Total deferred corporate taxes $ 4,677
Less: Current Portion (3,934)
Non current portion $ 743 included in "Other Assets"
7. BANK LINE OF CREDIT
The company has available a $40,000 line of credit with the Royal Bank in
Vancouver, British Columbia. The line of credit bears interest at the rate of
Royal Bank prime plus 1.75% per annum. At the balance sheet date, the company
has not used the line of credit that is available.
8. ACCOUNTS PAYABLE & ACCRUED LIABILITIES
Included in accounts payable and accruals is accrued distribution and
exclusivity fees of $177,690 (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).
<PAGE>
9. MORTGAGE PAYABLE
Mortgage payable consists of the following:
Mortgage payable to Vancity Credit Union bearing interest at 8.75% per annum
with monthly payments of $632 (Renewal May 2001) Secured by real estate (office)
at 208-2323 Boundary Road, Vancouver, British Columbia. The balance at November
30, 1999 is $75,884 (August 31, 1999 - $76,014). The company expensed $2,597 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) $ 552
2001 $ 744
2002 $ 812
2003 $ 885
2004 $ 966
Thereafter $ 71,925
10. CONTINGENCIES
(a) In the 1998 fiscal year, the company entered into a contingent sale
agreement for the sale of Mailcard software territory rights to unrelated third
parties. The company received and realized $523,000 in revenue as well as
$2,878,000 in funds which are secured by the purchasing party as collateral
against the purchasers portion of the projected minimum sales guaranteed by the
company over a ten year period (See note 5). If and when the 3.2 million minimum
sales units over the ten year period is met by the company, it shall receive the
collateral funds as income at a rate of approx. 97% of the gross sales 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.
<PAGE>
The collateral funds are registered and are not able to be used by the company
until such time as these funds (or portion thereof) are released by the secured
parties. The term ending date is December 31, 2007. These collateral funds are
in the form of CIBC weekly GICs (See note 5)
(c) In the 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. 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)
1st Quarter Fiscal 2000 Comprehensive Income
(424,250)
Balance 11/30/99 10,480,614 $ 7,041 3,673,292 $2,439 $1,497,399 ($1,058,612)
</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.
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 $16,245
(Fiscal 1999 - $48 000). Aggregate office rent totaled $8,200 (Fiscal 1999 -
$24,000).
<PAGE>
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 $82,887 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 fiscal year ended
August 31, 1999, the company has paid $133 000 from interest generated by the
collateral amount with $82,887 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 $94,812, which is the interest earned on the collateralized GICs
from July 1, 1999 to November 30, 1999, which has not yet been paid to the
Casting Workbook purchasers.
In the event that sales are not sufficient to meet the minimum requirements in a
& b above, any shortfall will be covered by interest generated by the security
held at the discretion of the company. See above.
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 1998 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 1998
figures have thus been restated to US dollars without a translation loss
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.
<PAGE>
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 (82) (82)
Ending balance $226 $226
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: $37,115
ITEM 2. MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the three month period September 1999 through to the end of November 1999
the Company continued its previously established business activity of hosting
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). Fees are billed and
collected directly from the Performers. Their annual subscriptions provide each
of them with the exposure of their Portfolios to casting directors who audition
and hire Performers for jobs in film, television, commercial and print
productions. To ensure exposure for the performers, the Company provides casting
directors and talent agents (Performer representatives) with personalized access
to the Casting Workbook database in order to facilitate the hiring of the
participating Performers. The Performers' Portfolios can be 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.
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.
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 Company's 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. Thus approximately 27
% of the Company's annual revenues from Canadian actors represented by Talent
Agents will not be billed and reported as revenue of the Company again until
April 2000. Using the Fiscal 1999 experience the revenues reported for this
first quarter of Fiscal 2000 represents 16% of the revenue to be derived from
Canadian Actors who are represented by Talent Agents.
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The Company began a marketing and promotion campaign in Los Angeles California
starting in the spring of 1999. Since that time the Company has equiped 46
California Talent Agents and 91 Casting Directors with computers, software and
services necessary for them to actively begin using the internet to access the
Company's database to caste film, television and commercial productions. In
addition, the Company continues to service 107 Casting Directors and 194 Talent
Agents in Canada.
Approximately 7,000 American actors' photos, resumes and/or sound files have
been received by the Company and are presently at various stages of being
included in the Company's databases with various free trial periods having been
provided to them while the entire industry system is being deployed. The Company
estimates that the volume of actors represented by Talent Agents in the state of
California will meet or exceed the numbers presently serviced by the Company's
business activities in all of Canada.
During this first reported quarter of Fiscal 2000 the Company also continued to
increase its business relations with industry professionals in other centers of
the 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.
In addition to increasing its business activities into the Los Angeles market in
respect to actors presently represented by Talent Agents, the Company also began
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 being deployed would alow 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 intends to collect a fee 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, subsequent to the financial period covered by this report, the
systems infrastructure necessary to carry out this process using the Canadian
banking system was fully established and an agressive marketing and promotional
campaign for its use is being developed and must be carried out early in the
year 2000. The Company estimates that that many more people world-wide could
subscribe to this new service of the Company by the end of Fiscal 2000 than is
represented by actors who have Talent Agents. However, the Company's internet
marketing and other advertising and promotions campaigns must be carried out
successfully early in the year in order to meet these objectives. 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. The Company continues to improve its system
for identifying and selecting scene locations, managing props, budgeting and
accounting for commercials, and scheduling the activities of film production.
All of these products and services are planned for continuing and future
marketing and deployment.
During the second quarter of Fiscal 2000 the Company will begin an agressive
internet marketing and commercial advertising campaign 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 budgeting and accounting 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.
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.
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No revenues were received from the group of represented actors in the Los
Angeles area due to the fact that various free trial periods were extended to
that group of customers on a Talent Agent specific basis. Free trial periods
generally range from 30 to 60 days and may be extended by the Company at its
discretion during the course of Fiscal 2000. The company expects that some or
all of the free trial periods will elapse and related revenues from this group
of customers will be realized as revenue during Fiscal 2000. The company
continues to promote directly to actors and Talent Agents in the Los Angeles are
in order to increase on the approximately 7,000 actors currently at some stage
of filing into the Company's databases.
No revenues were yet received from that group of North American customers who
are unrepresented by Talent / Model Agents. The internet marketing campaign to
target this customer base and the full operation of the related e-commerce
system for accepting payment from them is scheduled for the second quarter of
Fiscal 2000.
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 such as has
provided sales revenue to the Company during Fiscal 1999.
Cost of Sales
Of the reported Cost of Sales for the period $102,917 US is accrued, and
directly offset by interest earned on collateralized long-term investments, in
respect of CastingWorkbook exclusivity payments.
The remaining amount ($114,083) 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 both throughout Canada and in
the Los Angeles area. Software and systems programming costs are expected to
continue into the future in order to maintain a competitive technology position.
Other costs of goods sold are non-recurring 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 revenue from
actors of those Talent Agents has not yet been realized due to free trial
periods for actors.
The Company experienced an 8% increase in the cost of goods sold pertaining to
Canadian operations when compared to the same period in the previous fiscal
year. Whereas revenue for the same customer base increased 33%. This is
attributed to a decrease in the direct personnel and hardware costs required to
maintain the existing customer base in Canada. The prior period included
one-time costs of to the implementation costs in Canada. Based on this
information, the Company expects to manage the same type of cost to revenue
rationalization in the Los Angeles area during the course of Fiscal 2000.
The costs of improvements to software programming may now also 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 unrepresented
talent and models throughout North America through the use of e-commerce web
sites that are accessible world-wide.
Operating Expenses
Operating Expenses increased when comparing the first quarter 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 econimic 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 ($15,900) representing a further 9% increase in Canadian
head office operating expenses.
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The core operating expenses of the Los Angeles branch office ($18,000) reflects
the current level of business activity (103 Casting Directors and 22 Talent
Agents on line) which will increase to accommodate at least a further 80 Talent
Agents over the course of Fiscal 2000 with additions of up to 5 full time staff
and improved office accommodation.
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. Future quarters 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 thus
on advertising and web marketing techniques that have a more direct relationship
to revenues realized.
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 November 30, 1999 ($379,000)
includes $178,689 of accrued distribution and exclusivity payments under the
field of use agreements referred to above. The $178,689 would subsequently be
paid from interest portions of long-term investments that will come due
approximately December 10, 1999 to December 31, 1999. Thus reported cash and
cash equivalents of $196,000 exceeds current demands on cash represented by the
remaining $131,689 of Accounts Payable and Accruals by $64,311. The amount of
$64,311 is sufficient, along with expected cash revenue realizations based on
historical revenue billings and receipts, and the Company's Line of Credit
availability through the Royal Bank of Canada ($60,000 - see Financial
Statements - Note 7), to sustain the Company over two months of reduced seasonal
operations.
This compares favourably to the same quarterly period in Fiscal 1999 wherein
Accounts Payable and Accruals net of accrued distribution and exclusivity
payments exceeded cash and cash equivalents by $26,000 US.
Subsequent to the Fiscal 2000 first quarter reported herein, and commensurate
with a seasonal slowdown in film industry casting functions during December, the
Company entered into a roll back of its promotional activities and related
expenditures.
The Company requires an increase in revenue realization as well as investment
inflows in order to provide for working capital requirements during the second
and third quarters of Fiscal 2000.
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
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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.
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
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Aerock Fox, President
