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, 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)
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Securities registration pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value OTC Bulletin Board
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(Title of Class)
<PAGE>
OnLine Production Services, Inc.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED November 30, 2000
TABLE OF CONTENTS
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
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
<PAGE>
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
OnLine Production Services, Inc.
Consolidated Balance Sheet
November 30, 2000 and 1999
Unaudited
Amounts in 1,000's of Dollars US
<TABLE>
<CAPTION>
ASSETS
2000 1999
---- ----
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ -- $ 196
Accounts Receivable - Note 3 113 49
Current Portion of Deferred Taxes - Note 6 -- 4
Accrued Interest - Note 5 238 83
Total Current Assets 351 332
Property, Plant and Equipment Net of Depreciation - Note 4 164 224
Other Assets
Net Investments - Note 5 22 77
Intangible Assets-Net of Amortization - Note 10(d)) 114 267
Other - Note 6 3 3
Total Other Assets 139 347
Total Assets $ 654 $ 903
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank Overdraft $ 12 $ --
Accounts Payable and Accrued Liabilities - Note 8 435 379
Bank Operating Loan - Note 7 60 --
Note Payable - Note 18 72 --
Management Fees Payable to Related Parties - Note 16 140 --
Current Portion of Mortgage Payable 1 1
Total Current Liabilities 720 380
Mortgage Payable - Note 9 74 75
Other Liabilities
Loans Payable - Shareholders - Note 19 387 --
Total Other Liabilities 387 --
Stockholders' Equity - Note 11
Capital Stock
Class A Common Stock, $0.001 par, 100,000,000 shares authorized,
9,626,640 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 1,498 1,498
Accumulated Deficit (2,378) (1,285)
Accumulated Other Comprehensive Income 344 226
Total Stockholders' Equity (527) 439
Total Liabilities and Stockholders' Equity $ 654 $ 903
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
OnLine Production Services, Inc.
Consolidated Statement of Loss and Accumulated Deficit
Three Months Ended November 30, 2000 and 1999
Unaudited
Amounts in 1,000's dollars US
2000 1999
Revenue
Sales $ 122 $ 49
Other -- 4
Total Revenue $ 122 $ 53
Cost of Sales 224 217
Gross Profit (102) (164)
General & Administrative Expenses 326 272
Depreciation/Amortization 45 57
Loss From Operations (473) (493)
Other Income/Expense
Interest Income -Notes 5 & 13 121 151
Net Loss Applicable to Common Stock $ (352) $ (342)
Weighted Average Shares - Common Stock 9,626,640 10,170
Loss Per Share of Common Stock $ (0.04) $ (0.03)
(stated by 1,000's)
Statement of Accumulated Deficit
Balance - Beginning of Year $ (2,026) $ (943)
Net Loss for the Quarter (352) (342)
Balance - End of Quarter $ (2,378) $ (1,285)
See Accompanying Notes to Financial Statements
<PAGE>
OnLine Production Services, Inc.
Consolidated Statement of Cash Flows
Three Months Ended November 30, 2000 and 1999
Unaudited
Amounts in 1,000's of Dollars US
2000 1999
OPERATING ACTIVITIES
Cash Used In Operations:
Net Loss $(352) $(342)
Add (deduct) charges to items not involving cash:
Amortization 45 57
$(307) $(285)
Non-cash working capital items:
Accounts Receivable 19 15
Accounts Payable & Accruals 139 166
$(149) $(104)
FINANCING ACTIVITIES
Change in Bank Operating Loan $ (4) $ (30)
Related Party Loans 138 --
$ (15) $ (30)
INVESTING ACTIVITIES
Decrease (Increase) in Long Term Investments before discounts -- (42)
Capital Asset Purchases -- (60)
$ -- $(102)
Translation Adjustment $ 24 $ (82)
Change In Cash $ 9 $(318)
Cash, start of year (21) 514
Cash, end of Quarter $ (12) $ 196
SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES: $ -- $ --
See Accompanying Notes to Financial Statements
<PAGE>
OnLine Production Services, Inc.
Consolidated Statement of
Changes in Equity
Three Months Ended November 30, 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 $ (200) $(2,026) $ 320
Comprehensive Income
Net Income (Loss) (352) (352) (352) --
Prior period adjustment -- -- -- --
Other comprehesive income: -- --
Foreign currency translation adjustments 24 24 -- 24
Total Comprehensive Income (328) -- --
Preference Shares Issued -- -- --
Paid In Capital -- -- --
$ (527) $(2,378) $ 344
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
OnLine Production Services, Inc.
Notes to the Consolidated Financial Statements
November 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OnLine Production Services Inc. is a Nevada corporation, which invests in,
represents, promotes, and delivers the products and services of its wholly owned
Canadian subsidiary, OnLine Film Services, Inc. which is an internet based,
e-commerce, business to business services provider of software and computer
systems solutions to entertainment industry professionals.
(a) Unaudited Financial Statements - Opinion of Management
The November 30, 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 cumulative translation
adjustment gain of $344 000 at the current balance sheet date and $226 000 gain
at the prior period balance sheet date.
(b) Investments
Investments are held to maturity investments and are recorded at their amortized
cost at the balance sheet date. These investments are strictly interest bearing
deposits in the form of savings bonds and guaranteed interest certificates at
the current and prior balance sheet dates. Investments are shown net of
collateral claims against these investments. (Note 5)
Subsidiaries are consolidated in these financial statements (Note 2).
(c) Deferred Corporate Taxes
Deferred corporate taxes arise due to temporary timing differences arising from
depreciation rates used for financial statement purposes and the depreciation
rates prescribed for taxation purposes. Deferred taxes are divided into a
current portion, which is expected to be utilized within one fiscal year and a
non-current portion, which is expected to be utilized in a future period in
excess of one fiscal year. (See note 6)
(d) Revenue Recognition Policy
Sales (excludes Mailcard and Casting Software rights) revenue is recognized when
realized. Realization occurs when the earning process is complete, or virtually
complete and revenue is evidenced by the existence of an exchange transaction
which provides significant certainty as to the ultimate collectibility of the
revenue amount. This policy applies to all fee and general revenue but does not
apply to the realization of Mailcard and Casting Software rights sales. There
were no Mailcard or Casting software rights sales in the current fiscal year.
Revenue relating to Casting Workbook fees is generated strictly from actors and
entertainers who wish to advertise on the system, 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.
<PAGE>
The company also uses a digital watermarking system to protect its digitally
created images against unauthorized resale. In the event that an unauthorized
distribution of an image containing this watermark is found, the company may
charge a fee for the use of this image. In this scenario, collection of the fee
charged is very uncertain. As such, any revenue generated through charges for
unauthorized distribution of company images will be realized when collected. At
the balance sheet date, there has been no charges or collections relating to
unauthorized distribution of company images.
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 released to, the company. In
the current and prior year, none of these collateral funds have been released at
to the audit date. (See note 10 )
(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.
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
Accounts receivable consist of the following
(in 1,000's of Dollars US)
November 30
2000 1999
Trade Accounts Receivable 452 51
Other Accounts Receivable 56 0
508 51
Less: Allowance for Doubtful Accounts 395 2
Accounts Receivable, Net 113 49
<PAGE>
The company's trade accounts primarily represent unsecured receivable which are
geographically disbursed throughout Canada and the United States. The increase
in trade accounts is primarily due to the launch in the United States.
The company has reserved a substantial portion of the United States trade
accounts because of problems that the company has had collecting these accounts
due to the actors strike which lasted most of the current year. The strike ended
in October 2000 and though the company has implemented methods to collect these
accounts there is little probability of collection.
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Asset Accum. Depreciation
Description Amount Deprec. Net Method
----------- ------ ------- --- ------
<S> <C> <C> <C> <C>
Office Furn & Fixtures $ 20 $ 8 $ 12 20% Declining Balance
Computer Software 13 13 nil 100% Declining Balance
Computer Equipment 155 95 60 30% Declining Balance
Building 112 20 92 4% Declining Balance
$ 164
</TABLE>
5. NET INVESTMENTS
Net investments includes three separate savings bonds held in trust as follows:
The first bond is a British Columbia Savings Bonds in a principal amount of
$2,910,606 with an unamortized bond premium of $1,019 to be amortized over the
remaining seven year period of the bonds. Accrued interest of $81,500 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. The last interest payment date was June 10, 2000.
The next interest payment date is expected on or around December 9, 2000. These
bonds are held in trust by the Canadian Imperial Bank of Commerce for the
benefit of the Mailcard rights purchasers (not controlled by company) and 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 $2,910,606 which is locked in until June 9, 2008. All of the interest
earned on this bond during the current quarter($42 000), included in interest
income line on the consolidated statement of loss and accumulated deficit, is
used to fund the minimum required Mailcard software purchase guarantee for the
quarter. (See notes 10 & 13).
The net investment relating to this collateralized bond included in investments
on the balance sheet is as follows:
Bond and related unamortized premium $2,911,625
Collateralized portion (write of setoff exists) (2,910,606)
Net included in investments $ 1,019
The second bond is a Manitoba Savings Bond (Previously a Canadian Imperial Bank
of Commerce weekly guaranteed interest certiificate) in a principal amount of
$2,655,978 with an unamortized quarter end discount of $131,170 to be amortized
over the remaining six years to bond maturity. Accrued interest of $67 000 was
unpaid at the balance sheet date. The bonds earn interest at 5.10% per annum
(effective interest rate 5.41%) paid semi-annually and are locked in until
December 1, 2006. The accrued interest amount is calculated at 5.10% of the
principal for an accrual period of 182 days. The last interest payment was on
June 1, 2000. The next interest payment is expected to be on or around December
1, 2000. These bonds are held in trust These bonds are held in trust by the
Canadian Imperial Bank of Commerce-Wood Gundy for the benefit of the Casting
Workbook rights purchasers (not controlled by company) and serve as registered
collateral relating to the Casting Workbook software contingent sale agreement
dated December 31, 1997. The amount of the collateral claim registered against
these bonds is $2,502,931 which is locked in until December 31, 2007. All of the
interest earned on this bond during the current quarter ($33,245) is included in
interest income line on the consolidated statement of loss and accumulated
deficit, is used to fund the required casting workbook exclusivity payments
relating to the Casting Workbook software purchase guarantee for the period.
(See notes 10 & 13).
<PAGE>
The net investment relating to this collateralized bond included in investments
on the balance sheet is as follows:
Bond and related unamortized discount $2,524,808
Collateralized portion (write of setoff exists) (2,502,931)
Net included in investments $ 21,877
The third bond is a British Columbia Savings Bond (Previously a Canadian
Imperial Bank of Commerce weekly guaranteed interest certiificate ) in a
principal amount of $2,938,371 with an unamortized year end premium of $5,500 to
be amortized over the remaining nine years to bond maturity. Accrued interest of
$83,800 was unpaid at the balance sheet date. The bonds earn interest at 6.25%
per annum (effective interest rate 6.24%) paid semi-annually and are locked in
until December 1, 2009. The accrued interest amount is calculated at 6.25% of
the principal for an accrual period of 182 days. The last interest payment was
on June 1, 2000. The next interest payment is expected to be on or around
December 1, 2000. These bonds are held in trust by the Canadian Imperial Bank of
Commerce-Wood Gundy for the benefit of the Casting Workbook rights purchasers
(not controlled by company) and serve as registered collateral relating to the
Casting Workbook software contingent sale agreement dated December 31, 1998. The
amount of the collateral claim registered against these bonds is $2,944,483
which is locked in until December 31, 2008. All of the interest earned on this
bond during the current quarter ($45,000) is included in interest income line on
the consolidated statement of loss and accumulated deficit, is used to fund the
required casting workbook exclusivity payments relating to the Casting Workbook
software purchase guarantee for the year. (See notes 10 & 13).
The net investment relating to this collateralized bond included in investments
on the balance sheet is as follows:
Bond and related unamortized discount $2,943,872
Collateralized portion (write of setoff exists) (2,944,483)
Net reduction in investments $ (611)
The accrued interest balance shown on the balance sheet relates to the above
investments as follows: ( in 1,000's of Dollars US)
2000 1999
---- ----
Interest accrued on Mailcard security held in trust $ 83 $ 83
Interest accrued on Casting Workbook security held in trust $155 -
$238 $ 83
The above investments are considered to be held to maturity debt investments
where the principal will be fully recovered and applied against the contingent
revenue amounts specified above. The investments above are held in trust, with
the company having no control over the investments. As a right of setoff exists
between the Bond investments and the collateralized contingent revenue to the
same individuals who provided the funding for the bonds, these amounts have been
offset on the balance sheet to more clearly present the company's net investment
asset position.
<PAGE>
In the current quarter, contingent revenue which is secured by investments held
in trust have been offset against the related investments used as security. The
investments are now in trust for the providers of the contingent revenue funds,
leaving the company with no likely future economic benefit or future cash flow
from these investments (all interest earned on the investments is paid directly
to the secured parties). As there is a right to setoff relating to the
contingent revenue and collateral investments held in trust, these amounts have
been offset, with the net amount included in investments on the balance sheet.
The prior period comparative figures have been restated to conform with current
year presentation. This reclassification has resulted in a reduction in the
prior year net investments by $8,345,000 and a removal of the prior year
contingent revenue balance, which was previously $8,268,000 This adjustment has
no impact on the statement of loss and deficit for the company in the current or
prior period.
6. DEFERRED TAXES - NON CURRENT 2000 1999
<TABLE>
<S> <C> <C>
Total deferred corporate taxes $9,058 $4,677
Allowance due to lack of realization certainty (9,058) --
Less: Current Portion -- (3,934)
Non current portion $Nil $ 743 included in "Other Assets"
</TABLE>
In the prior year, it had been determined that virtual certainty of realizing
any future deferred tax benefit is not supported based on historical results,
therefore an allowance for the potential of not realizing this future benefit
has been setup as shown above.
7. BANK OPERATING LOAN
The company has available a $40,000 operating line of credit with the Royal Bank
in Vancouver, British Columbia. The operating line of credit bears interest at
the rate of Royal Bank prime plus 1.75% per annum., secured by a primary claim
to specified operating assets of the company, as well as personal guarantees by
two of the company directors. At the balance sheet date, the company has used
$40,000 of this available operating line of credit. In addition the Company has
a $20,000 loan outstanding with the same bank and branch, and having similar
arrangements as the operating line of credit except that the loan shall be
retired in equal monthly principal payments over the course of the three month
period following the date of the balance sheet.
8. ACCOUNTS PAYABLE & ACCRUED LIABILITIES
Included in accounts payable and accruals is accrued distribution and
exclusivity fees of $238,000 relating to the Mailcard and Casting Workbook
contractual agreements . The remaining amount relates to trade payables and
operating accruals (Note 13). The breakdown of accounts payable and accruals
shown on the balance sheet is as follows: (In 1,000's of dollars US)
<PAGE>
Trade Payables $175
Payroll Deductions 64
Net Sales Taxes Payable (Recoverable) (42)
Distribution and exclusivity fees 238
$435
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, 2000 is $74,000. The company expensed $1 600 in interest relating to this
loan in the current quarter.
Annual principal payments are:
Fiscal Year Principal
----------- ---------
2001 $ 744
2002 $ 812
2003 $ 885
2004 $ 966
2005 $ 1,065
Thereafter $71,528
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
$2,910,606 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 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 $2,910,606 held as collateral. To date, the company has not
made the minimum sales requirement and has funded the annual purchase guarantee
entirely from interest generated from collateral funds, this trend is expected
to continue until the end of the term.
The amount of future revenue relating to this contingency agreement is not
determinable until its ten year expiration date or until such time as the
minimum required sales level is met. As a result, revenue is realized on the
collection method, whereby deferred revenue is realized as income when funds are
released from collateral. At the balance sheet date, the cumulative minimum
sales has not yet been obtained, resulting in $2,910,606 included in unrealized
contingent revenue relating to this agreement at the balance sheet date. This
trend shows no current signs of improving. This unrealized revenue amount has
been offset against the collateral investment held in trust against this
contingent revenue unrealized (see note 5).
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 (None of these funds have been released to date). The term ending date
is December 28, 2007. The contingent (deferred) revenue amount above is secured
by a claim against the ten year BC Savings bonds held in trust for the company.
(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
$2,503,000 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
the minimum casting revenue over the ten year period is met by the company, it
shall receive the collateral funds as income at a rate of approx. 97% of the
gross revenue amount for aggregate revenue generated in excess of the approx.
$5.895 million. Once all of the collateral funds have been released and realized
as income by the Company, the Company shall earn 100% of the Casting software
sales revenue less a perpetual fee of 3% to 5% of gross revenue (depending on
sales price) to the software rights purchasers. In the event that the projected
minimum revenue over the ten year period is not met, the company must make up
purchasers portion of these shortfall from the collateral funds held as
contingent revenue.
The amount of future revenue, should it occur, relating to this contingency
agreement is not
<PAGE>
determinable until its ten year expiration date or until such time as the
minimum required revenue level is met. As a result, revenue is realized on the
collection method, whereby deferred revenue is realized as income when funds are
released from collateral. At the balance sheet date, the cumulative minimum has
not yet been obtained, resulting in $2,503,000 remaining in unrealized
contingent revenue relating to this agreement at the balance sheet date. To
date, none of the funds held in trust have been released to the company.
The collateral funds are registered funds held in trust 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 (none of these funds have been released to
date). The term ending date is December 31, 2007. These collateral funds are in
the form of Manitoba Saving Bonds held in trust. The amount of the secured
contingent revenue has been offset against its related investment collateral
asset on the balance sheet. (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 $2,944,000 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 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 held in trust as security against this contingent revenue.
The amount of future revenue, should it occur, relating to this contingency
agreement is not determinable until its ten year expiration date or until such
time as the minimum required revenue level is met. As a result, revenue is
realized on the collection method, whereby deferred revenue is realized as
income when funds are released from collateral. At the balance sheet date, the
cumulative minimum has not yet been obtained, resulting in $2,944,000 remaining
as unrealized contingent revenue relating to this agreement at the balance sheet
date. To date, none of the funds held in trust have been released to the
company.
The collateral funds are registered funds held in trust 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 (None of these funds have been released to
date). The term ending date is December 31, 2008. These collateral funds are in
the form of British Columbia Savings Bonds. The amount of the contingent revenue
has been offset against its related investment asset on the balance sheet. (See
note 5).
(d) In the 1998 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 was 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 $38,166 in the current quarter, leaving $114,500
unamortized at the balance sheet date. 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. To date, there has been no revenue generated to the company
related to this purchase agreement.
11. STOCKHOLDERS' EQUITY
Statement of Changes in Stockholders' Equity (Including Accumulated Deficit
Statement)
<PAGE>
<TABLE>
<CAPTION>
Class A Common Preference Shares Paid In
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance 8/31/00 9,626,640 $ 6,645 3,673,292 2,439 $1,497,399 ($2,025,845)
Comprehensive Income (375,576)
--------- ------- --------- ----- ---------- -----------
Balance 11/30/00 9,626,640 $ 6,645 3,673,292 $2,439 $1,497,795 ($2,401,421)
Current Year Currency Adjustment (24,000)
Accumulated Deficit 11/30/00 ($2,377,421)
</TABLE>
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 2001 2002 2003 2004 2005
Computer & Office Equip 60,000 63,000 66,000 68,000 70,000
Vancouver Office Lease 10,000 10,500 11,000 11,500 12,000
Toronto Office Lease 11,000 11,500 12,000 12,500 13,000
LA Office Lease 59,000 60,000 61,000 62,000 63,000
TOTALS 140,000 145,000 150,000 154,000 158,000
In the current quarter computer and office equipment leases totaled $14,361.
Aggregate office rent totaled $ 17,630.
13. OTHER CONTINGENT LIABILITIES
(a)The company is obligated to purchase a minimum of approximately $175 000 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 $81 000 representing the portion of the
obligation payable but not yet due or paid at the balance sheet date. This
amount was based on the interest accrued on the collateralized BC Savings Bonds
Investment (Note 5) which is to be paid directly to the collateralized party to
cover the guaranteed purchase amount. This amount is paid semi-annually on or
around June 10 and December 9 of each calendar year.
(b) The company is also obligated to pay minimum exclusivity fees, which is the
interest earned on the Manitoba and British Columbia Savings Bonds (Prevously
CIBC weekly GICs, which were converted to bonds during year) (note 5), per
calendar year for the right to provide management services related to the
Casting Workbook. This minimum obligations remains in effect until December 28,
2007 and 2008 (note 10), at which time, the agreements may be terminated or
renewed, depending on the circumstances at that time. Included in accounts
payable and accrued liabilities is an accrual of approximately $159,000, which
is the interest earned on the collateralized Manitoba and British Columbia
Savings Bonds (Note 5) relating to this agreement from June 1, 2000 to November
30, 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 in trust. See above.
<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 120,000
2007 1,050,000
$1,487,000
The estimated net operating loss resulting from the operations of the American
parent company total approximately $213,000 which may in certain circumstances
be applied against taxable income of the parent company in future years. These
loss carryforwards expire in $33,000 in 2020 and $180,000 in 2019.
15. DEVELOPMENT COSTS
Expenditures relating to Casting Workbook enhancements and refinements 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 subscription revenue.
Costs relating to development of Casting Workbook enhancements which are still
in development at the balance sheet date, are considered to be unfinished
enhancements to the Casting Workbook at the balance sheet date. As such, these
development costs (primarily personnel related) are expensed in the period in
which they are incurred. These enhancements are thought to be necessary to keep
the Casting Workbook software useful in the current market. As such, these costs
are included in cost of sales, as they relate to the continuing usefulness of
the Casting Workbook and the related subscription revenue earned through the use
of the Casting Workbook software.
16. RELATED PARTY TRANSACTIONS
The company had no related party management fees to be included in the
Consolidated Statement of Loss and Accumulated Deficit during the quarter.
At the balance sheet date, the company has approximately $140,000 payable to
companies controlled by or related to directors of the company for services
provided relating to management contracts.
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
Foreign Total Accumulated
Currency Other Comprehensive
Items Income
Beginning balance $320 $320
Current Period change 24 24
Ending balance $344 $344
18. NOTE PAYABLE
Payable to the Telus New Media and Broadcast Fund, located in British Columbia,
Canada, which assists in funding new media projects in British Columbia.
Principal amount of loan is $68,000. Loan bears interest at a rate of 6.75% per
annum and is secured by assets of the company subordinated to the Royal Bank's
claim relating to security for the operating line of credit (Note 7). At the
balance sheet date, the note total includes accrued interest of $4,971. The loan
principal was scheduled to be repaid as follows $34,000 on August 31, 2000
(unpaid at balance sheet date), with the remaining $34,000 to be repaid at
$3,400 per month from September 2000 through June 2000 These payments have yet
to be paid at the balance sheet date.
<PAGE>
19. LOAN PAYABLE - SHAREHOLDER
These are funds advanced to the company throughout the yer to help the company
meet its cash flow requirements. These funds are non interest bearing, with no
fixed terms of repayment.
ITEM 2. MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report includes projections of future results and "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Stockholders and investors are cautioned that all forward-looking statements
involve risks and uncertainty, including, without limitation, the ability to
plan and execute our business, general market conditions, a general lack of
public interest in either our products or securities, federal or state laws or
regulations having adverse effects on small business enterprises, market
competition and pricing. Although we believe the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and, therefore, there can be no assurance that
the forward-looking statements in this Report will prove to be accurate.
Should any of these risks or uncertainties materialize, or should our underlying
assumptions prove incorrect, actual results may vary materially from those
described in this registration statement as anticipated, estimated or expected.
BUSINESS OPERATIONS
OnLine Production Services Inc. ("ONPS", a Nevada corporation), invests in,
represents, promotes, and delivers the products and services of its wholly owned
Canadian subsidiary, OnLine Film Services, Inc. ("OnLine"), which is an internet
based, e-commerce, business-to-business services provider of software and
computer systems solutions to entertainment industry professionals.
During this, our fist quarter of fiscal 2001, we increased our previously
established principal business activity of providing our proprietary software
and services to Talent Agents and Casting Directors worldwide. As an integral
part of providing services to Talent Agents and Casting Directors we host
computerized / digital photographs and/or resumes and/or audio clips and / or
video clips ("Portfolios") for actors and models ("Performers") for a fee (see
also "Revenue Recognition Policy" and "advertise" Note 1(d) to the Financial
Statements).
We have provided our proprietary software and services free to Talent Agents and
Casting Directors as an incentive for them to use our database of Performers.
The fact that Talent Agents and Casting Directors use our software and systems
provides incentive for Performers to subscribe to and pay for our services.
Fees are now collected from Performers and deposited using internet e-commerce.
We have also developed other complementary electronic capabilities in order to
increase our direct service and contact with Performers that will work
hand-in-hand with our e-commerce capabilities to further improve sales, billing
and collections during the second quarter of Fiscal 2001.
Performers' subscriptions to our 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, we provide Casting Directors and Talent Agents (Performer
representatives) with personalized access to the "Casting Workbook" database
that facilitates the hiring of the participating Performers. During Fiscal 2001
we will be implementing a program of personalized access for self-represented
performers that is tailored to their particular requirements in finding work and
/ or agency representation. Use of our software allows the performers"
Portfolios to be 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 our software and systems are continuous,
adding more time saving features to ensure that entertainment professionals
continue to increase their use of our software and systems.
<PAGE>
Our software and systems are developed and tested in Canada by our internal
personnel primarily in Vancouver and Toronto (the centers for the Canadian film,
television, and commercials industries). Prior to deployment in Los Angeles, we
tested and implemented our software in Canada between June 1995 and the spring
of 1999. Development and testing was done with the assistance of Canadian Talent
Agents and Casting Directors who continue to use the system to actively cast
roles in film and television and commercial productions. During that period
approximately 15,000 Canadian actors were entered into our 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 we now provide them on a continuing basis.
We now estimate approximately 80% of all Canadian electronic script breakdowns
are cast by directors using our software and systems.
We began a marketing and promotion campaign in Los Angeles California starting
in the spring of 1999. We now provide professional, personalized, consultative
and supporting services to Casting Directors and Talent Agents in the Los
Angeles area. In addition, we have also made further professional contacts so
that our supporting informational services will be provided to other types of US
companies and entertainment professionals during Fiscal 2001, including, most
significantly, major US production studios.
We report statistical increases in key areas of our computerized
business-to-business transactions as follows:
Quarter Ended
November 30, 1999 November 30, 2000 Increase
Film Projects Processed: 706 1,079 53%
Roles (Acting Jobs) Cast: 3,354 4,435 32%
Audition Suggestions Processed: 93,374 155,704 67%
Our internet sites now receive more than 1.5 million hits per month made mostly
by talent agents and casting directors.
Contracted arrangements with niche market and community based companies like
Latin Heat magazine, Black Talent News, and XXI Century Model Search will
provide us with increased and paid Performer Portfolio hosting throughout Fiscal
2001.
During the quarter we also continued to increase business relations with
industry professionals in other film production centers worldwide. We or
continued negotiations with professional s in the Latin American, Australian and
Asian film, television and commercial industries thus providing us with
increased information that would ultimately establish the timing necessary to
deploy our software and systems in all of those demographic areas. Subsequent to
the quarter we formed a subsidiary corporation that will see full deployment of
"The Casting Workbook" and services in Australia during Fiscal 2001.
With respect to North America and in addition to increasing our business
activities with Talent Agents and Casting Directors in the Los Angeles market,
we also continued to deploy our software and systems in order to provide
services to talented performers throughout North America and worldwide who are
not presently represented by a Talent Agent (self-represented performers). Our
system allows anyone, for a fee, to submit electronically their resume and other
information (e.g. photos and/or sound and / or video clips) to us using access
over the internet We began to collect fees from these performers using a now
commonly used method called e-commerce whereby credit card information is
collected and processed and money deposited to our bank account(s)
electronically. In December 1999 our systems infrastructure necessary to carry
out this process using the Canadian banking system was fully established and a
marketing and promotional campaign has begun subsequent to this reported
quarter. We estimate that many more people worldwide
could subscribe to this new service than 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 advertise themselves in front of
professional Talent Agents and Casting Directors who use our software and
services. Thus we are capable of providing many more individuals (customers) a
chance to be discovered by Talent Agents and/or immediately obtain work from
Casting Directors who are seeking that particular talent.
During the period we also continued to design, develop and program software and
systems that provide increasing computer automation to Agents, Casting Directors
and other professionals in the film, television, commercials and modeling
industries as well as tie into their other existing systems (e.g. accounting
software of other suppliers). All of our present products
<PAGE>
and services are planned for continuing and future marketing and deployment.
RISK FACTORS ASSOCIATED WITH THE COMPANY'S BUSINESS
Risks Associated Changing and Expanding Business.
The Company has experienced substantial changes in and expansion of the
Company's business and operations since it commenced operations, and expects to
continue to experience periods of change. The Company's past changes have
placed, and any future changes would place, significant demands on the Company's
administrative, operational, financial and other resources. The Company expects
operating expenses and staffing levels to increase in the future. In particular,
the Company intends to hire a number of additional skilled personnel, including
persons with experience in both the computer and film industries. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to attract, assimilate or retain additional highly qualified senior
managers and technical and production personnel in the future. The Company also
expects to expend resources with respect to future expansion of its technology,
accounting and internal management systems. This expansion will continue to
challenge the Company's ability to hire, train, motivate and manage its
personnel. If the Company's revenues do not increase in proportion to the
Company's operating expenses, the Company's management systems do not expand to
meet increasing demands, the Company fail to attract, assimilate and retain
qualified personnel, or the Company's management otherwise fails to manage the
Company's expansion effectively, there would be a material adverse effect on the
Company's business, financial condition and operating results. The
implementation of the Company's strategy for rapid growth in the use of the
Company's services may strain its ability to adequately expand technologically.
In addition, the Company relies on a number of third parties to process the
Company's transactions, including on-line and Internet service providers, all of
which will need to expand the scope of the operations they perform for the
Company. Any backlog or inability to use the Company's services caused by a
third party's inability to meet the Company's needs could have a material
adverse effect on the Company's business, financial condition and operating
results.
Risk of Error and of Systems Failure.
The Company's business is subject to various risks associated with systems
errors and malfunctions and employee errors. Heavy stress placed on the systems
during peak "breakdown" times could cause the Company's systems to operate at
unacceptably low speeds or systems could fail altogether.
The Company has experienced incidents of system failure in the past and
there can be no assurances that such incidents will not reoccur in the future.
If such system failure, or if access to the internet is disputed, it may
preclude the Company from conducting normal operation for an undetermined period
of time. The Company may also experience losses in connection with employee
errors. Although expenses incurred by the Company in connection with employee
errors have not been significant in the past, there can be no assurance that
these expenses will not increase in the future.
Significant Fluctuations in Quarterly Operating Results.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including the
following: the timing of introductions or enhancements of services and products
by the Company or the Company's competitors; changes in pricing policies by the
Company or the Company's competitors; changes in strategy; the success of or
costs associated with acquisitions or other strategic relationships; changes in
key personnel; seasonal trends; changes in the level of operating expenses to
support projected growth; and general economic conditions. In addition, the
Company has experienced fluctuations in the average number of customer
transactions per day and expects that its rate of growth in customer
transactions at any given time is not necessarily indicative of future
transaction activity.
<PAGE>
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast, and the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as any indication of future performance. It is likely
that the Company's future quarterly operating results from time to time will not
meet the expectations of securities analysts or investors, which may have an
adverse effect on the market price of the Company's Class A Common Stock.
Competition.
The Company's management is not aware of any other company in Canada that
has the same type of database and/or service to film and television
professionals as it is currently providing. There are several small companies
who offer various television and film services but they are without a direct
response element and accordingly do not, in the Company's view, present a
competitive risk to the Company's operations
There can be no assurance that the Company will be able to compete
effectively with current or future competitors or that the competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, financial condition and operating results.
Early Stage of Market Development; Dependence on the Internet.
As is typical for new and rapidly evolving industries, demand and market
acceptance for recently introduced services and products are subject to a high
level of uncertainty. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary infrastructure,
such as a reliable network backbone, or timely development of complementary
services and products, such as high speed modems and high speed
communication-lines. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In addition,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity or due to increased governmental regulation. Moreover, critical issues
concerning the commercial use of the Internet (including security, reliability,
cost, ease of use, accessibility and quality of service) remain unresolved and
may negatively affect the growth of Internet use or the attractiveness of
commerce and communication on the Internet. Because global commerce and on-line
exchange of information on the Internet and other similar open wide area
networks are new and evolving, there can be no assurance that the Internet will
prove to be a viable commercial marketplace. If critical issues concerning the
commercial use of the Internet are not favorably resolved, if the necessary
infrastructure is not developed, or if the Internet does not become a viable
commercial marketplace, the Company's retail business, financial condition and
operating results will be materially adversely affected. Adoption of on-line
commerce, particularly by those individuals that have historically relied upon
traditional means of commerce, will require a broad acceptance by such
individuals of new and substantially different methods of conducting business.
Technical Changes.
The information and financial services and communications industries are
characterized by rapid technological change, changes in customer requirements,
frequent new service and product introductions and enhancements, and emerging
industry standards. The introduction of services or products embodying new
technologies and the emergence of new industry standards and practices can
render existing services or products obsolete and unmarketable. The Company's
future success shall depend, in part, on its ability to develop leading
technologies, enhance its existing services and products, develop new services
and products that address the increasingly sophisticated and varied needs of its
prospective customers, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. The
development of new services and products or enhanced versions of existing
<PAGE>
services and products entails significant technical risks. There can be no
assurance that the Company will be successful in effectively using new
technologies, adapting its services and products to emerging industry standards,
developing, introducing and marketing service and product enhancements, or new
services and products, or that it will not experience difficulties that could
delay or prevent the successful development, introduction or marketing of these
services and products, or that its new service and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable to develop and introduce new services and
products or enhancements of existing services and products in a timely manner in
response to changing market conditions or customer requirements, or if new
services and products do not achieve market acceptance, the Company's business,
financial condition and operating results will be materially adversely affected.
Proprietary Rights and Risk of Infringement.
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology and on the proprietary technology licensed
by it. The Company relies primarily on copyright, trade secret and trade-mark
law to protect its technology and the technology licensed by it from third
parties. Notwithstanding the precautions taken by the Company, it may be
possible for a third party to copy or otherwise obtain and use the Company's
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of the Company's
technology is difficult, particularly because the global nature of the Internet
makes it difficult to control the ultimate destination or security of software
or other data transmitted.
The laws of other countries may afford the Company little or no effective
protection of its intellectual property. There can be no assurance that the
steps taken by the Company will prevent misappropriation of its technology or
that agreements entered into for that purpose would be enforceable. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources,
either of which could have a material adverse effect on the Company's business,
financial condition and operating results.
The Company may in the future receive notices of claims of infringement of
other parties' proprietary rights. There can be no assurance that claims for
infringement or invalidity (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against the Company. Any
such claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert the Company's management's attention and resources or
require the Company to enter into royalty or licensing agreements. There can be
no assurance that such licenses would be available on reasonable terms, if at
all, and the assertion or prosecution of any such claims could have a material
adverse effect on the Company's business, financial condition and operating
results.
Future Capital Needs; Uncertainty of Additional Financing.
The Company would need to raise additional funds in order to support
expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or take
advantage of unanticipated opportunities. The Company's future liquidity and
capital requirements will depend upon numerous factors, including the costs and
timing of expansion of research and development efforts and the success of such
efforts, the success of the Company's existing and new service offerings and
competing technological and market developments.
The Company may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that such additional funding, if needed, will be available on terms
<PAGE>
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to shareholders, and debt financing, if available, may
involve restrictive covenants. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's
shareholders will be reduced, shareholders may experience additional dilution in
net book value per share, or such equity securities may have rights, preferences
or privileges senior to those of the holders of the Common Stock. If adequate
funds are not available on acceptable terms, the Company may be unable to
develop or enhance its services and products, take advantage of future
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on the Company's business, financial condition and
operating results.
Risks Associated with Acquisitions and Strategic Relationships.
The Company may make acquisitions of other companies or technologies in the
future, or may enter into strategic relationships, and the Company regularly
evaluate such opportunities. Acquisitions and the implementation of strategic
relationships entail numerous risks, including difficulties in the assimilation
of acquired operations and products, diversion of management's attention from
other business concerns, amortization of acquired intangible assets and
potential loss of key employees of acquired companies. No assurance can be given
that the Company will be able to integrate successfully any operations,
personnel, services or products that might be acquired in the future, and the
Company's failure to do so could have a material adverse effect on business,
financial condition and operating results.
The Company has established a number of relationships with on-line and
Internet service providers and software, information and financial service
providers. The Company will continue to seek out similar strategic opportunities
in the future. There can be no assurance that any such
relationships will be maintained, that if such relationships are maintained,
they will be successful or profitable, or that the Company will develop any new
such relationships. Further, the Company's success in any of its strategic
relationships is dependent on the reputation of its strategic partners. Should
any of the Company's strategic partners experience damage to their reputation,
the Company may be materially adversely affected.
Limited Operating History. The Company has not achieved profitability and
there is no guarantee that the Company will be able to achieve profitability in
the future. The Company has never paid a dividend on the Company's Class A
Common Stock and does not expect to do so in the foreseeable future.
Potential Future 144 Sales.
Rule 144 provides, in essence, that a person holding restricted securities
for a period of one year may sell those securities in unsolicited brokerage
transactions or in transactions with a market maker, in an amount equal to one
percent of the Company's outstanding Class A Common Stock every three months.
Additionally, Rule 144 requires that an issuer of securities make available
adequate current public information with respect to the issuer. Such information
is deemed available if the issuer satisfies the reporting requirements of
Sections 13 or 15(d) of the Exchange Act and of Rule 15c2-11 thereunder. Rule
144 also permits, under certain circumstances, the sale of shares by a person
who is not an affiliate of the Company and who has satisfied a two year holding
period without any quantity limitation and whether or not there is adequate
current public information available. Investors should be aware that sales under
Rule 144, or pursuant to a registration statement filed under the Act, may have
a depressive effect on the market price of the Company's Class A Common Stock in
any market that may develop for such shares.
Limited Market For the Company's Class A Common Stock.
There is only a limited trading market for the Company's Class A Common
Stock on the National Association of Securities Dealers, Inc. ("NASD")
over-the-counter Bulletin Board (the "OTCBB"), which may limit the marketability
and liquidity of the shares of the Class A Common Stock.
<PAGE>
Penny Stock Rules.
Under Rule 15g-9 of the Exchange Act, a broker or dealer may not sell a
"penny stock" to, or effect the purchase of a penny stock by, any person unless:
(a) such sale or purchase is exempt from Rule 15g-9;
(b) prior to the transaction the broker or dealer has (1) approved the
person's account for transactions in penny stocks in accordance with
Rule 15g-9, and (2) received from the person a written agreement to
the transaction setting forth the identity and quantity of the penny
stock to be purchased; and
(c) the purchaser has been provided an propitiate disclosure statement as
to penny stock investment.
The United States Securities and Exchange Commission (the "Commission") has
adopted regulations that generally define a penny stock to be any equity
security other than a security excluded from such definition by Rule 3a51-1.
Such exemptions include, but are not limited to (1) an equity security issued by
an issuer that has (i) net tangible assets of at least $2,000,000, if such
issuer has been in continuous operations for at least three years, (ii) net
tangible assets of at least $5,000,000, if such issuer has been in continuous
operation for less than three years, or (iii) average revenue of at least
$6,000,000 for the preceding three years; (2) except for purposes of Section
7(b) of the Exchange Act and Rule 419, any security that has a price of $5.00 or
more; and (3) a security that is authorized or approved for authorization upon
notice of issuance for quotation on the NASDAQ Stock Market, Inc.'s Automated
Quotation System.
Currently shares of the Company's Class A Common Stock will be subject to
the regulations on penny stocks; consequently, the market liquidity for the
Company's Class A Common Stock may be adversely affected by such regulations
limiting the ability of broker/dealers to sell the Company's Class A Common
Stock and the ability of shareholders to sell their securities in the secondary
market.
Moreover, the Company's shares may only be sold or transferred by its
stockholders in those jurisdictions in which an exemption for such "secondary
trading" exists or in which the shares may have been registered.
Adequate Labor and Dependence Upon Key Personnel; No Employment Agreements.
The Company will depend upon recruiting and maintaining qualified personnel
to staff the Company's operations. The Company believes that such personnel are
currently available at reasonable salaries and wages. There can be no assurance,
however, that such personnel will always be available in the future. Loss of the
services of any of this management team and key employees could have a material
adverse effect on the Company's operations.
Conflicts of Interest.
From time to time certain of the Company's directors and executive officers
may serve as directors or executive officers of other companies and, to the
extent that such other companies may participate in the industries in which the
Company may participate, such directors and officers may have a conflict of
interest. In addition, the Company's dependence on directors and officers who
devote time to other business interests may create conflicts of interest, i.e.
that the fiduciary obligations of an individual to the other company conflict
with the individual fiduciary obligations of the Company and visa versa.
Directors and officers must exercise their judgment to resolve all conflicts of
interest in a manner consistent with their fiduciary duties to the Company. In
the event that such a conflict of interest arises at a meeting of the directors
of the Company, a director who has such a conflict will abstain from voting for
or against the approval of such a participation or such terms. In appropriate
cases, the Company will establish a special committee of independent directors
<PAGE>
to review a matter in which several directors, or management, may have a
conflict. The Company is not aware of the existence of any conflict of interest
as described herein.
FINANCIAL CONDITION, RESULTS AND PLAN
GENERAL
OnLine Production Services Inc. ("ONPS", a Nevada corporation), invests in,
represents, promotes, and delivers the products and services of its wholly owned
Canadian subsidiary, OnLine Film Services, Inc. ("OnLine"), which is an internet
based, e-commerce, business to business services provider of software and
computer systems solutions to entertainment industry professionals.
An historical overview and discussion of operations is set-out above in Part I,
Item 1 Business.
REVENUES
Agent Represented Performer Memberships:
Revenues from performer memberships during the first quarter of Fiscal 2000
($49,000 US) were received in Canadian Dollars from Canadian actors only. Most
of those performers are represented by Canadian Talent Agents. This represented
a 33% increase from that market group over the same period in Fiscal 1999.
During this newly reported first quarter of Fiscal 2001 revenues of $121,760 (a
149% increase over the same quarter in the previous year) was nearly all
received in full and nearly all from Canadian actors.
Many free trial periods, set up in the prior fiscal year, for actors and models
who are represented by Agents expired during the second quarter of Fiscal 2000,
resulting in a substantial increase in Performers billings, and mostly in the
Los Angeles area (a greater than 1,500% overall increase compared to the prior
period). However, collection of those fees from US performers continue as of
November 30, 2000.
During the third and fourth quarters of Fiscal 2000 we granted payment
extensions (without affecting service start dates) to actors and models
represented by Agents in the United States. This was a gesture of goodwill
toward actors affected by the US actor strike, and as a part of a competitive
strategy. Approximately $300,000 US Dollars of reported accounts receivable were
affected.
Our historical experience indicated that our ability to collect these accounts
was high due to the importance of our service to the Performers by way of their
increased job audition opportunities. The professional industry in Los Angeles
is still implementing our software and systems with approximately the same
increasing rate as that which we experienced in Canada. However, subsequent to
the reported quarter, we have written down our US accounts receivable to zero by
way of full allowance for any doubtfulness in receiving payment from the US
market for billings made during the period of the actors strike.
We expect a more rapid rate of Los Angeles acceptance, revenue and collections
than we experienced in Canada because, during the fourth quarter of Fiscal 2000
and in readiness of actor strike resolution, we concentrated on developing and
launching an improved program of technical service and revenue collection.
Our collection of Canadian accounts continues with the help of our new
electronic customer relations and direct contact processes deployed subsequent
to Fiscal 2000 year end and after the US actors' strike was resolved (October
2000). These technical improvements have aso enriched our relations with casting
directors, including those employed inside major studios. We are experiencing
increases in the number of script breakdowns that we process from the United
States. Those script breakdowns represent job opportunities to performers and
further motivate Talent Agents and their performer rosters to sign onto our
system and pay our fees. We expect that these processes will decrease the amount
of accounts receivable that we carry in the future because new accounts will be
collected immediately and renewal accounts will be collected as they become due.
<PAGE>
Self-Represented Performer Memberships (Retail Markets):
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
our e-commerce based fee collection capabilities had been deployed during Fiscal
2000 and we planned to initiate a marketing campaign that was dependent on the
development and allocation of sufficient funding for what we considered
essentially a retail market. We considered that market, in traditional terms, to
require print and broadcast advertising in order to accomplish adequate sales
volumes. An agreement was negotiated and then abandoned, without litigation,
during Fiscal 2000, for the supply of infomercials directed at the
self-represented market sector. This abandonment occurred due, in part, to a
lack of confirmation of value. By analyzing the approaches made by our
competitors we realized that traditional retail print and broadcast advertising
was to involve unjustifiably high cash expenditure requirements compared to
resulting sales increases (and less profitable) when compared to our traditional
services to the professional industry. During the fourth quarter of Fiscal 2000
we began to program new in-house electronic advertising facilities, now named
"E-pitch" for our branding purposes. Our traditional approach, enhanced by those
new facilities, now justifies our increasing entry into this market demographic.
Subsequent to the currently reported Fiscal Year end, we completed and we have
deployed an electronic advertising approach. Electronically we are advertising
our services to all casting directors and all represented and self-represented
performers and their agents. The industry throughout North America is
dramatically acknowledging our new technical capabilities that link all of our
traditional services with this new electronic advertising methodology. We now
make these electronic advertising and thus job finding capabilities available to
any individual or Agent where the appropriate performer membership fees have
been paid.
These new technical services are extremely competitive and acceptance in the
market has been more dramatic than any we have previously experienced.
Our new technical service has also been integrated with our billing and
collection services, incorporating e-commerce, thus increasing our expectation
of cash receipts in the near term.
Development of New Revenue Sources from Agencies:
During Fiscal 2000 we entered into an agreement whereby a large US Talent /
Literary Agency supplied a description of certain business requirements, and we
have performed for our mutual benefit the required software programming, in
order to accomplish new automated data and reporting capabilities to handle
extended day-to-day business functions of Talent and Literary Agents. The
computer automation of a wide range of Agents' requirements is beyond that
currently supplied by any of our competitors. Our new software also provides
links into existing, widely distributed accounting software programming with the
cooperation of the copyright owner of that software. This new software
programming is useful industry-wide. Testing of our new software is ongoing
on-site at the Agency with whom we have the agreement. We are confident that
successful implementation will be achieved. Further arrangement for
industry-wide distribution, and resulting revenue from Agents is estimated to
begin during Fiscal 2001. Receipts of revenue, direct from Agents, is previously
untapped by us.
International Licensing / Joint Ventures / Territory Sales:
We have not pursued, during the current period, and we have no intention of
pursuing in the future, the sale of territory rights as in prior periods.
However, revenue rights in many territories were never sold including the Los
Angeles district and all territories outside of North America.
Instead of selling territory rights we will continue to pursue international
licensing and/or joint venture agreements in Latin America, the United Kingdom,
Europe and Asia during the next fiscal year. Subsequent to our reported quarter
we completed detailed negotiations in order to form a subsidiary corporation for
the deployment of our software and services in Australia. We expect that the
Australian market, estimated by us to be equal to 50 % of our current Canadian
customer base, and our related 51 % joint venture receipts, will provide us with
revenues sufficient to break even in Australia during the course of Fiscal 2001.
Niche Market and Community Based Revenues:
Contracted arrangements with niche market companies and performer communities
like Latin Heat
<PAGE>
magazine, Black Talent News, and XXI Century Model Search, increasingly provided
us with Performer Portfolios to be hosted during Fiscal 2000. The number of
these types of community level service arrangements will be increased in Fiscal
2001 and they will be pursued as immediate cash receipts arrangements.
COST OF SALES AND GROSS MARGIN
Of our reported Cost of Sales for the quarter, $121,000 relates to sales
guarantee amounts which are paid directly from interest we earned on
collateralized long-term investments, in respect of CastingWorkbook exclusivity
payments and Mailcard distribution payments relating our sale of territory
rights in prior periods (See note 13 to the financial statements).
The remaining cost of goods sold, ($103,000), was incurred to continue the
direct activities of programming competitive improvements to our software and
systems for continuing use by Casting Directors, Performers, and their Agents as
well as other industry professionals. Costs are incurred also to maintain 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 we seek opportunities to decrease our costs of that
infrastructure component.
The sunk costs of our previous improvements to software programming may now be
spread over a larger customer base in the future thus providing an expectation
of a more effective use of cost of goods sold and increasing gross margin.
This, the first quarter of our Fiscal 2001, indicates a positive gross margin of
16% when the $121,000 sales guarantees under collatoralized agreements (see
Notes 13 to the Finacial Statements) is factored out of cost of goods sold and
matched directly against the related interest earned to service it. The 16%
positive gross margin for this reported quarter compares favourably to a
negative 75% percent gross loss reported for the same quarter in the previous
fiscal year.
OPERATING EXPENSES
Operating Expenses for the reported quarter (326,000) includes $180,000 of one
time bad debt allowance related directly to the ongoing US actor strike that
continued during the period. The remaining amount ($146,000) represents a 46%
decrease over the same period in the prior year due primarily to our decrease in
US operations also due to the US actor strike. Operations in the Los Angeles
area is expected to increase during the remainder of Fiscal 2001.
Our operating expenses included no payment to executive management during this
reported quarter and only nominal amounts during the same quarter in the prior
year.
For the remainder of Fiscal 2001 we will implement marketing strategies that
include direct internet promotion to performers and their agents in order to
maintain low operating costs, and particularly in the Los Angeles area. We will
focus attention on the actor and model customer base using advertising and web
marketing techniques that have a more direct relationship to the realization of
revenues.
OTHER INCOME
Other sources of income earned during the period consist 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 FROM 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 2001.
CASH FLOW AND WORKING CAPITAL
Accounts Payable and Accruals reported as at November 30, 2000 ($435,000)
includes $238,000 of accrued distribution and exclusivity payments under the
Territory Sales agreements referred to
<PAGE>
above. The $238,000 would subsequently be paid from interest portions of
long-term investments that will come due approximately December 10, 2000 to
December 31, 2000.
Reported cash and cash equivalents of ($12,000) is not sufficient to meet
current demands on cash represented by $197,000 of Accounts Payable and Accruals
(a $209,000 deficiency).
We financed our Fiscal 2001 first quarter of operations by way of revenue
receipt as well as by unsecured loans of major shareholders of ONPS.
We require an increase in revenue realization as well as investment inflows in
order to provide for working capital requirements during the remainder of Fiscal
2001.
ONPS has entertained proposals from a number of individuals and companies that
vary in their collaborative intentions, impact on OnLine's business operations
and having differing financial benefits. We are prepared to cover cash flow
requirements by way of accepting proposals involving the further issuance of
treasury stock if circumstances necessitate.
ONPS has, during and subsequent to the reported quarter, concentrated on
developing reorganization structures that affectively bring in both finance and
expanded business operations in order to accomplish value added for its current
customer base and investors.
A proposal has been provided an exclusive by us to proceed through negotiations
up to February 28, 2001. The proposal involves expansion that is; a
collaboration with complementary industry leaders in other entertainment based
operations, an inclusion of our "Casting Workbook" and related industry software
into a broader field of use, and commitment of $1,000,000 annual operating
finance to our wholly owned subsidiary, OnLine. Related to our granting of this
exclusive negotiation, up to $300,000 would be received by us during the
negotiations until closing. We are confident that the reorganization represented
by this proposal can be completed and all terms negotiated.
In addition, we at ONPS are renewing our business presentations, and increasing
our contacts of potential financial partners, on the premise of accessing
further financing for our wholly owned subsidiary, OnLine, as may be warranted
by newly developed technology and thus value added operations. This is being
done subject to and still respecting the negotiations exclusivity arrangement
discussed above.
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.
<PAGE>
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 January 11, 2001 /s/ Aerock Fox
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Aerock Fox, President
