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As filed with the Securities and Exchange Commission on January 13, 2000
Registration No. 000-27363
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTIONS 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
INTERNETSTUDIOS.COM, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 13-4009696
(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
1351 4/th/ Street, Suite 227 90401
(Address of principal offices) (Zip Code)
(310) 394-4025
(Registrant's telephone number, including area code)
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of the Act:
Common stock, par value $0.0001 per share
(Title of class)
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InternetStudios.com, Inc.
Table of Contents
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<S> <C>
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 10
ITEM 3. PROPERTIES 14
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 15
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 16
ITEM 6. EXECUTIVE COMPENSATION 17
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
ITEM 8. LEGAL PROCEEDINGS 23
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND OTHER 23
STOCKHOLDER MATTERS
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES 24
ITEM 11. DESCRIPTION OF SECURITIES 25
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS 25
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL 26
DISCLOSURE
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS 27
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ITEM 1. DESCRIPTION OF BUSINESS
InternetStudios.com, Inc. effected a 1 for 3 forward stock split on April
15, 1999 and a 1 for 3 reverse stock split on September 23, 1999 of its common
stock. All references in the Form 10 take these stock splits into effect when
referring to the number of share of common stock or per share data.
Overview
InternetStudios.com, Inc. was incorporated in the State of Nevada on April
14, 1998 as The Enterprise, Inc. For a period of time prior to December 14,
1998, InternetStudios was engaged in the word processing business. On December
14, 1998, InternetStudios withdrew from the word processing business in
anticipation of acquiring a license to software technology for the health
industry. This acquisition was not completed. On September 18, 1999, the
stockholders of InternetStudios approved a name change to InternetStudios.com,
Inc. in anticipation of acquiring and developing an Internet business. The name
change was effective September 21, 1999. Pursuant to an Acquisition Agreement
dated September 17, 1999 among eHealth.com, Inc., Mark Rutledge and Rob Maclean
(together the "Principals") and Online Films LLC, a Delaware limited liability
company, the Principals agreed to transfer on their behalves, and on behalf of
other beneficial owners, 91.847% of the membership interest in Online Films so
that Online Films became a subsidiary of eHealth. In consideration of the
transfer of the Principals' membership interests, the Principals and other
beneficial owners of Online Films received an aggregate of 5,632,800 shares of
InternetStudios common stock. As a result of the acquisition eHealth acquired a
91.847% ownership interest in Online Films. The acquisition of 91.847% of the
membership interest of Online Films is referred to herein as the "Online Films
Acquisition." As a result of the Online Films Acquisition, the prior owners of
Online Films now control 44.5% percent of eHealth, which was renamed
InternetStudios, effective September 18, 1997. (Hereinafter, reference to
InternetStudios shall include its subsidiary Online Films unless the context
otherwise requires.)
As a result of the Online Films Acquisition, InternetStudios is in the
business of compiling an online database of filmed entertainment and
facilitating a digital market targeted at the entertainment industry.
onlinefilmsales.com
InternetStudios is a development stage company with no operations, no
revenues, an expectation of further significant losses and no commercially
acceptable products and services. InternetStudios' proposed operations are
subject to all of the risks inherent in a growing business enterprise, including
the potential of operating losses. The likelihood of InternetStudios' success
must be considered in light of the expenses, difficulties and delays frequently
encountered in connection with a new business.
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InternetStudios' business plan is to compile an online database of filmed
entertainment and facilitate a digital market targeted at the entertainment
industry. InternetStudios envisions that the online filmed entertainment
database will be available 24 hours a day, 7 days a week for the holders of
rights to filmed entertainment and buyers of filmed entertainment productions to
trade such rights in an open and efficient centralized forum. InternetStudios
believes that by creating an online database of filmed entertainment and digital
market, both producers and holders of rights to film entertainment and buyers of
filmed entertainment will benefit. The online database of filmed entertainment
will provide a convenient, centralized venue for producers and rights holders to
market their inventories. The online database will provide access for the
buyers of filmed entertainment to a central forum with information necessary to
making an informed purchasing decision.
InternetStudios is building the website to list filmed entertainment rights
at www.onlinefilmsales.com. InternetStudios anticipates that listing
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capabilities for filmed entertainment rights on the onlinefilmsales.com website
will be launched for beta testing in time for the American Film Market in
February 2000. The onlinefilmsales.com website will allow holders of rights to
list on the website, filmed entertainment productions for sale. Buyers will be
able to bid on and purchase these rights and all registered users will be able
to browse through the productions from any place in the world at any time. The
onlinefilmsales.com website will offer buyers information on a large selection
of filmed entertainment productions that was traditionally time consuming and
costly to acquire. The online listing and sales market will also enable the
holders of rights to reach a larger number of potential buyers and to exploit
such productions more effectively than traditional industry markets.
InternetStudios intends for transactions to take place as follows. Once a
filmed entertainment rights holder pays a listing fee to list their rights on
the onlinefilmsales.com website, buyers of filmed entertainment rights will be
able to access information provided by the rights holders on the website, such
as available rights and territories and view trailers of the filmed
entertainment using technology that transmits video over the Internet. Buyers
will be able to target their search for products to particular rights and
particular territories. InternetStudios will facilitate the bidding process by
enabling buyers to e-mail a bid to the rights holder. The rights holder will
either accept the bid via e-mail or reject the bid and e-mail a counteroffer to
the proposed buyer. Once an agreement is reached between the parties,
InternetStudios will charge a transaction fee for matching the buyer and seller.
InternetStudios plans to continually enhance the onlinefilmsales.com website to
meet the needs of buyers and sellers, and will strive to improve the user
experience by incorporating user feedback and advances in technology.
InternetStudios intends to generate revenues from listing fees, transaction
fees, financing and profit participations, subscription fees and advertising
fees, all as more particularly described below.
A listing fee of between $5,000 and $100,000 per year, depending on the
number of filmed entertainment products and their respective budgets, will be
assessed by InternetStudios on sales companies and larger producers for the
listing of the entertainment product on the onlinefilmsales.com website.
Initially, independent producers of filmed entertainment product will not be
assessed a listing fee. However, InternetStudios may decide to impose a listing
fee on independent producers as the business develops.
In the event, buyer and seller complete a sale through the use of the
onlinefilmsales.com website, InternetStudios will receive a fee for enabling the
transaction. The transaction fee will vary between 2% and 10% of the negotiated
sales price depending on the number of filmed
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entertainment rights listed by the seller on the onlinefilmsales.com website or
the amount of the negotiated sales price.
InternetStudios' long term business plan contemplates facilitating the
financing of filmed entertainment via the onlinefilmsales.com website in 2001.
InternetStudios intends to provide a forum for producers to pre-sell a portion
of filmed entertainment rights and use the proceeds of the sale to cover the
cost of producing and marketing filmed entertainment rights in the development
stage. InternetStudios will earn a financing fee from facilitating the
financing of the filmed entertainment. In addition, InternetStudios may also
receive profit participations upon the release and financial success of such
filmed entertainment. InternetStudios is currently exploring the feasibility of
providing such services.
After an initial introductory period, InternetStudios plans to charge
a subscription fee for reportertv and studiobuzz services (as discussed below).
InternetStudios anticipates that, commencing the second quarter of the year
2000, it will charge a subscription fee of approximately $30 per month for
independent subscribers to access reportertv and will provide discounts for
multiple users in the same organization.
InternetStudios plans to generate advertising revenues from advertisement
on its websites. Currently InternetStudios does not have any advertisers on its
websites but plans to attract advertisers by marketing to potential advertisers.
InternetStudios expects its material operating expenses to be comprised of
two main expenses. The largest percentage of operating expenses is expected to
be from marketing expenses including, salaries for its sales staff, fees to
attend film festivals and entertainment industry forums and expenses incurred
for online and offline advertising. In addition, InternetStudios expects to
incur material expenses in maintaining its online database including, salaries
for data entry and customer service staff, costs for compiling and researching
information to be incorporated onto the onlinefilmsales.com website and costs
for maintaining the hardware to operate the website.
InternetStudios has not performed any market studies or analyses to
determine the demand for or likely market acceptance of its onlinefilmsales.com
website or any other of its business concepts.
Sales and Marketing
Since the Online Acquisition, InternetStudios' management team has focused
on marketing and public relations efforts to attract vendors to list their
filmed entertainment rights on the onlinefilmsales.com web site.
InternetStudios believes that much of the awareness of the onlinefilmsales.com
website will be generated by attendance at film festivals, entertainment
industry forums and other events. InternetStudios has used a combination of
online and offline advertising to generate awareness of InternetStudios and the
onlinefilmsales.com website.
Once the onlinefilmsales.com website is launched for beta testing,
InternetStudios intends to generate additional brand awareness from specific
promotional activities such as:
. setting up promotional booths and kiosks at major and minor film
festivals; and
. enter into relationships with other websites to place links on their
sites to the onlinefilmsales.com website.
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InternetStudios expects to hire sales personnel as demand increases.
Relationship with MediaChase Ltd.
InternetStudios has agreed, subject to a definitive contract, to enter into
two joint ventures with MediaChase Ltd., a Los Angeles based software
development company that has developed e-commerce systems and websites for
telecommunications companies and specializes in database integration and website
enablement of corporate processes. There is no affiliation between
InternetStudios and MediaChase or any of MediaChase's principals. The
discussions with MediaChase regarding the joint venture are ongoing. The parties
have signed a preliminary deal memo pursuant to which each party agrees to
negotiate in good faith, through January 31, 2000, the terms and conditions of
any long form documents necessary to accomplish the contemplated transaction.
One joint venture, reportertv.com, will focus on providing a twice daily
business entertainment news magazine broadcast over the Internet in television
broadcast news format and the other joint venture, studiobuzz.com, will focus on
creating a comprehensive database of information relating to the entertainment
industry. MediaChase is also engaged by InternetStudios to design and develop
the onlinefilmsales.com website and its website at www.internetstudios.com,
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which currently offers limited functionality. InternetStudios considered four
candidates in its search for a technology partner including MediaChase, Scient
Corporation, Razorfish, Inc. and Sychronicity Software. Based on discussions
with management of MediaChase, MediaChase was selected because it was the most
compatible partner with the relevant technological expertise and innovative
ideas including the concept for a business entertainment news magazine broadcast
over the Internet. InternetStudios believes that MediaChase shares its vision
and would be the most suitable candidate to develop its technological
requirements in accordance with its business plan.
reportertv.com
InternetStudios and MediaChase have agreed to jointly create and produce an
interactive entertainment news magazine in a television format broadcast via the
Internet. The broadcast is dedicated to delivering content and information
similar to entertainment industry trade magazines twice a day and is targeted at
producers, studio executives and other entertainment industry related businesses
worldwide. The first Internet broadcast was launched on November 3, 1999. The
broadcast is accessible via the Internet at www.reportertv.com.
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As of December 31, 1999, InternetStudios had advanced $1,291,635 to
MediaChase in the form of a loan as evidenced by the Secured Promissory Note
dated November 12, 1999 and the Allonge to the Secured Promissory Note dated
December 16, 1999, to fund the development of the reporterTV concept. Upon the
execution of the definitive agreements for the joint venture, this loan will be
contributed by InternetStudios to the joint venture. InternetStudios is
required to contribute a total of $1,500,000 cash (which includes the $1,291,635
loan to be contributed) to the joint venture over time as required by the
management committee of the joint venture to fund the development of the
reporterTV concept. InternetStudios will use the proceeds of the sale of
1,000,000 shares of InternetStudios' common stock of $8 per share to investors
in offshore transactions pursuant to Regulation S to fund any other capital
contributions to reportertv.com. There can be no assurances that the business
model for the joint venture will be successful, or that the venture will
generate revenues for InternetStudios.
studiobuzz.com
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InternetStudios and MediaChase have agreed to jointly create an online
database with the capability to store and provide access to information relating
to development, financing, production, talent, marketing and distribution of
filmed entertainment rights. The database will be accessible on the web at
www.studiobuzz.com.
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As of October 31, 1999, the studiobuzz concept is still in the planning
stages. The companies anticipate that the studiobuzz concept will not be
developed until the latter half of 2000. There can be no assurances that the
business model for the joint venture will be successful, or that the venture
will generate revenues for InternetStudios.
Competition
As adoption of the Web as a medium for commerce continues to grow, other
companies may enter the market to provide a forum for auctioning filmed
entertainment rights. InternetStudios has identified FilmAxis.com,
FilmBazaar.com, ShowBizData.com, Reelplay.com and InHollywood.com as its
principal competitors.
InternetStudios' ability to compete successfully in the rapidly evolving
Internet filmed entertainment rights market will depend upon certain factors,
many of which are beyond its control. There can be no assurance that
InternetStudios will be able to compete successfully. However, InternetStudios
believes that it can be differentiated from its competitors in several areas,
including relationships of its management in the entertainment industry, the
proprietary technology being developed for its websites and its secured equity
funding source.
Technology
The onlinefilmsales.com website is currently being designed and developed,
on InternetStudios behalf, by MediaChase. InternetStudios' system is being
designed around industry standard architectures. InternetStudios is unable to
predict at this time whether its infrastructure is adequate to accommodate the
volume of traffic and the number of filmed entertainment rights transactions
that will actually be conducted by users on its website. The failure of
InternetStudios' systems to accommodate the volume of traffic or the number of
transactions could cause the website to become unstable and possibly cease to
operate for periods of time. InternetStudios anticipates that it will continue
to devote significant resources to develop its technology infrastructure.
InternetStudios' future success will depend on its ability to adapt to rapidly
changing technologies, to adapt its services to evolving industry standards and
to continually improve the performance, features and reliability of its service
in response to competitive service and product offerings and evolving demands of
the marketplace. The failure of the InternetStudios to adapt to such changes
would harm its business.
Our Intellectual Property
InternetStudios regards the protection of its copyrights, service marks,
trademarks, trade dress and trade secrets as critical to its success.
InternetStudios relies on a combination of patent, copyright, trademark, service
mark and trade secret laws and contractual restrictions to protect its
proprietary rights in products and services. InternetStudios plans to enter
into confidentiality and invention assignment agreements with its employees and
contractors, and nondisclosure agreements with parties with which it conducts
business to limit access to and disclosure of its proprietary information. Any
contractual arrangements and the other steps taken by InternetStudios to protect
its intellectual property may not prevent misappropriation of its technology or
deter independent third-party development of similar technologies.
InternetStudios
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has a current pending application for the servicemark of
"InternetStudios.com" with the United States Patent and Trademark Office.
Our Employees
As of December 31, 1999, InternetStudios had ten full time employees.
InternetStudios plans to expand significantly and will actively seek, among
others, a Chief Financial Officer, accounting personnel and administrative
staff.
Industry Background
The Filmed Entertainment Rights Market
Historically, filmed entertainment rights have been bought and sold
primarily through major and minor film festivals and trade shows. Independent
producers create over 6,000 films and hundreds of thousand of hours of
television programs each year. Each project requires marketing of the
distribution rights for different media, such as theatrical release, video sales
and rental, video on demand, pay television, free television and the Internet,
in every geographic market. This results in six or more licenses for each
production in as many as 200 territories. The rise of independent feature film
and television productions over the last 15 years has created a demand for a
more efficient marketplace for distribution of the rights for these filmed
entertainment.
The market for filmed entertainment rights is fragmented. There is no
central service available for entertainment industry executives to access
information with respect to the availability and nature of filmed entertainment
rights. Currently, the entertainment industry utilizes a combination of
subscription database services, trade magazines and relies heavily on the
networking of staff and attendance at the film markets and festivals to locate
and purchase project exploitation and distribution rights or list and license
their available inventories. The market is inefficient, labor intensive and the
cost of concluding a licensing arrangement can be prohibitively high.
InternetStudios believes that there are significant market opportunities for an
easily accessible, centralized forum where entertainment industry executives and
producers can buy and sell filmed entertainment rights. An online database and
digital market will enable holders to list and sell any unsold filmed
entertainment rights. InternetStudios also believes that the Internet provides
such a forum for the transaction of filmed entertainment rights.
The Internet
The Internet has emerged as a global platform that allow millions of people
to share information, communicate and conduct business electronically.
International Data Corporation ("IDC") estimates that the number of web users
will grow from approximately 150 million worldwide in 1998 to approximately 500
million worldwide by the end of 2003. The growing adoption of the web
represents an enormous opportunity for buyers and vendors of filmed
entertainment rights to conduct commerce over the Internet. IDC estimates that
commerce over the Internet will increase from approximately $40 billion
worldwide in 1998 to approximately $900 billion worldwide in 2003.
Filmed entertainment rights have been historically bought and sold
primarily through major and minor film festivals and trade shows. These markets
are highly inefficient for the following reasons:
. their fragmented, regional nature makes it difficult and expensive for
buyers and vendors to meet, exchange information and complete
transactions;
. they offer a limited breadth of filmed entertainment rights;
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. they often have high transaction costs from intermediaries; and
. they are information inefficient, as buyers and vendors lack a
reliable and convenient means of setting prices for sales or
purchases.
The Internet offers for the first time the opportunity to create a
compelling global marketplace that overcomes the inefficiencies associated with
traditional trading of filmed entertainment rights by offering the benefits of
Internet-based commerce. An Internet-based centralized trading place offers the
following benefits:
. facilitates buyers and vendors meeting, listing filmed entertainment
rights for sale, exchanging information, interacting with each other
and, ultimately, consummating transactions;
. allows buyers and vendors to trade directly, bypassing traditional
intermediaries and lowering costs for both parties;
. is global in reach, offering buyers a significantly broader selection
of filmed entertainment rights to purchase and providing vendors the
opportunity to sell their filmed entertainment rights efficiently to a
broader base of buyers; and
. offers significant convenience, allowing trading at all hours and
providing continually updated information.
As a result, there exists a significant market opportunity for an Internet-
based centralized marketplace that applies the unique attributes of the Internet
to facilitate the trading of filmed entertainment rights directly from vendors
to buyers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview:
InternetStudios.com, Inc. was incorporated in the State of Nevada on April
14, 1998 as The Enterprise, Inc. For a period of time prior to December 14,
1998, InternetStudios was engaged in the word processing business. On December
14, 1998, InternetStudios withdrew from the word processing business in
anticipation of acquiring a license to software technology for the health
industry. This acquisition was not completed. On September 18, 1999, the
stockholders of InternetStudios approved a name change to InternetStudios.com,
Inc. in anticipation of acquiring and developing an Internet business. The name
change was effective September 21, 1999. Pursuant to an Acquisition Agreement
dated September 17, 1999 among eHealth.com, Inc., Mark Rutledge and Rob Maclean
(together the "Principals") and Online Films LLC, a Delaware limited liability
company, the Principals agreed to transfer on their behalfs, and on behalf of
other beneficial owners, 91.847% of the membership interest in Online Films so
that Online Films became a subsidiary of eHealth. In consideration of the
transfer of the Principals' membership interests, the Principals and other
beneficial owners of Online Films received an aggregate of 5,632,800 shares of
InternetStudios common stock. As a result of the acquisition eHealth acquired a
91.847% ownership interest in Online Films. The acquisition of 91.847% of the
membership interest of Online Films is referred to herein as the "Online Films
Acquisition." As a result of the Online Films Acquisition, the prior owners of
Online Films now control 44.5% percent of eHealth, which was renamed
InternetStudios, effective September 18, 1997. (Hereinafter, reference to
InternetStudios shall include its subsidiary Online Films unless the context
otherwise requires.)
As a result of the Online Films Acquisition, InternetStudios is in the
business of compiling an online database of filmed entertainment and
facilitating a digital market targeted at the entertainment industry.
As a result of the Online Films Acquisition, InternetStudios is in the
business of compiling an online database of filmed entertainment and
facilitating a digital market targeted at the entertainment industry.
In September, 1999, InternetStudios entered into an agreement to raise
$8,000,000 to finance the development of a comprehensive group of services for
the filmed entertainment community delivered via the Internet.
To date, InternetStudios has not recognized any revenue and does not expect
to recognize any revenues until it has fully launched its web-based services.
Once the web-based service is launched, InternetStudios expects to derive
revenues from a number of revenue streams, including, but not limited to,
listing fees, transactions fees on sales of filmed entertainment rights over the
websites, financing fees and profit participations subscription fees and
advertising fees from the web site.
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A listing fee of between $5,000 and $100,000 per year, depending on the
number of filmed entertainment products and their respective budgets, will be
assessed by InternetStudios on sales companies and larger producers for the
listing of the entertainment product on the onlinefilmsales.com website.
Initially, independent producers of filmed entertainment product will not be
assessed a listing fee. However, InternetStudios may decide to impose a listing
fee on independent producers as the business develops.
In the event, buyer and seller complete a sale through the use of the
onlinefilmsales.com website, InternetStudios will receive a fee for enabling the
transaction. The transaction fee will vary between 2% and 10% of the negotiated
sales price depending on the number of filmed entertainment rights listed by the
seller on the onlinefilmsales.com website or the amount of the negotiated sales
price.
InternetStudios long term business plan includes the financing of filmed
entertainment via the onlinefilmsales.com website in 2001. InternetStudios
intends to provide a forum for producers to pre-sell a portion of filmed
entertainment rights and use the proceeds of the sale to cover the cost of
producing and marketing filmed rights in the development stage. InternetStudios
will earn a financing fee from facilitating the financing of the film. In
addition, InternetStudios may also receive profit participations upon the
release and financial success of such filmed entertainment. InternetStudios is
currently exploring the feasibility of providing such services.
After an initial introductory period, InternetStudios plans to charge a
subscription fee for reportertv and studiobuzz services. InternetStudios
anticipates that, commencing the second quarter of the year 2000, it will charge
a subscription fee of approximately $30 per month for independent subscribers to
access reportertv and will provide discounts for multiple users in the same
organization.
InternetStudios plans to generate advertising revenues from advertisement
on its websites. Currently InternetStudios does not have any advertisers on its
websites but plans to attract advertisers by marketing to potential advertisers.
InternetStudios' financial statements have been prepared assuming that
InternetStudios will continue as a going concern. InternetStudios has not
generated revenues since its inception and has experienced operating losses
which raise substantial doubts about InternetStudios' ability to continue as a
going concern.
Selected Financial Data
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This schedule contains summary financial information extracted from the
Registrant's registration statement on Form 10 and is qualified in its entirety
to such registration statement on Form 10.
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<CAPTION>
Nine months April 14, 1998
ended (inception) to
September 30, December 31,
1999 1998
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$ $
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Operating revenues -- --
General and administrative expenses 43,883 16,137
Loss from continuing operations (43,883) (16,137)
</TABLE>
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<TABLE>
<S> <C> <C>
Loss per share (0.006) (0.011)
Total assets 1,541,717 31,025
</TABLE>
The consolidated financial statements dated September 30, 1999 include the
acquisition of Online Films, LLC effective on September 3, 1999. Accordingly,
the assets of Online Films, LLC are included in the total assets at September
30, 1999, however, the loss from continuing operations does not include the
losses of Online Films, LLC. These losses totalled $228,091 for the initial
period August 27, 1999 to September 30, 1999.
Results of Operations
Revenues. InternetStudios has not recognized revenues to date and does not
expect to recognize revenues until after the Internet services are fully
launched. The website will offer various services after launch to provide
access to the site. InternetStudios plans to charge a variety of fees,
including subscription and advertising fees, for such services.
Cost of Revenues. InternetStudios currently has no cost of revenues
because it has not recognized any revenues to date. Once InternetStudios begins
to charge fees and subscriptions, as well as advertising charges, cost of
revenues will primarily consist of costs associated with marketing, customer
service activities, and server and network operations, and to a lesser extent,
bank and escrow processing charges on fees earned on transactions, Internet
connection charges, depreciation of server and network equipment and allocation
of overhead.
Sales and Marketing Expenses. Costs related to InternetStudios' sales and
marketing efforts, which to date have not been significant, are currently
classified as general and administrative expenses until it commences charging
transaction fees and subscriptions. InternetStudios' sales and marketing
expenses will consist mainly of advertising expenses, creative development and
promotional costs and commissions, and compensation for sales and marketing
personnel. The majority of these costs will be directed to programs designed to
build brand name recognition, attract filmed entertainment companies and
individuals to InternetStudios' websites, and to attract motion pictures and
television programming for listing on the onlinefilmsales.com web site.
Research and Development Expenses. InternetStudios' research and
development costs to date have not been significant. However, InternetStudios
expects to incur significant research and development expenses in the future.
The research and development expenses will consist of compensation for personnel
involved in the development of InternetStudios' web sites and systems, and
expenditures for consulting services, third-party software and other costs
related to development.
General and Administrative Expenses. InternetStudios' general and
administrative expenses consist primarily of salaries and related costs for
general and corporate functions, including finance, accounting, facilities and
fees for legal and other professional services. InternetStudios' general and
administrative expenses for the period from inception and ended September 30,
1999 were $60,020
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Liquidity and Capital Resources
From inception to September 17, 1999, InternetStudios had financed its
operations entirely from private placements. On September 17, 1999,
InternetStudios acquired 91.847% of the membership interest of Online Films. On
September 30, 1999 InternetStudios had $1,011,659 in cash and cash equivalents.
InternetStudios has had negative cash flows from operating activities in each
fiscal and quarterly period to date.
In October, 1999 InternetStudios entered into a facility lease agreement
for InternetStudios' corporate headquarters with minimum lease payments of
$96,000 through November, 2004.
Net cash used in operating activities was $39,400 for the period from
inception of InternetStudios to September 30, 1999.
Pursuant to the Financing Agreement, dated September 17, 1999, among
InternetStudios, Online Films and Pacific Capital Markets, Inc., Pacific Capital
will arrange for the sale of 1,000,000 shares of InternetStudios' common stock
at $8 per share to investors in offshore transactions. As of December 31, 1999,
a total of 562,500 shares of common stock were issued to 5 unrelated third
party, non U.S. investors for a total offering price of $4,500,000. This
offering was done pursuant to Regulation S.
InternetStudios believes that its current cash balances together with the
net proceeds of the financing will allow InternetStudios to fund its operations
for at least the next 12 months. However, InternetStudios may require
substantial working capital to fund its business and it may need to raise
additional capital. Management is currently in discussion with a number of
groups regarding financing activities from the sale of equity securities.
Management believes that it will be able to raise $15 to $25 million from such
financing sources by the end of the second quarter of 2000. If InternetStudios
is able to complete $15 million of the financing, the funds raised from the sale
of the equity securities will be sufficient to support its planned operations
for the next 24 months. To the extent that there is a shortfall in raising at
least $15 million of financing, InternetStudios will be required to modify its
business plan and curtail its operations.
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Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. As InternetStudios does not currently
engage in derivative or hedging activities there will be no impact to
InternetStudios' results of operations, financial position or cash flow upon the
adoption of this standard.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," which establishes standards for
certain activities of mortgage banking enterprises. SFAS No. 134 is effective
for fiscal years beginning after December 15, 1998. The adoption of SFAS No.
134 will not have an impact on InternetStudios' results of operations, financial
position or cash flow.
Year 2000 Issues
The "year 2000 problem" refers to the possible failure of many
computer systems that may arise as a result of existing computer programs using
only the last two digits to refer to a year. InternetStudios has undertaken an
initial review of the potential effects of the year 2000 problem. These
potential problems are being addressed on a system-by-system basis.
InternetStudios has assessed its information technology hardware and
software, including personal computers, application and network software for
year 2000 compliance readiness. InternetStudios believes it is year 2000
compliant and does not foresee the need for any additional purchases in relation
to the year 2000 problem. All equipment and software purchased were financed by
cash flows from operating activities. InternetStudios expects that any expenses
incurred for InternetStudios to be year 2000 compliant will be immaterial.
The most significant outside control risk is possible problems
experienced by InternetStudios' financing institutions that maintain its
depository accounts and outstanding debt. InternetStudios is in the process of
confirming the state of year 2000 readiness with these parties. It is
anticipated that this process will be completed prior to January 1, 2000.
InternetStudios' task force is in the process of developing a
contingency plan to address other potential year 2000 problems and solutions.
The plan will be completed prior to January 1, 2000.
ITEM 3. PROPERTIES
InternetStudios maintains its offices in Santa Monica, California and
Vancouver, British Columbia. Pursuant to a three year lease commencing on
November 1, 1999,
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<PAGE>
InternetStudios leases offices for its corporate headquarters at 1351 4th
Street, Suite 271, Los Angeles, California. The initial rent is $8,000 per
month. InternetStudios also sublets 800 square feet of office space in
Vancouver, British Columbia, at a current rent of Cdn$3,000 per month ($2,035)
on a month to month basis. InternetStudios does not own any real estate.
InternetStudios believes that it currently has sufficient space to carry on its
operations for the foreseeable future.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31,
1999 with respect to the beneficial ownership of the common stock of (1) each of
our directors, each of our executive officers and all of our executive officers
and directors as a group, and (2) each stockholder known by InternetStudios to
be the beneficial owner of 5% or more of the common stock, and the percentage of
common stock so owned.
As used in this table, the term "beneficial ownership" with respect to
a security is defined by Rule 13d-3 under the Exchange Act of 1934, as amended,
as consisting of sole or shared voting power (including the power to vote or
direct the vote) and/or sole or shared investment power (including the power to
dispose of or direct the disposition of) with respect to the security through
any contract, arrangement, understanding, relationship or otherwise, subject to
community property laws where applicable. Each person has sole voting and
investment power with respect to the shares of common stock, except as otherwise
indicated. Beneficial ownership consists of a direct interest in the shares of
common stock, except as otherwise indicated. The address of those individuals
for which an address is not otherwise indicated is: 1040 Hamilton Street, Suite
207, Vancouver, BC, V6B 2R9, Canada.
Beneficial Ownership of Management
<TABLE>
<CAPTION>
Name and Address Number of Shares of Percentage of Outstanding
of Beneficial Owner Common Stock Common Stock
Beneficially Owned Beneficially Owned
<S> <C> <C>
Robert Maclean 1,124,500 8.51%
Mark Rutledge 1,110,000 8.40%
Michael Edwards 100,000 .75%
Heidi Lester -- --%
1351 4th Street
Suite 227
Santa Monica, California 90401
Steven Fredericks -- --%
1351 4th Street
Suite 227
Santa Monica, California 90401
Directors and Officers as a Group 2,334,500 17.66%
</TABLE>
15
<PAGE>
Beneficial Owner of more than 5%
<TABLE>
<CAPTION>
Number of Shares of Percentage of Outstanding
Name and Address Common Stock Common Stock
of Beneficial Owner Beneficially Owned Beneficially Owned
<S> <C> <C>
Jayvee & Co. 900,000 6.81%
c/o CIBC Mellon Global Services
320 Bay Street, P.O. Box 1
Toronto, ONT, Canada MSH 4A6
</TABLE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers
The following table and text sets forth the names and ages of all of
InternetStudios' directors and executive officers as of December 31, 1999. All
of the directors will serve until the next annual meeting of stockholders and
until their successors are elected and qualified, or until their earlier death,
retirement, resignation or removal. Executive officers serve at the discretion
of the board of directors, and are appointed to serve until the first board of
directors meeting following the annual meeting of stockholders.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert Maclean 44 Director
Mark Rutledge 40 Secretary, Treasurer, Vice President of Business
Affairs and Director
Michael Edwards 31 Chief Operating Officer and Director
Heidi Lester 38 Chief Executive Officer
Steven Fredericks 53 Acting President and Chief Financial Officer
</TABLE>
Robert Maclean has been a director of InternetStudios since September,
1999 and served as President from September, 1999 to December 1999. Mr. Maclean
will continue to act in an executive capacity for InternetStudios, however, he
currently has no title or defined responsibility. For the past five years, Mr.
Maclean has been an independent producer of filmed entertainment projects. He
has produced over a dozen independent motion pictures and television movies
including such films as Criminal Law, Bright Angel and Man with a Gun. Mr.
Maclean also served as head of production at RKO Pictures in Los Angeles and has
developed and produced a number of miniseries and movies of the week for ABC,
CBS, and HBO. Mr. Maclean began his film career as a documentary filmmaker based
in Paris, France where he produced several documentary series including, The
Last Sailors and The Gold Lust. Mr. Maclean obtained a Bachelor's of Art degree
from University of Oregon and a Certificate of Advanced Motion Picture
Productions from Banff School of Fine Arts.
Mark Rutledge has been Secretary, Treasurer, Vice President of
Business Affairs and a director of InternetStudios since September, 1999. He
has a Bachelor of Arts (Honours) and a Bachelor of Laws from University of
British Columbia. He was the Vice President of Business Affairs for Northwood
Entertainment Corp. from 1997 to August 1999, and was the Vice President of
Business Affairs for Movie Vista Productions from 1994 to 1997. As vice
president of these two
16
<PAGE>
companies, Mr. Rutledge was responsible for negotiating and preparing contracts
for film and television distribution and financing of film and television
productions. Prior to these positions, Mr. Rutledge practiced law for six years,
specializing in the areas of corporate finance, public offerings and
entertainment law. In addition, Mr. Rutledge produced a number of award winning
medical documentaries.
Michael Edwards has been Chief Operating Officer and a director of
InternetStudios since September, 1999. From 1991 to 1997, Mr. Edwards was the
controller of Alik Enterprises Ltd., a small BC, Canada based business. From
1997 to 1999, Mr. Edwards was the president of Soul Rider Sports, Inc., a small
consumer goods manufacturing and distribution company. Mr. Edwards serves on
the board of Fedora Industries Ltd., a web-based retailer of consumer goods.
This company has been at the forefront of developing alternative distribution
networks using the Internet.
Heidi Lester has been Chief Executive Officer of InternetStudios since
September, 1999. Ms. Lester has over 15 years of experience in the film
acquisition and distribution industry. From 1994 to 1999, she held the position
of Senior Vice President of Acquisition and Production at Summit Entertainment.
In 1994, Ms. Lester was Vice President of Acquisitions at Largo Entertainment.
From 1989 to 1994, Ms. Lester was in charge of the Los Angeles Liason office for
the JVC Visual Software Division. She is currently the Co-Chairman of Industry
Relations Committee for the American Film Market Association ("AFMA") and is a
member of the Internet Committee for AFMA. Ms. Lester has previously served as
a member of the Board of Directors of AFMA.
Dr. Steven Fredericks has been Acting President and Chief Financial Officer of
InternetStudios since December 1999. Mr. Fredericks will be officially appointed
by the Board of Directors as President in the near future. Mr. Fredericks has
over 20 years of financial and business development experience with exceptional
skills in all aspects of financial management and operations including mergers,
acquisitions and divestitures, financial planning, and international finance. He
joined Digital Domain as the Chief Financial Officer in April 1995 and was
promoted to Chief Operating Officer in January 1996. Digital Domain is the
entertainment industry's leading special effects studio. Under his leadership,
the company achieved its greatest growth and won two Academy Awards (Best Visual
Effects) for "Titanic" and "What Dreams May Come." The company was also named
the Southern California Software Company of the Year in 1997, and was selected
as one of the top 250 companies in the digital universe by Red Herring magazine.
In his 15 year career at IBM from 1979-1995, Dr. Fredericks served in numerous
financial management positions including an assignment in Paris, France as the
head of Financial Plans and Controls for Europe, Middle East and Africa. Prior
to joining Digital Domain, he was responsible for mergers and acquisitions in
entertainment and media for the IBM Corporation. Dr. Fredericks, who has earned
a doctorate in Education from Indiana University and an MA (with Honors) in
Political Science from the Graduate Division of the New School for Social
Research, and an MBA (with Distinction) in Finance from New York University,
taught philosophy and education in the Graduate Division of Bank Street College
of Education from 1973-1979, and currently serves on the Board of Directors of
the Southern California Institute of Architecture and has recently been
appointed Consultative Professor of Shanghai University in China.
ITEM 6. EXECUTIVE COMPENSATION
No compensation was paid to any of InternetStudios' officers or
directors for the period ended December 31, 1998.
Employment Agreements
InternetStudios intends to enter into a Management Agreement with
Robert Maclean. Under Mr. Maclean's Management Agreement, Mr.Maclean will serve
in an executive capacity for a term of three years. The term may be renewed upon
a written agreement between the parties for two additional one year periods. The
provisions of the Management Agreement will include:
. base salary of $180,000 per year, subject to an increase at the end
of each year of the term determined by the Board of Directors in
its sole discretion;
. annual bonus, determined by the Board of Directors in its sole
discretion;
. an option to purchase 175,000 shares of InternetStudios' common
stock at an exercise price of $5.00 per share, subject to vesting
requirements and approval of the Board of Directors and
stockholders;
. customary employee benefits and reimbursement of reasonable
expenses incurred in connection with the performance of his duties;
and
. noncompetition, nondisclosure and nonsolicitation covenants
In the event InternetStudios terminates Mr. Maclean for any reason other than
death, disability, or for cause, or in the event Mr. Maclean terminates his
services for cause, Mr. Maclean will be entitled to the following compensation
on the eighth day after his signing a Confidential Severance Agreement and a
letter confirming that he did not revoke and will take no action to revoke the
Confidential Severance Agreement:
. a lump sum severance payment equal to one and one-half times his
base salary;
. any accrued and unpaid vacation or other benefits;
. any accrued and unpaid bonus; and
. accelerated vesting of his stock options.
InternetStudios intends to enter into a Management Agreement with Mark
Rutledge. Under Mr. Rutledge's Management Agreement, Mr. Rutledge will serve as
InternetStudios' Secretary, Treasurer and Vice President of Business Affairs for
a term of three years. The term may be renewed upon a written agreement between
the parties for two additional one year periods. The provisions of the
Management Agreement will include:
. base salary of $180,000 per year, subject to an increase at the end
of each year of the term, determined by the Board of Directors in
its sole discretion;
. annual bonus, determined by the Board of Directors in its sole
discretion;
. an option to purchase 175,000 shares of InternetStudios' common
stock at an exercise price of $5.00 per share, subject to vesting
requirements and approval of the Board of Directors and
stockholders;
. customary employee benefits and reimbursement of reasonable
expenses incurred in connection with the performance of his duties;
and
. noncompetition, nondisclosure and nonsolicitation covenants.
In the event InternetStudios terminates Mr. Rutledge for any reason other than
death, disability, or for cause, or in the event Mr. Rutledge terminates his
services for cause, Mr. Rutledge will be entitled to the following compensation
on the eighth day after his signing a Confidential Severance Agreement and a
letter confirming that he did not revoke and will take no action to revoke the
Confidential Severance Agreement:
. a lump sum severance payment equal to one and one-half times his
base salary;
. any accrued and unpaid vacation or other benefits;
. any accrued and unpaid bonus; and
. accelerated vesting of his stock options.
InternetStudios intends to enter into a Management Agreement with
Michael Edwards. Under Mr. Edwards' Management Agreement, Mr. Edwards will
serve as InternetStudios' Chief Operating Officer or in such other position as
mutually agreed by Mr. Edwards and InternetStudios for a term of three years.
The term may be renewed upon a written agreement between the parties for two
additional one year periods. The provisions of the Management Agreement will
include:
. base salary of $180,000 per year, subject to an increase at the end
of each year of the term, determined by the Board of Directors in
its sole discretion;
. annual bonus, determined by the Board of Directors in its sole
discretion;
. an option to purchase 75,000 shares of InternetStudios' common
stock at an exercise price of $5.00 per share, subject to vesting
requirements and approval of the Board of Directors and
stockholders;
. customary employee benefits and reimbursement of reasonable
expenses incurred in connection with the performance of his duties;
and
. noncompetition, nondisclosure and nonsolicitation covenants.
In the event InternetStudios terminates Mr. Edwards for any reason other than
death, disability, or for cause, or in the event Mr. Edwards terminates his
services for cause, Mr. Edwards will be entitled to the following compensation
on the eighth day after his signing a Confidential Severance Agreement and a
letter confirming that he did not revoke and will take no action to revoke such
Confidential Severance Agreement:
. a lump sum severance payment equal to one and one-half times his
base salary;
. any accrued and unpaid vacation or other benefits;
. any accrued and unpaid bonus; and
. accelerated vesting of his stock options.
InternetStudios intends to enter into a Management Agreement with
Heidi Lester. Under Ms. Lester's Management Agreement, Ms. Lester will serve as
InternetStudios' Chief Executive Officer for a term of three years. The term
may be renewed upon a written agreement between the parties for two additional
one year periods. The provisions of the Management Agreement will include:
. base salary of $252,000 per year, subject to an increase at the end
of each year of the term, determined by the Board of Directors in
its sole discretion;
. annual bonus, determined by the Board of Directors in its sole
discretion;
. an option to purchase 175,000 shares of InternetStudios' common
stock at an exercise price of $5.00 per share, subject to vesting
requirements and approval of the Board of Directors and
stockholders;
. customary employee benefits and reimbursement of reasonable
expenses incurred in connection with the performance of her duties;
and
. noncompetition, nondisclosure and nonsolicitation covenants.
In the event InternetStudios terminates Ms. Lester for any reason other than
death, disability, or for cause, or in the event Ms. Lester terminates her
services for cause, she will be entitled to the following compensation on the
eighth day after her signing a Confidential Severance Agreement and a letter
confirming that she did not revoke and will take no action to revoke the
Confidential Severance Agreement:
. a lump sum severance payment equal to one and one-half times her
base salary;
. any accrued and unpaid vacation or other benefits;
. any accrued and unpaid bonus; and
. accelerated vesting of her stock options.
InternetStudios intends to enter into a Management Agreement with
Steven Fredericks. Under Mr. Frederick's Management Agreement, Mr. Fredericks
will serve as InternetStudios's President and Chief Financial Officer for a term
of two years. The provisions of the Management Agreement will include:
. base salary of $250,000 per year, subject to an increase at the end
of each year of the term, determined by the Board of Directors in
its sole discretion;
. annual bonus, determined by the Board of Directors in its sole
discretion;
. an option to purchase 200,000 shares of InternetStudios' common
stock at an exercise price of $5.00 per share, subject to vesting
requirements and approval of the Board of Directors and
stockholders;
. sign-on bonus of $50,000 upon successful closing of a financing
from the sale of equity securities; and
. customary employee benefits and reimbursement of reasonable
expenses incurred in connection with the performance of his duties.
17
<PAGE>
Board of Directors
During the year ended December 31, 1998, no meetings of the Board of
Directors were held; all corporate actions were conducted by unanimous written
consent of the Board of Directors. Directors may be paid their expenses for
attending each meeting of the directors and may be paid a fixed sum for
attendance at each meeting of the directors or a stated salary as director. No
payment precludes any director from serving InternetStudios in any other
capacity and being compensated for the service. Members of special or standing
committees may be allowed like reimbursement and compensation for attending
committee meetings.
Option Grants
No stock options were granted by InternetStudios for the fiscal year ended
1998.
Stock Option Plans
Stock Incentive Plan - Non-United States Residents. The purpose of the
1999 Non-US Stock Incentive Plan is to encourage eligible participants to
purchase shares of InternetStudios' common stock, thereby providing eligible
participants with an incentive to remain associated with and promote the
interests of InternetStudios. Eligible participants under the option plan are
employees, directors and consultants of InternetStudios and certain related
entities.
18
<PAGE>
The 1999 Non-US Stock Incentive Plan provides for the granting of awards
according to the discretion of the administrator of the Plan. The highlights of
the Plan are as follows:
(a) the administrator is the Board of Directors of InternetStudios or
a committee of the Board of Directors;
(b) subject to applicable laws, including the rules of any applicable stock
exchange or national market system, the plan administrator is authorized to
grant any type of award to an eligible participant. An award may be:
. shares of common stock of InternetStudios (including shares which
may be earned upon the accomplishment of performance criteria established by
the plan administrator);
. a stock option;
. a stock appreciation right entitling the eligible participant to acquire a
certain number of shares of common stock of InternetStudios or receive cash
compensation based on any appreciation in the value of InternetStudios'
common stock;
. any right similar to a stock appreciation right, with a fixed or variable
price related to the fair market value of InternetStudios' common stock and
with an exercise or conversion privilege related to the passage of time, the
occurrence of one or more events, or the accomplishment of performance
criteria or other conditions;
. restricted stock in exchange for payment (if any) by the eligible participant
and subject to restrictions on transfer, rights of first refusal, repurchase
provisions, forfeiture provisions, and other terms and conditions as the plan
administrator may establish;
. performance units which may be earned in whole or in part upon the
accomplishment of performance criteria established by the plan administrator
and which may be settled in cash, common stock or other securities of
InternetStudios, or a combination of cash, common stock or other securities,
as determined by the plan administrator;
. any other security with the value derived from the value of the
InternetStudios' common stock; or
. any combination of the items listed above;
(c) the maximum number of shares of common stock of InternetStudios that
will be issuable under the 1999 Non-US Stock Incentive Plan is 500,000
shares;
(d) there are restrictions on the granting of awards to insiders of
InternetStudios;
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<PAGE>
(e) the maximum number of shares of common stock with respect to which
options and stock appreciation rights may be granted to any participant in any
fiscal year of InternetStudios is 300,000 shares, subject to adjustment in
certain circumstances;
(f) the term of an option will be no more than ten years;
(g) if the exercise price or any tax required to be withheld with respect
to an option is satisfied by InternetStudios or the eligible participant's
employer withholding shares otherwise deliverable to the participant, the plan
administrator may issue the participant an additional option, subject to terms
identical to the Award Agreement under which the option was exercised, but at an
exercise price determined by the plan administrator;
(h) an option may not be sold, pledged, assigned, transferred or disposed
of in any way other than by will or by the laws of descent or distribution, and
may be exercised only by the option holder during his or her lifetime;
(i) other awards will be transferable to the extent provided in each
applicable Award Agreement;
(j) subject to applicable laws, including the rules of an applicable stock
exchange or national market system, an Award Agreement may permit the exercise
of an incentive award for a specified period following termination of the
eligible participant's employment, in which event the award will terminate to
the extent it is not exercised on the last day of the specified period or the
last day of the original term of the award, whichever occurs first;
(k) subject to applicable laws, including the rules of an applicable stock
exchange or national market system, the consideration to be paid for the shares
of common stock upon exercise or purchase of an incentive award, including the
method of payment, will be determined by the plan administrator (and, in the
case of an option, will be determined at the time of grant); provided that, in
addition to any other types of consideration the plan administrator may
determine, the plan administrator will be authorized to accept as consideration
for the shares of common stock of InternetStudios:
. cash;
. check;
. surrender of shares of InternetStudios for a cashless exercise or purchase of
the award
. any combination of the above-listed methods of payment; and
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<PAGE>
(l) the Board of Directors of InternetStudios may at any time amend,
suspend or terminate the 1999 Non-US Stock Incentive Plan, subject to such
stockholder approval as may be required by applicable laws, including the rules
of an applicable stock exchange or national market system.
Stock Incentive Plan - United States Residents. The purpose of the 1999 US
Stock Incentive Plan is to promote the interests of InternetStudios by
encouraging eligible participants who are U.S. residents or who are subject to
U.S. taxation to purchase shares of InternetStudios common stock, thereby
providing participants with an incentive to remain associated with and promote
the interests of InternetStudios in the conduct of their affairs.
The 1999 US Stock Incentive Plan provides for the granting of such
awards as the plan administrator (being the Board of Directors of
InternetStudios or a committee of the Board of Directors) may determine.
The 1999 US Stock Incentive Plan is modeled on the 1999 Non-US Stock
Incentive Plan, and the foregoing discussion of the 1999 Non-US Stock Incentive
Plan generally applies to the 1999 US Stock Incentive Plan, except that:
(a) the maximum number of shares of common stock of InternetStudios
issuable under the 1999 US Stock Incentive Plan is 1,000,000 shares;
(b) under the 1999 US Stock Incentive Plan, options may be granted as
either incentive stock options under section 422 of the Code and the regulations
thereunder (the "Incentive Stock Options") or non-incentive stock options under
section 18 of the Code (the "Non-Qualified Stock Options");
21
<PAGE>
(c) the specific provisions under the 1999 US Stock Incentive Plan which
apply to Incentive Stock Options include the following:
. if granted to an eligible employee who at the time of the grant owns stock
representing more than 10% of the voting power of all classes of stock of
InternetStudios or any parent or subsidiary, an Incentive Stock Option will
be limited to a maximum term of five years, and will be subject to an
exercise price per share not less than 110% of the fair market value of
InternetStudios' common stock on the date of the grant;
. an Incentive Stock Option granted to any other eligible employee may be
granted for a term not exceeding ten years at an exercise price per share not
less than the fair market value of InternetStudios' common stock on the date
of the grant; and
. if the aggregate fair market value of InternetStudios' common stock subject
to Incentive Stock Options which become exercisable for the first time by an
eligible employee (under all plans of InternetStudios or any parent or
subsidiary) exceeds US$100,000 during any calendar year, the Incentive Stock
Options to which such excess value is attributable will be treated as Non-
Qualified Stock Options;
(d) any Incentive Stock Option which is not exercised following the
eligible employee's termination within the time permitted by law will
automatically convert to a Non-Qualified Stock Option and will thereafter be
exercisable for the period specified under each applicable Award Agreement;
(e) Non-Qualified Stock Options may be granted for a term not exceeding ten
years, and unless otherwise determined by the plan administrator, the exercise
price per share may not be less than the fair market value of InternetStudios'
common stock on the date of the grant; and
(f) the 1999 US Stock Incentive Plan has specific provisions which apply to
grants of incentive awards intended to qualify as "Performance-Based
Compensation", as defined under section 162(m) of the Code, to any employees who
are "covered employees" for the purposes of section 162(m)(3) of the Code, such
as, the exercise or purchase price per share, if any, of such an award may not
be less than the fair market value of InternetStudios' common stock on the date
of the grant.
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<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From the date of the Online Films Acquisition until the effective date
of the Management Agreements, InternetStudios' four officers received and will
continue to receive an aggregate of $63,000 in management fees for their
services as officers of the InternetStudios. Upon the effective date of the
Management Agreements, these management fees will terminate and be superceded by
the compensation specified in each such officer's Management Agreement. See Item
6.
ITEM 8. LEGAL PROCEEDINGS
InternetStudios is not a party to any pending or threatened legal
proceeding.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS
Market Information
Since September 23, 1999, InternetStudios' common stock has been
quoted on the NASD OTC Bulletin Board under the symbol "ISTS." Prior to that
date, InternetStudios' common stock traded under the symbol "EHLC." The trading
market is limited and sporadic and should not be deemed to constitute an
"established trading market." The following table sets forth the high ask and
low bid information for each fiscal quarter since InternetStudios' common stock
has been quoted on the NASD OTC Bulletin Board on September 17, 1998. The bid
information was obtained from Bloomberg and FinancialWeb.com and reflects inter-
dealer prices, without retail mark-up, mark-down or commission, and may not
represent actual transactions. All prices reflect the 1-for-3 forward stock
split effective April 15, 1999 and the 1-for-3 reverse stock split effective
September 23, 1999.
23
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1998 High Low
- ----------------------------------- ---- ---
<S> <C> <C>
Quarter Ended September 30, 1998 $0.03 $0.02
Quarter Ended December 31, 1998 $1.09 $0.03
Fiscal Year Ended December 31, 1999 High Low
- ------------------------------------ ---- ---
Quarter Ended March 31, 1999 $ 6.00 $1.09
Quarter Ended June 30, 1999 $30.38 $3.13
Quarter Ended September 30, 1999 $15.38 $4.25
Quarter Ended December 31, 1999 $ 6.50 $4.75
Fiscal Year Ending December 31, 2000
- ------------------------------------
Period from January 1 to January 11, 2000 $ 7.00 $5.50
</TABLE>
On January 11, 2000, the closing bid price for the common stock as
reported by the NASD OTC Electronic Bulletin Board was $6.44.
As of December 31, 1999, the number of security holders of record of
the common stock was 40. As of such date, 13,218,750 shares were outstanding.
ITEM 10 RECENT SALES OF UNREGISTERED SECURITIES
The following is information for all securities that InternetStudios sold since
inception without registering the securities under the Securities Act.
1. In April, 1998, InternetStudios issued an aggregate of 1,000,000 shares of
common stock to its three directors for a total offering price of $1,000.
These shares were offered pursuant to Section 4(2) of the Securities Act of
1933, as amended.
2. In July, 1998, InternetStudios issued an aggregate of 17,200 shares of
common stock to fifteen investors for a total offering price of $17,200.
The offering was done pursuant to Rule 504 of Regulation D.
3. In December, 1998, InternetStudios issued an aggregate of 100,000 shares of
common stock to one person for a total offering price of $100. The offering
was done pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
4. In December, 1998, InternetStudios issued an aggregate of 6,000,000 shares
of common stock to ten corporate subscribers for a total offering price of
$30,000. This offering was done pursuant to Rule 504 of Regulation D.
5. In September, 1999, 5,632,800 shares of common stock were issued to 27
beneficial owners of Online Films, LLC pursuant to the Online Acquisition.
This offering was done pursuant to Section 4(2) of the Securities Act of
1933, as amended.
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<PAGE>
6. From September, 1999 to December, 1999, InternetStudios issued a total of
562,500 shares of common stock to 4 investors for a total offering price of
$4,500,000. This offering was done pursuant to Regulation S.
ITEM 11. DESCRIPTION OF SECURITIES
InternetStudios is authorized by its Articles of Incorporation to
issue an aggregate of 100,000,000 shares of common stock, par value $.0001 per
share. As of October 31, 1999, 13,093,750 shares of common stock were issued and
outstanding and held of record by 40 stockholders.
All shares have equal voting rights. Voting rights are not
cumulative, and, therefore, the holders of more than 50% of the common stock of
InternetStudios could, if they chose to do so, elect all of the Directors.
Upon liquidation, dissolution or winding up of InternetStudios, the
assets of InternetStudios will be distributed pro rata to the holders of the
common stock. The holders of the common stock do not have preemptive rights to
subscribe for any securities of InternetStudios and have no right to require
InternetStudios to redeem or purchase their shares.
Holders of common stock are entitled to share equally in dividends
when, as and if declared by the Board of Directors of InternetStudios, out of
funds legally available therefor. InternetStudios has not paid any cash
dividends on its common stock, and it is unlikely that any such dividends will
be declared in the foreseeable future.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As authorized by Section 78.751 of the Nevada General Corporation Law,
InternetStudios may indemnify its officers and directors against expenses
incurred by such persons in connection with any threatened, pending or completed
action, suit or proceedings, whether civil, criminal, administrative or
investigative, involving such persons in their capacities as officers and
directors, so long as such persons acted in good faith and in a manner which
they reasonably believed to be in the best interests of InternetStudios. If the
legal proceeding, however, is by or in the right of InternetStudios, the
director or officer may not be indemnified in respect of any claim, issue or
matter as to which he is adjudged to be liable for negligence or misconduct in
the performance of his duty to InternetStudios unless a court determines
otherwise.
Under Nevada law, corporations may also purchase and maintain
insurance or make other financial arrangements on behalf of any person who is or
was a director or officer (or is serving at the request of the corporation as a
director or officer of another corporation) for any liability asserted against
such person and any expenses incurred by him in his capacity as a director or
officer. These financial arrangements may include trust funds, self insurance
programs, guarantees and insurance policies.
Article 12 provides that no director or officer shall be personally
liable to InternetStudios or any of its stockholders for damages for breach of
fiduciary duty as a director or officer involving any act or omission of such
director or officer; provided, however, that the foregoing provision shall not
eliminate or limit the liability of a director or officer (i) for acts or
omissions which
25
<PAGE>
involve intentional misconduct, fraud or knowing violation of law or (ii) the
payment of dividends in violation of Section 78.300 of the Nevada Revised
Statutes. Article 11 of the bylaws provides that every officer or director of
InternetStudios will not be liable for damages incurred in connection with his
actions as a director or officer to the fullest extent permitted by law.
InternetStudios has been advised that it is the position of the
Securities and Exchange Commission (the "Commission") that insofar as the
provision of InternetStudios' Articles of Incorporation, as amended, and By-laws
may be invoked for liabilities arising under the Securities Act, the provision
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page F-1.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective in 1999, Jody M. Weber, Certified Public Accountant,
resigned as InternetStudios' independent accountant, and InternetStudios engaged
LaBonte & Co. ("LaBonte") as InternetStudios' new independent accountant. Ms.
Weber retired from her practice in New York and has limited her practice scope
in the field of accounting.
Prior to the engagement of LaBonte, neither InternetStudios nor anyone
on its behalf consulted with such firm regarding the application of accounting
principles to a specified transaction, either completed or uncompleted, or type
of audit opinion that might by rendered on InternetStudios financial statements.
Ms. Weber audited InternetStudios financial statements for the three
month period from InternetStudios inception, April 14, 1998 to July 13, 1998.
Ms. Weber's report for such period did not contain an adverse opinion or a
disclaimer of opinion, nor was the report qualified or modified as to
uncertainty, audit scope or accounting principles.
During the period from January 1, 1999 to November 9, 1999 and the
year ended December 31, 1998, there were no disagreements with Ms. Weber on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope procedure, which disagreements, if not resolved to the
satisfaction of Ms. Weber, would have caused her to make reference to the
subject matter of the disagreements in connection with its reports on
InternetStudios' financial statements. In addition, there were no such events
as described under Item 304 of Regulation S-K during the fiscal year ended
December 31, 1998 and the subsequent interim periods through November 9, 1999.
InternetStudios has provided Ms. Weber with a copy of the disclosures
contained herein, and has requested that she furnish InternetStudios with a
letter addressed to the Securities and Exchange Commission stating whether she
agrees with the statements made by InternetStudios in response to Item 304
regarding her involvement with InternetStudios as independent accountant and, if
not, stating the respects in which she does not agree. A copy of Ms. Weber's
letter is attached as an exhibit to this Form 10.
26
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(b) Exhibits
Exhibit Description
------- -----------
2.1 Acquisition Agreement*
3.1 Articles of Incorporation*
3.2 Certificate of Amendment of Articles of Incorporation*
3.3 Certificate of Amendment of Articles of Incorporation*
3.4 By-laws*
3.5 Amended By-Laws*
10.1 Financing Agreement*
10.2 Consulting Agreement*
10.3 Letter Agreement between InternetStudios and MediaChase*
10.4 Secured Promissory Note and Allonge to Secured Promissory
Note*
10.5 Allonge to Secured Promissory Note dated November 21, 1999
16.1 Letter of Jody M. Weber, Certified Public Accountant*
21.1 List of Subsidiaries*
27.1 Financial data schedule*
* Previously Filed.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, as amended, the registrant caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated January 12, 2000
InternetStudios.com, Inc.
a Nevada corporation
/s/ Robert K. Maclean
___________________________________
Robert K. Maclean
President
/s/ Mark Rutledge
___________________________________
Mark Rutledge
Secretary, Treasurer
28
<PAGE>
INTERNETSTUDIOS.COM, INC.
(formerly eHealth.com, Inc.)
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
AUDITORS' REPORT
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
<PAGE>
LABONTE & CO. 1205 - 1095 West Pender Street
========================================= Vancouver, BC Canada
C H A R T E R E D A C C O U N T A N T S V6E 2M6
========================================= Telephone (604) 682-2778
Facsimile (604) 689-2778
Email [email protected]
AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors of InternetStudios.com, Inc.
We have audited the consolidated balance sheets of InternetStudios.com, Inc. (a
development stage company) as at September 30, 1999 and December 31, 1998 and
the consolidated statements of operations, changes in stockholders' equity and
cash flows for the periods then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
1999 and December 31, 1998 and the results of its operations and the changes in
stockholders' equity and cash flows for the periods then ended in accordance
with generally accepted accounting principles in the United States.
LaBonte & Co.
CHARTERED ACCOUNTANTS
Vancouver, B.C.
October 31, 1999
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-UNITED STATES REPORTING
- -----------------------------------------------------------------------
DIFFERENCES
- -----------
In the United States, reporting standards for auditors' would require the
addition of an explanatory paragraph following the opinion paragraph when the
financial statements are affected by a significant uncertainty such as referred
to in Note 1 regarding the Company's ability to continue as a going concern.
Our report to the directors dated October 31, 1999 is expressed in accordance
with Canadian reporting standards which do not permit a reference to such
uncertainties in the auditors' report when the uncertainties are adequately
disclosed in the financial statements.
LaBonte & Co.
CHARTERED ACCOUNTANTS
Vancouver, B.C.
October 31, 1999
F-2
<PAGE>
INTERNETSTUDIOS.COM, INC.
(formerly eHealth.com, Inc.)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $1,011,659 $ 10,025
Loans receivable (Note 4) 100,000 20,000
Prepaids and deposits 157,803 -
- -------------------------------------------------------------------------------------------------------------------------------
1,269,462 30,025
CAPITAL ASSET 15,000 -
GOODWILL (Note 3) 256,255 -
INCORPORATION COSTS 1,000 1,000
- -------------------------------------------------------------------------------------------------------------------------------
$1,541,717 $ 31,025
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 28,971 $ 8,862
Notes payable (Note 3) 1,006,302 -
- -------------------------------------------------------------------------------------------------------------------------------
1,035,273 8,862
- -------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 8)
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value, 100,000,000 shares authorized
1999 - 12,812,500, 1998 - 7,117,200 issued and outstanding 7,686 7,117
Additional paid-in capital 558,778 31,183
Deficit accumulated during the development stage (60,020) (16,137)
- -------------------------------------------------------------------------------------------------------------------------------
506,444 22,163
- -------------------------------------------------------------------------------------------------------------------------------
$1,541,717 $ 31,025
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
INTERNETSTUDIOS.COM, INC.
(formerly eHealth.com, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
April 14, 1998 Nine months April 14, 1998
(inception) to ended (inception) to
September 30, September 30, December 31,
1999 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES
Business investigation costs $20,000 $20,000 $ -
Management fees 3,200 - 3,200
Marketing 2,000 2,000 -
Office and general 14,399 3,425 10,974
Professional fees 13,775 13,775 -
Transfer agent and filing fees 757 757 -
Travel and accommodation 5,889 3,926 1,963
- ---------------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $60,020 $43,883 $16,137
=================================================================================================================================
BASIC NET LOSS PER SHARE $ 0.014 $ 0.006 $ 0.011
=================================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,407,036 7,138,391 1,528,145
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
INTERNETSTUDIOS.COM, INC.
(formerly eHealth.com, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 14, 1998 (INCEPTION) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during the
Number of Paid In development
shares Amount Capital stage Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common stock issued for cash 1,017,200 $1,017 $ 17,183 $ - $ 18,200
Common stock issued for cash, net of deferred
offering costs 6,100,000 6,100 14,000 - 20,100
Net loss for the period - - - (16,137) (16,137)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 7,117,200 7,117 31,183 (16,137) 22,163
Share split on a 3 for 1 basis 14,234,400 - - - -
Share consolidation on a 3 for 1 basis (14,234,400) - - - -
Common stock issued for acquisition of Online
Films, LLC 5,632,800 563 27,601 - 28,164
Common stock issued for cash pursuant to
Regulation S offering 62,500 6 499,994 - 500,000
Net loss for the period - - - (43,883) (43,883)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 12,812,500 $7,686 $558,778 $(60,020) $506,444
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
INTERNETSTUDIOS.COM, INC.
(formerly eHealth.com, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
April 14, 1998 Nine months April 14, 1998
(inception) to ended (inception) to
September 30, September 30, December 31,
1999 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (60,020) $ (43,883) $(16,137)
Adjustments to reconcile net loss to net cash from operating activities:
- accounts payable 20,620 11,758 8,862
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (39,400) (32,125) (7,275)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Incorporation costs (1,000) - (1,000)
Cash acquired on acquisition of Online Films, LLC 363,759 363,759 -
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES 362,759 363,759 (1,000)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans receivable (100,000) (80,000) (20,000)
Notes payable 250,000 250,000 -
Net proceeds on sale of common stock 538,300 500,000 38,300
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 688,300 670,000 18,300
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,011,659 1,001,634 10,025
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 10,025 -
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,011,659 $1,011,659 $ 10,025
====================================================================================================================================
CASH AND CASH EQUIVALENTS CONSISTS OF:
Cash $ 791,102 $ 791,102 $10,025
Short-term investments 220,557 220,557 -
- ------------------------------------------------------------------------------------------------------------------------------------
$1,011,659 $1,011,659 $10,025
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
INTERNETSTUDIOS.COM, INC.
(formerly eHealth.com, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
================================================================================
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
- -------------------------------------------------------------------------------
The Company was incorporated on April 14, 1998 in the State of Nevada.
Effective December 14, 1998 the Company changed its name to eHealth.com, Inc.,
and on September 20, 1999 changed its name to InternetStudios.com, Inc. The
Company is in the development stage and since inception has been investigating
business opportunities. Effective September 30, 1999 the Company acquired a
91.847% interest in Online Films, LLC, a private Delaware company developing a
business of compiling an online database of filmed entertainment and
facilitating a digital marketplace targeted at the entertainment industry.
Concurrently, Online Films, LLC entered into a financing agreement with Pacific
Capital Markets Inc. ("PCMI") to provide start-up capital and to raise
$8,000,000 for the development of the business. Refer to Note 3.
The consolidated financial statements have been prepared on the basis of a going
concern which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company and its subsidiary
are in the development stage, have not generated any revenues to date and
further significant losses are expected in developing its business. The ability
of the Company to continue as a going concern is dependent on raising additional
capital and on generating future profitable operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
Principles of Consolidation
The financial statements include the accounts of the Company and its wholly-
owned subsidiary Online Films, LLC which was acquired on September 30, 1999.
Accordingly, the financial statements for the period ended December 31, 1998 and
the statements of operations and cash flows for the period ended September 30,
1999 include only the accounts of the Company.
Use of Estimates and Assumptions
Preparation of the Company's financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all liquid investments, with an original maturity of three
months or less when purchased, to be cash equivalents.
Goodwill
Goodwill arising on the acquisition of Online Films, LLC will be amortized
straight-line over five years commencing October 1, 1999.
Foreign Currency Translation
The financial statements are presented in United States dollars. In accordance
with Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation", foreign denominated monetary assets and liabilities are translated
to their United States dollar equivalents using foreign exchange rates which
prevailed at the balance sheet date. Revenue and expenses are translated at
average rates of exchange during the year. Related translation adjustments are
reported as a separate component of stockholders' equity, whereas gains or
losses resulting from foreign currency transactions are included in results of
operations.
Net Loss per Common Share
Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Dilutive earnings per share reflects the
potential dilution of securities that could share in the earnings of the
Company. Because the Company does not have any potentially dilutive securities,
the accompanying presentation is only of basic loss per share.
F-7
<PAGE>
INTERNETSTUDIOS.COM, INC.
(formerly eHealth.com, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
================================================================================
NOTE 3 - ACQUISITION OF ONLINE FILMS, LLC
- --------------------------------------------------------------------------------
By agreement dated September 17, 1999 and effective September 30, 1999 the
Company acquired a 91.847% interest in Online Films, LLC in consideration for
the issuance of 5,632,800 restricted common shares valued at $.005 per share for
a total of $28,164. This business combination has been accounted for using the
purchase method of accounting and as the fair value of liabilities exceeds the
fair value of identifiable assets no minority interest arises on the
acquisition. The purchase price has been allocated as follows:
<TABLE>
Assets acquired:
<S> <C>
Current assets $ 521,562
Capital assets 15,000
Goodwill 256,255
---------
792,817
Liabilities assumed:
Notes payable (756,302)
Accounts payable (8,351)
---------
Purchase price 5,632,800 shares $ 28,164
=========
</TABLE>
Online Films, LLC was formed on July 23, 1999 and commenced operations August
27, 1999. Online Films, LLC is in the development stage of its internet based
business and has not generated any revenues to date. During the initial period
ended September 30, 1999, Online Films, LLC realized a loss of $228,091.
Accordingly, the pro-forma results of operations assuming the acquisition had
taken place on the inception of Online Films, LLC on August 27, 1999 would be a
net loss of $271,974 for the nine months ended September 30, 1999 and a basic
net loss per share of $0.035.
Concurrent with the acquisition of Online Films, LLC the Company entered into a
financing agreement and a consulting agreement with Pacific Capital Markets Inc.
("PCMI") whereby PCMI has agreed to raise $8,000,000 of new financing for the
development of the Company's business and to provide public relations, investor
relations and advertising services. The proposed financing is for the sale of
1,000,000 shares of common stock at a price of $8.00 per share pursuant to
Regulation S of the United States Securities Act of 1933. The consulting
agreement is for the period October 1, 1999 to September 30, 2000 with a fee
totalling $2,000,000 payable as follows:
<TABLE>
<S> <C>
October 1, 1999 $ 250,000 (paid)
October 18, 1999 250,000 (paid)
November 15, 1999 500,000
January 15, 2000 500,000
March 15, 2000 500,000
----------
$2,000,000
==========
</TABLE>
At September 30, 1999 PCMI had advanced $756,302 to Online Films, LLC and
$250,000 to the Company by way of demand loans bearing interest at a rate of 10%
per year secured by promissory notes. During October an additional $500,000 was
loaned by PCMI and the entire $1,500,000 was subsequently repaid from funds
raised pursuant to the Regulation S common stock financing. Refer to Note 10 -
Subsequent Events.
NOTE 4 - LOAN RECEIVABLE
- --------------------------------------------------------------------------------
Online Films, LLC entered into an agreement in principle on September 9, 1999,
subject to a definitive contract, to enter into two joint ventures with
MediaChase Ltd., a Los Angeles based software development company. MediaChase
Ltd. has developed e-commerce systems and websites and specializes in database
integration and website enablement of corporate processes. MediaChase Ltd. is
also engaged to design and develop the Company's websites.
F-8
<PAGE>
INTERNETSTUDIOS.COM, INC.
(formerly eHealth.com, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
================================================================================
NOTE 4 - LOAN RECEIVABLE (cont'd)
- --------------------------------------------------------------------------------
At September 30, 1999 the Company had advanced $100,000 by way of demand loan to
fund the development of the first joint venture. During October 1999 the
Company advanced an additional $460,000 by way of demand loans. These loans
bear interest at the rate of 10% per year. Upon execution of a definitive
contract it is the intention of the parties that these loans will form part of
the Company's $1,500,000 contribution of development funds to the joint
ventures.
NOTE 5 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
Online Films, LLC has agreed to pay management fees to four senior officers
totalling $63,000 per month.
NOTE 6 - CAPITAL STOCK
- --------------------------------------------------------------------------------
The Company's initial capitalization was 100,000,000 common shares with a par
value of $.001 per share. On December 17, 1998 the par value was decreased to
$.0001 per share. On March 15, 1999 the Company split its outstanding shares on
a three for one basis, resulting in an increase in the number of shares
outstanding from 7,117,200 to 21,351,600 common shares. On September 23, 1999
the Company consolidated its outstanding shares on a three for one basis,
resulting in a decrease in the number of shares outstanding from 21,351,600 to
7,117,200 common shares. Refer to Note 9 - Subsequent Events.
NOTE 7 - INCOME TAXES
- --------------------------------------------------------------------------------
There were no temporary differences between the Company's tax and financial
bases, except for the Company's net operating loss carryforwards amounting to
approximately $60,000, and $16,000 at September 30, 1999 and December 31, 1998,
respectively. These carryforwards will expire, if not utilized, beginning in
2013.
The Company has deferred tax assets amounting to approximately $20,000 at
September 30, 1999, related to the net operating loss carryovers. The
realization of the benefits from these deferred tax assets appears uncertain due
to recurring net losses. Accordingly, a valuation allowance has been recorded
which offsets the deferred tax assets at the end of each period.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
Lease Commitments
Online Films, LLC leases office space under an operating lease which expires
October 31, 2002. Future minimum rental commitments amount to $16,000 for 1999,
$96,000 for 2000, $96,000 for 2001, and $80,000 for 2002.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107. Disclosures about Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. The fair value of financial instruments classified as
current assets or liabilities including cash and cash equivalents and notes and
accounts payable approximate carrying value due to the short-term maturity of
the instruments.
Concentration of Credit Risk
The Company invests its cash and certificates of deposit primarily in deposits
with major banks. Certain deposits, at times, are in excess of federally
insured limits. The Company has not incurred losses related to its cash.
F-9
<PAGE>
INTERNETSTUDIOS.COM, INC.
(formerly eHealth.com, Inc.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
================================================================================
NOTE 8 - COMMITMENTS AND CONTINGENCIES (cont'd)
- --------------------------------------------------------------------------------
Uncertainty Due to the Year 2000 Issue
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on, or
after January 1, 2000 and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could impact the Company's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company will be fully resolved.
Other
Refer to Notes 3, 4 and 5.
NOTE 9 - SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
The Company received subscriptions for 375,000 shares at $8.00 per share for
proceeds of $3,000,000 pursuant to its Regulation S financing anticipated to
raise a total of $8,000,000.
The Company paid $500,000 to PCMI pursuant to its consulting agreement.
The Company repaid its outstanding loan to PCMI in the amount of $1,500,000 of
which $1,000,000 was outstanding at September 30, 1999.
The Company advanced an additional $460,000 to MediaChase Ltd. by way of a
demand loan which bears interest at 10% per year.
F-10
<PAGE>
EXHIBIT 10.5
ALLONGE
TO
SECURED PROMISSORY NOTE
Reference is hereby made to that certain Secured Promissory Note,
dated November 12, 1999, in the original principal amount of Seven Hundred
Thousand Dollars ($700,000), made by the undersigned to the order of
InternetStudios.com, Inc., a Nevada corporation, to which this Allonge is
attached, as amended by that certain Allonge, dated November 18, 1999, modifying
the principal amount thereof to One Million Forty Thousand Dollars ($1,040,000)
(as amended, the "Note"). All capitalized terms used herein but not otherwise
defined herein shall have the meanings ascribed to them in the Note.
The Note is hereby amended by changing the original principal amount
thereof from One Million Forty Thousand Dollars ($1,040,000) to One Million Two
Hundred Ninety-One Thousand Six Hundred Thirty-five Dollars ($1,291,635), and
accordingly all references therein to "One Million Forty Thousand Dollars
($1,040,000)" are hereby deleted, and "One Million Two Hundred Ninety-One
Thousand Six Hundred Thirty-five Dollars ($1,291,635)" shall be inserted in lieu
thereof.
The undersigned acknowledges that all amounts payable by the
undersigned to Lender under the Note, as increased by this Allonge, are secured
by a first priority security interest of Lender in the Collateral.
IN WITNESS WHEREOF, the undersigned has executed this Allonge,
effective as of December 16, 1999.
MEDIACHASE LTD., a Delaware corporation
By: /s/ Melanie Lutz
------------------------------------
Name: Melanie Lutz
Title:
