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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 2000.
REGISTRATION NO. 0-29907
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A NO. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934
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BLUE ZONE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
NEVADA 541512 86-0863053
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
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329 Railway Street, 5th Floor
Vancouver, British Columbia
Canada V6A 1A4
(604) 685-4310
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
AND PRINCIPAL PLACE OF BUSINESS)
COPIES OF COMMUNICATIONS TO:
DAVID M. HENKOFF, ESQ.
Morrison & Foerster LLP
1290 Avenue of the Americas
New York, New York 10104-0050
(212) 468-8000
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Not applicable
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value per share
(Title of Class)
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This registration statement contains forward-looking statements that are
subject to a number of risks and uncertainties, many of which are beyond our
control. Some of these risks and uncertainties include:
- plans and ability to hire additional personnel;
- business strategy, including development of our MediaBz(TM) software;
- expectations for future expansion both in the United States and in Asia;
- anticipated growth in revenue;
- uncertainty regarding our future operating results;
- anticipated sources of funds to fund our operations; and
- plans, objectives, expectations and intentions contained in this
registration statement that are not historical facts.
All statements, other than statements of historical fact included in this
registration statement, regarding our strategy, future operations, financial
position, estimated revenues or losses, projected costs, prospects, plans and
objectives of management are forward-looking statements. When used in this
registration statement, the words "will", "believe", "anticipate", "intend",
"estimate", "expect", "project" and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements speak only as of the date
of this registration statement. You should not place undue reliance on these
forward-looking statements. Although we believe that our plans, intentions and
expectations reflected in or suggested by the forward-looking statements that we
make in this registration statement are reasonable, we can give no assurance
that these plans, intentions or expectations will be achieved.
ITEM 1. BUSINESS
BLUE ZONE, INC.
GENERAL
Blue Zone, Inc. is currently engaged in two principal lines of business:
- WEBSITE DEVELOPMENT AND STRATEGIC CONSULTING SERVICES. We create,
develop, and maintain interactive Websites for broadcasting and media
companies to help them establish and expand their presence on the
Internet. We also provide strategic and technical advice to broadcasting
and media companies to help them to identify and exploit Internet
applications and outlets for their television, radio and print content.
- DEVELOPMENT OF OUR MEDIABZ(TM) SOFTWARE PRODUCTS. We are currently
developing a proprietary software platform called MediaBz(TM).
MediaBz(TM) is a family of software applications that will allow
broadcasters to manage their television, radio and print content and
permit them to transmit that content to consumers through a variety of
outlets, such as a computer monitor, an analog television equipped with a
cable set-top box, a digital television, or a hand-held electronic device
such as a personal digital assistant. Within the MediaBz(TM) family of
software products, we are currently developing two specialized
applications: NewsBz(TM), which will be customized for news broadcasters,
and RadioBz(TM), which will be customized for radio broadcasters. We
believe that our MediaBz(TM) family of software applications will enable
our broadcasting and media clients to capitalize on the emerging
technology of convergence broadcasting. Convergence broadcasting refers
to the technology that allows broadcasters to combine the allure of their
video or audio content with the information-rich nature of print
publications and the interactivity of the Internet. In addition to
NewsBz(TM) and RadioBz(TM), we intend to develop software applications
for other specialized broadcasting subjects, such as sports,
entertainment and finance. Ultimately, we expect to derive
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fees from developing, marketing, licensing and maintaining our family of
MediaBz(TM) software applications.
We currently have agreements with several of Canada's leading television
and radio broadcasting companies. We have a Website and interactive television
development agreement with CTV, Inc. to develop interactive Websites for its
24-hour NewsNet Station and CTV National News broadcasting content properties.
In addition, we have Website development agreements with WIC Premium Television,
a Limited Subsidiary of Western International Communications Ltd. and owner of
the "Super Channel", "Movie Max" and "Viewer's Choice" cable channels, and with
CKNW/CFMI, a division of WIC RADIO Ltd. and owner of the CKNW and Rock 101 radio
stations.
We have previously worked with BCTV to develop its interactive Website.
Since its launch in 1998, the BCTV Website has received more than 12 million
unique visits. During the design and development phase of that relationship, we
obtained information and experience that allow us to address the particular
technical and creative requirements of broadcasting and media companies.
We intend to use our relationships with our Canadian broadcasting and media
partners to strengthen our market position in Canada and to develop our business
in the United States and Asia. We are currently marketing our strategic
consulting and Website development services to television, radio and print media
companies in these markets. We also intend to develop, market, license and
maintain our MediaBz(TM) family of software applications worldwide.
HISTORY
Blue Zone, Inc. was originally incorporated on March 11, 1997 in the State
of Nevada under the name "Western Food Distributors, Inc." On July 21, 1998,
Western Food Distributors, Inc. filed a disclosure statement pursuant to Rule
15c2-11 of the Securities Exchange Act of 1934 with the National Association of
Securities Dealers, Inc. for the purpose of including its common stock, $.001
par value per share, for trading on the OTC Bulletin Board, a quotation service
for securities that are not listed or traded on a national securities exchange.
On October 8, 1999, Blue Zone Productions Ltd. and Western Food
Distributors, Inc. entered into a Share Exchange Agreement. Under the Share
Exchange Agreement, all of the shares of Blue Zone Productions Ltd. were
exchanged for 12 million shares of Western Food Distributors, Inc., Blue Zone
Productions Ltd. became a wholly-owned subsidiary of Western Food Distributors,
Inc., and Western Food Distributors, Inc. changed its name to "Blue Zone, Inc."
The existing management of Western Food Distributors, Inc. then resigned, and
our current officers and directors assumed the management of Blue Zone, Inc.
Blue Zone, Inc. is currently publicly traded on the OTC Bulletin Board under the
symbol "BLZNE."
In connection with the Share Exchange Agreement, Blue Zone Productions Ltd.
entered into a Loan Agreement and a General Security Agreement, each dated as of
August 30, 1999, with Terra Growth Investments Fund. Under the Loan Agreement,
Terra Growth loaned Blue Zone Productions Ltd. $2,000,000 to be repaid within 30
days after completion of the transactions under the Share Exchange Agreement.
When we completed the transactions under the Share Exchange Agreement, we also
received $5,254,429 in proceeds from a private placement of our common stock and
warrants exercisable to buy shares of our common stock. We used a portion of the
monies received from the private placement to repay the outstanding loan to
Terra Growth Investments Fund.
We presently conduct our business through our subsidiaries, Blue Zone
Productions Ltd., Blue Zone Entertainment Inc. and Blue Zone International Inc.
Blue Zone Productions Ltd., which was incorporated in British Columbia, Canada
on January 14, 1975, is a wholly owned subsidiary of Blue Zone, Inc. Blue Zone
Entertainment Inc., which was incorporated in British Columbia, Canada on April
24, 1994, and Blue Zone International Inc., which was incorporated in Barbados
on July 5, 1996, are each wholly owned subsidiaries of Blue Zone Productions
Ltd. Unless otherwise indicated, references in this Form 10 to "Blue Zone",
"we", "us", and "our" include Blue Zone, Inc., Western Food Distributors, Inc.,
and all of our
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subsidiaries. In addition, unless otherwise indicated, all references to share
numbers contained in this registration statement give effect to a 5-for-1 stock
split of all of our outstanding common stock, effected on July 14, 1998, and a
1.125-for-1 stock split of all of our issued and outstanding stock, effected on
September 27, 1999.
We operate in one business segment: we develop, maintain and license
software relating to websites and we provide consulting services to broadcasting
companies to assist them to identify and exploit interactive and convergence
Internet applications and outlets for their television, radio and print content.
To date, all of our revenue has been derived exclusively from customers in
Canada.
Our executive offices are located at 329 Railway Street, 5th Floor,
Vancouver, British Columbia Canada V6A 1A4. Our telephone number (604) 685-4310.
INDUSTRY OVERVIEW
The Internet provides broadcasting and media companies with a new outlet to
deliver content to consumers. Recognizing this market, many broadcasters are
creating interactive Websites to establish or enhance their presence on the
Internet. In addition, many broadcasters are focused on determining how they can
use the Internet to generate new business opportunities or improve their
existing business strategies. Rather than developing Internet-related technology
or expertise in-house, broadcasting companies frequently rely on outside firms
such as ours that can provide specialized products and services. As a result,
various providers of products and services have entered this market, such as
computer software and hardware manufacturers, Internet service firms, technology
consulting firms and strategic consulting firms. We believe that the
broadcasting industry is a specialized market, however, and many of our
competitors lack the experience and technical expertise necessary to address the
particular needs of broadcasting companies. In addition, we believe that our
existing relationships with several leading Canadian television and radio
broadcasting companies give us a marketing advantage over actual or potential
competitors. We intend to use these relationships to strengthen our competitive
position and reputation in Canada. We also intend to establish similar business
relationships in the United States and Asia.
In addition, we operate in the developing industry of convergence
broadcasting. Many companies in this industry, including telecommunications
firms, cable companies, and hardware and software manufacturers, are working to
assemble a high-speed digital network capable of carrying voice, data and video
directly to consumers. Other companies, including broadcasting and media
companies, are working to establish and expand their digital content capacity.
We believe that, as with their efforts to exploit the Internet, broadcasting
companies will turn to outside firms with specialized expertise to help them
understand and exploit the market for convergence broadcasting. We also believe
that our industry experience, our proprietary software, our service offerings,
and our relationships with leading Canadian broadcasting and media companies
will enable us to compete successfully in this market. As with the market for
Internet services, we intend to use our strong market position and reputation in
Canada to compete in the developing markets for convergence broadcasting in the
United States and Asia.
BUSINESS
We utilize a multi-stage approach to create, develop and maintain
broadcasters' Websites. We also provide authoring tools to design and create
interactive television broadcasts for our broadcasting and media clients. The
following description illustrates the products and services that we may provide
to broadcasters and those that we are currently developing as well as a typical
timetable for implementation of our products and services.
Initial Consulting Services and Strategy
Our initial involvement with a broadcasting or media company consists of
consulting with the client to define its Internet strategy with respect to one
or more of the following: Website design, content offerings, interactive
convergence broadcasting, targeted advertising or electronic commerce. We are
typically
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retained by broadcasters who are seeking to expand and enhance the products and
services that they offer over the Internet. Generally, we support the senior
management of our clients, and the management executives that we assist
frequently have little technical training or expertise. Therefore, our principal
focus at this stage is to provide creative vision and technical advice in terms
that can be understood and implemented by a non-technical person. In addition,
because Internet revenue models may be unfamiliar to our clients, we also
identify and articulate revenue strategies for these management executives.
This initial phase of our engagement typically lasts for approximately
eight weeks. In that time, we work with the client to understand its business
needs and long-term goals. We attend meetings with senior management, evaluate
the market segment in which the client competes, and assess the client's
operating and technical environment. Once the client's objectives are defined,
we prepare a written plan that identifies the client's strategy, establishes the
project's scope and budget, creates a detailed working schedule, and defines
clear criteria for implementation.
An important goal at this stage is to position us to generate more revenue
by having the client select us to develop, deploy, and maintain the client's
interactive Website. Accordingly, we generally provide strategic and technical
consulting services only to those clients who we reasonably expect will select
us to function in a fulfillment capacity. By providing strategic and technical
advisory services at an early stage, however, we believe that we enhance our
industry visibility and cement our relationship with senior management.
To date, we have provided consulting services to CTV, Inc. as part of our
arrangement to develop interactive Websites for its 24-hour NewsNet Station and
CTV National News broadcasting content properties. We have also provided
consulting services to WIC Premium Television and CKNW/CFMI to develop
interactive Websites for their specialty pay-per-view television and radio
stations, respectively. We intend to enter into similar arrangements with other
television, radio and print media companies as we expand our business into the
United States and Asia.
On-going Consulting Services
As part of our engagement, we may be retained by a client to provide
consulting services on an on-going basis. CTV has retained us to advise it on
macro Internet strategies and technological opportunities. In this capacity, we
continue to participate in key management and executive meetings and we make
quarterly presentations to CTV regarding interactivity, strategy, content,
advertising and technology. We agreed to provide on-going consulting services
for a one-year minimum, which is automatically extended on a month-to-month
basis unless either party gives sixty days' written notice. We expect to enter
into similar relationships with other broadcasting and media companies in the
future.
We believe that we benefit from providing on-going consulting services
because we continue to receive access to information, technology and business
opportunities and we maintain strong ties with senior management. We intend to
use our relationships with our current clients to expand the scope and length of
our current projects and to enter into additional projects. We also anticipate
that, as our clients consider how to exploit emerging technologies such as
convergence broadcasting, they will continue to utilize our technology and
expertise.
Interactive Website Design and Development
With the written plan as a guide, we move from design and strategy to
fulfillment and production. We begin by working with the client to define
further the functional, technical, and creative requirements needed to implement
the client's Internet strategy.
Our software development team combines third-party software with our own
proprietary software to build the basic platform that will become the client's
interactive Website. Because our clients are broadcasting and media companies,
they generally want their Websites to retain the "look and feel" of their on-air
broadcasting presence. Accordingly, we customize our software to create a user
interface that
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incorporates the features, functionality and branding desired by each client. We
also typically develop one or more prototypes of the Website to test design
concepts and functionality.
During this stage, we define the hardware, software, interactive elements,
networking and telecommunications equipment needed to operate the interactive
Website, and we work with the client to integrate the equipment into its
existing information technology infrastructure. We collaborate with the client
to identify staffing requirements and technical expertise necessary to maintain
the interactive Website after launch, and we may begin training the client's
personnel to operate and maintain the Website.
Each aspect of the design and development phase of a project is documented
in writing, and we collaborate with the client to refine the strategy and assess
whether the interactive Website meets the client's goals. Our development team
can generally accomplish the design and development phase of a project in
approximately six months.
Development of Convergence Broadcasting Software -- MediaBz(TM)
We are currently developing a proprietary software platform, called
MediaBz(TM), that we intend to offer in the emerging market of convergence
broadcasting. Convergence broadcasting refers to the technology that allows
broadcasters to combine the allure of their video or audio content with the
information-rich nature of print publications and the interactivity of the
Internet. MediaBz(TM) is a software application that is compatible with the
equipment and technology standards currently used by many broadcasters. Using
MediaBz(TM), broadcasters will be able to adapt their current technology to
deliver their video and audio and print media content for broadcast over the
Internet as well as through existing channels. We are developing
MediaBz(TM)because we believe that, rather than developing technology for
convergence broadcasting in-house, broadcasters will prefer to engage outside
firms that can offer proprietary technology and specialized expertise in this
area. We intend to capitalize on our strength in building and managing
interactive Websites and our solid base of broadcasting and media clients to
exploit this emerging market. As the first two members of the MediaBz(TM)
family, we are developing NewsBz(TM) and RadioBz(TM), which we intend to market
to news media and radio broadcasters, respectively.
NewsBz(TM)
We are developing NewsBz(TM) as a software application to be used by both
producers and consumers of interactive news content. We plan to make the
software accessible from anywhere with access to the Internet through a
convenient, Internet-based user interface called a Web browser. We expect that
NewsBz(TM) will incorporate the following features and functionality:
- PRODUCERS OF NEWS CONTENT. NewsBz(TM) will allow a news reporter to
prepare an interactive news story, including text, graphics and audio and
video clips, without the need for a Web development team or technical
expertise. While researching the news story, for example, a reporter will
be able to access the broadcaster's password-protected Website and, using
NewsBz(TM), search the broadcaster's database of past video, audio and
print content for relevant information. Once the story is complete,
NewsBz(TM) will enable the reporter to incorporate audio and video clips,
graphics, interactive advertising and links to articles on the same or
related content, into the story. If a television broadcaster has
relationships with several newspapers, for example, NewsBz(TM) can be
used to establish links from the broadcaster's Website to related content
on the Websites of its print media partners.
In addition, we are developing NewsBz(TM) to be compatible with the
hardware and software currently used by most broadcasters to produce
their television news programs. By using NewsBz(TM), a news reporter will
be able to send a completed story to an editor for review or publish the
story directly to the broadcaster's Website or on-air. Finally, because
the broadcaster's Website and the NewsBz(TM) software will be accessible
via the Internet, the reporter will be able to write the story as easily
from a hotel room in a foreign country as from the office or from home.
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- CONSUMERS OF NEWS CONTENT. NewsBz(TM) will allow consumers to experience
interactive news content using either a Web browser on their computer, a
digital television or an analog television equipped with a cable set-top
box. For example, a Website user will be able to watch and listen to
"headlines" composed of streaming video and audio clips, similar to a
30-second segment on a conventional television news program. Unlike
conventional television news programs, however, a consumer using
NewsBz(TM) will be able to access additional content by clicking on the
streaming video "headline" with a computer mouse or a television remote
control. The additional content available to the consumer may include
interactive graphics, video and audio clips, or text stories on the same
or related content. As a result, NewsBz(TM) will combine the immediacy of
video content with the information-rich nature of print publications and
the interactivity of the Internet.
RadioBz(TM)
We are developing RadioBz(TM) as a software application to be used by
producers and consumers of radio broadcasting content. As with NewsBz(TM), we
intend to make our RadioBz(TM) software accessible through a Web browser.
Because NewsBz(TM) and RadioBz(TM) are being developed using the same software
platform, they will share many of the same features and functionality.
- PRODUCERS OF RADIO CONTENT. RadioBz(TM) will allow radio broadcasters to
expand their content offerings and their market reach. RadioBz(TM) will
enable a station manager or on-air personality to manage the station's
database of audio content and to combine that content with video, print
media, and interactive features. For news broadcasters, RadioBz(TM) will
provide features and functionality similar to NewsBz(TM), such as the
ability to search the station's archives of radio content and to
integrate text, graphics, links to other Websites, and audio and video
clips into a news story without the need for extensive technical training
or expertise. Examples of audio and video content that could be
integrated include live transmissions that might be generated from the
disc jockey booth or television advertisements or promotional segments
produced by the radio stations. For music and entertainment stations,
RadioBz(TM) will support features such as chat rooms, on-air requests and
audio-on-demand. Using RadioBz(TM), radio stations will be able to
broadcast both audio and video content in digital form by "streaming" the
content over the Internet. Thus, radio stations equipped with RadioBz(TM)
will be able to broadcast their signal to a consumer anywhere in the
world with access to the Internet.
- CONSUMERS OF RADIO CONTENT. RadioBz(TM) will allow consumers to
experience interactive radio broadcasting using a Web browser and their
computer, a digital television or an analog television equipped with a
cable set-top box. Because the content will be transmitted by "streaming"
over the Internet, a radio listener will not be limited by the strength
of the radio signal but will be able to receive the radio broadcasting
content from anywhere. In addition to streaming audio, consumers will be
offered streaming video clips, such as music videos, as well as
interactive interviews, chat rooms and audio-on-demand.
We expect to launch the NewsBz(TM) software application in the late summer
of 2000. We are developing NewsBz(TM) under our agreement with CTV but we expect
to license NewsBz(TM) to other present and future news broadcasting clients
outside of Canada. Accordingly, we are developing NewsBz(TM) as a general
software application that can be customized to suit an individual broadcaster's
specific needs. For example, while the basic software functionality will not
vary, we will customize the user interface used by consumers to incorporate the
branding, colors, features and functionality required by a particular client.
In November 1999, we launched the first elements of the RadioBz(TM)
software platform. Although our development of RadioBz(TM) is not complete, our
clients CKNW and Rock 101 are using particular applications of RadioBz(TM) to
manage their databases of audio content. We expect that, as with NewsBz(TM), we
will customize the RadioBz(TM) application to suit the technical and promotional
needs of a particular client. We also expect to market and license RadioBz(TM)
to radio broadcasters worldwide.
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Additional Opportunities for Our Convergence Broadcasting Software
We believe that NewsBz(TM) and RadioBz(TM) will be the first examples of a
family of related software applications that will present us with additional
revenue opportunities. Ultimately, once we have launched NewsBz(TM)and
RadioBz(TM), we intend to license the software to our broadcasting and media
clients and derive fees from licensing, maintenance and the development and sale
of updates to the software. We also believe that our Web-based interactive
broadcasting platform is not limited to news broadcasting, and we plan to create
related software applications, such as SportsBz(TM), EntertainmentBz(TM) and
BusinessBz(TM), for the sports, entertainment and finance broadcasting
industries, respectively. With these applications, consumers will be able to
access information, such as statistical information about a particular sports
figure or franchise, in-depth coverage of a celebrity news story, or stock
charts and detailed financial information relating to a particular company.
We also intend to expand and enhance our product and service offerings to
exploit new revenue opportunities, such as targeted advertising and electronic
commerce, that we believe will be made possible by convergence broadcasting. By
having users of NewsBz(TM) register to use the software, for instance, we intend
to develop user profiles, which can be used to target advertisements to
consumers based on their geographic location, buying patterns or personal
choices. Similarly, we intend to offer broadcasters the possibility of engaging
in electronic commerce by coupling targeted advertisements to interactive
content available via NewsBz(TM). A television viewer or computer user could,
for example, use a television remote control or a computer mouse to purchase
merchandise, request product samples, coupons or catalogues. We also intend to
continue providing strategic and technical consulting to help our clients to
identify and exploit new opportunities in this area.
Key Customers
In June 1998, Blue Zone Entertainment Inc. signed a 2-year agreement with
WIC Premium Television, a Limited Subsidiary of Western International
Communications Ltd., to design, operate and maintain the WIC Premium Television
Website. WPT is one of the leading cable television providers in western Canada,
operating the "Super Channel", "Movie Max" and "Viewer's Choice" channels. We
have already received the development fees due to us under the agreement, and we
will share any revenue generated from the sale of advertising and products sold
from the client's Website. While there are currently no products sold from the
WPT Website, we expect to begin to receive our share of the advertising revenue
generated from this Website later this year. Our agreement with WIC Premium
Television will terminate on June 16, 2000, but both parties have agreed to
negotiate an extension or renewal of the contract in good faith. We do not know
if these negotiations will result in an extension or renewal of the contract.
In July 1999, Blue Zone Entertainment Inc. signed a 3-year contract with
CKNW/CFMI, a division of WIC RADIO Ltd. Under the contract we will design,
operate and maintain the Websites for the radio stations CKNW and Rock 101 in
Vancouver, Canada and provide exclusive Website hosting and streaming media
services. We have received a fee for developing the Websites, and we continue to
receive promotional advertising on the client's Websites and radio station. We
will also share with the client any advertising revenue generated from the
Website. Our agreement with CKNW/CFMI may be terminated either by CKNW/CFMI or
by us upon six months' notice. Our agreement with CKNW/CFMI contains certain
exclusivity provisions. CKNW/CFMI agreed not to use any party other than us to
maintain, design or host the CKNW and Rock 101 Websites. CKNW/CFMI also agreed
that it would not use anyone other than us to host or stream CKNW/CFMI content
online. We agreed not to engage directly or indirectly in Website design
services for radio stations based in British Columbia.
In December 1999, Blue Zone Productions Ltd. signed an agreement with CTV
Television, Inc. to be the exclusive provider of Website development, Web
hosting, and strategic consulting services to the CTV NewsNet and the CTV
National News interactive properties. We are developing a customized version of
our NewsBz(TM) software platform for CTV, for which we expect to receive
development, licensing, and maintenance fees from CTV. We also expect to provide
Website hosting services to the CTV Websites,
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which will include the operation and maintenance of the CTV Website and 24-hour
telephone support in Toronto, Canada. In exchange for providing the Website
hosting services, we will receive our labor, materials and out-of-pocket costs
plus a 20% premium.
As part of our agreement with CTV, we have provided each other with
reciprocal rights of first refusal. Until December 2001, we cannot provide
website production or interactive television development services relating to
news broadcasting to any other Canadian television company, and CTV cannot use
any other provider for website production or interactive television development
services relating to news. In addition, we agreed not to offer website
production or interactive television development services in any area of
broadcasting to another Canadian television company until June 2000. As part of
our agreement with CTV, we each also have a right of first refusal until June
2000 with regard to website production or interactive television development
services relating to broadcasting content other than news. Our existing
relationships with WIC Premium Television and WIC Radio were specifically
excluded from these non-compete provisions.
We have been and expect to continue to be substantially dependent on
several key contracts with customers as a source of revenue. For the fiscal year
ended December 31, 1999, approximately 80% of our revenues were derived from
contracts with two customers. During 1999, our contract with CTV accounted for
approximately 10% of our revenue, but we expect that it may account for
substantially more of our revenue during the fiscal year ending December 31,
2000. Our agreement with CTV is terminable by the client at any time upon 60
days' prior written notice. If CTV terminates the agreement, it is required to
pay us for all of the time, materials and expenses that we have incurred through
the effective date of termination. We believe that we will continue to derive a
significant portion of our revenues from a limited number of larger clients. Any
cancellation, deferral or significant reduction in work performed for these
principal clients or a significant number of smaller clients could have a
material adverse effect on our business, financial condition and results of
operations.
SALES AND MARKETING
Our marketing efforts are dedicated to strengthening our brand name and
enhancing our reputation as a creative provider of interactive Website
development and strategic consulting services to broadcasting and media clients.
We believe that our relationships with leading Canadian broadcasting and media
companies provide us with an advantage over competitors whose brands and
reputations may not be as established or whose businesses may not be as focused
on the broadcasting and media industry. We receive and expect to continue to
receive a substantial amount of our business through referrals from our existing
customers.
Our marketing campaign will continue to incorporate all media, including
television, radio, print and the Internet. As part of our agreements with our
broadcasting clients, we receive promotion and advertisement in the form of
co-branding, news releases, trade show appearances, and attendance at key
management and executive meetings of our clients. We believe that one of the
best means of promotion is to co-brand Blue Zone with the high-quality content
of our broadcasting and media clients.
To date, our President and Chief Executive Officer have taken primary
responsibility for our marketing and sales. Because of the historically high
demand for our services, we have not needed a formal marketing or sales force.
As our business opportunities expand, however, we are developing a sales and
marketing force to generate new business leads and to pursue contracts with
prospective clients.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our ability to compete is dependent, in part, upon our internally
developed, proprietary intellectual property. We seek to protect our
intellectual property through a combination of license agreements and trademark,
service mark, copyright and trade secret laws. We are currently pursuing
protection of our trademarks in the United States and internationally. We
generally enter into non-competition/non-disclosure agreements with our
employees and clients and use our best efforts to limit access to and
distribution of proprietary information licensed from third parties. Despite
these precautions, it may be
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possible for a third party to copy or otherwise obtain and use our products or
technology without our authorization, or to develop similar products or
technology independently through reverse engineering or other means. Policing
unauthorized use of our products is difficult. The steps that we take to prevent
misappropriation of our intellectual property and proprietary technology may not
be successful.
COMPETITIVE CONSIDERATIONS
We compete in the information technology services market, which is a
relatively new and intensely competitive market. There are many firms that
provide Website development, hosting and maintenance services as well as
strategic consulting services. There are also an increasing number of firms
working in the emerging industry of convergence broadcasting. We anticipate that
competition will increase as existing broadcasting and media companies continue
to migrate their businesses to the Internet and as Internet competitors expand
their businesses and market reach.
Many of our existing and potential competitors have longer operating
histories, larger client bases, longer relationships with clients, greater brand
or name recognition and significantly greater financial, technical, marketing
and public relations resources than we do. As a result of their greater
resources, our competitors may be in a position to respond more quickly to new
or emerging technologies and changes in customer requirements and to develop and
promote their products and services more effectively than we do.
There are relatively low barriers to entry into the information technology
services market. As a result, new market entrants pose a threat to our business.
We do not own any patents nor have we filed any patent applications that might
preclude or inhibit potential competitors from entering our markets. Existing or
future competitors may develop or offer services that are comparable or superior
to ours at a lower price, which could have a material adverse effect on our
business, results of operations and financial condition.
RESEARCH AND DEVELOPMENT
We expended $65,158 for research and development expenditures for the
fiscal year ended December 31, 1999. We expect to significantly increase our
research and development expenditures for the fiscal year ending December 31,
2000. These expenditures are contingent upon our ability to raise additional
financing. If we are not able to raise sufficient additional financing, we may
not be able to complete all of our proposed research and development activities,
which could adversely affect the development of our business. Our research and
development expenses will include further development of our NewsBz(TM) and
RadioBz(TM) software applications, the creation and development of MediaBz(TM)
applications for other broadcasting areas, and expenses associated with building
and equipping a multimedia interactive television studio at our facility in
Vancouver.
GOVERNMENTAL REGULATION
We operate in an environment of tremendous uncertainty as to potential
government regulation of the Internet. We believe that our business is not
currently subject to direct regulation other than regulations applicable to
businesses generally. However, the Internet is evolving rapidly, and
governmental agencies have not yet been able to adapt all existing regulations
to the Internet environment.
Although Canada does not presently have laws regulating the Internet, the
Canadian Radio-television and Telecommunications Commission is considering
legislation that would regulate certain aspects of the Internet, including
on-line content, copyright infringement, user privacy, taxation, access charges,
liability for third-party activities, jurisdiction and the protection of
Canadian culture. Laws and regulations may be introduced and court decisions
reached that affect the Internet or other online services, covering issues such
as user pricing, user privacy, freedom of expression, access charges, content
and quality of products and services, advertising, intellectual property rights
and information security.
9
<PAGE> 11
The United States Congress has recently passed legislation that regulates
certain aspects of the Internet, including on-line content, copyright
infringement, user privacy, taxation, access charges, liability for third-party
activities and jurisdiction. In addition, federal, state, local and foreign
governmental organizations also are considering other legislative and regulatory
proposals that would regulate the Internet. Laws and regulations may be
introduced and court decisions reached that affect the Internet or other online
services, covering issues such as user pricing, user privacy, freedom of
expression, access charges, content and quality of products and services,
advertising, intellectual property rights and information security.
We or our customers may also become subject to legislation or regulation in
the broadcasting industry and the cable television industry. Broadcasting
industries are regulated in the United States by the FCC, some states and
substantially all local governments. Congress has passed legislation that
regulates the broadcasting industry including programming access and exclusivity
arrangements, consumer protection, technical standards and privacy of customer
information. Various legislative and regulatory proposals under consideration
from time to time by Congress and various federal agencies may in the future
materially affect the broadcasting and cable television industries. Since we
market and expect to continue to market our products and services to companies
in the broadcasting and cable television industries, increased regulation in
these areas could have a material adverse effect on our business, results of
operations and financial condition.
We cannot predict what new laws will be enacted or how courts will
interpret both existing and new laws. As a result, we are uncertain as to how
new laws or the application of existing laws may affect our business. In
addition, our business may be indirectly affected by our clients who may be
subject to such legislation. Increased regulation of the Internet or the
broadcasting industry may decrease the growth in the use of the Internet or
hamper the development of convergence broadcasting, which could decrease the
demand for our services, increase our cost of doing business or otherwise have a
material adverse effect on our business, results of operations and financial
condition.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
All of our revenue for fiscal year ended December 31, 1999 was derived
exclusively from customers in Canada.
EMPLOYEES
As of May 1, 2000, we employed 40 persons on a full-time basis, excluding
temporary personnel, consultants and independent contractors. None of our
employees is represented by a labor union, and we believe that our relationship
with our employees is good.
We believe that our future success will depend to a significant extent upon
our ability to attract, train and retain highly skilled technical, creative,
management, sales, and marketing personnel. Competition for such personnel in
the industry is intense, and we cannot be certain that we will be successful in
attracting, motivating or retaining such personnel. Our inability to attract,
motivate or retain our employees could have a material adverse effect on our
business, financial condition and results of operations.
We are substantially dependent upon the continued services and performance
of our senior management, including our Chief Executive Officer, Bruce Warren,
and our President, Jamie Ollivier, each of whom co-founded our business. Our
agreement with CTV Television, Inc. terminates automatically if our Chief
Executive Officer and President are no longer our principals or employees. The
loss of the services of any of our executive officers or other key employees
could have a material adverse effect on our business, financial condition and
results of operations.
See the description of "Executive Compensation" in Item 6 for the terms of
our Employment Agreements with Bruce Warren, our Chief Executive Officer, Jamie
Ollivier, our President, and Catherine Warren, our Chief Operating Officer.
10
<PAGE> 12
ITEM 2. FINANCIAL INFORMATION.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for each of the
three years ended December 31, 1997, 1998 and 1999, have been derived from our
audited financial statements. When you read this financial data, it is important
that you also read the historical financial statements and related notes
included at the end of this registration statement, as well as the section of
this registration statement related to "Management's Discussion and Analysis of
Financial Condition and Results of Operations." These historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1999 1998 1997
--------- ---------- -------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................... 883,137 774,830 342,120
Cost of revenues............................................ 370,803 144,419 51,759
Gross profit................................................ 512,334 630,411 290,361
Loss from operations........................................ 1,422,331 32,888 14,623
Net loss.................................................... 1,422,331 28,457 17,054
Basic and diluted net loss per share........................ 0.09 .00 .00
BALANCE SHEET DATA:
Cash and cash equivalents................................... 4,097,869 891
Total assets................................................ 4,784,850 41,906
Working capital (deficit)................................... 3,763,577 (51,265)
Total liabilities........................................... 595,677 52,714
Total stockholders' equity.................................. 4,189,173 (10,808)
</TABLE>
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATION
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements. The following discussion should
be read in conjunction with our audited Consolidated Financial Statements and
related Notes thereto and the Special Note regarding forward-looking statements
included elsewhere in this registration statement.
OVERVIEW
We generate revenue from software licensing, interactive television content
enhancements, creative production and maintenance services related to website
development and interactive television broadcasting and from consulting services
related to Internet strategies. Our business has historically been focused on
providing Website design and content services to a range of British
Columbia-based media and broadcasting companies, as well as fulfilling the
interactive needs of a group of clients on a project basis.
We have developed proprietary technology and knowledge from working closely
with broadcasting companies. Our experience with live news delivery, including
the large variety of filming, graphics and editing equipment for audio and video
production and specific communication standards that exist inside a newsroom
between equipment or employees, has provided us with opportunities to develop
software to service the unique needs of the broadcast community.
Bruce Warren and Jamie Ollivier, our Chief Executive Officer and President,
respectively, have worked in the broadcast field for ten years, during which
time we acquired valuable insights into the technology requirements of
traditional television and radio broadcast companies to access the world wide
web, set-top-boxes, and other interactive devices. In 1997, we began development
of a proprietary product, now trademarked as the MediaBz(TM) suite of products,
to facilitate convergence of television, radio, and print media organizations to
the interactive environment.
In the latter half of 1999, we contracted with CTV, Canada's largest
private TV network, to develop, plan, and design CTV's interactive website, to
be focused around the MediaBz(TM) product. We have also been retained as an
ongoing consultant to CTV.
We have incurred losses in the last three years, and as of December 31,
1999, had an accumulated deficit of $1.45 million. The net loss in fiscal 1999
was $1.4 million because we began implementing our business plan built on the
marketing of the MediaBz(TM) product line to a broad range of television and
radio media companies. General and administrative expenses have been increased
to support this effort. We have leased new office space, and our capital budget
has been increased to provide some of our enlarged infrastructure needs.
Revenues have been recorded as the services are rendered to our clients.
For long-term development projects, such as the fulfillment of the CTV contract,
revenue is recognized on a percentage of completion basis. Payments under the
CTV contract are received based on the achievement of specifically identifiable
milestones. We have deferred revenue of $180,000 on our balance sheet which
represents payment received from CTV that we will not recognize as revenue until
we have achieved specific milestones related to development of CTV's interactive
Website.
A significant proportion of our revenue for the past three years has been
in the form of an exchange agreement with BCTV. This revenue has been recorded
as gross, with the offset to Selling and Marketing expense.
12
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the our consolidated statement of income, expressed as a percentage of
sales.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1999 1998 1997
------ ---- ----
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues.................................................... 100% 100% 100%
Cost of revenues............................................ 42.0% 18.6% 15.1%
Gross profit................................................ 58.0% 81.4% 84.9%
Operating Expenses:
General and Administrative.................................. 138.9% 16.4% 18.1%
Selling and Marketing....................................... 69.1 65.4% 66.1%
Depreciation................................................ 11.1% 3.9 5.0
------ ---- ----
219.1% 85.7% 89.2%
Loss before income taxes.................................... (161.1)% (4.3)% (4.3)%
------ ---- ----
Income tax expense (recovery)............................... 0% (0.6)% 0.7%
------ ---- ----
Net loss.................................................... (161.1)% (3.7)% (5.0)%
------ ---- ----
</TABLE>
REVENUE
Our revenue increased 14% in 1999 to $883,000 from $775,000 in 1998 and
from $342,000 in 1997. The first payments recorded from the CTV contract,
including consulting fees, accounted for all of the increased revenue. More than
60% of the 1999 revenue was contributed by BCTV, as we completed a three-year
website evolution project. This BCTV contract payment consisted almost entirely
of exchange income. We exchange our services for airtime rather than receiving a
cash payment. In return for services, we received television airtime with a
commercial value of $504,000. We then recorded this as a selling and marketing
expense. We used this airtime to enhance our name recognition because we believe
it to be valuable in marketing our products to current and other potential
clients. A similar arrangement with BCTV was in effect in 1998 and 1997 and we
recorded expense charges of $505,000 and $225,000, respectively, to selling and
marketing.
We received revenues from Lotus (an IBM company) for recurring work in the
amount of $38,000 in 1999, compared with $43,000 in 1998 and nothing in 1997;
and from Electronic Arts Canada, $13,000 in each of the past two years. The
balance of the revenue was derived from individual projects, generally of a
non-recurring nature.
Major account revenue, including BC Tel, Lotus, Electronic Arts Canada, and
the WIC Group, in 1998 was $132,000, compared with only $15,000 in 1997. The
balance of revenue in both years was from project work of a non-recurring nature
from more than a dozen customers. All of our revenues were derived from Canadian
based customers and paid in Canadian currency.
GROSS PROFIT
Cost of revenues include labor, materials and overhead expenses incurred in
the delivery of software and services. Prior to our reorganization in late 1999,
we retained the bulk of our technical workforce on short-term contracts. Our
Chief Executive Officer, Bruce Warren and our President, Jamie Ollivier,
developed much of our detailed design and code writing for software before our
1999 reorganization.
Our 1999 margins were unfavorably impacted by the recruitment and retention
fees associated with replacing a contract workforce with full-time employees.
The higher gross margins we realized in 1998 and 1997 were primarily
attributable to the modest salaries we paid to our CEO and President.
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<PAGE> 15
We expect our gross profit to fluctuate based on our product mix,
geographic mix, product and patent licenses, and the uncertain costs associated
with hiring competent technical, creative and management personnel. We can
provide you no assurance that we will be able to improve our gross margins.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses increased from $62,000 in 1997 to
$127,000 in 1998 and to $1,227,000 in 1999 and from $62,000 in 1997. Our
expenses represented 139% of revenue in 1999, 16% in 1998 and 18% in 1997. Our
increase in general and administrative expenses was primarily the result of the
implementation of our new business plan, which focused on marketing the
MediaBz(TM) suite of products, and has resulted in a build-up of full-time
personnel, in place of a contract workforce in 1997 and 1998. Personnel and
related costs rose $75,000 in 1999 from $39,000 in 1998 and $19,000 in 1997.
We moved to new Vancouver headquarters in late 1999. Occupancy and related
costs increased $62,000 to $98,000 in 1999. Our occupancy costs in 1998 were
$15,000 higher than in 1997.
Our accounting, legal, and investor relation fees rose by $376,000 from
$31,000 in 1998 compared to $407,000 in 1999. Our accounting and legal expenses
in 1998 were $24,000 more than in 1997. Much of this increase was attributable
to our reorganization in October 1999, as well as the legal support enlisted in
the execution of the CTV contract. Professional fees of $33,000 relating to the
share issuance were charged against the shareholders' equity account.
We incurred substantial travel and entertainment costs in the months
leading up to the completion of our private placement in October 1999. We spent
$287,000 in 1999 compared with $4,000 in 1998 and $8,000 in 1997.
We have reserved 4.5 million shares of common stock for issuance under a
stock option plan. The plan is an essential tool to attract and retain the
qualified personnel needed to implement our business strategy. Our plan provides
for the granting of stock options to directors, officers, eligible employees and
contractors. At December 31, 1999, we have granted 1.995 million options. While
no options were exercised in 1999, we incurred a non-cash charge to the 1999
income statement of $297,000.
We expect our general and administrative expenses to continue to grow in
the future as we hire additional personnel and open new offices in the United
States and overseas.
We recorded $26,000 in interest income in 1999 (none in 1998 or 1997) as
the proceeds of the share issuance were invested in high quality debt
securities.
RESEARCH AND DEVELOPMENT
Based on the anticipated success of the MediaBz(TM) suite of software
products and based on our ability to raise additional funds, we expect to invest
large amounts of money in research and development. These funds will be used to
improve the existing MediaBz(TM) products and to provide features and options
requested by broadcasters and other clients. The amounts invested in research
and development for 1997, 1998 and 1999 were $6,675, $25,273 and $65,158,
respectively. In addition to their duties as executive officers, our President,
Jamie Ollivier and Chief Executive Officer, Bruce Warren conducted most of our
research and development prior to our becoming a public company. This was time
for which little or no remuneration was received. We cannot guarantee that
expenditures in research and development will ensure our success or lead to
innovations that are not available to our competition.
SALES AND MARKETING
We recorded sales and marketing expense of $610,000 in 1999 compared with
$506,000 in 1998 and $226,000 in 1997. The offset to the revenue received from
BCTV and other clients in 1999 was $13,000. We expended the balance of our 1999
expense of $96,000 primarily for preparation of promotional and marketing
material. All of our 1998 expense related to the exchange transactions with
BCTV, as well as all of the $226,000 we recorded in 1997.
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<PAGE> 16
DEPRECIATION
We have used the declining balance basis of depreciation with a 30% rate
for all capital asset categories. The 1999 expense increased to $98,000 from
$30,000 in 1998 and from $17,000 in 1997 because we expended $483,000 on capital
assets and leasehold improvements in 1999. Almost $200,000 of our depreciation
expenses related to the occupation of the new Vancouver head office and the
Toronto office servicing the CTV contract.
Our capital additions in 1998 were $45,000 compared with $12,000 in 1997
and our depreciation charges were $30,000 and $17,000 for 1998 and 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our reorganization in October 1999, we had very limited access to
capital, and we depended entirely on our principal stockholder and current
Chairman Michael Warren for direct financing or as guarantor of a line of credit
from recognized financial institutions.
As a result of the $5.25 million private placement in October 1999, we had
working capital of $3.76 million as of December 31, 1999. This compared to a
cash position of less than $1,000 at the end of fiscal 1998 and $12,375 in 1997.
During fiscal 1999, we used $788,000 in our operating activities. The
negative impact on cash from our net loss of $1.4 million was mitigated by a
total of $395,000 of non-cash charges relating to stock options and depreciation
and amortization.
We invested $482,000 in equipment and leaseholds, the latter in connection
with the move to a new Vancouver head office, and the opening of a Toronto
office to service the CTV contract.
We believe we have sufficient liquidity on hand to finance our operations
through to the end of fiscal 2000, however, we are heavily dependent on the CTV
contract. Should CTV cancel our agreement we do not have other existing clients
to support our Toronto office. We do not have in place any lines of credit. Our
future capital requirements will, however, depend on a number of factors,
including costs associated with product development efforts, the success of the
commercial introduction of our products and the possible acquisition of
complementary business, products and technologies. To the extent additional
capital is required, we may sell additional equity, debt or convertible
securities or establish credit facilities. We cannot assure you that additional
capital will be available when we need it on terms that we consider acceptable.
INCOME TAXES
No taxes are payable for 1999 as a result of the operating loss recorded.
Based on a number of factors, including the lack of a history of profits, we
believe there is sufficient uncertainty regarding the realization of deferred
tax assets, and we have not booked an income tax benefit. The 1999 loss can be
carried forward for seven years.
In 1998, we recovered $4,000 of income tax because the loss recorded for
fiscal 1998 was carried back to earlier profitable years. In 1997, despite
recording a book loss before tax, we had taxable income and recorded a provision
of $2,000.
COST OF YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products were coded
to accept only two-digit entries in date code fields. Both before and after the
year 2000, these date code fields will need to accept four-digit entries to
enable the computer systems and software products to distinguish twenty-first
century dates from twentieth century dates. Any of our computer programs or
hardware that have date-sensitive software or embedded computer chips which have
not been upgraded to be compliant with the requirements of the year 2000
changeover may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations,
15
<PAGE> 17
including among other things, a temporary inability to properly process
transactions internally or in conjunction with external computer systems on
which we depend to provide our customers with our product and services. Although
we have not suffered from any of these types of events to date, we may do so in
the future.
OUR GENERAL READINESS
The year 2000 requirements affect the computers, software and other
equipment that we use, operate or maintain for our operations. Substantially all
of our software was developed after awareness of these issues became wide spread
in the software industry, such that our software was designed with reference to
preventing year 2000 related difficulties from arising. Nonetheless, we have
adopted an internal policy to ensure that our product remains year 2000
compliant. To the best of our knowledge, none of our internal systems or
equipment which are necessary for the conduct of our business has any defects,
errors or deficiencies relating to the year 2000 which are not capable of being
remedied.
COST OF OUR YEAR 2000 EFFORTS
We have incurred no direct expenses since our inception in connection with
this process, and do not expect to incur any significant additional expenditures
in this regard.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS
We believe that it is not possible to determine with complete certainty
that all year 2000 related problems affecting us have been identified or
corrected. The number of devices and systems that could be affected and the
interactions among these devices and systems are numerous. We believe that there
exists the potential for a significant number of operational inconveniences and
inefficiencies, and possible disputes and claims related to products or services
used or provided by us.
CONTINGENCY PLANS
We have taken measures to ensure that our internal systems and equipment
are year 2000 compliant for both hardware and software. All of our operating
systems on all critical servers have been upgraded, and all individual computers
and tools have been verified as year 2000 compliant. We perform a daily back-up
of all critical information. In the event of a failure, we estimate that the
information technology infrastructure necessary to run our internal business
operations could be restored.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, we had not entered into or acquired financial
instruments that have material market risk. We have no financial instruments for
trading or other purposes or derivative or other financial instruments with off
balance sheet risk. All financial assets and liabilities are due within the next
twelve months and are classified as current assets or liabilities in the
consolidated balance sheet provided in response to Item 13. The fair value of
all financial instruments at December 31, 1999 is not materially different from
their carrying value.
We regularly invest funds in excess of our immediate needs in guaranteed
investment certificates issued by major Canadian banks. The fair value of these
instruments, which generally have a term to maturity of 90 days or less, does
not differ significantly from their face value.
To December 31, 1999, substantially all revenues and the majority of cash
costs have been realized or incurred in Canadian dollars. To date we have not
entered into foreign currency contracts to hedge against foreign currency risks
between the Canadian dollar or other foreign currencies and our reporting
currency, the United States dollar. Generally, however, we attempt to manage our
risk of exchange rate fluctuations by maintaining sufficient net assets in
Canadian dollars to retire our liabilities as they come due.
16
<PAGE> 18
ITEM 3. PROPERTIES.
Through our Blue Zone Entertainment Inc. subsidiary, we entered into a five
year lease, commencing on October 1, 1999, that houses our corporate
headquarters in approximately 6,110 square feet located at 329 Railway Street,
5th Floor, Vancouver, British Columbia, Canada V6A 1A4. Blue Zone Productions
Ltd. guaranteed the lease. Our monthly rent over the term of the lease is
$4,277.
Through our Blue Zone Entertainment Inc. subsidiary, we entered into a five
year lease, commencing on November 1, 1999, for approximately 3,006 square feet
of office space at 488 Wellington Street, Suite 202, Toronto, Ontario, Canada
M5V 1E3. Our monthly rent over the term of the lease is $3,070.
We believe that our existing facilities are adequate for our needs through
the end of 2000. Should we require additional space at that time, or prior
thereto, we believe that we could secure such space on commercially reasonable
terms and without undue operational disruption.
17
<PAGE> 19
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with respect
to beneficial ownership of our common stock as of May 1, 2000 by:
- each person known by us to beneficially own 5% or more of our outstanding
common stock;
- each of our directors and executive officers; and
- each executive officer named in the summary compensation table.
In general, a person is deemed to be a "beneficial owner" of a security if
that person has or shares the power to vote or direct the voting of such
security, or the power to dispose or direct the disposition of such security. In
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to options held by that
person that are currently exercisable or exercisable within 60 days of May 1,
2000 are deemed outstanding. Percentage of beneficial ownership is based upon
21,538,100 shares of common stock outstanding at May 1, 2000. To our knowledge,
except as set forth in the footnotes to this table and subject to applicable
community property laws, each person named in the table has sole voting and
investment power with respect to the shares set forth opposite such person's
name. Except as otherwise indicated, the address of each of the persons in this
table is as follows: c/o Blue Zone, Inc., 329 Railway Street, 5th Floor,
Vancouver, British Columbia, V6A 1A4.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
OFFICERS AND DIRECTORS BENEFICIALLY OWNED BENEFICIALLY OWNED
---------------------- ------------------ ------------------
<S> <C> <C>
Bruce Warren.............................................. 1,000,000(1) 4.44%
Jamie Ollivier............................................ 1,000,000(1) 4.44%
F. Michael P. Warren...................................... 12,150,100(2) 56.02%
P.O. Box 772
The Valley
Anguilla, B.W.I
Tryon M. Williams......................................... 150,000(3) (4)
3711 Pugent Drive
Vancouver, BC
Canada, V6L 2T8
David A. Thomas........................................... 150,000(3) (4)
Suite 412
1 Stafford Road
Nepean, ON
Canada, K2H 1B9
Jay Shecter............................................... 0 0
1235 North Wetherly Drive
Los Angeles, CA 90069
All directors and executive officers as a group (7 14,650,100(5) 60.57%
persons)................................................
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
OFFICERS AND DIRECTORS BENEFICIALLY OWNED BENEFICIALLY OWNED
---------------------- ------------------ ------------------
<S> <C> <C>
FIVE PERCENT STOCKHOLDERS
Savoy Holdings Limited(6)................................. 1,574,944(6) 7.14%
Mansion House -- Suite 2B
143 Main Street
Gibraltar
Doug McLeod............................................... 1,125,000 5.22%
688-6 Ishikawa
Fujisawa City
Kanagawa, Japan
252 0815
</TABLE>
- ---------------
(1) Represents options to purchase 500,000 shares of our common stock at $5.00
per share until November 10, 2009 and options to purchase 500,000 shares of
our common stock at $7.44 per share until November 10, 2009.
(2) Includes options to purchase 150,000 shares of our common stock at $5.00 per
share until November 10, 2009.
(3) Represents options to purchase 150,000 shares of our common stock at $5.00
per share until November 10, 2009.
(4) Represents less than one percent.
(5) Includes a total of 12,000,100 shares and 2,450,000 options referred to in
notes (1), (2) and (3) and a total of 200,000 options held by Catherine
Warren, our Chief Operating Officer, to purchase 100,000 shares of our
common stock at $5.00 per share until November 10, 2009 and to purchase
100,000 shares of our common stock at $7.44 per share until November 10,
2009.
(6) Includes stock purchase warrants to purchase 524,981 shares of the Company's
common stock at a price of $5.63 per share if the warrant is exercised
before October 1, 2000 and at a price of $6.75 per share if the warrant is
exercised after October 1, 2000 but before the warrants expire on October 1,
2001. Mrs. Jodi Hunter is the sole record and beneficial stockholder of
Savoy Holdings Limited.
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<PAGE> 21
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES.
MANAGEMENT
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
F. Michael P. Warren................................. 64 Chairman of the Board of Directors
Bruce Warren......................................... 34 Chief Executive Officer and Director
Jamie Ollivier....................................... 36 President and Director
Catherine Warren..................................... 37 Chief Operating Officer
Tryon Williams....................................... 59 Director
David Thomas......................................... 53 Director
Jay Shecter.......................................... 56 Treasurer and Director
</TABLE>
FAMILY RELATIONSHIPS
Our chief executive officer, Bruce Warren, and our chief operating officer,
Catherine Warren, are the son and daughter, respectively, of our Chairman, F.
Michael P. Warren. Otherwise, no family relationship exists between or among any
of our directors, executive officers or significant employees or any person
contemplated to become a director, executive officer or significant employee.
BUSINESS EXPERIENCE
F. MICHAEL P. WARREN, Q.C. has been our Chairman since October 8, 1999. Mr.
Warren is the founder and chairman of Warren Capital Ltd., a venture capital
fund with holdings in a broad range of industrial and technological companies,
and has served as its chairman since March 1998. From January 1991 to March
1998, Mr. Warren was chairman of International Murex Technologies Corporation, a
medical diagnostics company, which was sold to Abbott Laboratories in March
1998. Prior to January 1991, Mr. Warren was a partner of the law firm of Owen,
Bird, Barristers & Solicitors, in Vancouver, BC.
BRUCE WARREN has been our Chief Executive Officer and a Director since
October 8, 1999. Mr. Warren is a co-founder of Blue Zone Productions Ltd. and
has served as its President since 1992. Mr. Warren created and programmed the
MediaBz(TM) prototype and, along with our President Jamie Ollivier, is primarily
responsible for negotiating our agreements with our broadcasting and media
clients.
JAMIE OLLIVIER has been our President and a Director since October 8, 1999.
Mr. Ollivier is a co-founder of Blue Zone Productions Ltd. and has served as its
creative director from 1994 to the present. From January 1991 to January 1993,
Mr. Ollivier was secretary of Balancetech, Inc., a software development firm,
which he also co-founded.
CATHERINE WARREN has been our Chief Operating Officer since October 8, 1999
and was the chief operating officer for Blue Zone Productions Ltd. from May 1999
until October 1999. From June 1996 to February 1999, Ms. Warren was the director
of education and community programming at the Vancouver Aquarium, where her
responsibilities included strategic business development for new media. From
November 1992 to June 1996, Ms. Warren was executive director and publisher for
the Association for the Promotion and Advancement of Science Education, a
multimedia and educational program development organization.
TRYON M. WILLIAMS has served as one of our Directors since October 8, 1999.
Since 1984, Mr. Williams has served as a principal of Tarpen Research
Corporation, a private consulting firm, and since 1993, he has been an Adjunct
Professor, Faculty of Commerce and Business Administration at the University of
British Columbia. From 1988 to 1991, he was President and chief executive
officer of
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<PAGE> 22
Distinctive Software, Inc. in Vancouver, BC, and, upon the acquisition of that
company by Electronic Arts Inc., North America's largest developer of
entertainment software, he became President and chief executive officer of
Electronic Arts (Canada) Inc., where he continued until 1993. Since 1993, Mr.
Williams has also been a Managing Partner in the CEG, AVC, and PEG Partnerships,
created to invest in entertainment software worldwide. Mr. Williams is a
director of American Softworks Corporation, York Medical, Inc., and several
other private corporations.
DAVID THOMAS has served as one of our Directors since October 8, 1999. In
1997, Mr. Thomas founded Bedarra Corporation, a privately-held management and
technology consulting company, and has served as its President since 1998. From
1991 to 1998, Mr. Thomas was President and chief executive officer of Object
Technology International, a technology company, which he also founded. Mr.
Thomas was a professor of engineering at Carleton University from 1983 to 1991.
JAY SHECTER has served as our Treasurer and one of our Directors since
January 1, 2000. From March 1997 to December 1999, Mr. Shecter was a vice
president in charge of strategic sourcing for the Universal Studios subsidiary
of The Seagram Company Ltd. From July 1992 to February 1997, Mr. Shecter was a
senior vice president and chief financial officer for Chivas Brothers Ltd., that
company's Global Whisky Group.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of our directors or executive officers has been involved in any legal
proceedings during the past five years that are material to an evaluation of
their ability or integrity as a director or executive officer.
BOARD OF DIRECTORS
We currently have six directors. All directors currently hold office until
the next annual meeting of stockholders or until their successors have been
elected and qualified. Our officers are elected annually by the Board of
Directors and hold office until their successors are elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
In December 1999, the Board of Directors designated an Audit Committee, a
Compensation Committee, and a Finance Committee. The basic functions of these
committees are summarized below.
AUDIT COMMITTEE. The Audit Committee, which currently consists of Messrs.
Shecter, Thomas and Williams, recommends the appointment of our independent
public accountants, reviews and approves the scope of our annual audit, and
reviews the results thereof with our independent accountants. The Audit
Committee also assists the Board of Directors in fulfilling its fiduciary
responsibilities relating to accounting and reporting policies, practices and
procedures, and reviews the continuing effectiveness of our business ethics and
conflicts of interest policies.
COMPENSATION COMMITTEE. The Compensation Committee, which currently
consists of Messrs. Shecter, Williams and M. Warren recommends to the Board of
Directors the salaries, bonuses and stock awards received by our executive
officers. The Compensation Committee is also responsible for administering our
1999 Stock Option Plan. The Compensation Committee determines the recipients of
awards, sets the exercise price and number of shares granted, and determines the
terms, provisions and conditions of rights granted.
FINANCE COMMITTEE. The Finance Committee, which consists of Messrs.
Shecter, M. Warren and B. Warren, reviews and approves our annual operating
budget, capital budget and our financing plans. The Finance Committee will
oversee the implementation of personnel and systems to manage the financial
reporting needs of our business. The Finance Committee will also oversee our
credit facilities, insurance coverage, investments, and commercial and
investment banking relationships.
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<PAGE> 23
ITEM 6. EXECUTIVE COMPENSATION.
The table below summarizes information for the fiscal year ended December
31, 1999, concerning the total compensation paid to our chief executive officer.
None of our other executive officers were paid compensation in excess of
$100,000 during the fiscal year ended December 31, 1999. The table only relates
to compensation paid by Blue Zone Productions Ltd. after we acquired it on
October 8, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
COMPENSATION AWARD LONG TERM-COMPENSATION
------------------ ----------------------
SECURITIES
UNDERLYING
NAME SALARY OPTIONS (#) OTHER COMPENSATION
- ---- ------ ----------- ------------------
<S> <C> <C> <C>
Bruce Warren.......................... $40,000(1) 500,000 -0-
</TABLE>
- ---------------
(1) Bruce Warren was paid $40,000 in compensation for the last four months of
1999, which corresponds to $120,000 on an annualized basis.
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<PAGE> 24
OPTION GRANTS IN THE FISCAL YEAR ENDED DECEMBER 31, 1999
The following table sets forth all stock options granted to our chief
executive officer during the fiscal year ended December 31, 1999. The options
were granted pursuant to our 1999 Stock Option Plan. In accordance with the
rules of the Securities and Exchange Commission, also shown is the potential
realizable value over the term of the option, the period from the grant date to
the expiration date, giving effect to an assumed price of $4.50 per share (the
fair market value on the date of grant) and based on an assumed rate of stock
appreciation of 5% and 10%, compounded annually. These rates are mandated by the
Securities and Exchange Commission and do not represent our estimate of our
future common stock price. Actual gains, if any, on stock option exercises will
depend on the future performance of our common stock. In the fiscal year ended
December 31, 1999, we granted options to acquire up to an aggregate of 1,955,000
shares of common stock to employees, consultants and directors.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------------------------------ ASSUMED ANNUAL RATES OF
PERCENT OF TOTAL STOCK PRICE APPRECIATION
NUMBER OF OPTIONS FOR
SECURITIES GRANTED EXERCISE OR THE OPTION PERIOD
UNDERLYING TO EMPLOYEES IN BASE PRICE -------------------------
NAME OPTIONS GRANTED FISCAL YEAR PER SHARE EXPIRATION DATE 5% 10%
---- --------------- ---------------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bruce Warren......... 500,000 28.0% $5.00 11/9/2009 1,165,012 3,335,920
</TABLE>
1999 STOCK OPTION PLAN
Our 1999 Stock Option Plan was adopted by the Board of Directors in
November, 1999. The purpose of our Plan is to attract and retain the best
available personnel, to provide an additional incentive to our employees,
directors and consultants and to promote the success of our business. Our Plan
provides for the issuance to our employees, directors and eligible advisors and
consultants shares of common stock pursuant to the grant of non-qualified stock
options. We may also issue incentive stock options within the meaning of Section
422 of the Internal Revenue Code to our employees. At our next annual meeting,
we intend to submit the Plan to our stockholders for approval. If the Plan is
not approved by our stockholders, we will still be able to issue non-qualified
options but not incentive options.
A total of 4,500,000 shares of our common stock has been reserved for
issuance under our 1999 Stock Option Plan. The Plan is administered by the
Compensation Committee of our Board of Directors that currently consists of
Messrs. Shecter, Williams and M. Warren. Subject to the provisions of the Plan,
the Compensation Committee has the authority to determine to whom stock options
are granted and the terms of any such grant, including the number of shares
subject to, the exercise price and vesting provisions of, the award.
Incentive stock options granted under the Plan have a maximum term of 10
years, or five years in the case of incentive stock options granted to an
employee who owns common shares having more than 10% of the voting power of our
company. The exercise price of incentive stock options will be no less than the
fair market value of our common stock on the date of the grant, or 110% of the
fair market value in the case of an incentive stock option granted to an
employee who owns common shares having more than 10% of the voting power of our
company. Non-qualified stock options granted under the Plan have a term set
forth in the Option Award Agreement and an exercise price of no less than 85% of
fair market value of our common shares on the date of the grant, unless
otherwise determined by the Administrator.
Payment for the exercise of an option may be made by cash, check delivery
of a promissory note by the grantee, surrender of shares owned by the grantee,
or through a broker-dealer sale and remittance procedure.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from us for their
services as members of the Board of Directors, although members are reimbursed
for expenses in connection with attendance at Board
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<PAGE> 25
of Directors, committee meetings, and specific Blue Zone business meetings.
Directors are eligible to participate in our 1999 Stock Option Plan. Option
grants to directors are at our discretion, and we have no specific plans
regarding amounts to be granted to our directors in the future.
OPTION GRANTS TO DIRECTORS AND OFFICERS
On December 29, 1999, we entered into an agreement with Jay Shecter when
Mr. Shecter joined our Board of Directors. The agreement provides that Mr.
Shecter will provide financial advisory services to us in consideration for
being granted an option to acquire 150,000 shares of our common stock at an
exercise price of $5.00 per share. We have not yet granted these options.
For the year ended December 31, 1999, we have granted a total of 1,550,000
options to our executive officers and directors. We granted options to each of
F. Michael P. Warren, our chairman, David Thomas, a director, and Tryon
Williams, a director, to purchase 150,000 shares of common stock. The options
have an exercise price of $5.00 per share and expire on November 10, 2009. We
have also granted options to Bruce Warren, our chief executive officer, Jamie
Ollivier, our president and Catherine Warren, our chief operating officer, to
purchase 500,000, 500,000 and 100,000 shares of our common stock, respectively.
The options granted to our executive officers have an exercise price of $5.00
and terminate on November 10, 2009.
On January 21, 2000, we granted 500,000 options to both Bruce Warren and
Jamie Ollivier and 100,000 options to Catherine Warren. These options are
exercisable at $7.44 per share until November 10, 2009.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
As of January 1, 2000, our Blue Zone Entertainment Inc. subsidiary entered
into employment agreements with Bruce Warren, to serve as our Chief Executive
Officer, Jamie Ollivier, to serve as our President, and Catherine Warren to
serve as our Chief Operating Officer. The agreements provide for annual salaries
of not less than $120,000, $120,000, and $100,000 for Bruce Warren, Jamie
Ollivier and Catherine Warren, respectively. The annual salaries may be
increased by our Compensation Committee upon review of the executive's
performance for the preceding year. Under the agreements, the executives are
entitled to receive incentive compensation based upon the achievement of
performance goals to be established jointly by the executive and the
Compensation Committee. If the executive achieves the performance goals, the
executive will receive a bonus equal to 50% of the executive's annual salary. If
the executive exceeds the performance goals by an amount agreed upon by the
executive and the Compensation Committee, then the executive may receive a bonus
of up to an additional 100% of the executive's annual salary, for a total bonus
of 150% of the executive's salary.
The employment agreements do not specify a term of employment. However, the
executive's employment with us may be terminated if (a) the executive is
convicted of a felony or any other criminal offense which has a material adverse
effect on us or the executive's ability to carry out his duties of employment;
(b) the executive willfully commits acts materially detrimental to our business
or reputation; (c) there is any material breach of any of the executive's
covenants or fiduciary duties as specified in the employment agreement which is
not capable of being cured by the executive or, if capable of being cured, which
is not cured by the executive within 15 days following written notice thereof
from our Board of Directors; or (d) the executive knowingly fails to follow
specific directives of our Board of Directors consistent with his duties.
The executive's employment with us may be terminated if the executive
suffers a physical or mental condition, other than pregnancy, which results in
the executive's absence from his employment duties for a period of ninety (90)
or more consecutive days. If the employment of any of the executives is
terminated under such circumstances, the executive shall be entitled to 180 days
of severance pay at full salary from the date the executive is deemed to have
such disability less any amounts received by the executive from disability
insurance. Alternatively, the executive's employment with us may be terminated
upon the death of the executive. If the employment of any of the executives is
terminated by reason of death, the
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<PAGE> 26
Company shall pay the balance of the monies due under the agreement to the
estate or beneficiaries of the decreased executive.
An executive's employment may also be terminated at the sole discretion of
the Board of Directors. In such circumstances, however, we are required to pay
the executive two years of severance pay at full salary plus one year of any
incentive or bonus compensation required to be paid to the executive and, in
such an event, the executive is not required to mitigate damages.
The employment agreements with Bruce Warren and Jamie Ollivier provide that
each of them shall be nominated for election to our Board of Directors. In
addition, we agreed that, while employed with us, Mr. Warren and Mr. Ollivier
would each serve as members of the Executive Committee of our Board of
Directors, when and if established, along with the Chairman of the Board.
Under the agreements, the executives are entitled to receive certain
additional benefits. The executives may participate in our present and future
stock option, benefit and deferred compensation plans. In addition, we are
required to reimburse the executives for their club and professional society
membership dues and monthly charges, the costs of their financial, tax and
estate planning, and an automobile allowance. Under the employment agreements,
we are also required to reimburse each executive for: (i) travel, meals and
lodging expenses incurred when the executive's spouse travels with the executive
on business for more than 15 days; (ii) childcare expenses incurred for the
executive's pre-school children when the executive's nanny or babysitter
accompanies the executive on business travel; or (iii) expenses incurred for
home-based childcare for the executive's pre-school children when the executive
travels on our behalf. In addition, if any executive is required to include any
of these benefits as income for purposes of federal or provincial tax, we will
reimburse the executive for any and all taxes paid.
Under the employment agreements, we retain all proprietary and intellectual
property rights in everything created, developed or conceived by the executives
while employed with us. In addition, so long as any executive is employed with
us, the executive is bound by non-competition and non-solicitation covenants.
During the term of employment and for one year thereafter, the executive is
prohibited from directly competing with us in any management capacity in any
phase of our business in any geographic area throughout the world in which we
presently market our products and services. If we begin to market our products
and services in new countries, the prohibition is amended automatically to
include those new geographic areas and, if we cease to market our products and
services in a particular geographic area, that area is no longer prohibited
after six months. During the term of employment and for two years thereafter,
the executive is prohibited from soliciting business or customers that the
executive serviced while employed with us and may not solicit or attempt to
solicit any of our employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee and none of our executive officers
has a relationship that would constitute an interlocking relationship with
executive officers and directors of another entity.
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<PAGE> 27
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 9, 1999, our Blue Zone Productions Ltd. subsidiary executed a
Business Banking Loan Agreement with the Royal Bank of Canada for a $100,000
line of credit. Under a Guarantee and Postponement of Claim Agreement, dated
July 9, 1999, our principal stockholder and current chairman, F. Michael P.
Warren, provided a guarantee of the line of credit in favor of Royal Bank of
Canada. Mr. Warren's liability under the guarantee was limited to $50,000. All
funds borrowed under the line of credit were paid in October 1999 and the line
of credit was terminated.
In connection with the closing of the transactions described in the Share
Exchange Agreement on October 8, 1999, we used a portion of the proceeds from
our private placement to Savoy Holdings to repay $96,600 to F. Michael P.
Warren, our chairman, $48,400 to Bruce Warren, our chief executive officer, and
$10,350 to Jamie Ollivier, our president, for loans and advances made by those
persons to our Blue Zone Productions Ltd. subsidiary.
As of December 31, 1999, our chairman, F. Michael P. Warren, had advanced
$45,559 to us in connection with unreimbursed travel and business expenses. As
of March 31, 2000, we had reimbursed Mr. Warren for all of his travel and
business expenses.
See the description of "Executive Compensation" in Item 6 for the terms of
Employment Agreements between the Company and Bruce Warren, our Chief Executive
Officer and a Director, Jamie Ollivier, our President and a Director, and
Catherine Warren, our Chief Operating Officer.
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<PAGE> 28
ITEM 8. LEGAL PROCEEDINGS.
We are not a party to any legal proceedings.
27
<PAGE> 29
ITEM 9. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Our common stock, $.001 per share, is quoted on the OTC Bulletin Board
under the symbol "BLZNE". The following table sets forth the highest and lowest
bid prices for our common stock for each calendar quarter since September 1999
when our common stock commenced trading, as reported by the National Quotation
Bureau, Inc.
As of February 1, 2000, there were 11 record holders of our common stock.
Because a significant number of shares of our common stock are held in the names
of nominees and through brokerage accounts and we have not conducted a search of
those accounts, we do not know the exact number of beneficial owners of our
common stock.
The prices set forth below represent interdealer quotations, without retail
markup, markdown or commission and may not be reflective of actual transactions.
<TABLE>
<CAPTION>
FISCAL 1999 HIGH BID LOW BID
----------- -------- -------
<S> <C> <C>
Third Quarter............................................... $ 5.33 $4.00
Fourth Quarter.............................................. $10.25 $3.75
FISCAL 2000
- ---------
First Quarter............................................... $15.38 $7.13
</TABLE>
We have never paid cash dividends on our common stock and we presently
intend to retain future earnings, if any, to finance the expansion of our
business. We do not anticipate that any cash dividends will be paid in the
foreseeable future. Future dividend policy will depend on our earnings, capital
requirements, expansion plans, financial condition and other relevant factors.
As of May 1, 2000, we have granted an aggregate of 3,286,000 options
exercisable into shares of our common stock. In connection with our private
placement of September 22, 1999, we issued warrants to acquire 524,981 (466,650
prior to giving effect to the 1.125-for-1 stock split on September 27, 1999)
shares of our common stock.
In connection with the closing under the Share Exchange Agreement on
October 8, 1999, we issued 12,000,000 shares of our common stock to F. Michael
P. Warren, our Chairman, in exchange for all of the issued and outstanding
common stock of Blue Zone Productions Ltd. Pursuant to the Share Exchange
Agreement, Mr. Warren agreed that he would not transfer, assign or sell the
shares for one year. We are required to register Mr. Warren's 12,000,000 shares
of common stock under the Securities Act of 1933, as amended, provided that Mr.
Warren pays for the expenses of such registration.
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<PAGE> 30
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
We sold the following securities within the past three years and prior to
the date of filing of this registration statement.
On or about March 11, 1997, we issued 28,125,000 (5,000,000 prior to giving
effect to our five-for-one stock split on July 14, 1998 and our 1.125-for-1
stock split on September 27, 1999) shares of our restricted common stock to a
person who was then a director and our secretary in consideration for services
rendered to us in connection with our formation and organization.
In April 1997, pursuant to Rule 504, we issued an aggregate of 1,125,000
(200,000 prior to giving effect to our five-for-one stock split on July 14, 1998
and our 1.125-for-1 stock split on September 27, 1999) shares of our common
stock for an aggregate purchase price of $20,000. One person, then a director
and our secretary, acquired 20,000 shares for $2,000. The remaining 180,000
shares were issued to a group of 41 persons in exchange for an aggregate
purchase price of $18,000.
On April 5 1999, pursuant to Rule 504 and Section 3(b) of the Securities
Act of 1933, as amended, we issued an aggregate of 6,750,000 (6,000,000 prior to
giving effect to the 1.125-for-1 stock split on September 27, 1999) shares of
our common stock to 11 investors for an aggregate purchase price of $120,000.
On September 22, 1999, we sold 1,049,963 (933,300 prior to giving effect to
the 1.125-for-1 stock split on September 27, 1999) units to Savoy Holdings
Limited for an aggregate purchase price of $5,254,479. Each unit consisted of
one share of common stock and one half of one non-transferable share purchase
warrant entitling the holder to purchase a further share of common stock at a
price of $5.63 per share if the warrant is exercised before October 1, 2000 and
at a price of $6.75 per share if the warrant is exercised before October 1, 2001
when the warrant expires. The units were issued pursuant to an exemption under
Regulation S of the Securities Act. The common stock issuable upon exercise of
the warrants, when issued, will be restricted securities issued in reliance on
Regulation S.
From November 1999 through March 1, 2000, pursuant to Rule 701 and
Regulation S, we have granted a total of 3,286,000 options to our employees,
officers, and directors under our 1999 Stock Option Plan, which options may be
exercised at prices ranging from $5.00 to $7.44 per share.
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<PAGE> 31
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
GENERAL
Under our amended certificate of incorporation, we are authorized to issue
up to 100,000,000 shares of common stock, $.001 par value per share. We are also
authorized to issue up to 5,000,000 shares of preferred stock, $.001 par value
per share, which may contain special preferences as determined by our Board of
Directors including, but not limited to, the bearing of interest and
convertibility into shares of our common stock. As of December 31, 1999, we had
21,538,100 shares of common stock issued and outstanding. No shares of preferred
stock are issued and outstanding.
The following summary of the terms and provisions of our capital stock is
not complete, and you should read our certificate of incorporation and bylaws,
copies of which have been filed as exhibits to this registration statement.
COMMON STOCK
Holders of our common stock are entitled to one vote per share for each
share owned of record. Generally, all matters to be voted on by our stockholders
must be approved by a majority of the votes that are entitled to be cast by all
shares of our common stock that are present in person or represented by proxy.
Except as otherwise provided by law, amendments to our certificate of
incorporation generally must be approved by a majority of the votes entitled to
be cast by all outstanding shares of our common stock.
Our certificate of incorporation does not provide for cumulative voting in
the election of directors, which means that the holders of more than 50% of the
outstanding shares voting for directors can elect all of the directors and, in
such event, the holders of the remaining shares will be unable to elect any of
our directors. Because our directors and officers own approximately 60% of our
outstanding common stock, this group will effectively control all material
matters requiring approval by our stockholders, including the election or
removal of the board of directors and any merger, takeover or other business
combination involving us or the sale of substantially all of our assets.
Holders of shares of our common stock have no preemptive, conversion or
subscription rights, and shares of our common stock are not subject to
redemption. Except as otherwise provided by law, dividends may be declared at
the sole discretion of the Board of Directors and may be paid in cash, property,
shares of corporate stock, or any other medium.
PREFERRED STOCK
Our Board of Directors is authorized to issue preferred stock in series
from time to time with such designations, rights, preferences and limitations as
our Board of Directors may determine. Moreover, unless the nature of a
particular transaction and applicable statute require such approval, our Board
of Directors need not obtain shareholder approval before issuing preferred
stock. The potential exists, therefore, that additional shares of preferred
stock might be issued with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of holders
of our stock. The issuance of preferred stock may have the effect of delaying or
preventing a change in control without any further action by stockholders.
WARRANTS
On September 22, 1999, we issued stock purchase warrants to purchase an
aggregate of 524,981 shares of our common stock to Savoy Holdings Limited. Each
warrant entitles the holder to purchase one share of our common stock at an
exercise price of $5.63 per share if the warrant is exercised before October 1,
2000 and at a price of $6.75 per share if the warrant is exercised after October
1, 2000 but before the warrants expire on October 1, 2001. As of February 1,
2000, none of these warrants has been exercised.
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<PAGE> 32
The warrants are immediately exercisable, non-transferable, and not
redeemable. The warrants bear a legend to prevent sale, transfer, assignment or
hypothecation in the absence of an effective registration statement or an
exemption from registration. In addition, any share certificates issued upon
exercise of the warrants but prior to the effective date of a registration
statement will bear similar legends.
In issuing the warrants to Savoy Holdings Ltd., we relied upon an exemption
from registration provided by Regulation S of the Securities Act. Upon exercise
of any or all of the warrants, the holder exercising the warrants must provide
to us either (i) certification that the holder is not a "U.S. Person" as defined
in Regulation S or (ii) a legal opinion satisfactory to us that the warrants and
the shares of common stock issuable upon exercise of the warrants have been
registered or are exempt from registration.
TRANSFER AGENT
The transfer agent for our common stock is First American Stock Transfer
located at 610 East Bell Road, Suite 2-155 PMB, Phoenix, AZ 85022-2393;
telephone number (608) 485-1346.
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<PAGE> 33
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Limitation on liability
Our certificate of incorporation contains a provision that is intended to
limit the liability of our officers and directors. Specifically, our officers
and directors will not be liable to us or our shareholders for damages for any
breach of fiduciary duty, except for liability arising as a result of acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law.
The principal effect of the limitation of liability provision is that a
shareholder is unable to prosecute an action for monetary damages against one of
our officers or directors unless the shareholder can demonstrate one of the
specified bases for liability. The provision does not eliminate or limit
liability arising in connection with causes of action brought under the federal
securities laws. In addition, our certificate of incorporation does not
eliminate the duty of care.
The inclusion of this provision in our certificate of incorporation may
discourage or deter our shareholders or our management from bringing a lawsuit
for breach of fiduciary duty against an officer or director, even though such an
action, if successful, might otherwise have benefited us and our shareholders.
Indemnification
With regard to indemnification of our officers and directors, our
certificate of incorporation provides as follows:
Article X. Indemnification: Each director and each officer of the
corporation may be indemnified by the corporation as follows:
(a) The corporation may indemnify any person who was or is a party, or
is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him in connection with the
action, suit or proceeding, if he acted in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suite or proceeding, by judgment, order, settlement, conviction
or upon a plea of nolo contendere or its equivalent, does not of itself
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action
or proceeding, he had reasonable cause to believe that his conduct was
unlawful.
(b) The corporation may indemnify any person who was or is a party, or
is threatened to be made a party, to any threatened, pending or completed
action or suit by or in the right of the corporation, to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses including amounts paid in settlement and attorneys' fees actually
and reasonably incurred by him in connection with the defense or settlement
of the action or suit, if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or
matters as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals there from, to be liable to
the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit
was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances
32
<PAGE> 34
of the case the person is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this Article, or in defense of any claim, issue or matter therein, he must
be indemnified by the corporation against expenses, including attorney's
fees, actually and reasonably incurred by him in connection with the
defense.
(d) Any indemnification under subsections (a) and (b) unless ordered
by a court or advanced pursuant to subsection (e), must be made by the
corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper
in the circumstances. The determination must be made:
(i) By the stockholders;
(ii) By the Board of Directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit or
proceeding;
(iii) If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by
independent legal counsel in a written opinion; or
(iv) If a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent legal
counsel in a written opinion.
(e) Expenses of officers and directors incurred in defending a civil
or criminal action, suit or proceeding must be paid by the corporation as
they are incurred and in advance of the final disposition of the action,
suit or proceeding, upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified
by the corporation. The provisions of this subsection do not affect any
rights to advancement of expenses to which corporate personnel other than
directors or officers may be entitled under any contract or otherwise by
law.
(f) The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section:
(i) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the
certificate or articles of incorporation or any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, for either an
action in his official capacity or an action in another capacity while
holding his office, except that indemnification, unless ordered by a
court pursuant to subsection (b) or for the advancement of expenses made
pursuant to subsection (e) may not be made t or on behalf of any
director or officer if a final adjudication establishes that his acts or
omissions involved intentional misconduct, fraud or a knowing violation
of the law and was material to the case of action.
(ii) Continues for a person who has ceased to be a director,
officer, employee or agent and insures to the benefit of the heirs,
executors and administrators of such a person.
With regard to indemnification of our officers and directors, our bylaws
provide as follows:
ARTICLE VII.
INDEMNIFICATION
Section 7.1 Indemnification. The corporation shall, unless prohibited by
Nevada Law, indemnify any person (an "Indemnitee") who is or was involved in any
manner (including, without limitation, as a party or a witness) or is threatened
to be so involved in any threatened, pending or completed action suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, including without limitation, any action, suit or proceeding
brought by or in the right of the corporation to procure a judgment in its
33
<PAGE> 35
favor (collectively, a "Proceeding") by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other entity or enterprise, against all Expenses and Liabilities actually and
reasonably incurred by him in connection with such Proceeding. The right to
indemnification conferred in this Article shall be presumed to have been relied
upon by the directors, officers, employees and agents of the corporation and
shall be enforceable as a contract right and inure to the benefit of heirs,
executors and administrators of such individuals.
Section 7.2 Indemnification Contracts. The Board of Directors is
authorized on behalf of the corporation, to enter into, deliver and perform
agreements or other arrangements to provide any Indemnitee with specific rights
of indemnification in addition to the rights provided hereunder to the fullest
extent permitted by Nevada Law. Such agreements or arrangements may provide (i)
that the Expenses of officers and directors incurred in defending a civil or
criminal action, suit or proceeding, must be paid by the corporation as they are
incurred and in advance of the final disposition of any such action, suit or
proceeding provided that, if required by Nevada Law at the time of such advance,
the officer or director provides an undertaking to repay such amounts if it is
ultimately determined by a court of competent jurisdiction that such individual
is not entitled to be indemnified against such expenses, (iii) that the
Indemnitee shall be presumed to be entitled to indemnification under this
Article or such agreement or arrangement and the corporation shall have the
burden of proof to overcome that presumption, (iii) for procedures to be
followed by the corporation and the Indemnitee in making any determination of
entitlement to indemnification or for appeals therefrom and (iv) for insurance
or such other Financial Arrangements described in Paragraph 7.02 of this
Article, all as may be deemed appropriate by the Board of Directors at the time
of execution of such agreement or arrangement.
Section 7.3 Insurance and Financial Arrangements. The corporation may,
unless prohibited by Nevada Law, purchase and maintain insurance or make other
financial arrangements ("Financial Arrangements") on behalf of any Indemnitee
for any liability asserted against him and liability and expenses incurred by
him in his capacity as a director, officer, employee or agent, or arising out of
his status as such, whether or not the corporation has the authority to
indemnify him against such liability and expenses. Such other Financial
Arrangements may include (i) the creation of a trust fund, (ii) the
establishment of a program of self-insurance, (iii) the securing of the
corporation's obligation of indemnification by granting a security interest or
other lien on any assets of the corporation, or (iv) the establishment of a
letter of credit, guaranty or surety.
Section 7.4 Definitions. For purposes of this Article:
Expenses. The word "Expenses" shall be broadly construed and, without
limitation, means (i) all direct and indirect costs incurred, paid or
accrued, (ii) all attorneys' fees, retainers, court costs, transcripts,
fees of experts, witness fees, travel expenses, food and lodging
expenses while traveling, duplicating costs, printing and binding costs,
telephone charges, postage, delivery service, freight or other
transportation fees and expenses, (iii) all other disbursements and
out-of-pocket expenses, (iv) amounts paid in settlement, to the extent
permitted by Nevada Law, and (v) reasonable compensation for time spent
by the Indemnitee for which he is otherwise not compensated by the
corporation or any third party, actually and reasonably incurred in
connection with either the appearance at or investigation, defense,
settlement or appeal of a Proceeding or establishing or enforcing a
right to indemnification under any agreement or arrangement, this
Article, the Nevada Law or otherwise; provided, however, that "Expenses"
shall not include any judgments or fines or excise taxes or penalties
imposed under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") or other excise taxes or penalties.
Liabilities. "Liabilities" of any type whatsoever, including, but not
limited to, judgments or fines, ERISA or other excise taxes and
penalties, and amounts paid in settlement.
34
<PAGE> 36
Nevada Law. "Nevada Law" means Chapter 78 of the Nevada Revised
Statutes as amended and in effect from time to time or any successor or
other statutes of Nevada having similar import and effect.
This Article. "This Article" means Paragraphs 7.01 through 7.04 of
these By-Laws or any portion of them.
Power of Stockholders. Paragraphs 7.01 through 7.04, including this
Paragraph, of these By-Laws may be amended by the stockholders only by
vote of the holders of sixty-six and two-thirds percent (66 2/3%) of the
entire number of shares of each class, voting separately, of the
outstanding capital stock of the corporation (even though the right of
any class to vote is otherwise restricted or denied); provided, however,
no amendment or repeal of this Article shall adversely affect any right
of any Indemnitee existing at the time such amendment or repeal becomes
effective.
Power of Directors. Paragraphs 7.01 through 7.04 and this Paragraph of
these By-Laws may be amended or repealed by the Board of Directors only
by vote of eighty percent (80%) of the total number of Directors and the
holders of sixty-six and two-thirds percent (66 2/3%) of the entire
number of shares of each class, voting separately, of the outstanding
capital stock of the corporation (even though the right of any class to
vote is otherwise restricted or denied); provided, however, no amendment
or repeal of this Article shall adversely affect any right of any
Indemnitee existing at the time such amendment or repeal becomes
effective.
In addition to the indemnification provisions present in our certificate of
incorporation and bylaws, we have liability insurance for our officers and
directors in the amount of $1 million. We also intend to enter into separate
indemnification agreements with each of our directors.
At present, there is no pending or threatened litigation or proceeding
involving any director or officer, employee or agent of ours where such
indemnification will be required or permitted.
35
<PAGE> 37
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data required by this Item are
filed as part of this Form 10. See Index to Financial Statement Information at
page F-1 of this Form 10.
36
<PAGE> 38
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In December 1999, we selected KPMG LLP as our principal independent
auditors to replace David E. Coffey, Certified Public Accountant. In connection
with the audit for the fiscal years ended December 31, 1997 and 1998, there were
no disagreements with David E. Coffey, Certified Public Accountant on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which, if not resolved to the satisfaction of David
E. Coffey, Certified Public Accountant, would have caused them to make reference
to the matter in their report. The report of David E. Coffey, Certified Public
Accountant on our financial statement for the fiscal years ended December 31,
1997 and 1998 did not contain any adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principles.
For accounting purposes, the transaction between Western Food Distributors,
Inc. and Blue Zone Productions Ltd. was accounted for as a recapitalization of
Blue Zone Productions Ltd., effectively as if it has issued common stock for
consideration equal to the net assets of Western Food Distributors, Inc. Our
comparative financial statements included in response to Item 13 are those of
Blue Zone Productions Ltd. and not of Western Food Distributors. Accordingly,
the report of David Coffey C.P.A. on the Western Food Distributors financial
statements is not included in this registration statement.
37
<PAGE> 39
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(A) Financial Statements
The information required by this item is contained in the "Index to
Financial Statements" on Page F-1 of this Form 10 registration statement and
such information is incorporated herein by reference.
(B) Exhibits
The following exhibits are being filed as a part of this Form 10
registration statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1* Share Exchange Agreement, dated as of October 5, 1999, among
F. Michael P. Warren, Bruce Warren, Jamie Ollivier, Blue
Zone Productions Ltd., Blue Zone Entertainment Inc., Blue
Zone International Inc. and Western Food Distributors, Inc.
(A list of exhibits and schedules to the Share Exchange
Agreement is set forth therein. The Registrant agrees to
furnish to the Commission supplementally, upon request, a
copy of any such exhibits or schedules not otherwise filed
herewith.)
3.1* Registrant's Articles of Incorporation dated March 10, 1997.
3.2* Certificate of Amendment to the Registrant's Articles of
Incorporation, dated July 14, 1998, providing for a 5-for-1
stock split of all of the Registrant's outstanding common
stock.
3.3* Certificate of Amendment to the Registrant's Certificate of
Incorporation, dated September 28, 1999, changing the name
of the Registrant to "Blue Zone, Inc." and providing for a
1.125-for-1 stock split of all of the Registrant's issued
and outstanding common stock.
3.4* Bylaws.
4.1* Specimen Common Stock Certificate.
4.2* Warrant to Purchase 524,981 shares of common stock of Blue
Zone, Inc., dated October 1, 1999, issued to Savoy Holdings
Limited.
10.1** Website and Interactive Television Development Agreement,
dated as of December 14, 1999, between CTV Television Inc.
and Blue Zone Productions Ltd.
10.2** Website Development Agreement, dated July 1, 1999, between
CKNW/CFMI, a division of WIC RADIO LTD., and Blue Zone
Entertainment Inc.
10.3** Joint Venture Agreement, dated June 16, 1998, between WIC
Premium Television, a Limited Subsidiary of WIC Western
International Communications Ltd. and Blue Zone
Entertainment Inc.
10.4* Business Banking Loan Agreement, dated July 9, 1999, between
Blue Zone Productions Ltd. and Royal Bank of Canada.
10.5* Guarantee and Postponement of Claim, dated July 9, 1999,
executed by F. Michael P. Warren in favor of Royal Bank of
Canada.
10.6* Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Jamie Ollivier.
10.7* Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Bruce Warren.
10.8* Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Catherine Warren.
10.9* 1999 Stock Option Plan
10.10* Subscription Agreement, dated as of September 22, 1999,
between Savoy Holdings Limited and Western Food
Distributors, Inc. for private placement of common stock and
stock purchase warrants.
16.1* Letter regarding change in certifying accountant.
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
21.1* Subsidiaries of the Registrant.
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** Confidential treatment has been requested with respect to certain portions of
the Exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
39
<PAGE> 41
BLUE ZONE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<S> <C>
Auditors' Report............................................ F-1
Consolidated Financial Statements
Balance Sheets............................................ F-2
Statements of Operations.................................. F-3
Statements of Stockholders' Equity (Deficit).............. F-4
Statements of Cash Flows.................................. F-5
Notes..................................................... F-6
</TABLE>
40
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Blue Zone, Inc.
We have audited the consolidated balance sheets of Blue Zone, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of operations and stockholders' (deficit) and cash flows for each of
the years in the three year period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blue Zone,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1999 in conformity with United States generally accepted
accounting principles.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
February 10, 2000
F-1
<PAGE> 43
BLUE ZONE, INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,097,869 $ 891
Accounts receivable....................................... 97,600 --
Work-in-progress.......................................... 70,581 --
Prepaid expenses.......................................... 93,204 558
----------- --------
4,359,254 1,449
CAPITAL ASSETS (note 3)..................................... 425,596 40,457
----------- --------
$ 4,784,850 $ 41,906
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 191,675 $ 21,830
Accrued liabilities (note 4).............................. 178,300 19,033
Deferred revenue.......................................... 180,143 --
Income taxes payable...................................... -- 2,589
Payable to stockholders (note 5).......................... 45,559 9,262
----------- --------
595,677 52,714
STOCKHOLDERS' EQUITY (DEFICIT) (note 6):
Preferred stock, authorized 5,000,000 shares, $.01 par
value, none issued in 1999 (1998 -- 5 shares).......... -- 5
Common stock, $.001 par value, authorized 100,000,000
shares; 21,538,100 issued in 1999 (1998 -- 7 shares)... 21,538 7
Additional paid in capital................................ 5,626,371 --
Deficit................................................... (1,433,831) (11,500)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment................ (24,905) 680
----------- --------
4,189,173 (10,808)
----------- --------
Uncertainty due to the Year 2000 Issue (note 12)............ $ 4,784,850 $ 41,906
=========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 44
BLUE ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Production and service revenue........................ $ 378,358 $ 269,132 $ 116,390
Exchange production and service revenue (note 8)...... 504,779 505,698 225,730
Cost of revenues...................................... 370,803 144,419 51,759
----------- ----------- -----------
Gross profit.......................................... 512,334 630,411 290,361
----------- ----------- -----------
Operating expenses:
General and administrative....................... 1,226,900 127,029 62,020
Selling and marketing............................ 105,231 712 306
Exchange advertising (note 8).................... 504,779 505,698 225,730
Depreciation..................................... 97,755 29,860 16,928
----------- ----------- -----------
1,934,665 663,299 304,984
----------- ----------- -----------
Loss before income taxes.............................. 1,422,331 32,888 14,623
Income tax expense (recovery)......................... -- (4,431) 2,431
----------- ----------- -----------
Net loss.............................................. $ 1,422,331 $ 28,457 $ 17,054
----------- ----------- -----------
Net loss per common share, basic and diluted (note
2(l))............................................... $ .09 $ -- $ --
----------- ----------- -----------
Weighted average common shares outstanding, basic and
diluted (note 2(l))................................. 14,168,937 12,000,000 12,000,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 45
BLUE ZONE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(EXPRESSED IN U.S. DOLLARS)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
EARNING
-------------
FOREIGN
PREFERRED STOCK COMMON STOCK PAID-IN CURRENCY TOTAL
----------------- -------------------- ADDITIONAL RETAINED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
------- ------- ---------- ------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................ 5 $ 5 7 $ 7 $ -- $ 34,011 $ -- 34,023
Net loss.......... -- -- -- -- -- (17,054) -- (17,054)
Cumulative translation
adjustment.......... -- -- -- -- -- -- (423) (423)
------- ------- ---------- ------- ---------- ----------- -------- -----------
Balance, December 31,
1997................ 5 5 7 7 -- 16,957 (423) 16,548
Net loss.......... -- -- -- -- -- (28,457) -- (28,457)
Cumulative translation
adjustment.......... -- -- -- -- -- -- 1,103 1,103
------- ------- ---------- ------- ---------- ----------- -------- -----------
Balance, December 31,
1998................ 5 5 7 7 -- (11,500) 680 (10,808)
Adjustments to comply
with
recapitalization
accounting, net of
cost of
recapitalization
transaction of
$32,791............. (5) (5) 21,538,093 21,531 5,329,360 -- -- 5,350,886
------- ------- ---------- ------- ---------- ----------- -------- -----------
Issuance of stock
options (note
6(b))............... -- -- -- -- 368,844 -- -- 368,844
Deferred stock
compensation (note
6(b))............... -- -- -- -- (71,833) -- -- (71,833)
Net loss.............. -- -- -- -- -- (1,422,331) -- (1,422,331)
Cumulative translation
adjustment.......... -- -- -- -- -- -- (25,585) (25,585)
------- ------- ---------- ------- ---------- ----------- -------- -----------
Balance, December 31,
1999................ -- $ -- 21,538,100 $21,538 $5,626,371 $(1,433,831) (24,905) $ 4,189,173
======= ======= ========== ======= ========== =========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 46
BLUE ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(1,422,331) $(28,457) $(17,054)
Items not involving cash:
Stock based compensation.............................. 297,011 -- --
Depreciation.......................................... 97,755 29,860 16,928
Changes in operating assets and liabilities:
Accounts receivable................................... (110,801) 45,771 (3,431)
Work-in-progress...................................... (70,581) -- (764)
Prepaid expenses...................................... (92,646) -- --
Accounts payable...................................... 170,944 8,321 9,369
Accrued liabilities................................... 164,907 9,336 --
Deferred revenue...................................... 180,143 -- --
Income taxes payable.................................. (2,589) (3,137) 2,206
----------- -------- --------
Net cash provided by (used in) operating activities...... (788,188) 61,694 7,254
Cash flows from financing activities:
Increase in payable to stockholders...................... 36,296 -- 12,363
Repayment of payable to shareholder...................... -- (28,641) --
Issue of common shares................................... 5,331,764 -- --
----------- -------- --------
Net cash provided by financing activities................ 5,368,060 (28,641) 12,363
Cash flows from investing activities:
Purchase of capital assets............................... (482,894) (44,537) (12,089)
----------- -------- --------
Net cash used in investing activities.................... (482,894) (44,537) (12,089)
----------- -------- --------
Net increase in cash and cash equivalents.................. 4,096,978 (11,484) 7,528
Cash and cash equivalents, beginning of year............... 891 12,375 4,847
----------- -------- --------
Cash and cash equivalents, end of year..................... $ 4,097,869 $ 891 $ 12,375
----------- -------- --------
Supplementary information:
Interest paid............................................ $ 23,984 $ 1,592 $ --
Income taxes paid........................................ 1,090 -- --
----------- -------- --------
Non-cash transactions:
Revenue received in exchange for advertising revenue..... $ 504,779 $505,698 $225,730
----------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 47
BLUE ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. NATURE OF BUSINESS:
Blue Zone, Inc. (the "Company") is incorporated in the state of Nevada and
is in the business of providing technical and creative expertise related to
website/interactive television development and related internet strategies to
assist the traditional mass media corporations in accessing the world wide web,
set-top boxes and other interactive devices.
On October 8, 1999, Western Food Distributors Ltd. ("Western Food"), a
public company listed on the over-the-counter bulletin board in the United
States, an entity without significant operations, issued 12,000,000 common
shares as consideration in exchange for 100% of the issued and outstanding
shares of Blue Zone Productions Ltd. ("Blue Zone"), a company incorporated in
the province of British Columbia, Canada. This transaction was accounted for as
a recapitalization of Blue Zone, effectively as if Blue Zone had issued common
shares for consideration equal to the net assets of Western Food. Immediately
following the transaction, Western Food changed its name to Blue Zone, Inc.
The Company's historical financial statements reflect the financial
position, results of operations and cash flows of Blue Zone for each of the
years in the three year period ended December 31, 1999 and include the
operations of Western Food from the date of the effective recapitalization,
being October 8, 1999. Stockholders' equity gives effect to the shares issued to
the stockholders of Blue Zone prior to October 8, 1999 and of the Company
thereafter.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States. The
financial statements include the accounts of the Company's wholly-owned
subsidiaries, Blue Zone Productions Ltd., Blue Zone Entertainment Inc. and Blue
Zone International Inc. All material intercompany balances and transactions have
been eliminated in the consolidated financial statements.
(b) Use of estimates:
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and recognized revenues and expenses for the reporting periods. To
these consolidated financial statements, significant areas requiring the use of
estimates include the valuation of long-lived assets, estimating the fair market
value of equity instruments and the valuation of deferred tax assets. Actual
results may significantly differ from these estimates.
(c) Revenue recognition:
(i) Production and service:
The Company generates production and service revenues through the following
sources: creative consulting services, website development and maintenance and
software licensing. Consulting service revenues are recognized upon delivery of
the service. Website maintenance is recognized over the term of the contracts,
typically month to month. For long-term website development projects revenue is
recognized on a percentage completion basis, based upon achievement of
specifically identifiable milestones.
F-6
<PAGE> 48
BLUE ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
To date the Company has not received any revenues from software licensing
agreements. In the future, software licensing revenue will be recognized over
the term of the license if persuasive evidence of an arrangement exists,
collection is probable, the fee is fixed or determinable, and vendor-specific
objective evidence exists to allocate the total fee to elements of the
arrangement. Vendor-specific objective evidence is typically based on the price
charged when an element is sold separately, or, in the case of an element not
yet sold separately, the price established by authorized management, if it is
probable that the price, once established, will not change before market
introduction. Elements included in multiple element arrangements could consist
of software products, upgrades, enhancements or customer support services.
If a transaction includes both license and service elements, license fee
revenues will be recognized over the term of the license, provided services do
not include significant customization or modification of the base product, and
the payment terms for licenses are not subject to acceptance criteria.
Revenue that has been prepaid or invoiced but does not yet qualify for
recognition under the Company's policies are reflected as deferred revenues.
(ii) Exchange production and services:
On August 1, 1997, the Company entered into an agreement to exchange
services with a British Columbia television station. The Company provided
website development and monthly maintenance services in exchange for daily
television advertising. The Company has recognized the revenues and advertising
expenses from the barter transaction at the fair value of the advertising
received.
In fiscal 2000, the Company will adopt EITF No. 99-17 "Accounting for
Advertising Barter Transactions", EITF 00-17 provides that the Company recognize
revenue and advertising expenses from barter transactions at the fair value only
when it has a historical practice of receiving or paying cash for similar
transactions. The Company currently has no barter transactions extending past
December 31, 1999.
(d) Foreign currency:
The functional currency of the Company and its Barbados subsidiary is the
United States dollar. The functional currency of the operations of the Company's
wholly-owned Canadian operating subsidiaries is the Canadian dollar. Assets and
liabilities measured in Canadian dollars are translated into United States
dollars using exchange rates in effect at the balance sheet date with revenue
and expense transactions translated using average exchange rates prevailing
during the year. Exchange gains and losses arising on this translation are
excluded from the determination of income and reported as the foreign currency
translation adjustment in stockholders' equity.
(e) Cash and cash equivalents:
The Company considers all short-term investments with a term to maturity at
the date of purchase of three months or less to be cash equivalents.
(f) Capital assets:
Capital assets are stated at cost.
Depreciation is provided on the declining balance basis using the following
annual rates:
<TABLE>
<CAPTION>
ASSET RATE
----- ----
<S> <C>
Equipment and computers..................................... 30%
Software.................................................... 30%
Furniture and fixtures...................................... 30%
</TABLE>
F-7
<PAGE> 49
BLUE ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Leasehold improvements are amortized on the straight-line basis over 5
years representing the term of the lease.
(g) Research and development and advertising:
Research and development and advertising costs are expensed as incurred.
Research and development costs expensed in 1999 total $65,158 (1998 -- $25,273,
1997 -- $6,675). Advertising costs expensed in 1999 total $513,252
(1998 -- $505,698, 1997 -- $225,730).
Equipment used in research and development is capitalized only if it has an
alternative in future use, which alternative is not solely in research and
development activities.
(h) Stock-based compensation:
As allowed under generally accepted accounting principles, the Company
accounts for its stock-based compensation arrangements with employees in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and related interpretations. As such, compensation expense under fixed term
option plans is recorded at the date of grant when the market value of the
underlying stock at the date of grant exceeds the exercise price. The Company
recognizes compensation expense for stock options, common stock and other equity
instruments issued to non-employees for services received based upon the fair
value of the services or equity instruments issued, whichever is more reliably
determined. This information is presented in note 6.
(i) Impairment of long-lived assets and long-lived assets to be disposed
of:
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of long-lived assets
and for long-lived assets to be disposed of". At December 31, 1999, the only
long-lived assets reported on the Company's consolidated balance sheet are
capital assets. This statement requires that long-lived assets and certain
identifiable recorded intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less costs to
sell.
(j) Comprehensive income:
To the Company, comprehensive income consists of net income or loss and
foreign currency translation adjustments that are separately presented in the
consolidated statements of stockholders' equity. Comprehensive income for each
of the years presented is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------- -------
<S> <C> <C> <C>
Net loss...................................... $1,422,331 $28,457 $17,054
Other comprehensive loss (income):
Foreign currency translation adjustment..... 25,585 (1,103) 423
---------- ------- -------
Comprehensive income.......................... $1,447,916 $27,354 $17,477
========== ======= =======
</TABLE>
(k) Income taxes:
The Company follows the asset and liability method of accounting for income
taxes. Under this method, current taxes are recognized for the estimated income
taxes payable for the current period.
F-8
<PAGE> 50
BLUE ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Deferred income taxes are provided based on the estimated future tax effects of
temporary differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases as well as the benefit of losses
available to be carried forward to future years for tax purposes.
Deferred tax assets and liabilities are measured using the enacted tax
rates that are expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered and settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
operations in the period that includes the substantive enactment date. A
valuation allowance is recorded for deferred tax assets when it is not more
likely than not that such deferred tax assets will be realized.
(l) Net loss per share:
Basic loss per share is computed using the weighted average number of
common stock outstanding during the periods, and gives retroactive effect to the
shares issued on the recapitalization described in note 1. Diluted loss per
share is computed using the weighted average number of common and potentially
dilutive common stock outstanding during the period. As the Company has a net
loss in each of the periods presented, basic and diluted net loss per share is
the same as any exercise of the 524,981 warrants (note 6(c)) or the 1,995,000
options (note 6(b)) outstanding during the year ended December 31, 1999 would be
anti-dilutive.
3. CAPITAL ASSETS:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
1999 COST DEPRECIATION VALUE
---- -------- ------------ --------
<S> <C> <C> <C>
Equipment and computers.............................. $292,249 $ 70,668 $221,581
Software............................................. 37,644 8,562 29,082
Furniture and fixtures............................... 42,362 9,343 33,019
Leasehold improvements............................... 172,008 30,094 141,914
-------- -------- --------
$544,263 $118,667 $425,596
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
1998 COST DEPRECIATION VALUE
---- -------- ------------ --------
<S> <C> <C> <C>
Equipment and computers.............................. $ 38,691 $ 13,061 $ 25,630
Software............................................. 6,863 1,144 5,719
Furniture and fixtures............................... 5,337 1,468 3,869
Leasehold improvements............................... 10,478 5,239 5,239
-------- -------- --------
$ 61,369 $ 20,912 $ 40,457
======== ======== ========
</TABLE>
4. ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Professional fees........................................... $133,035 $ --
Goods and service tax....................................... -- 16,650
Other....................................................... 45,265 2,383
-------- -------
$178,300 $19,033
</TABLE>
F-9
<PAGE> 51
BLUE ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PAYABLE TO STOCKHOLDERS:
The amount payable to stockholders is repayable in Canadian dollars,
non-interest bearing, unsecured and without specific terms of repayment.
6. STOCKHOLDERS' EQUITY:
(a) Stock option plan:
The Company has reserved 4,500,000 common shares for issuance under its
stock option plan. The plan provides for the granting of stock options to
directors, officers, eligible employees and contractors.
1,660,000 options granted in the year ended December 31, 1999 vest
immediately and the remaining options vest at a rate of 25% per year.
(b) Stock option plan (continued):
The Board of Directors determines the terms of the options granted,
including the number of options granted, the exercise price and their vesting
schedule.
<TABLE>
<CAPTION>
NUMBER
EXERCISE OF
PRICE SHARES
---------- ---------
<S> <C> <C>
Outstanding, December 31, 1998 and 1997............... -- $ --
Granted............................................. 1,995,000 5.00
Exercised........................................... -- --
Cancelled........................................... -- --
---------- -----
Outstanding, December 31, 1999........................ 1,995,000 $5.00
---------- -----
Exercisable, December 31, 1999........................ 1,660,000 $5.00
---------- -----
Weighted average fair value of options granted during
1999................................................ $ 2.81
---------- -----
</TABLE>
The options outstanding at December 31, 1999 expire on November 9, 2009.
In 1999 the Company recorded non-cash compensation expense of $16,094 and
deferred compensation expense of $48,281 relating to the issuance of 45,000
stock options to purchase common shares to certain employees of the Company,
representing an implicit benefit derived from the exercise price being less than
fair market value. The deferred compensation is being amortized at 25% a year,
the vesting period of the underlying options.
In 1999, the Company recorded non-cash compensation expense of $280,917 and
deferred compensation expense of $23,552 relating to the issuance of 111,500
stock options to purchase common shares to certain contractors of the Company.
The fair value of the stock options was estimated at $2.66 per option at the
time of the transaction. The deferred compensation is being amortized at 25% a
year, the vesting period of the underlying options.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("FAS 123"), Accounting for Stock Based
Compensation, to account for grants to employees under the Company's existing
stock based compensation plan. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant date for awards
under those plans consistent with the measurement provisions of FAS 123, the
Company's net loss and basic loss per share
F-10
<PAGE> 52
BLUE ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
would have been adjusted as follows (as no options were granted prior to the
year ended December 31, 1999, there would be no differences to actual reported
loss and loss per share prior to 1999):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Loss for the period -- as reported.......................... $1,422,331
Loss for the period -- proforma............................. 6,943,905
Basic loss per share -- as reported......................... 0.09
Basic loss per shares -- proforma........................... 0.49
</TABLE>
The fair value of each option grant has been estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Expected dividend yield..................................... 0.0%
Expected stock price volatility............................. 70.0%
Risk-free interest rate..................................... 6.0%
Expected life of options.................................... 5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
(c) Warrants:
During 1999, the Company issued 524,981 (1998 -- Nil, 1997 -- Nil) stock
purchase warrants. The warrants allow the holder to purchase 1 common share at a
price of $5.63 per share if the warrant is exercisable before October 1, 2000
and a price of $6.73 per share if the warrant is exercisable after October 1,
2000. The exercise price of the warrants exceeded the market price of the
Company's common stock on the date of issuance. The warrants expire on October
1, 2001. To December 31, 1999, no warrants have been exercised.
7. OPERATING LEASES:
The Company leases office facilities in Vancouver and Toronto in addition
to internet services under operating lease agreements that expire to September,
2004. Minimum lease payments under these operating leases are approximately as
follows:
<TABLE>
<S> <C>
2000........................................................ $119,000
2001........................................................ 116,000
2002........................................................ 120,000
2003........................................................ 92,000
2004........................................................ 72,000
</TABLE>
Rent expense totalled $27,940 for the year ended December 31, 1999
(1998 -- $13,184, 1997 -- $12,950).
F-11
<PAGE> 53
BLUE ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES:
Income tax recovery attributable to losses from operations was $Nil and
$4,431 for the years December 31, 1999 and 1998, respectively, and differed from
the amounts computed by applying the United States federal income tax rate of 34
percent to pretax losses from operations as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Computed "expected" tax recovery...................... $(483,592) $(11,182) $(5,118)
Increase (reduction) in income taxes resulting from
income taxes in a higher jurisdiction............... (156,456) (3,617) (1,550)
Permanent difference resulting from stock based
compensation........................................ 133,654 -- --
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense..................... 506,394 10,368 9,099
--------- -------- -------
$ -- $ (4,431) $ 2,431
--------- -------- -------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Deferred tax assets
Capital assets, principally due to differences in
depreciation........................................... $ 46,996 $ 3,006
Net operating loss carryforwards.......................... 474,508 12,104
--------- --------
Total gross deferred tax assets........................... 521,504 15,110
Less valuation allowance.................................. (521,504) (15,110)
--------- --------
Net deferred tax assets................................... -- --
Net deferred tax liabilities.............................. -- --
--------- --------
Deferred taxes.............................................. $ -- $ --
--------- --------
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1999 and
1998 was $521,504 and $15,110, respectively. The net change in the total
valuation allowance for the years ended December 31, 1999 and 1998 was an
increase of $506,394 and $10,368, respectively. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income of approximately $1,150,000
prior to the expiration of the net operating loss carryforwards in 2006. Based
upon the level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible, management
does not believe it is more likely than not that the Company will realize the
benefits of these deductible differences.
9. FINANCIAL INSTRUMENTS:
(a) Fair values:
The Company regularly invests funds in excess of its immediate needs in
guaranteed investment certificates. The fair value of cash and cash equivalents,
trade accounts receivable, receivable from
F-12
<PAGE> 54
BLUE ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FINANCIAL INSTRUMENTS -- (CONTINUED)
employees, accounts payable and accrued liabilities approximates their financial
statement carrying amounts due to the short-term maturities of these
instruments. The carrying amount of shareholder loans approximates fair value
since they have a short-term to maturity.
(b) Concentration of credit risk:
During the year ended 1999 approximately 80% of the Company's revenues were
derived from two customers. In 1998 approximately 74% of revenue was derived
from two customers and in 1997 approximately 20% of revenue was derived from one
customer.
(c) Foreign currency risk:
The Company operates internationally which give rise to the risk that cash
flows may be adversely impacted by exchange rate fluctuations.
10. SEGMENTED INFORMATION:
The Company operates in one business segment, the development, maintenance
and consulting related to website/interactive television and internet
strategies. The revenue for the three years ended December 31, 1999 has been
derived exclusively from business in Canada.
11. 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. Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 issue that may affect the entity, including
those related to customers, suppliers, or third parties, have been fully
resolved.
F-13
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Act of 1934,
the registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, there unto duly authorized on May 1, 2000.
BLUE ZONE, INC.
By: /s/ BRUCE WARREN
------------------------------------
Bruce Warren, Chief Executive
Officer
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1* Share Exchange Agreement, dated as of October 5, 1999, among
F. Michael P. Warren, Bruce Warren, Jamie Ollivier, Blue
Zone Productions Ltd., Blue Zone Entertainment Inc., Blue
Zone International Inc. and Western Food Distributors, Inc.
(A list of exhibits and schedules to the Share Exchange
Agreement is set forth therein. The Registrant agrees to
furnish to the Commission supplementally, upon request, a
copy of any such exhibits or schedules not otherwise filed
herewith.)
3.1* Articles of Incorporation dated March 10, 1997.
3.2* Certificate of Amendment to the Registrant's Articles of
Incorporation, dated July 14, 1998, providing for a 5-for-1
stock split of all of the Registrant's outstanding common
stock.
3.3* Certificate of Amendment to the Registrant's Certificate of
Incorporation, dated September 28, 1999, changing the name
of the Registrant to "Blue Zone, Inc." and providing for a
1.125-for-1 stock split of all of the Registrant's issued
and outstanding common stock.
3.4* Bylaws.
4.1* Specimen Common Stock Certificate.
4.2* Warrant to purchase shares of common stock of Blue Zone,
Inc., dated October 1, 1999, issued to Savoy Holdings
Limited.
10.1** Website and Interactive Television Development Agreement,
dated as of December 14, 1999, between CTV Television Inc.
and Blue Zone Productions Ltd.
10.2** Website Development Agreement, dated July 1, 1999, between
CKNW/CFMI, a division of WIC RADIO LTD., and Blue Zone
Entertainment Inc.
10.3** Joint Venture Agreement, dated June 16, 1998, between WIC
Premium Television, a Limited Subsidiary of WIC Western
International Communications Ltd. and Blue Zone
Entertainment Inc.
10.4* Business Banking Loan Agreement, dated July 9, 1999, between
Blue Zone Productions Ltd. and Royal Bank of Canada.
10.5* Guarantee and Postponement of Claim, dated July 9, 1999,
executed by F. Michael P. Warren in favor of Royal Bank of
Canada.
10.6* Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Jamie Ollivier.
10.7* Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Bruce Warren.
10.8* Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Catherine Warren.
10.9* 1999 Stock Option Plan
10.10* Subscription Agreement, dated as of September 22, 1999,
between Savoy Holdings Limited and Western Food
Distributors, Inc. for private placement of common stock and
stock purchase warrants.
16.1* Letter regarding change in certifying accountant.
21.1* Subsidiaries of the Registrant.
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** Confidential treatment has been requested with respect to certain portions of
the Exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
