<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 2000
Registration No. 333-
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
BLUE ZONE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 541512 86-086053
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
329 RAILWAY STREET
VANCOUVER, BRITISH COLUMBIA
CANADA V6A 1A4
(604) 685-4310
</TABLE>
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRUCE WARREN
CHIEF EXECUTIVE OFFICER
BLUE ZONE, INC.
329 RAILWAY STREET
Vancouver, British Columbia
Canada V6A 1A4
(604) 685-4310
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------------
Copy to:
DAVID M. HENKOFF, ESQ.
MORRISON & FOERSTER LLP
1290 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10104
TELEPHONE: (212) 468-8000
FACSIMILE: (212) 468-7900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. [X]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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====================================================================================================================================
Proposed Maximum
Amount to be Aggregate Offering Amount of
Title of Each Class of Securities to be Registered Registered Price(1) Registration Fee
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<S> <C> <C> <C>
Common Stock, $.001 par value...................... 4,028,249(2) $9,567,092 $2,555
====================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) In the event of a stock split, stock dividend, or similar transaction
involving common stock of the registrant, in order to prevent dilution,
the number of shares registered shall be automatically increased to cover
the additional shares in accordance with Rule 416 under the Securities
Act.
----------------------
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 19, 2000.
PROSPECTUS
4,028,249 SHARES
[BLUE ZONE LOGO]
BLUE ZONE, INC.
COMMON STOCK
This prospectus relates to 4,028,249 shares of our common stock
which may be sold from time to time by the selling stockholders, including their
transferees, pledgees or donees or their successors. The shares being offered by
this prospectus include shares of our common stock currently outstanding and
shares of our common stock issuable upon exercise of outstanding initial
warrants, adjustment warrants, common stock purchase warrants and purchase
options, including shares issuable upon the exercise of warrants that will be
issued if the purchase options are exercised.
The shares are being registered to permit the selling stockholders
to sell the shares from time to time in the public market. The selling
stockholders may sell the shares of our common stock through ordinary brokerage
transactions, directly to market makers of our shares or through any other means
described in the section "Plan of Distribution" beginning on page 50. We cannot
assure you that the selling stockholders will sell all or any portion of the
shares offered under this prospectus.
Our common stock is quoted on the Nasdaq National Market under the
symbol "BLZN". On October 17, 2000, the last reported sale price for the common
stock on the Nasdaq National Market was $2.375 per share.
INVESTING IN SHARES OF OUR COMMON STOCK INVOLVES RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is October 19, 2000.
<PAGE> 3
TABLE OF CONTENTS
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PAGE PAGE
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PROSPECTUS SUMMARY.......................................... 3 RELATED PARTY TRANSACTIONS........................ 41
RISK FACTORS................................................ 6 PRINCIPAL STOCKHOLDERS............................ 42
USE OF PROCEEDS............................................. 16 DESCRIPTION OF CAPITAL STOCK...................... 44
DIVIDEND POLICY............................................. 16 SELLING STOCKHOLDERS.............................. 47
PRICE RANGE OF COMMON STOCK................................. 16 SHARES ELIGIBLE FOR FUTURE SALE................... 48
SELECTED FINANCIAL DATA..................................... 17 PLAN OF DISTRIBUTION.............................. 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION EXPERTS........................................... 51
AND RESULTS OF OPERATIONS................................. 18
LEGAL MATTERS..................................... 51
BUSINESS.................................................... 25
WHERE YOU CAN FIND MORE INFORMATION............... 51
MANAGEMENT.................................................. 35
INDEX TO FINANCIAL STATEMENTS..................... F-1
</TABLE>
----------------------
You should rely only on the information contained in this document
or to which we have referred you. We have not authorized anyone to provide you
with information that is different. This document may only be used where it is
legal to sell these securities. The information in this document may only be
accurate on the date of this document.
Blue Zone(TM), MediaBZ(TM) , NewsBZ(TM) , RadioBZ(TM),
SportsBZ(TM), EntertainmentBZ(TM) , BusinessBZ(TM) and our logo are the property
of Blue Zone, Inc. All other trademarks or trade names referred to in this
prospectus are the property of their respective owners.
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<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more
detailed information regarding our business, our common stock being offered in
this offering and our financial statements and the related notes appearing
elsewhere in this prospectus.
BLUE ZONE, INC.
We are currently engaged in two principal lines of business. The
first involves the continued development of our MediaBZ(TM) family of software
products. MediaBZ(TM) software applications 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 personal digital assistant. Within the
MediaBZ(TM) family of software products, we have developed two specialized
applications: NewsBZ(TM), which is customized for news broadcasters, and
RadioBZ(TM), which will be customized for radio broadcasters. We believe that
our MediaBZ(TM) software applications enables 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 fees from developing, marketing,
licensing and maintaining our family of MediaBZ(TM) software applications.
The second line of business is Web site development and strategic
consulting services. We create, develop, and maintain interactive Web sites 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.
We currently have agreements with several of Canada's leading
television and radio broadcasting companies. We have a Web site and interactive
television development agreement with CTV, Inc. to develop interactive Web sites
for its 24-hour NewsNet Station and CTV National News broadcasting content
properties. In addition, we have Web site 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.
On September 8, 2000, we completed a private placement of our
securities to three institutional investors. We issued and sold a total of
705,467 shares of common stock and initial warrants to acquire an additional
148,148 shares of common stock. The investors also received adjustment warrants
which entitle them to purchase a significant number of additional shares of
common stock, at exercise price of $0.001 per share, if the price of a share of
our common stock declines and remains below $7.08. The number of shares of
common stock issuable upon exercise of the adjustment warrants may increase from
time to time based upon the market price of our common stock. In addition, we
granted the investors a one-year option to acquire up to an additional $2.0
million of our common stock and warrants at a price per share based upon the
market price at the time the option is exercised, provided that the option may
not be exercised by the investors if the market price on the date of exercise is
less than $7.08 per share. The gross proceeds from the offering to us were $5.0
million, of which we received $4.0 million on September 8, 2000 and the
remainder of which we will receive upon the effectiveness of this registration
statement. In addition, we granted to the placement agent in the private
placement, a common stock purchase
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warrant exercisable for 28,249 shares of our common stock at an exercise price
equal to $8.10 per share. We agreed with the investors and the placement agent
that we would prepare and file the registration statement containing this
prospectus with the Securities and Exchange Commission to cover the sale of the
shares of our common stock issued pursuant to the private placement and issuable
pursuant to the related warrants and option, including pursuant to any warrants
issued upon exercise of the option.
Blue Zone, Inc. was originally incorporated on March 11, 1997 in
the State of Nevada under the name "Western Food Distributors, Inc." On October
8, 1999, Blue Zone Productions Ltd. and Western Food Distributors, Inc. entered
into a Share Exchange Agreement, pursuant to which, 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 the current officers and directors assumed
the management of Blue Zone, Inc.
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 March 9, 1987, 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. References in this prospectus to "Blue Zone," "we," "us," and
"our" refer to Blue Zone, Inc. and its subsidiaries.
Our executive offices are located at 329 Railway Street, 5th
Floor, Vancouver, British Columbia Canada V6A 1A4. Our telephone number (604)
685-4310.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table is a summary of our consolidated financial
data. You should read this information together with our consolidated financial
statements and the related notes included at the end of this prospectus and the
information under "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,
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1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues......................................... $342,120 $774,830 $883,137
Cost of revenues................................. 51,759 144,419 370,803
Gross profit..................................... 290,361 630,411 512,334
Loss from operations............................. 14,623 32,888 1,422,331
Net loss......................................... 17,054 28,457 1,422,331
Basic and diluted net loss per share............. .00 .00 0.09
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1999 2000
---- ----
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues......................................... $400,522 $424,805
Cost of revenues................................. 104,327 352,212
Gross profit..................................... 296,225 72,593
Loss from operations............................. 60,713 1,931,918
Net loss......................................... 60,713 1,931,918
Basic and diluted net loss per share............. 0.01 0.09
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------- -----------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $891 $4,097,869 $1,541,281
Total assets....................................... 41,906 4,784,850 2,678,879
Working capital (deficit).......................... (51,265) 3,763,577 1,363,040
Total liabilities.................................. 52,714 595,677 471,013
Total stockholders' equity......................... (10,808) 4,189,173 2,207,866
</TABLE>
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RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information contained in this prospectus before deciding whether
to invest in our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or operating results could be materially adversely affected.
In such case, the trading price of our common stock could decline and you may
lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY AND OPERATE IN A NEW AND RAPIDLY
EVOLVING MARKET, AND ARE SUBJECT TO THE RISKS ENCOUNTERED BY EARLY STAGE
COMPANIES IN DEVELOPING INDUSTRIES.
We have only a limited operating history on which you may base an
evaluation of our business and prospects. You should consider our prospects in
light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets, such as convergence broadcasting,
that are using new and unproven business models. For us, these risks include the
possibility that:
- our revenue forecasts may be incorrect because of our
limited experience selling our products and services;
- a market for our products and services may not develop
because of a lack of interest in convergence broadcasting
by consumers and the broadcasting industry;
- our products may become obsolete, even if the convergence
broadcasting market develops, because we may not be able to
develop new products or update our existing products to
respond to technological developments and changing industry
standards;
- our MediaBZ(TM) suite of software applications may not gain
broad market acceptance
- we may not be able to attract, integrate and retain
qualified personnel;
- we may not be able to develop relationships with strategic
partners in the broadcasting industry; and
- we may be unable to maintain and enhance the Blue Zone
brand;
These risks are described in more detail below. Our future growth will depend
substantially on our ability to address these and the other risks described in
this section. If we do not successfully address these risks, our business would
be significantly harmed.
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND CANNOT ASSURE YOU
THAT WE WILL ACHIEVE PROFITABILITY
We have incurred significant net losses and negative cash flow from
operations since our inception. We incurred net losses of $28,457 in fiscal
1998, $1,422,331 in fiscal 1999 and $1,931,918 in the first six months of fiscal
2000. As of June 30, 2000, we had an accumulated deficit of $3,365,749. We
expect to continue to incur significantly greater sales and marketing, research
and development, and general and administrative expenses. As a result, we expect
to incur losses for the foreseeable future and will need to generate
significantly higher revenues in order to achieve profitability. If we achieve
profitability, we may not be able to sustain it.
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WE WILL NEED ADDITIONAL CAPITAL TO OPERATE AND SUCCESSFULLY GROW OUR
BUSINESS.
We will require additional capital to fund the growth of our
business. We expect that our available funds and revenues, will be sufficient to
meet our expected needs for working capital and capital expenditures for
approximately the next 18 months. Before the end of that period, we may need to
raise additional funds. We cannot be certain that additional financing will be
available to us on favorable terms when required or at all. If we cannot raise
funds in a timely manner on acceptable terms, we may not be able to promote our
brand, develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures or unexpected requirements. If
we successfully raise additional funds through the issuance of debt, we will be
required to service that debt and are likely to become subject to restrictive
covenants and other restrictions contained in the instruments governing that
debt, which may limit our operational flexibility. If we raise additional funds
through the issuance of equity securities, then those securities may have
rights, preferences or privileges senior to the rights of holders of our common
stock, and holders of our common stock will experience dilution.
POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE FINANCIAL
FORECASTING DIFFICULT.
Our future quarterly operating results may fluctuate significantly due to
a number of factors, many of which are outside our control. These factors
include, but are not limited to:
- whether convergence broadcasting technologies become widely
accepted by broadcasters, media companies and consumers;
- demand for our products and services, including the extent to
which we can license our MediaBZ(TM) suite of proprietary software
applications;
- the announcement or introduction of new or enhanced products or
services by our competitors;
- the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
- the ability to manage rapid growth and deployment, including
hiring, training and retaining an adequate number of qualified
personnel and the timing of various expenses and capital
expenditures;
- the effects of existing or new government regulations or legal
conditions; and
- general economic conditions.
Due to our brief operating history, we have generated insufficient
data to permit meaningful period-to-period comparisons of our operating results.
Our quarterly operating results have varied significantly in the past and will
likely vary significantly in the future. As a result, we believe that
period-to-period comparisons of our operating results are not meaningful and
should not be relied upon as indicators of our future performance. Our past
revenues have been due largely to Web site development activities and specific
technical and consulting services provided on a per-project basis. In the
future, we anticipate that our revenues will depend substantially on our ability
to develop and license our proprietary MediaBZ(TM) software applications.
However, our experience with convergence broadcasting is limited. Accordingly,
our forecasts related to future revenues, particularly those derived from
licensing our MediaBZ(TM) suite of software products is subject to an unusual
degree of uncertainty.
WE ARE SUBSTANTIALLY DEPENDENT ON OUR AGREEMENTS WITH A FEW BROADCASTING
AND MEDIA COMPANIES.
We have a limited number of agreements with broadcasting and media
companies. The termination of one or more of these agreements, or our failure to
secure a significant number of new agreements and to increase programming
commitments substantially would materially adversely affect our business,
operating results and financial condition. In particular, we expect to be
substantially dependent on our contract with CTV, Inc. as a source of revenue.
During 1999, our contract with CTV
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accounted for approximately 10% of our revenue. For the six months ended June
30, 2000, our contract with CTV accounted for approximately 86% of our revenue.
This contract will account for a substantial portion of our revenue during the
fiscal year ending December 31, 2000. In addition, our agreement with CTV is
terminable by the client at any time upon 60-days' prior written notice. 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.
WE MUST CONTINUE TO DEVELOP AND MAINTAIN THE BLUE ZONE BRAND, WHICH IS
COSTLY AND WHICH MAY NOT GENERATE CORRESPONDING REVENUES.
We believe that broad recognition and a favorable perception among
broadcasters and media companies of the Blue Zone brand are important to our
future success. Due to the early stage and competitive nature of the market for
convergence broadcasting products and services, we may lose the opportunity to
build a critical mass of broadcasting and media clients if we do not establish
our brand quickly. Promoting and positioning our brand will depend largely on
the success of our marketing efforts and our ability to provide consistent,
high-quality experiences to both producers and consumers of convergence
broadcasting content. To promote our brand, we intend to continue to pursue an
aggressive brand enhancement strategy, which will consist of advertising on
television, radio, print and the Internet. These initiatives may involve
significant expense if we cannot negotiate co-branding agreements with our
clients but may not result in a corresponding increase in our revenue.
IF OUR MEDIABZ(TM) SUITE OF SOFTWARE PRODUCTS IS NOT ATTRACTIVE TO
BROADCAST COMPANIES AND NOT LICENSED BY THEM, OUR BUSINESS WILL SUFFER.
An essential part of our strategy is the adoption and continued
use of our MediaBZ(TM) software platform by broadcasting and media companies,
television viewers and computer users. It is impossible to predict the degree to
which broadcasters and consumers will use our products and the extent to which
our revenue models will be accurate. The failure of our new products and
software applications to become commercially viable and to achieve market
acceptance could significantly reduce the revenues that we expect to generate.
Consequently, the effective and reliable performance of our
MediaBZ(TM) suite of products is vital to our ability to attract and retain
strategic partners, sell advertising and develop online commerce opportunities.
Although the NewsBZ(TM) and RadioBZ(TM) products are licensed, the complete
MediaBZ(TM) software suite is currently being developed, and has not been
launched. Inability to successfully build on our launch of the MediaBZ(TM)
software, integrate the MediaBZ(TM) family of software products with the
existing software and hardware infrastructure of our broadcasting and media
partners, or the subsequent occurrence of significant system interruptions or
errors could materially adversely affect our business, operating results and
financial condition. In addition, we may be required to change or upgrade our
MediaBZ(TM) software in order to respond to changes in the software or hardware
used by broadcasters, media companies or cable television companies. There can
be no assurance that we will be able to implement effectively changes or
upgrades to the MediaBZ(TM) software in a timely manner.
OUR RECENT GROWTH HAS STRAINED OUR RESOURCES, AND IF WE ARE UNABLE TO
MANAGE OUR GROWTH, OUR OPERATING RESULTS WILL BE IMPAIRED.
Our operating results will be impaired if we fail to manage our growth.
Our rapid growth has sometimes strained and may in the future continue to
strain, our managerial, administrative, operational and financial resources and
controls. We have grown from a total of two employees at December 31, 1997 to 49
employees at September 30, 2000. We plan to continue to expand our operations
and increase
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the number of our full-time employees. Our ability to manage growth will depend
in part on our ability to continue to enhance our operating, financial, and
management information systems. Our personnel, systems and controls may not be
adequate to support our growth. In addition, our revenues may not grow at a
sufficient rate to absorb the costs associated with a larger employee base.
OUR SUCCESS WILL BE IMPAIRED IF WE ARE UNABLE TO PROCURE, PROTECT AND
ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS.
Our ability to compete is dependent in part upon our
internally-developed, proprietary intellectual property. We regard the
protection of our intellectual property rights as critical to our future
success. We rely on trademark, trade secret and copyright law, as well as
confidentiality procedures and licensing arrangements to establish and protect
our rights in our technology. We have filed an application to register our
MediaBZ(TM) trademark in the United States. However, our trademark application
may not result in the issuance of a valid trademark. In addition, effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which we market our products and services. If we
are unable to procure, protect and enforce our intellectual property rights,
then we may not realize the full value of these assets and our business may
suffer. In addition, we have a patent pending for both the system and method of
creating "enhanced story packages" (the MediaBZ software along with ESP files it
creates, and its cross-publishing capabilities) in the Canadian Patent Office,
filed September 18, 2000. There is no assurance that a patent will issue form
this application.
Others may develop technologies that are similar or superior to
our technology. We typically enter into confidentiality or license agreements
with our employees, consultants, customers, strategic partners and vendors, and
typically control access to and distribution of our software, documentation and
other proprietary information. Despite these precautions, it may be possible for
a third party to copy or otherwise obtain and use our products or technology
without authorization, or to develop similar technology independently through
reverse engineering or other means. Policing unauthorized use of our products is
difficult. There can be no assurance that the steps that we take will prevent
misappropriation of our technology. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on our business, operating results and financial condition.
In the future, we may receive notices of claims of infringement of
other parties' proprietary rights. Although we do not believe that our products
infringe the proprietary rights of third parties, infringement or invalidity
claims (or claims for indemnification resulting from infringement claims) may be
asserted or prosecuted against us and any of these types of assertions or
prosecutions may materially adversely affect our business, operating results or
financial condition. Irrespective of the validity or the successful assertion of
any claims, we could incur significant costs and diversion of resources with
respect to the defense of any claims brought, which could have a material
adverse effect on our business, operating results and financial condition. In
addition, the assertion of infringement claims could result in injunctions
preventing us from distributing certain products, which could have a material
adverse effect on our business, operating results and financial condition. If
any claims or actions are asserted against us, we may seek to obtain a license
under a third party's intellectual property rights. However, we cannot assure
you, that under these circumstances a license would be available on reasonable
terms, if at all.
OUR SUCCESS WILL BE IMPAIRED IF WE CANNOT PROTECT OUR DOMAIN NAME.
Although we have registered the Bluezone.com and BlueZone.net
domain names and other domain names that contain our other trademarks, there are
many other domain names that contain the
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name "BlueZone," as well as our other trademarks. We cannot assure you that our
competitors will not attempt to purchase any of the existing domain names that
include "BlueZone" or our other trademarks or to register such other domain
names, using either the existing generic "Top-Level Domains" or "TLDs" (e.g.,
.com, .net, .org, etc.) or the TLDs of other countries (e.g., .uk or .fr). In
addition, the Internet Corporation for Assigned Names and Numbers ("ICANN"), the
not-for-profit organization recognized by the United States government to
coordinate the Internet's domain name system, is in the process of reviewing
possible new generic "TLDs" (for instance, .store, .kids) and expects to
authorize the issuance of such TLDs shortly. We cannot assure you that we will
be able to secure registration of domain names that include the name "BlueZone"
(or any of our other trademarks) for such new TLDs (e.g., BlueZone.store). If we
are unable to prevent our competitors from securing any such domain names, they
could capitalize on our brand recognition.
WE DEPEND ON LICENSES WITH THIRD PARTIES FOR THE SUCCESSFUL OPERATION OF
OUR BUSINESS.
We rely on technologies that we license from third parties, such
as the suppliers of key database technology, our operating system and specific
hardware components. We cannot assure you that these third party technology
licenses will continue to be available to us on commercially reasonable terms or
at all. The loss of these licenses could require us to obtain substitute
technology of lower quality or performance standards or at greater cost.
WE DEPEND ON OUR KEY MANAGEMENT PERSONNEL FOR SUCCESSFUL OPERATION OF OUR
BUSINESS.
The loss of the services of any of our executive officers or other
key employees could impair our ability to implement our business model and could
lower our revenues. We are substantially dependent upon the continued service
and performance of our senior management, particularly our chief executive
officer, Bruce Warren and our president, Jamie Ollivier. Our agreement with CTV,
Inc. terminates automatically if Mr. Warren and Mr. Ollivier are no longer our
principals or employees. Our employment agreements with Mr. Warren and Mr.
Ollivier may be terminated by them at any time.
WE MUST HIRE ADDITIONAL PERSONNEL TO EXPAND OUR OPERATIONS.
Our future success will also depend to a significant extent upon
our ability to attract, train, retain and motivate highly skilled technical,
creative, management, sales and marketing personnel. Competition for such
personnel in the information technology industry is intense, and we cannot be
certain that we will be successful in attracting, motivating or retaining the
personnel to meet our needs. If we are unable to attract and integrate new
employees and motivate and retain the employees in our service, our business,
financial condition and results of operations could be materially adversely
effected.
OUR GROWTH AND OPERATING RESULTS COULD BE IMPAIRED BY THE RISKS
ASSOCIATED WITH INTERNATIONAL OPERATIONS.
A key component of our strategy is expansion into international
markets. We intend to market our product and service offerings to various
foreign markets in the near future. However, we cannot assure you that our
products and services or our business model will be successful in these foreign
markets. There are certain risks inherent in doing business internationally,
including:
- changes in regulatory requirements and tariffs;
- language barriers;
- difficulties in staffing and managing foreign operations;
- longer payment cycles and greater difficulty in collecting
accounts receivable;
- reduced protection of intellectual property rights;
- potentially harmful tax consequences;
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<PAGE> 12
- fluctuating exchange rates;
- price controls or other restrictions on foreign currency;
- difficulties in obtaining import and export licenses;
- the burden of complying with a variety of foreign laws; and
- political or economic constraints on international trade or
instability.
We cannot assure you that one or more of these factors will not
have a material adverse effect on our future international operations and,
consequently, on our business, operating results and financial condition.
RISKS RELATED TO OUR INDUSTRY
CONVERGENCE BROADCASTING IS AN UNPROVEN BUSINESS CONCEPT.
The concept of convergence broadcasting is new and emerging, and,
as a result, demand for and market acceptance of this concept is subject to an
unusual degree of uncertainty. Our success depends upon, among other things,
broad acceptance of the concept of convergence broadcasting by industry
participants, including broadcasters, media companies, cable television
operators, advertisers, television viewers, and manufacturers of televisions and
set-top terminals.
There have been a number of well-financed, high profile attempts
to develop and deploy interactive television systems, a form of convergence
broadcasting. None of these attempts has been wholly successful, and many key
industry participants have been deterred from participating in interactive
television for a variety of reasons, including: inconsistent quality of service;
the need for new and expensive hardware in homes, transmission networks and
broadcast centers; complicated and expensive processes for creating interactive
content; the need to alter television viewing habits substantially; uncertain
protection of the confidentiality of stored data and information; and
conflicting interests of various participants. Accordingly, these participants
may perceive convergence broadcasting negatively and be reluctant to invest in
convergence broadcasting initiatives.
OUR FINANCIAL VIABILITY IS DEPENDENT UPON BROAD ACCEPTANCE OF THE CONCEPT
OF CONVERGENCE BROADCASTING IN GENERAL AND OUR PRODUCTS AND SERVICES IN
PARTICULAR BY A SIGNIFICANT NUMBER OF INDUSTRY PARTICIPANTS.
The convergence-broadcasting field is still emerging, with
multiple, often conflicting technologies, and the potential for frequent new
product and service introductions. The failure of significant industry
participants to adopt convergence broadcasting, in general, and our product and
service offerings, in particular, would materially adversely affect our
business, operating results and financial condition and potentially prevent us
from becoming a financially viable operation. Moreover, because of the complex
interrelationships among industry participants, failure to adopt our product and
service offerings by a significant industry participant or group of participants
could deter or preclude adoption by other industry participants.
IF CONVERGENCE-BROADCASTING IS NOT BROADLY ACCEPTED BY CONSUMERS, OUR
BUSINESS WILL BE ADVERSELY AFFECTED.
The adoption by industry participants of our products and services
is heavily dependent upon convincing broadcasting and media companies that our
products and services are an effective way to market their broadcasting and
media content to television viewers and computer users. We cannot assure you,
however, that viewers will react favorably to convergence broadcasting generally
or to our products and services in particular. For example, viewers may
determine that interactive content is too complex or does not add value to or
interferes with their viewing experience. Moreover, viewers' reactions may be
11
<PAGE> 13
affected by security or privacy issues concerning the transmission of personal
information through a new electronic medium. To the extent that television
viewers or computer users do not accept convergence broadcasting, broadcasting
and media companies will likely terminate their licenses for our products and
services or fail to adopt our products and services, and our business, operating
results and financial condition would be materially adversely affected.
A FAILURE TO EXPAND AND IMPROVE THE INFRASTRUCTURE OF THE INTERNET COULD
CONSTRAIN THE APPEAL OF OUR PRODUCTS AND SERVICES AND THUS LIMIT OUR REVENUES.
The recent growth in Internet traffic has caused frequent periods
of decreased performance, and if Internet usage continues to grow rapidly, the
Internet infrastructure may not be able to support this growth and reliability
may decline. If outages or delays on the Internet occur frequently or increase
in frequency, overall Internet usage and the appeal of convergence broadcasting
could grow more slowly or decline. The ability of consumers to enjoy some of the
advantages of convergence broadcasting is to a large degree limited by and
depends upon the speed and reliability of both the Internet and our customers'
internal networks. Consequently, the emergence and growth of the market for our
products and services depends upon improvements being made to the entire
Internet as well as to our individual customers' networking infrastructures to
alleviate overloading and congestion. If these improvements are not made, the
incentive to our customers to use our products and services will decline, and
our business, operating results and financial condition may suffer.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS AND
SERVICES COULD BECOME OBSOLETE AND OUR BUSINESS WOULD BE SERIOUSLY HARMED.
The convergence broadcasting and interactive television fields are
still emerging and may be adopted by the broadcasting industry using standards
that are not compatible with our MediaBZ(TM) suite of software applications. In
the event a competing technology is adopted as a standard for convergence
broadcasting or interactive television in general and we fail to adapt to that
technology, our business, would be materially adversely affected.
Even if the standards adopted for convergence broadcasting are
compatible with our products, the emerging nature of convergence broadcasting
technology will require that we continually improve the performance, features
and reliability of our product and service offerings, particularly in response
to offerings by our competitors. The introduction of new technologies could
render our products and services obsolete or unmarketable. In addition, the
widespread adoption of new television technologies or standards, cable-based or
otherwise, could require us to incur substantial expense to modify or adapt our
technology, products or services. We cannot assure you that we will be
successful in responding quickly, cost effectively and adequately to these
developments and any failure by us to respond effectively would harm our
business, operating results and financial condition.
WE OPERATE IN AN INTENSELY COMPETITIVE INDUSTRY.
We compete in the rapidly developing industry of information
technology, which is characterized by changing technology, an absence of
industry standards, frequent new product and service introductions and extensive
capital requirements. There are many firms that provide Web site 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.
We face competition from a number of companies, many of which have
significantly greater financial, technical, manufacturing and marketing
resources than we do and may be in a better position to
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<PAGE> 14
compete in the industry. In addition, with the advent of digital broadcast
technologies, we expect that competition in the convergence broadcasting
industry will intensify. Many of our existing and potential competitors have
longer operating histories, larger client bases, longer-term 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. Although, we have filed 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.
WE MAY BECOME SUBJECT TO GOVERNMENTAL REGULATION OF THE INTERNET,
CONSUMER PRIVACY OR ONLINE COMMERCE.
We operate in an environment of tremendous uncertainty about
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.
The United States Congress has recently passed legislation that
regulates certain aspects of the Internet, including online 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.
Our customers or we may also become subject to legislation or
regulation in the broadcasting industry and the cable television industry. In
the United States, broadcasting industries are regulated by the FCC, some states
and substantially all local governments. In Canada, where we have conducted all
our business to date, the broadcasting industry is regulated by the Canadian
Radio-television and Telecommunications Commission. The United States Congress
has passed legislation that regulates the broadcasting industry including
programming access and exclusivity arrangements, consumer protection, technical
standards and privacy of customer information. In the future, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies may 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 about 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.
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<PAGE> 15
RISKS RELATED TO OUR COMMON STOCK
THE EXERCISE OF WARRANTS ISSUED TO CERTAIN OF OUR INVESTORS COULD RESULT
IN SUBSTANTIAL NUMBERS OF ADDITIONAL SHARES BEING ISSUED IF OUR MARKET PRICE
DECLINES.
In connection with our financing on September 8, 2000, we issued
warrants to the investors which may entitle them to purchase additional shares
of our common stock at a exercise price of $.001 per share. The right to
purchase additional shares under the warrants will be determined on eight
adjustment dates which will occur every ninety days for a period of up to two
years beginning on December 7, 2000. If on any of those eight adjustment dates,
the average closing price for a share of our common stock on the ten lowest
closing price trading days during the thirty day period preceding the adjustment
date is lower than the closing price as calculated for the preceding adjustment
date or lower than $7.08 for the first adjustment date, the investors will
receive the right to purchase additional shares of our common stock. The precise
number of shares of common stock, if any, which may be issued on any of these
adjustment dates will be determined in accordance with a formula as set forth in
the warrant.
If, as a result of stock price declines, we ever become required
to issue more than 705,467 shares of common stock under the warrants, we have
the option of paying to the investors the cash value of the shares instead of
issuing more shares, although we may be precluded from exercising this option
under certain circumstances as set forth in the warrants. If our stock price
drops substantially and we do not exercise our option to pay cash or are
precluded from doing so, we would be required to issue a significant number of
additional shares of our common stock which could cause substantial dilution to
our stockholders. In addition, to the extent shares of our common stock are
issued under the warrants, a significant number of these shares may be sold into
the public market, which could decrease the price of our common stock.
IF WE FAIL TO MAINTAIN THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT
OR ANY SUBSTITUTED REGISTRATION STATEMENT, WE COULD BECOME OBLIGATED TO PAY
SUBSTANTIAL PENALTIES TO THE SELLING STOCKHOLDERS OR TO REDEEM THEIR SHARES OF
OUR COMMON STOCK AT A REDEMPTION PRICE THAT IS SUBSTANTIALLY HIGHER THAN THE
MARKET PRICE OF OUR COMMON STOCK.
If there are interruptions of the effectiveness of this
registration statement for more than ten consecutive days or 30 days in any
twelve month period, we will be required to pay $100,000 (plus two percent of
the proceeds we receive as a result of any option exercises by the selling
stockholders) to the selling stockholders for every 30 day period that the
effectiveness of the registration is interrupted. If there are interruptions of
the effectiveness of this registration statement for more than 25 consecutive
days or 45 days in any twelve month period, the selling stockholders can require
us to redeem all of the securities they acquired in a private placement
completed on September 8, 2000, at a price determined in accordance with a
formula that will result in a premium being paid to the selling stockholders in
excess of what they paid for the securities.
In order to comply with regulations of the Securities and Exchange
Commission, we will be required to file a post-effective amendment to the
registration statement containing this prospectus in order to include audited
financial statements for the fiscal year ending December 31, 2000. When we file
this post-effective amendment, the effectiveness of this Registration Statement
will be interrupted until the SEC declares our post-effective amendment
effective. If the post-effective amendment is not effective within 30 days, we
will become subject to the penalties described in the preceding paragraph.
If we are unable to keep this registration statement effective and
as a result are required to make payments to the selling stockholders or redeem
the securities of the selling stockholders, our ability to
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<PAGE> 16
continue the development and operation of our business could be materially
adversely affected. These payments could reduce our working capital and could
hinder our ability to promote our brand, develop or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures. It is also possible that these payments could impair our ability to
fund our operating costs and endanger our ability to continue our business.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO
FALL.
If our stockholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding warrants, the market
price of our common stock could decline. As of September 30, 2000, we had
outstanding 22,244,817 shares of common stock and options and warrants to
acquire an aggregate of 4,622,878 shares of common stock, of which 3,840,878
were vested and exercisable. Of the shares outstanding, 7,364,387 shares of our
common stock are freely tradeable in the public market and an additional
14,880,430 shares are freely tradable subject to the applicable restrictions,
under Rule 144 of the Securities Act of 1933, as amended. All shares acquired
upon exercise of options are also freely tradeable in the public market.
In general, under Rule 144 as currently in effect, a person who
beneficially owns restricted securities for at least one year is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (a) one percent of the number of shares of common stock then
outstanding (which for us was 222,448 shares as of October 19, 2000) or (b) the
average weekly trading volume of the common stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to requirements with
respect to manner of sale, notice, and the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
our affiliate, as the term is defined in Rule 144, at any time during the three
months preceding a sale, and who has beneficially owned the shares proposed to
be sold for at least two years, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Sales by our stockholders of a substantial amount
of our common stock could adversely affect the market price of our common stock.
OUR OFFICERS AND DIRECTORS HOLD A MAJORITY OF OUR STOCK AND, AS A RESULT,
CONTROL US; THIS COULD LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF KEY
TRANSACTIONS, INCLUDING CHANGES OF CONTROL.
Currently our officers and directors beneficially own
approximately 59% of our outstanding common stock. As a result, the ability of
our other stockholders to influence matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or
similar transactions, could be limited.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
risks and uncertainties. Discussions containing forward-looking statements may
be found in the material set forth under "Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" as well as in this prospectus generally. We generally
use words such as "believes," "intends," "expects," "anticipates," "plans," and
similar expressions to identify forward-looking statements. You should not place
undue reliance on these forward-looking statements. Our actual results could
differ materially from those expressed or implied in the forward-looking
statements for many reasons, including the risks described under "Risk Factors"
and elsewhere in this prospectus.
Although we believe that the expectations reflected in the
forward-looking statements contained in this prospectus are reasonable, they
relate only to events as of the date on which the statements are
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<PAGE> 17
made, and we cannot assure you that our future results, levels of activity,
performance or achievements will meet these expectations. Subject to any
obligation that we may have to amend or supplement this prospectus as required
by law and the rules of the Securities and Exchange Commission, we are under no
duty to update any of these forward-looking statements after the date of this
prospectus to conform these statements to actual results or to changes in our
expectations.
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the
sale of securities sold pursuant to this prospectus. We may, however, receive up
to $2.0 million upon the exercise of outstanding options and up to approximately
$1.4 million upon the exercise of outstanding warrants held by the selling
stockholders. We will use any proceeds from exercise of the options or warrants
for working capital.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock
and do not expect to do so in the foreseeable future. We currently intend to
retain any future earnings to finance the growth and development of our
business. Our board of directors will make any future determination as to any
future payment of dividends based on then existing conditions, including our
results of operations, financial condition and capital requirements, contractual
restrictions and such other factors as our board of directors may deem relevant.
PRICE RANGE OF OUR COMMON STOCK
Since July 10, 2000, our common stock has been traded on the
Nasdaq National Market and is listed under the symbol "BLZN." From September 7,
1999 to July 7, 1999, our stock was listed for trading on the OTC Bulletin
Board. The following table represents the high and low closing sales prices for
our common stock during the periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Third Quarter.............................................. $5.33 $4.00
Fourth Quarter............................................. $10.25 $3.75
YEAR ENDING DECEMBER 31, 2000
First Quarter.............................................. $15.375 $7.125
Second Quarter............................................. $9.4375 $3.6875
Third Quarter ............................................. $9.8125 $4.0625
</TABLE>
As of October 19, 2000, there were 19 stockholders of record of
our common stock.
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<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read
in conjunction with, and are qualified by reference to, our consolidated
financial statements and related notes to our consolidated financial statements
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations". The consolidated statement of operations data for the period for
the years ended December 31,1997, 1998 and 1999 and the consolidated balance
sheet data as of December 31, 1998 and 1999 are derived from, and are qualified
by reference to, our audited consolidated financial statements included
elsewhere in this prospectus, which have been audited by KPMG LLP independent
auditors. The consolidated financial data as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 were derived from unaudited financial
statements included elsewhere in this prospectus. We have prepared the unaudited
information on the same basis as the audited consolidated financial statements
and have included all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and operating results for these periods.
The historical results are not necessarily indicative of results
to be expected in any future period and results for the six months ended June
30, 2000 are not necessarily indicative of results to be expected for the full
fiscal year.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................................. $342,120 $774,830 $883,137
Cost of net revenues .................................... 51,759 144,419 370,803
Gross profit ............................................ 290,361 630,411 512,334
Expenses:
Total operating expenses ............................ 300,984 663,299 1,934,665
Operating loss ...................................... 14,623 32,888 1,422,331
Loss before income taxes ............................ 14,623 32,888 1,422,331
Net loss ............................................ 17,054 28,457 1,422,331
Net loss attributable to common stock ................... 17,054 28,457 1,422,331
Basic and diluted net loss per share of common stock .... - - 0.09
Shares used in calculating basic and diluted
net loss per share of common stock ................... 12,000,000 12,000,000 14,168,937
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 2000
---- ----
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................................. $400,522 $424,805
Cost of net revenues .................................... 104,327 352,212
Gross profit ............................................ 296,225 72,593
Expenses:
Total operating expenses ............................ 356,938 2,004,511
Operating loss ...................................... 60,713 1,931,918
Loss before income taxes ............................ 60,713 1,931,918
Net loss ............................................ 60,713 1,931,918
Net loss attributable to common stock ................... 60,713 1,931,918
Basic and diluted net loss per share of common stock .... 0.01 0.09
Shares used in calculating basic and diluted
net loss per share of common stock ................... 12,000,000 21,538,100
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $891 $4,097,869 $1,541,281
Working capital (deficit).............................. (51,265) 3,763,577 1,363,040
Total assets........................................... 41,906 4,784,850 2,678,879
Stockholders' equity (deficit)......................... (10,808) 4,189,173 2,207,866
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion with the financial
statements appearing elsewhere in this prospectus.
OVERVIEW
We generate revenue from software licensing, interactive
television content enhancements, creative production and maintenance services
related to Web site development and from consulting services related to Internet
strategies. Our business has historically been focused on providing Web site
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 incurred losses in the last three years, and as of June
30, 2000, had an accumulated deficit of $3.37 million. Our net loss for the six
months ended June 30, 2000 was $1.93 million. Concurrent with our
recapitalization and stock market listing in October 1999, 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. To this end, we
substantially augmented our payroll, have leased new office space and increased
our capital budget to deliver some of our enlarged infrastructure needs.
A significant proportion of our reported revenue for the three
years ended December 31, 1999 has been in the form of a barter exchange
agreement with BCTV. This revenue has been offset to Exchange advertising. Under
the BCTV contract, we exchanged our services for airtime rather than receiving a
cash payment. In return for services, we received television airtime, which we
accounted for as selling and marketing expense under a barter exchange
agreement. 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.
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RESULT OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND
2000
The following table presents selected financial data, derived from
our unaudited statements of operations, as a percentage of total revenues for
the periods indicated. The operating results for the three months and six months
ended June 30, 2000 and 1999 are not necessarily indicative of the results that
may be expected for the full fiscal year or any future period.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-----------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Production and service revenue......................... 100% 30% 100% 37%
Exchange production and service revenue................ 0% 70% 0% 63%
-----------------------------------------------------------------
100% 100% 100% 100%
Cost of production and service revenues................ 90% 26% 83% 26%
-----------------------------------------------------------------
Gross profit 10% 74% 17% 74%
Operating expenses:
General and administrative.......................... 272% 26% 362% 18%
Research and development............................ 59% 5% 65% 4%
Selling and marketing............................... 8% 1% 23% 1%
Exchange advertising................................ 0% 70% 0% 63%
Depreciation........................................... 16% 3% 22% 3%
-----------------------------------------------------------------
355% 105% 472% 89%
-----------------------------------------------------------------
Net loss............................................... 345% 31% 455% 15%
=================================================================
</TABLE>
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The following table presents selected financial data, derived from
our audited consolidated statement of income, as a percentage of total revenues
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------------
1997 1998 1999
------------------- ---------------------- ---------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues......................................... 100% 100% 100%
Cost of revenues................................. 15.1% 18.6% 42.0%
Gross profit..................................... 84.9% 81.4% 58.0%
Operating Expenses:
General and Administrative....................... 18.1% 16.4% 138.9%
Selling and Marketing............................ 66.1% 65.4% 69.1%
Depreciation..................................... 5.0% 3.9% 11.1%
----------------------------------------------------------------
89.2% 85.7% 219.1%
Loss before income taxes......................... (4.3)% (4.3)% (161.1)%
----------------------------------------------------------------
Income tax expense (recovery).................... 0.7% (0.6)% 0%
----------------------------------------------------------------
Net loss......................................... (5.0)% (3.7)% (16.1)%
================================================================
</TABLE>
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SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Revenue
Our total revenue for the second quarter of fiscal 2000 increased
71% to $311,000 from $181,000 for the prior-year quarter. Revenues for the six
month period ended June 30, 2000 were $425,000 compared with $401,000 for prior
year six month period, representing an increase of 6%. Revenues from CTV
accounted for 91% of the total revenues for the second quarter compared to nil
in the same quarter last year. For the six months ended June 30, 2000, CTV
revenues accounted for 86% of total revenues. In the prior-year six month
period, BCTV accounted for 64% of revenues. We received no revenues under barter
exchange agreements for the three and six month periods ended June 30, 2000
compared to $127,000 and $251,000 for the three and six month periods ended June
30, 1999, respectively. This decrease was due to the completion of our contract
on December 31, 1999 with BCTV which was a three-year Web site evolution
project.
Revenues from our multi-year contract with CTV, Canada's largest
private TV network, have been accounted for under the percentage-of-completion
basis, based upon achievement of specifically identifiable milestones. Billings
under the CTV contract made to date have been recognized as revenues.
Cost of Revenues
Cost of revenues includes labor, materials and overhead expenses
incurred in the delivery of software and services. Prior to our reorganization
in late 1999, our Chief Executive Officer, Bruce Warren and our President, Jamie
Ollivier, contributed much of the detailed design and code writing for software
and the bulk of the technical workforce was retained on short-term contracts.
With the signing of the CTV contract, we began to transform our workforce to
full time, permanent employees. As a result, our staffing for production
personnel increased significantly for the six months ended June 30, 2000 over
the same period last year
Cost of revenues increased by 487% to $279,000 in the second
quarter from $48,000. For the six months ended June 30, 2000 and 1999,
respectively, cost of revenues increased by 238% to $352,000 from $104,000. This
increase is mainly attributable to production costs for the CTV contract. Labor
costs for the three months ended June 30, 2000 increased by $93,000 over the
same period last year. The majority of our production personnel were hired in
the second quarter, which contributed to the increase in cost of sales. The
introduction of new personnel resulted in some inefficiencies because it took
some time for these persons to contribute productively. Associated with the
increase in staffing were increased costs in production overhead and consulting
this year.
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. There can be
no assurance that we will be able to improve our gross margins.
General and Administrative Expenses
General and administrative expenses increased by $799,000 to
$847,000 in the second quarter. For the six months ended June 30, 2000, these
expenses increased by $1.47 million to $1.54 million from the same period last
year. Overall, the rise is attributable to professional fees associated with
obtaining our Nasdaq listing, and the implementation of our new business plan,
which focuses on marketing the MediaBZ(TM) suite of products. Staffing levels
doubled in the second quarter over the first quarter of this year and as a
result, staffing costs increased by $337,000 in the first six months of this
year compared to the same period last year.
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Accounting, legal, and investor relations fees increased to
$520,000 from $8,000 for the six months ended June 30, 2000 and 1999,
respectively. This increase was primarily due to legal costs associated with the
filing of our Form 10 with the Securities and Exchange Commission and our
successful application for inclusion in the Nasdaq National Market System as
well as increased investor relations activities.
Travel costs increased significantly to $354,000 for the six
months ended June 30, 2000 compared to $9,000 for the same period last year.
Much of these travel costs were incurred for our new customer marketing and
selling efforts in addition to numerous trips and presentation to potential
investors.
Other expenses in the areas of rent, office supplies and telephone
increased by $209,000 for the six months ended June 30, 2000 over the same
period last year.
General and administrative expenses are expected to continue to
grow in the future as additional personnel are hired and new offices are opened
in the United States and overseas.
Total general and administrative costs were reduced by $83,000 in
interest income in the six months of this year.
Research and Development
Based on the anticipated success of the MediaBZ(TM) suite of
software products and contingent based upon our recent success in raising
additional funds, we expect to invest funds to improve the existing MediaBZ(TM)
products by providing features and options requested by broadcasters and other
clients. Research and development costs increased to $184,000 in the second
quarter from $8,000 for the prior-year quarter. For the six months ended June
30, 2000, research and development costs rose to $278,000 from $19,000 for the
same period last year. Most of our research and development prior to becoming a
public company was developed by our President, Jamie Ollivier and Chief
Executive Officer, Bruce Warren. We now have a team of people in the research
and development group. We cannot guarantee that expenditures in research and
development will ensure our success or lead to innovations that are not
available to our competition.
Selling and Marketing
Selling and marketing costs increased to $26,000 in the second
quarter from $1,000 for the prior-year quarter. For the six months ended June
30, 2000, these costs increased to $98,000 from $5,000 for the same period last
year. The preparation of promotional and marketing material costs accounted for
$72,000 of the six months total costs.
Depreciation
Depreciation has been provided on the declining balance basis
using a 30% rate for all capital asset categories, except for leasehold
improvements, which are amortized on a straight-line basis over five years,
representing the terms of the lease. The expense for the second quarter
increased to $49,000 from $6,000 for the same quarter last year. The expense for
the six months ended June 30, 2000 increased to $91,000 from $11,000 for the
same period last year. Total capital asset purchases were $278,000 and $511,000
for the three and six months ended June 30, 2000 respectively, as we continue to
build our technical infrastructure.
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YEARS ENDED DECEMBER 31, 1998 AND 1999
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 Web site evolution project. This BCTV contract payment consisted
almost entirely of exchange income. We exchanged 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, the bulk of the technical workforce was retained on short-term
contracts. Our Chief Executive Officer, Bruce Warren and our President, Jamie
Ollivier, contributed much of the detailed design and code writing for our
software.
The 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 realized in 1998 and 1997 were primarily
attributable to the contribution without remuneration by our CEO and President.
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. There can be
no assurance that we will be able to improve our gross margins.
General and Administrative Expenses
General and administrative expenses increased from $127,000 in
1998 to $1,227,000 in 1999 and from $62,000 in 1997. The 1999 level of expenses
was 139% of revenue, 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 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.
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Accounting, legal, and investor relation fees rose by $376,000
from $31,000 in 1998 compared to $407,000 in 1999. 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.
This spending was $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 had 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.
General and administrative expenses are expected to continue to
grow in the future as additional personnel are hired and new offices are opened
in the U.S. and overseas.
General and administrative expenses in 1998 were $127,000
representing an increase of $65,000 from 1997. Occupancy costs were $15,000
higher; accounting and legal fees increased $24,000, and personnel costs
increased $20,000 from 1997 to 1998.
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.
Income Taxes
No taxes are payable in 1999, as a result of the operating loss
recorded. Based on a number of factors, including the lack of a history of
profits, management believes there is sufficient uncertainty regarding the
realization of deferred tax assets, and has 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, as 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.
Research and Development
Based on the anticipated success of the MediaBZ(TM) suite of
software products and based on our ability to raise additional 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, and were based on the assets of a private company. Most
of our research and development prior to becoming a public company came in the
form of time invested by our President, Jamie Ollivier and Chief Executive
Officer, Bruce Warren. 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.
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Sales and Marketing
We recorded an 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. The balance of the 1999 expense of $96,000
was expended primarily for preparation of promotional and marketing material.
All of the 1998 expense was related to the exchange transactions with BCTV, as
was all of the $226,000 recorded in 1997.
Depreciation
Depreciation has been provided on the declining balance basis
using 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
was related to the occupation of the new Vancouver head office and the Toronto
office servicing the CTV contract.
Capital additions in 1998 were $45,000 compared with $12,000 in
1997 and the depreciation charge was $30,000 and $17,000 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. The
working capital as of June 30, 2000 was $1.36 million. Cash and cash equivalents
at June 30, 2000 were $1,541,000 compared to $4,098,000 at December 31, 1999.
During the six months ended June 30, 2000, we used $2,000,000 in
our operating activities compared to $38,000 in the prior year six month period.
Non-cash charges relating to stock option compensation and depreciation were
$114,000 for the six months ended June 30, 2000.
We invested $278,000 and $511,000 in capital assets for the three
and six months ended June 30, 2000, respectively, including $28,000 and $16,000
in leasehold improvements pertaining to additional space in our Vancouver
office.
On September 8, 2000, we completed a private placement of our
securities to three institutional investors. The gross proceeds from the
offering to us were $4,000,000. We will receive an additional $1,000,000 when
the registration statement including this prospectus is declared effective.
We believe we have sufficient liquidity on hand to finance our
operations for the following 18 months; however, we are heavily dependent upon
our contract with CTV. 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 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 businesses, 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 assume that
additional capital will be available when we need it on terms that we consider
acceptable.
INCOME TAXES
No taxes are payable for the three and six months ended June 30,
2000 and 1999, as a result of the operating losses 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
have not booked an income tax benefit. These losses can be carried forward for
seven years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2000, 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 included in this prospectus. The fair value of all
financial instruments at June 30, 2000 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 or high grade
corporate debt securities. 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 June 30, 2000, 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.
CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS
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 statements 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.
On October 8, 1999, Blue Zone Productions Ltd. and Western Food
Distributors, Inc. entered into a Share Exchange Agreement. Pursuant to 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."
For accounting purposes, the transactions pursuant to the Share Exchange
Agreement was accounted for as a recapitalization of Blue Zone Productions Ltd.,
effectively as if it had issued common stock for consideration equal to the net
assets of Western Food Distributors, Inc. The Financial Statements attached to
this prospectus are those of Blue Zone Productions Ltd. as audited by KPMG and
not of Western Food Distributors. Accordingly, the report of David Coffee,
C.P.A. on the Western Food Distributors financial statements is not included
in this prospectus.
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BUSINESS
OVERVIEW
We are currently engaged in two principal lines of business. The
first involves the continued development of our MediaBZ(TM) family of software
products. MediaBZ(TM) software applications 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 personal digital assistant. Within the
MediaBZ(TM) family of software products, we have developed two specialized
applications: NewsBZ(TM), which is customized for news broadcasters, and
RadioBZ(TM), which will be customized for radio broadcasters. We believe that
our MediaBZ(TM) software applications enables 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 fees from developing, marketing,
licensing and maintaining our family of MediaBZ(TM) software applications.
The second line of business is Web site development and strategic
consulting services. We create, develop, and maintain interactive Web sites 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.
We currently have agreements with several of Canada's leading
television and radio broadcasting companies. We have a Web site and interactive
television development agreement with CTV, Inc. to develop interactive Web sites
for its 24-hour NewsNet Station and CTV National News broadcasting content
properties.
In addition, we have Web site 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.
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 Web sites 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. However, we believe that the broadcasting industry is a specialized
market and that 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
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position and reputation in Canada. We also intend to establish similar business
relationships in the United States and elsewhere.
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 and content offerings, and our
relationships with leading Canadian broadcasting and media companies will enable
us to compete successfully in this market. 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 elsewhere.
PRODUCTS AND SERVICES
We utilize a multi-stage approach to create, develop and maintain
broadcasters' Web sites. 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.
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: Web site design, content offerings,
interactive convergence broadcasting, targeted advertising or electronic
commerce. Typically, we are 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 broadcasts including their Web site, interactive
television, personal digital television, personal digital assistant and wireless
offerings. 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.
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To date, we have provided consulting services to CTV, Inc. as part
of our arrangement to develop interactive broadcasting and Web sites 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 Web sites 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 elsewhere.
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 Web site 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 Web site. Because our clients are broadcasting and media
companies, they generally want their Web sites to retain the "look and feel" of
their on-air broadcasting presence. Accordingly, we customize our software to
create a user interface that incorporates the features, functionality and
branding desired by each client. We also typically develop one or more
prototypes of the Web site 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 Web site, 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 Web site after launch, and we may begin training the
client's personnel to operate and maintain the Web site.
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 Web site meets the client's goals. Our
development team can generally accomplish the design and development phase of a
project in approximately six months.
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Development of Convergence Broadcasting Software - MediaBZ(TM)
We have developed a proprietary software platform, called
MediaBZ(TM), that we 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 broadcasters. Using MediaBZ(TM), broadcasters are
able to adapt their current technology to deliver their video and audio and
print media content for use over the Internet as well as through existing
channels, set top boxes and wireless devices. We will continue to enhance
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 Web sites 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 have developed NewsBZ(TM) and RadioBZ(TM), which we market to news
media and radio broadcasters, respectively.
NEWSBZ(TM)
NewsBZ(TM) is a software application intended to be used by both
producers and consumers of interactive news content. We make the software
accessible from anywhere with access to the Internet through a convenient,
Internet-based user interface called a Web browser. NewsBZ(TM) incorporates the
following features and functionality:
- PRODUCERS OF NEWS CONTENT. NewsBZ(TM) allows 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 is able
to access the broadcaster's password-protected Web site
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) enables
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 Web site to related
content on the Web sites of its print media partners. In
addition, NewsBZ(TM) is compatible with the hardware and
software currently used by most broadcasters to produce
their television news programs. By using NewsBZ(TM), a news
reporter is able to send a completed story to an editor for
review or publish the story directly to the broadcaster's
Web site or on-air. Finally, because the broadcaster's Web
site and the NewsBZ(TM) software are accessible via the
Internet, the reporter is able to write the story as easily
from a hotel room in a foreign country as from the office
or from home.
- CONSUMERS OF NEWS CONTENT. NewsBZ(TM) allows 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,
personal digital assistant and wireless devices. For
example, a Web site user can 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) can 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) combines the immediacy of video content with the
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information-rich nature of print publications and the
interactivity of the Internet. In addition, NewsBZ(TM)
allows consumers to view simulcasts of a news broadcaster's
television programming through 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) is being designed
with the goal of allowing radio broadcasters to expand
their content offerings and their market reach. We are
designing RadioBZ(TM) to 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 Web sites, 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) is being designed to support features such as
chat rooms, on-air requests and audio-on-demand. Using
RadioBZ(TM), we intend that 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) is being designed
to 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, RadioBZ(TM) is
being designed to offer consumers streaming video clips,
such as music videos, as well as interactive interviews,
chat rooms and audio-on-demand.
LICENSING
CTV's Newsnet, the first Web site powered by our NewsBZ(TM)
application, was launched in September 2000. We expect to license NewsBZ(TM) to
other present and future news broadcasting clients outside of Canada.
Accordingly, we developed 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 world-wide.
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<PAGE> 31
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. We intend to license the NewsBZ(TM) and
RadioBZ(TM) 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 develop user profiles, which can be used to target advertisements
to consumers based on their geographic location, buying patterns or personal
choices. Similarly, we 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 Web site. 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 Web site. While there are
currently no products sold from the WPT Web site, we expect to begin to receive
our share of the advertising revenue generated under from this Web site later
this year. Our agreement with WIC Premium Television terminated on June 16,
2000, but we are continuing our relationship with WIC as set forth under the
agreement while we attempt to negotiate an extension or renewal of the contract.
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 which we will
design, operate and maintain the Web sites for the radio stations CKNW and Rock
101 in Vancouver, Canada and provide exclusive Web site hosting and streaming
media services. We have received a fee for developing the Web sites, and we
continue to receive promotional advertising on the client's Web sites and radio
station. We will also share with the client any advertising revenue generated
from the Web site. 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 CFNW and Rock 101 Web sites.
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 Web site design services for radio stations based in British Columbia.
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<PAGE> 32
In December 1999, Blue Zone Productions Ltd. signed an agreement
with CTV Television, Inc. to be the exclusive provider of Web site development,
Web hosting, and strategic consulting services to the CTV NewsNet and the CTV
National News interactive properties. We have developed 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 provide Web site
hosting services to CTV Web sites, which includes the operation and maintenance
of the CTV Web site and 24-hour telephone support in Toronto, Canada. In
exchange for providing the Web site 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
Web site production or interactive television development services relating to
news broadcasting to any other Canadian television company, and CTV cannot use
any other provider for Web site production or interactive television development
services relating to news.
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 more
than 90% 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 the MediaBZ(TM)
software platform and interactive Web site 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 advertise on 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 executive officers have taken primary responsibility
for our marketing and sales efforts. Because our business opportunities are
expanding, we are developing a sales and marketing force to generate new
business leads and to pursue contracts with prospective clients.
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<PAGE> 33
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 Canada and are planning to
pursue 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 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.
COMPETITION
We compete in the information technology services market, which is
a relatively new and intensely competitive market. There are many firms that
provide Web site 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, long-standing 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 incur $500,000 for
research and development expenditures for the fiscal year ending December 31,
2000. 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.
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GOVERNMENTAL REGULATION
We operate in an environment of tremendous uncertainty about
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.
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.
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<PAGE> 35
EMPLOYEES
As of September 30, 2000, we employed 49 persons on a full-time
basis, excluding temporary personnel, consultants and independent contractors.
Of these employees, 13 were in product and technology, 13 in general and
administrative positions and 23 in sales and marketing. None of our employees is
represented by a labor union, and we believe that our relationship with our
employees is good.
FACILITIES
Our primary administrative, sales, marketing and research and
development facility is located in Vancouver, British Columbia. This facility
occupies approximately 6,100 square feet. We also lease office space in Toronto,
Ontario. We believe that these facilities will be adequate to meet our
requirements for the foreseeable future and that suitable additional space will
be available if needed.
LITIGATION
At present, we are not a party to any legal proceedings and no
such action is pending or has been threatened against us.
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<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
F. Michael P. Warren(1)(2) 64 Chairman of our Board of Directors
Bruce Warren(2) 35 Chief Executive Officer and Director
Jamie Ollivier 37 President and Director
Catherine Warren 37 Chief Operating Officer
Tryon Williams(1)(3) 59 Director
David Thomas(3) 54 Director
Jay Shecter(1)(2)(3) 57 Director
--------------------
</TABLE>
(1) Member of our Compensation Committee.
(2) Member of our Finance Committee.
(3) Member of our Audit Committee.
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.
F. MICHAEL P. WARREN, Q.C. has been our Chairman since October 8,
1999. Mr. Warren is the founder and chairman of Warren Capital Limited, a
venture capital fund with holdings in a 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.
BRUCE WARREN has been our Chief Executive Officer and a Director
since October 8, 1999. Mr. Warren co-founded our subsidiary, Blue Zone
Productions Ltd., and has served as its President since 1992. Mr. Warren created
and programmed our software prototype, MediaBZ(TM), and, along with our
President, Jamie Ollivier, is primarily responsible for negotiating agreements
with our broadcasting and media clients.
JAMIE OLLIVIER has been our President and a Director since October
8, 1999. Mr. Ollivier co-founded our Blue Zone Productions Ltd. subsidiary 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.
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<PAGE> 37
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 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 the Managing Partner of CEG, AVC and PEG
Partnerships, created to invest in entertainment software worldwide. Mr.
Williams is a director of York Medical, Inc., CellStop International Limited 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 one of our Directors since January 1,
2000. From January 1, 2000 to June 15, 2000, Mr. Shecter served as our
Treasurer. From March 1997 to December 1999, Mr. Shecter was a vice president in
charge of strategic sourcing for the Universal Studios subsidiary of the
Seagrams Company Ltd. From July 1992 to February 1997, Mr. Shecter was a senior
vice president and chief financial officer for Chivas Brothers Ltd. and a chief
financial officer responsible for the company's Global Whisky Group.
Composition of our 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 OUR BOARD OF DIRECTORS
AUDIT COMMITTEE. Our 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. Our
Audit Committee also assists our 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. Our Compensation Committee, which
currently consists of Messrs. Shecter, Williams and F. Michael P. Warren,
recommends to our Board of Directors the salaries, bonuses and stock awards
received by our executive officers. Our Compensation Committee is also
responsible for administering our 1999 Stock Option Plan. Our 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. Our Finance Committee, which consists of
Messrs. Shecter, F. Michael P. Warren and Bruce Warren, reviews and approves our
annual capital budget and our long-term financing plans. Our Finance Committee
oversees the implementation of personnel and systems to manage the financial
reporting needs of our business. When applicable, our Finance Committee also
oversees our credit facilities, insurance coverage, investments, and commercial
and investment banking relationships.
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<PAGE> 38
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.
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 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. During the year ended December 31,
1999, 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 each of Bruce Warren, our
chief executive officer and a director and Jamie Ollivier, our president and a
director, to purchase 500,000 shares of our common stock. These options have an
exercise price of $5.00 and terminate on November 10, 2009.
On January 2, 2000 we granted an option to purchase 500,000 shares
of our common stock to both Bruce Warren and Jaime Ollivier. These options are
exercisable at $7.44 per share until November 10, 2009.
On August 9, 2000, we granted an option to Jay Shecter, a
director, to purchase 150,000 shares of our common stock. This option has an
exercise price of $5.00 per share and terminates on November 10, 2009.
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 was 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 his services to us during
the last three months of 1999.
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OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth all stock options granted to our
chief executive officer during the fiscal year ended December 31, 1999. No stock
options were exercised by any of our executive officers during the fiscal year
ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO EXERCISE OR
UNDERLYING OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED (1) FISCAL YEAR (2) PER SHARE EXPIRATION DATE
----- ----------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Bruce Warren 500,000 28.0% $5.00 11/9/2009
------------
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR THE OPTION
PERIOD (3)
---------------------------------
NAME 5% 10%
----- -- ---
<S> <C> <C>
Bruce Warren 1,165,012 3,335,920
------------
</TABLE>
(1) The options were granted pursuant to our 1999 Stock Option Plan.
(2) Based upon options to purchase an aggregate of 1,785,715 shares of our
common stock granted in 1999.
(3) In accordance with the rules of the Securities and Exchange Commission,
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.
1999 STOCK OPTION PLAN
Our 1999 Stock Option Plan, as amended, has 6,680,000 shares of
our common stock reserved for issuance upon exercises of options under the plan.
As of September 30, 2000, options to purchase a total of 3,921,500 shares had
been granted of which options to acquire 3,920,250 shares remained outstanding
at exercise prices ranging from $5.00 to $13.44 per share and 2,758,500 shares
remained available for future grant under the 1999 Stock Option Plan.
The 1999 Stock Option Plan is administered by our Compensation
Committee. Our Compensation Committee is authorized to construe and interpret
the provisions of the 1999 Stock Option Plan, to select employees, directors and
consultants to whom options will be granted, to determine the terms and
conditions of options and, with the consent of the grantee, to amend the terms
of any outstanding options. The committee is constituted in such a manner as to
satisfy applicable laws, including Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended. With respect to Awards subject to Internal
Revenue Code Section 162(m), the committee will be comprised solely of two or
more "outside directors" as defined under Internal Revenue Code Section 162(m)
and applicable tax regulations. For grants of awards to individuals not subject
to Rule 16b-3 and Internal Revenue Code Section 162(m), our Board may authorize
one or more officers to grant such awards.
The 1999 Stock Option Plan provides for the granting to our
employees of incentive stock options and the granting to our employees,
directors and consultants of non-qualified stock options. Our
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Compensation Committee determines the terms and provisions of each option
granted under the 1999 Stock Option Plan, including the exercise price, vesting
schedule, repurchase provisions, rights of first refusal and form of payment. In
the case of incentive options, the exercise price cannot be less than 100% (or
110%, in the case of incentive options granted to any grantee who owns stock
representing more than 10% of the combined voting power of Blue Zone or any of
our parent or subsidiary corporations) of the fair market value of our common
stock on the date the option is granted. The exercise price of non-qualified
stock options shall not be less than 85% of the fair market value of our common
stock. The exercise price of options intended to qualify as performance-based
compensation for purposes of Code Section 162(m) shall not be less than 100% of
the fair market value of the stock. The aggregate fair market value of the
common stock with respect to any incentive stock options that are exercisable
for the first time by an eligible employee in any calendar year may not exceed
$100,000.
The term of options under the 1999 Stock Option Plan will be
determined by our Compensation Committee; however, the term of an incentive
stock option may not be for more than ten years (or five years in the case of
incentive stock options granted to any grantee who owns stock representing more
than 10% of the combined voting power of Blue Zone or any of our parent or
subsidiary corporations). Where the award agreement permits the exercise of an
option for a period of time following the recipient's termination of service
with us, disability or death, that option will terminate to the extent not
exercised or purchased on the last day of the specified period or the last day
of the original term of the option, whichever occurs first.
If a third party acquires us through the purchase of all or
substantially all of our assets, a merger or other business combination, except
as otherwise provided in an individual award agreement, all unexercised options
will terminate unless assumed by the successor corporation.
EMPLOYMENT 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.
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<PAGE> 41
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 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.
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<PAGE> 42
RELATED PARTY 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. The line had a minimum borrowing amount of $5,000 and
beared interest at 2% above the Royal Bank prime rate. Under a Guarantee and
Postponement of Claim Agreement, dated July 9, 1999, our principal stockholder
and 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. As of December 20, 1999, this line of credit was closed and
Mr. F. Michael P. Warren's guarantee was cancelled.
In connection with the closing of the transactions described in a
Share Exchange Agreement, dated as of 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. During 2000, we paid all amounts due to Mr. Warren for unreimbursed
travel and business expenses incurred by him in 1999.
On August 10, 2000, our subsidiary, Blue Zone Productions Ltd.,
entered into a letter of intent with F. Michael P. Warren, our chairman, who
agreed to provide our subsidiary with an unsecured credit facility of up to
$1,000,000. The credit facility had a maximum term of one year from the date of
the agreement at an interest rate equal to LIBOR plus 2% per annum. In
connection with a financing that we completed on September 8, 2000, this letter
of intent was terminated.
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<PAGE> 43
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of September 30, 2000 by:
(1) each person known by us to own beneficially 5% or more of
our common stock;
(2) each of our directors;
(3) each of our executive officers named in the Summary
Compensation Table under "Executive Compensation"; and
(4) all of our directors and executive officers as a group.
The percentages shown are based on 22,244,817 shares of common stock outstanding
at September 30, 2000. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and, in general, includes the
power to vote or direct the voting of a security, or the power to dispose or
direct the disposition of such security. The number of shares beneficially owned
by a person includes shares of common stock subject to options held by that
person that are currently exercisable or exercisable within 60 days of October
19, 2000. The shares issuable under those options are treated as if outstanding
for computing the percentage ownership of the person holding those options but
are not treated as if outstanding for computing the percentage ownership of any
other person. To our knowledge, except as set forth in the footnotes to this
table and to the extent authority is shared by spouses under applicable law,
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) 4.3%
Jamie Ollivier......................................... 1,000,000(1) 4.3%
F. Michael P. Warren................................... 12,150,100(2) 54.3%
P.O. Box 772
The Valley
Anguilla, B.W.I.
Tryon M. Williams...................................... 150,000(3) (4)
#203 Shakespeare Tower
London, England, EC2Y 8DR
David A. Thomas........................................ 150,000(3) (4)
Suite 412
1 Stafford Road
Nepean, ON
Canada, K2H 1B9
Jay Shecter............................................ 150,000(3) (4)
1235 North Wetherly Drive
Los Angeles, CA 90069
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
<S> <C> <C>
Savoy Holdings Limited......................... 1,574,944(5) 6.9%
Mansion House -- Suite 2B
143 Main Street
Gibraltar
Doug McLeod.................................... 1,125,000 5.1%
688-6 Ishikawa
Fujisawa City
Kanagawa, Japan
252 0815
All directors and executive officers............ 14,900,100(6) 59.2%
as a group (7 persons):
----------------------
</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 stock purchase warrants to purchase 524,981 shares of our
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.
(6) Includes a total of 12,000,100 shares and 2,600,000 options
referred to in notes (1), (2) and (3) and a total of 300,000
options held by Catherine Warren, our Chief Operating Officer, to
purchase 200,000 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.
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<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
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, $0.01
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 September 30, 2000, we had
22,244,817 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.
Holders of shares of our common stock have no pre-emptive,
conversion or subscription rights. 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.
On September 8, 2000, we completed a private placement in which we
sold 705,467 shares of our common stock, initial warrants exercisable for
148,148 shares of our common stock, an option exercisable for $2,000,000 of our
common stock and adjustment warrants which could entitle the investors to a
significant number of shares of our common stock, if our stock price declines
and remains below $7.08 per share. All of the shares of common stock and shares
underlying the option and the warrants sold in the private placement, including
warrants which may be issued upon exercise of the option, are subject to
redemption at the option of the investors if our common stock is delisted from
Nasdaq for more than five consecutive days or the registration statement is not
effective for ten consecutive days or an aggregate of 30 days during any 12
month period, provided that the effectiveness of the registration statement
containing this prospectus can be suspended for 30 consecutive days to
incorporate our fiscal 2000 financial statements. If we are required to redeem
the shares of common stock and shares underlying the options and warrants held
by the investors, the redemption price will be equal to 120% of the purchase
price for the initial 705,467 shares of common stock purchased on September 8,
2000 and 120% of the exercise price for those shares received by the investors
pursuant to the exercise of the option. For any shares issued upon exercise of
the initial warrants, the option, the adjustment warrants or any warrants issued
upon any exercise of the option, the redemption price will be 120% of the fair
market value of the shares at the time of redemption or default of our
registration obligations. For any unexercised initial warrants, adjustment
warrants, options and/or warrants issued upon any exercise of the options, the
redemption price will be
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<PAGE> 46
120% of the fair market value at the time of redemption or default of our
registration obligations of the number of shares underlying such securities.
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
Savoy Holdings Limited Warrants
On September 22, 1999, we issued warrants exercisable for an
aggregate of 524,981 shares of our common stock until October 1, 2001 to Savoy
Holdings Limited. Each warrant entitles the holder to purchase one share of our
common stock at an exercise price of $6.73 per share. The warrants are currently
exercisable.
Initial Warrants
In connection with our financing on September 8, 2000, we issued
warrants to the investors that are exercisable to purchase up to 148,148 shares
of our common stock at an exercise price of $8.10 per share. The warrants are
exercisable until their expiration on September 8, 2003.
Adjustment Warrants
In connection with our financing on September 8, 2000, we issued
warrants to the investors which entitle them to purchase shares of our common
stock at an exercise price of $.001 per share. The right to purchase additional
shares under the warrants will be determined on eight adjustment dates which
will occur every ninety days for a period of up to two years beginning on
December 7, 2000. If on those eight adjustment dates, the average closing price
for a share of our common stock on the ten lowest closing price trading days
during the thirty day period preceding the adjustment date is lower than the
closing price as calculated for the preceding adjustment date or lower than
$7.08 for the first adjustment date, the investors will receive the right to
purchase additional shares of our common stock at $0.001 per share. The precise
number of shares of common stock, if any, which the investors may become
entitled to purchase as of any of these adjustment dates shall be determined in
accordance with a formula as set forth in the warrant.
If, as a result of stock price declines, we ever become required
to issue more than 705,467 shares of common stock under the warrants, we have
the option of paying to the investors the cash value of the shares in lieu of
issuing more shares, although we may be precluded from exercising this option
under certain circumstances as set forth in the warrants. If our stock price
drops substantially and we do not exercise our option to pay cash or are
precluded from doing so, we would be required to issue a significant number of
additional shares of common stock. The rights to purchase shares under the
warrants shall be exercisable until January 8, 2003. Our obligation to issue
additional shares under the warrants as of future adjustment dates will
immediately terminate, regardless of whether or not all eight adjustment dates
have occurred, if at any time after the effectiveness of this registration
statement, the
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<PAGE> 47
price of a share of our common stock exceeds $12.40 for ten consecutive trading
days, although we will remain obligated to issue those shares accrued by the
investors under the warrant, prior to the ten trading days in which our stock
price exceeded $12.40.
Ladenburg Warrants
In connection with our financing on September 8, 2000, we issued a
two year warrant to Ladenburg Thalmann & Co. Inc. as consideration for its
services as placement agent in the financing. This warrant is exercisable for
28,249 shares of our common stock at an exercise price of $8.10 per share.
OPTION
In connection with our financing on September 8, 2000, we granted
one year options to the investors to purchase up to $2,000,000 of our common
stock at a purchase price per share equal to the average closing price of a
share of our common stock on the three days preceding the exercise of the
purchase option provided that the option may not be exercised by the investors
unless the closing price on the date of exercise is at least $7.08 per share. If
the purchase option is exercised, we are also obligated to issue warrants to the
investors that are exercisable to acquire a number of shares equal to 20% of the
shares issued under the purchase option at an exercise price per share equal to
120% of the purchase price paid for the shares of common stock under the option.
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.
46
<PAGE> 48
SELLING STOCKHOLDERS
The following table sets forth the names of the selling
stockholders, the number of shares of common stock owned beneficially by each of
them as of October 19, 2000, calculated in the manner described below, the
number of shares which may be offered pursuant to this prospectus and the number
of shares and percentage of class to be owned by each selling stockholder after
this offering. The selling stockholders may sell all, some or none of their
shares in this offering. See "Plan of Distribution." We will not receive any
proceeds from the sale of our common stock by the selling stockholders. We may,
however, receive up to $2.0 million upon the exercise of outstanding options and
up to approximately $1.4 million upon the exercise of outstanding warrants held
by the selling stockholders. None of the selling stockholders has held any
position or office or has had any other material relationship with us or any of
our affiliates within the past three years other than as a result of his or her
ownership of shares of our securities. Because the selling stockholders may
offer all, some or none of their common stock, we cannot provide a definitive
estimate about the number of shares that will be held by the selling
stockholders after the offering but the "Common Stock Beneficially Owned after
Offering" column assumes the sale of all shares offered will be sold.
We determined the number of shares of our common stock to be
offered for resale under this prospectus in accordance with a formula set forth
in a registration rights agreement between us and the selling stockholders. The
number of shares being offered by this prospectus is greater than the number of
shares beneficially owned by the selling stockholders because the number of
shares issuable upon the exercise of warrants held by, or to be issued to, the
selling stockholders is based upon fluctuations in the market price of our
common stock, which means that we can not determine, at this time, the actual
number of shares that will be issuable in the future upon exercise of these
warrants.
Except as set forth in the footnotes to the table, the persons
named in the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them. A person is
considered the beneficial owner of securities that can be acquired within 60
days from the date of this prospectus through the exercise of any option,
warrant or right.
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED COMMON STOCK OFFERED BY BENEFICIALLY SHARES
NAME OF SELLING STOCKHOLDER PRIOR TO OFFERING THIS PROSPECTUS OWNED AFTER OFFERING
--------------------------- ----------------- --------------- --------------------
<S> <C> <C> <C>
Millennium Partners, L.P. 681,662(1) 2,400,000 0
Elliott Associates, L.P. 227,221(2) 800,000 0
Westgate International, L.P. 227,221(3) 800,000 0
Ladenburg Thalmann & Co. Inc. 28,249(4) 28,249 0
</TABLE>
-----------
(1) Includes 88,889 shares of common stock issuable upon exercise of warrants
and up to 169,492 shares of our common stock issuable upon exercise of a
purchase option.
(2) Includes 29,630 shares of common stock issuable upon exercise of warrants
and up to 56,498 shares of our common stock issuable upon exercise of a purchase
option.
(3) Includes 29,630 shares of common stock issuable upon exercise of warrants
and up to 56,498 shares of our common stock issuable upon exercise of a purchase
option.
(4) Represents 28,249 shares of our common stock issuable upon the exercise
of a warrant.
47
<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
As of October 19, 2000, we had outstanding 22,244,817 shares of
common stock and warrants and options to acquire an aggregate of 4,622,878
shares of common stock, of which 3,840,878 were vested and exercisable. Of the
shares outstanding, 7,364,387 shares of our common stock are freely tradeable in
the public market and an additional 14,880,430 shares are freely tradable
subject to the applicable restrictions, under Rule 144 of the Securities Act of
1933, as amended. All shares acquired upon exercise of options are also freely
tradeable in the public market.
In general, under Rule 144 as currently in effect, a person who
has beneficially owns restricted securities for at least one year are entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (a) one percent of the number of shares of common stock then
outstanding (which for us was 222,448 shares as of October 19, 2000) or (b) the
average weekly trading volume of the common stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to requirements with
respect to manner of sale, notice, and the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
our affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
48
<PAGE> 50
PLAN OF DISTRIBUTION
The selling stockholders, or pledgees, donees, transferees, or
other successors in interest, may sell the shares of common stock registered
hereby from time to time on the Nasdaq National Market, in the over-the-counter
market, in privately negotiated transactions or otherwise, at fixed prices that
may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at prices otherwise negotiated. The
shares of common stock may be sold by the selling stockholders by one or more of
the following methods, without limitation:
- block trades in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate
the transaction;
- purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this
prospectus;
- an exchange distribution in accordance with the rules of an
exchange;
- ordinary brokerage transactions and transactions in which
the broker solicits purchases;
- privately negotiated transactions;
- through the writing of options on the shares;
- one or more underwritten offerings on a firm commitment or
best efforts basis; and
- any combination of these methods of sale.
The selling stockholders may also transfer shares by gift. We do
not know of any arrangements by the selling stockholders for the sale of any of
the common stock.
In effecting sales, brokers and dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate.
Broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share. To the extent such
broker-dealer is unable to do so acting as agent for a selling stockholder, it
may purchase as principal any unsold shares at the stipulated price.
Broker-dealers who acquire shares as principals may thereafter resell such
shares from time to time in transactions on the Nasdaq National Market at prices
and on terms then prevailing at the time of sale, at prices related to the
then-current market price or in negotiated transactions. Broker-dealers may use
block transactions and sales to and through broker-dealers, including
transactions of the nature described above. The selling stockholders may also
sell the shares in accordance with Rule 144 under the Securities Act of 1933, as
amended, rather than pursuant to this prospectus, regardless of whether such
shares are covered by this prospectus.
From time to time, one or more of the selling stockholders may
pledge, hypothecate or grant a security interest in some or all of the shares
owned by them. The pledgees, secured parties or persons to whom such securities
have been hypothecated will, upon foreclosure in the event of default, be deemed
to be selling stockholders. The number of a selling stockholder's shares offered
under this prospectus will decrease as and when it takes such actions. The plan
of distribution for such selling stockholder's shares will otherwise remain
unchanged. In addition, a selling stockholder may, from time to time, sell short
our common stock, and, in such instances, this prospectus may be delivered in
connection with such short sales and the shares offered under this prospectus
may be used to cover short sales.
49
<PAGE> 51
To the extent required under the Securities Act of 1933, as
amended, the aggregate amount of selling stockholders' shares of common stock
being offered and the terms of the offering, the names of any such agents,
brokers, dealers or underwriters and any applicable commission with respect to a
particular offer will be set forth in an accompanying prospectus supplement. Any
underwriters, dealers, brokers or agents participating in the distribution of
the common stock may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a selling stockholder and/or purchasers of
selling stockholders' shares of common stock, for whom they may act (which
compensation as to a particular broker-dealer might be in excess of customary
commissions).
The selling stockholders and any broker-dealers that participate
in the distribution of the common stock may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933, as amended, and any
commissions received by them and any profit on the resale of the common stock
sold by them may be deemed to be underwriting discounts and commissions.
A selling stockholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with such selling
stockholder, including, without limitation, in connection with distributions of
the common stock by such broker-dealers. A selling stockholder may enter into
option or other transactions with broker-dealers that involve the delivery of
the shares offered hereby to the broker-dealers, who may then resell or
otherwise transfer such shares. A selling stockholder may also loan or pledge
the shares offered hereby to a broker-dealer and the broker-dealer may sell the
shares offered hereby so loaned or upon a default may sell or otherwise transfer
the pledged shares offered hereby.
The selling stockholders and other persons participating in the
sale or distribution of the shares will be subject to applicable provisions of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder, which provisions may limit the timing of purchases and sales of any
of the shares of the selling stockholders or any other such person. The
foregoing may affect the marketability of the shares.
We have agreed to indemnify in certain circumstances the selling
stockholders and the broker-dealers and agents who may be deemed to be
underwriters, if any, of the securities covered by the registration statement,
against certain liabilities, including liabilities under the Securities Act of
1933, as amended. The selling stockholders have agreed to indemnify us in
certain circumstances against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
The shares of common stock offered hereby were or will have been
originally issued to the selling stockholders pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended. We agreed
to register the common stock under the Securities Act of 1933, as amended.
We cannot assure you that the selling stockholders will sell all
or any portion of the common stock offered hereby.
We will pay all of our expenses in connection with this offering
and will not receive any proceeds from sales of any common stock by the selling
stockholders. We may, however, receive up to $2.0 million upon the exercise of
outstanding options and up to approximately $1.4 million upon the exercise of
outstanding warrants held by the selling stockholders
50
<PAGE> 52
EXPERTS
Our financial statements as of December 31, 1999 and 1998 and for each of the
years in the three year period ended December 31, 1999 have been included herein
in reliance on the report of KPMG LLP, independent chartered accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed on for us by McDonald Carano Wilson McCune Bergin Frankovich & Hicks LLP.
WHERE YOU CAN OBTAIN MORE INFORMATION
We have filed a registration statement on Form S-1 with the
Securities and Exchange Commission for the common stock we are offering by this
prospectus. This prospectus does not include all of the information contained in
the registration statement. You should refer to the registration statement and
its exhibits for additional information. Whenever we make reference in this
prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. When we complete this offering, we will also be
required to file annual, quarterly and special reports, proxy statements and
other information with the Commission.
You can read our Commission filings, including the registration
statement, over the Internet at the commission's Web site at http://www.sec.gov.
You may also read and copy any document we file with the Commission at its
public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549;
Seven World Trade Center, Suite 1300, New York, New York 10048; and Citicorp
Center 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You
may also obtain copies of these documents at prescribed rates by writing to the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference facilities.
51
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS
BLUE ZONE, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999..................................... F-2
Consolidated Statements of Operations for three and six months ended June 30, 2000........................ F-3
Consolidated Statements of Stockholder's Equity (Deficiency) as of June 30, 2000.......................... F-4
Consolidated Statements of Cash Flows for six months ended June 30, 2000 and June 30, 1999................ F-5
Notes to Financial Statements............................................................................. F-6
Independent Auditors' Report.............................................................................. F-8
Consolidated Balance Sheets as of December 31, 1999 and 1998.............................................. F-9
Consolidated Statements of Operations for fiscal years 1999, 1998 and 1997................................ F-10
Consolidated Statements of Stockholders Equity (Deficit) as of December 31, 1999, 1998 and 1997........... F-11
Consolidated Statements of Cash Flows for fiscal years 1999, 1998 and 1997................................ F-12
Notes to Financial Statements............................................................................. F-13
</TABLE>
F-1
<PAGE> 54
BLUE ZONE, INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
===================================================================================================================
2000 1999
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,541,281 $ 4,097,869
Accounts receivable 233,750 97,600
Work-in-progress - 70,581
Prepaid expenses 59,022 93,204
----------------- -----------------
1,834,053 4,359,254
Capital assets, net of accumulated depreciation 844,826 425,596
----------------- -----------------
$ 2,678,879 $ 4,784,850
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 278,439 $ 191,675
Accrued liabilities 192,574 178,300
Deferred revenue - 180,143
Payable to stockholders - 45,559
----------------- -----------------
471,013 595,677
Stockholders' equity:
Common stock, $0.001 par value, authorized 100,000,000 shares;
21,538,100 issued in 2000 and 1999 21,538 21,538
Additional paid in capital 5,649,321 5,626,371
Deficit (3,365,749) (1,433,831)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (97,244) (24,905)
----------------- -----------------
2,207,866 4,189,173
----------------- -----------------
$ 2,678,879 $ 4,784,850
================= =================
</TABLE>
F-2
<PAGE> 55
BLUE ZONE, INC.
Consolidated Statement of Operations
(Expressed in U.S. dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
======================================================================================================================
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---------------- --------------- --------------- ---------------
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Production and service revenue $ 310,863 $ 54,269 $ 424,805 $ 149,606
Exchange production and service revenue - 126,881 - 250,946
----------- ------------ ------------ ------------
310,863 181,150 424,805 400,552
Cost of production and service revenues 279,084 47,523 352,212 104,327
----------- ------------ ------------ ------------
Gross profit 31,779 133,628 72,593 296,225
Operating expenses:
General and administrative 846,691 47,966 1,537,569 71,556
Research and development 184,376 8,439 277,837 18,526
Selling and marketing 25,836 1,344 97,730 4,528
Exchange advertising - 126,881 - 250,946
Depreciation 48,735 5,691 91,375 11,382
----------- ------------ ------------ ------------
1,105,638 190,321 2,004,511 356,938
----------- ------------ ------------ ------------
Net loss $ 1,073,859 $ 56,693 $ 1,931,918 $ 60,713
=========== ============ ============ ============
Net loss per common share, basic and diluted $ 0.05 $ 0.00 $ 0.09 $ 0.01
----------- ------------ ------------ ------------
Weighted average common shares
outstanding, basic and diluted 21,538,100 12,000,000 21,538,100 12,000,000
----------- ------------ ------------ ------------
</TABLE>
F-3
<PAGE> 56
BLUE ZONE, INC.
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. dollars)
Six months ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
========================================================================================================================
Paid-in
Preferred stock Common stock additional
Shares Amount Shares Amount capital
-------------- -------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 - $ - 21,538,100 $ 21,538 $ 5,626,371
Issuance of stock options - - - - 178,215
Deferred compensation of stock
options - - - - (161,090)
Amortization of deferred
compensation of stock options - - - - 5,825
Net Loss - - - - -
Cumulative translation adjustment - - - - -
-------------- -------------- -------------- --------------- ----------------
Balance, June 30, 2000 - $ - 21,538,100 $ 21,538 $ 5,649,321
============== ============== ============== =============== ================
</TABLE>
<TABLE>
<CAPTION>
===========================================================================================
Accumulated
other
comprehensive
earning
-----------
Foreign Total
Retained currency stockholders'
earnings adjustment equity
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1999 $ (1,433,831) $ (24,905) $ 4,189,173
Issuance of stock options - - 178,215
Deferred compensation of stock
options - - (161,090)
Amortization of deferred
compensation of stock options - - 5,825
Net Loss (1,931,918) - (1,931,918)
Cumulative translation adjustment - (72,339) (72,339)
---------------- ---------------- ----------------
Balance, June 30, 2000 $ (3,365,749) $ (97,244) $ 2,207,866
================ ================ ================
</TABLE>
F-4
<PAGE> 57
BLUE ZONE, INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
===================================================================================================================
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,931,918) $ (60,713)
Items not involving cash:
Stock based compensation 22,950 -
Depreciation 91,375 11,382
Changes in operating assets and liabilities
Accounts receivable (136,150) (2,682)
Work-in-progress (70,581) -
Prepaid expenses 34,182 558
Accounts payable and accrued liabilities 28,698 15,688
Deferred revenue (180,143) -
Income taxes payable - (2,589)
------------------ ------------------
Net cash used in operating activities (2,000,425) (38,356)
Cash flows from financing activities:
Increase in payable to stockholders - 31,314
Repayment of payable to shareholder (45,559) -
Increase in bank indebtedness - 25,376
------------------ ------------------
Net cash provided by (used in) financing activities (45,559) 56,690
Cash flows from investing activities:
Purchase of capital assets (510,604) (19,225)
------------------ ------------------
Net cash used in investing activities (510,604) (19,225)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (2,556,588) (891)
Cash and cash equivalents, beginning of period 4,097,869 891
------------------ ------------------
Cash and cash equivalents, end of period $ 1,541,281 $ -
================== ==================
Supplementary information:
Interest paid $ 2,122 $ 1,094
Income taxes paid $ - $ 1,090
================== ==================
Non-cash transactions
Exchange production and service revenue $ - $ 250,946
================== ==================
</TABLE>
F-5
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the Company's opinion,
the statements include all adjustments (which are of a normal and recurring
nature) necessary for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the year ended
December 31, 1999, included elsewhere in this prospectus. The Company's results
of operations for any interim period are not necessarily indicative of the
results of operations for any other interim period or for a full fiscal year.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
BASIS OF PRESENTATION
The financial statements have been prepared on the going concern basis,
which assumes the realization of assets and liquidation of liabilities in the
normal course of business. The application of the going concern basis is
dependent on the Company's ability to obtain additional financing and,
ultimately, attain profitable operations to meet the Company's liabilities and
commitments as they become payable.
REVENUE RECOGNITION
The Company generates production and service revenues through the
following sources: creative consulting services, Web site development and
maintenance, and software licensing. Consulting service revenues are recognized
upon delivery of the service. Web site maintenance is recognized over the term
of the contracts, typically month to month. For long-term Web site development
projects, we recognize revenue on a percentage of completion basis, based upon
achievement of specifically identifiable contractual milestones.
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 our policies is reflected as deferred revenues.
F-6
<PAGE> 59
SUBSEQUENT EVENT
On September 8, 2000, the Company completed a private placement of its
common stock whereby it issued 705,467 shares at $7.08 per share for gross
proceeds of $5,000,000 and initial warrants to purchase an additional 148,148
shares at $8.10 per share expiring on September 8, 2003. In connection with this
financing, the Company issued additional warrants to the investors which entitle
them to purchase shares of common stock at an exercise price of $0.001 per
share. The right to purchase additional shares under the warrants will be
determined on eight adjustment dates which will occur every ninety days for a
period of up to two years beginning on the earliest date of December 7, 2000
assuming effective registration of the securities. If on those eight adjustment
dates, the average closing price for a share of common stock on the ten lowest
closing price trading days during the thirty day period preceding the adjustment
date is lower than the closing price as calculated for the preceding adjustment
date or lower than $7.08 for the first adjustment date, the investors will
receive the right to purchase additional shares or common stock at $0.001 per
share. The precise number of shares of common stock, if any, which may be issued
on any of these adjustment dates shall be determined in accordance with a
formula as set forth in the warrant with the effect of lowering the average
price per share issued in the private placement. In addition, the Company issued
a two year warrant to its placement agent in this financing. This warrant is
exercisable for 28,249 share of common stock at an exercise price $8.10. Of the
$5,000,000 in gross proceeds, $1,000,000 will not be paid to the Company until
such time that the Company's registration of its common stock with the
Securities and Exchange Commission becomes effective.
In addition, the Company granted a one year option to the investors to
acquire up to an additional $2,000,000 in shares based on then-prevailing market
prices. These options may not be exercised unless the closing price on the date
of exercise is at least $7.08 per share. The Company is obligated to issue
warrants equal to 20% of the shares issued under the purchase option at an
exercise price per share equal to 120% of the purchase price paid for the shares
of common stock under the option.
F-7
<PAGE> 60
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-8
<PAGE> 61
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)
-------------------------------------------------------------------------------------------------------------------
$ 4,784,850 $ 41,906
===================================================================================================================
</TABLE>
Uncertainty due to the Year 2000 Issue (note 11)
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 62
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-10
<PAGE> 63
BLUE ZONE, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
(Expressed in U.S. dollars)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
===================================================================================================================
Paid-in
Preferred stock Common stock additional
Shares Amount Shares Amount capital
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5 $ 5 7 $ 7 $ -
Net loss - - - - -
Cumulative translation adjustment - - - - -
-------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 5 5 7 7 -
Net loss - - - - -
Cumulative translation adjustment - - - - -
-------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5 5 7 7 -
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
-----------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Issuance of stock options (note 6(b)) - - - - 368,844
Deferred stock compensation
(note 6(b)) - - - - (71,833)
Net loss - - - - -
Cumulative translation adjustment - - - - -
-------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 - $ - 21,538,100 $ 21,538 $ 5,626,371
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
Accumulated
other
comprehensive
earning
-------------
Foreign
currency Total
Retained translation stockholders'
earnings adjustment equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1996 $ 34,011 $ - $ 34,023
Net loss (17,054) - (17,054)
Cumulative translation adjustment - (423) (423)
---------------------------------------------------------------------------------------------
Balance, December 31, 1997 16,957 (423) 16,546
Net loss (28,457) - (28,457)
Cumulative translation adjustment - 1,103 1,103
---------------------------------------------------------------------------------------------
Balance, December 31, 1998 (11,500) 680 (10,808)
Adjustments to comply with
recapitalization accounting,
net of cost of recapitalization
transaction of $32,791 - - 5,350,886
-------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Issuance of stock options (note 6(b)) - - 368,844
Deferred stock compensation
(note 6(b)) - - (71,833)
Net loss (1,422,331) - (1,422,331)
Cumulative translation adjustment - (25,585) (25,585)
---------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ (1,433,831) $ (24,905) $ 4,189,173
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 64
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 expense $ 504,779 $ 505,698 $ 225,730
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 65
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.
F-13
<PAGE> 66
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(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.
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.
F-14
<PAGE> 67
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(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>
Leasehold improvements are amortized on the straight-line basis over 5
years representing the term of the lease.
F-15
<PAGE> 68
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(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.
F-16
<PAGE> 69
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(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. 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.
F-17
<PAGE> 70
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
===============================================================================
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>
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.
F-18
<PAGE> 71
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.
F-19
<PAGE> 72
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
===============================================================================
6. STOCKHOLDERS' EQUITY (CONTINUED):
(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
of Exercise
shares price
------------------------------------------------------------------------------------------------------
<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.
F-20
<PAGE> 73
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
===============================================================================
6. STOCKHOLDERS' EQUITY (CONTINUED):
(b) Stock option plan (continued):
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 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.
F-21
<PAGE> 74
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
===============================================================================
6. STOCKHOLDERS' EQUITY (CONTINUED):
(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 exerciseable
before October 1, 2000 and a price of $6.73 per share if the warrant is
exerciseable 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).
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>
F-22
<PAGE> 75
F-23
<PAGE> 76
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
===============================================================================
8. INCOME TAXES (CONTINUED):
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 employees,
accounts payable and accrued liabilities approximates their financial
statement carrying amounts due to the short-term maturities of
F-24
<PAGE> 77
these instruments. The carrying amount of shareholder loans
approximates fair value since they have a short-term to maturity.
F-25
<PAGE> 78
BLUE ZONE, INC.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 1999 and 1998
================================================================================
9. FINANCIAL INSTRUMENTS (CONTINUED):
(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-26
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the distribution, all of which will be borne
by Blue Zone, Inc., are as follows:
<TABLE>
<S> <C>
SEC registration fee......................................................... $2,248
Accounting fees and expenses................................................. $20,000
Legal fees and expenses...................................................... $120,000
Printing and engraving....................................................... $20,000
Miscellaneous................................................................ $10,000
Total.................................................................... $172,248
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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,
II-1
<PAGE> 80
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 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.
II-2
<PAGE> 81
(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 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
II-3
<PAGE> 82
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.
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
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<PAGE> 83
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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Unless otherwise indicated, all of the transactions described below
were exempt from registration because the issuances and sales of these
securities were made in reliance on Section 4(2) of the Securities Act regarding
transactions by the issuer not involving a public offering, in that the
transactions were made, without general solicitation or advertising, to
sophisticated investors with access to all relevant information necessary to
evaluate this investment and who represented to us that the securities were
being acquired for investment.
The Registrant 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 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 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
II-5
<PAGE> 84
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 until May 8, 2000, pursuant to Rule 701, we granted
options to purchase 3,168,500 shares of our common stock to our employees,
officers, and directors under our 1999 Stock Option Plan, which options may be
exercised at prices ranging from $5.00 to $13.44.
From May 9, 2000 through October 2000, we granted options to purchase
753,000 shares of our common stock to our employees, officers, and directors
under our 1999 Stock Option Plan, which options may be exercised at a price of
$5.00.
On September 8, 2000, we completed a private placement of our
securities to three investors. We issued and sold a total of 705,467 shares of
common stock and warrants to acquire an additional 148,148 shares of common
stock exercisable for $8.11 per share. We also granted the investors an option,
which is exercisable for one year, to acquire up to an additional $2.0 million
of our common stock at a price per share equal to the market price at the time
the option is exercised, provided that the price paid by the investors shall not
be less than $7.08 per share. In addition, we issued warrants which may entitle
the investors to purchase a significant number of additional shares of our
common stock at a purchase price of $.001 per share if the price of a share of
our common stock declines and remains below $7.08. The gross proceeds from the
offering to us were $5.0 million, of which we received $4.0 million on September
8, 2000 and the remainder of which we will receive upon the effectiveness of
this registration statement.
On September 8, 2000, we issued to Ladenburg Thalmannn & Co. Inc., as
consideration for its services as placement in connection with our private
placement, a two year warrant exercisable for 28,249 shares of our common stock
at an exercise price of $8.10 per share.
Unless otherwise indicated, the sales set forth above are claimed to be
exempt from registration with the Securities and Exchange Commission pursuant to
Section 4(2) of the Securities Act of 1933, as amended, as transactions by an
issuer not involving any public offering, because (i) we sold those securities
to financially sophisticated individuals who at the time of purchase were fully
aware of our activities, as well as our business and financial condition, (ii)
there was no advertising for or general solicitation of investors, and (iii)
when these securities were acquired for investment purposes, investors
understood the ramifications of their investment. All certificates representing
the shares issued by us as set forth herein which are currently outstanding,
except for those shares sold pursuant to Rule 504, have been properly legended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<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.) (1)
3.1 Articles of Incorporation dated March 10, 1997. (1)
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. (1)
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. (1)
</TABLE>
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<PAGE> 85
<TABLE>
<S> <C>
3.4 Bylaws. (1)
4.1 Specimen Common Stock Certificate. (1)
4.2 Warrant to purchase shares of common stock of Blue Zone,
Inc., dated October 1, 1999, issued to Savoy Holdings
Limited. (1)
4.3 Form of Initial Warrant, dated September 8, 2000. (2)
4.4 Form of Adjustment Warrant, dated September 8, 2000. (2)
4.5 Form of Option to Purchase Common Stock, dated September 8,
2000. (2)
5.1 Opinion of McDonald Carano Wilson McCune Bergin Frankovich &
Hicks LLP
10.1 Web site and Interactive Television Development Agreement,
dated as of December 14, 1999, between CTV Television Inc.
and Blue Zone Productions Ltd. (1)
10.2 Web site 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. (1)
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 Common Stock Investment Agreement dated September 8, 2000,
between the Company and each person listed as an investor on
Schedule 1 attached thereto. (2)
10.7 Registration Rights Agreement dated September 8, 2000,
between the Company and each of the entities listed under
investors on the signature pages thereto. (2)
10.8 Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Jamie Ollivier. (1)
10.9 Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Bruce Warren. (1)
10.10 Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Catherine Warren. (1)
10.11 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. (1)
10.12 Amended and Restated 1999 Stock Option Plan. (3)
16.1 Letter regarding change in certifying accountant. (1)
21.1 Subsidiaries of the Registrant. (1)
23.1 Consent of McDonald Carano Wilson McCune Bergin Frankovich &
Hicks LLP (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
27.1 Financial Data Schedule (1)
</TABLE>
------------------------
(1) Filed as an exhibit to the Company's Registration Statement on Form 10 (File
No. 0-29907), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 20, 2000, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's 2000 Proxy Statement dated August 30,
2000, and incorporated herein by reference.
Financial Statement Schedules
None.
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<PAGE> 86
ITEM 17. UNDERTAKINGS.
(1) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions hereof, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(2) The undersigned Registrant hereby undertakes: To file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the maximum aggregate offering
price may be reflected in the form of prospectus filed with the SEC pursuant to
Rule 424(b) under the Securities Act, if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(3) The undersigned Registrant hereby undertakes: to remove from
registration, by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering.
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<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Vancouver, British
Columbia on the 19th day of October, 2000.
Blue Zone, Inc.
By: /s/ Bruce Warren
-------------------------------------
Name: Bruce Warren
Title: Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Bruce Warren and Jaime Ollivier
or either of them, each acting alone, his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for such person and in his or her name, place and stead, in any and all
capacities, in connection with the Registrant's Registration Statement on Form
S-1 under the Securities Act of 1933, including to sign the Registration
Statement in the name and on behalf of the undersigned as a director or officer
of the Registrant and any and all amendments or supplements thereto, including
any and all stickers and post-effective amendments thereto, and any and all
additional registration statements relating to the same offering of securities
as those that are covered by the Registration Statement that are filed pursuant
to Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission and any applicable securities exchange or
securities self-regulatory body, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his, her or their substitutes, may lawfully do or cause to be done by
virtue hereto.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED ON THE 19TH DAY OF OCTOBER, 2000 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
By: /s/ F. Michael P. Warren
----------------------------------------------------
F. Michael P. Warren Chairman of the Board of Directors
By: /s/ Bruce Warren Chief Executive Officer, Chief Financial
---------------------------------------------------- Officer (Principal Executive Officer
Bruce Warren and Principal Financial Officer) and Director
By: /s/ Jamie Ollivier
----------------------------------------------------
Jamie Ollivier President and Director
By: /s/ Tryon Williams
----------------------------------------------------
Tryon Williams Director
By: /s/ David Thomas
----------------------------------------------------
David Thomas Director
By: /s/ Jay Shecter
----------------------------------------------------
Jay Shecter Director
</TABLE>
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<PAGE> 88
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.) (1)
3.1 Articles of Incorporation dated March 10, 1997. (1)
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. (1)
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. (1)
3.4 Bylaws. (1)
4.1 Specimen Common Stock Certificate. (1)
4.2 Warrant to purchase shares of common stock of Blue Zone,
Inc., dated October 1, 1999, issued to Savoy Holdings
Limited. (1)
4.3 Form of Initial Warrant, dated September 8, 2000. (2)
4.4 Form of Adjustment Warrant, dated September 8, 2000. (2)
4.5 Form of Option to Purchase Common Stock, dated September 8,
2000. (2)
5.1 Opinion of McDonald Carano Wilson McCune Bergin Frankovich &
Hicks LLP
10.1 Web site and Interactive Television Development Agreement,
dated as of December 14, 1999, between CTV Television Inc.
and Blue Zone Productions Ltd. (1)
10.2 Web site Development Agreement, dated July 1, 1999, between
CKNW/CFMI, a division of WIC RADIO LTD., and Blue Zone
Entertainment Inc. (1)
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. (1)
10.4 Business Banking Loan Agreement, dated July 9, 1999, between
Blue Zone Productions Ltd. and Royal Bank of Canada. (1)
10.5 Guarantee and Postponement of Claim, dated July 9, 1999,
executed by F. Michael P. Warren in favor of Royal Bank of
Canada. (1)
10.6 Common Stock Investment Agreement dated September 8, 2000,
between the Company and each person listed as an investor on
Schedule 1 attached thereto. (2)
10.7 Registration Rights Agreement dated September 8, 2000,
between the Company and each of the entities listed under
investors on the signature pages thereto. (2)
10.8 Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Jamie Ollivier. (1)
10.9 Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Bruce Warren. (1)
10.10 Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Catherine Warren. (1)
10.11 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. (1)
10.12 Amended and Restated 1999 Stock Option Plan. (3)
16.1 Letter regarding change in certifying accountant. (1)
21.1 Subsidiaries of the Registrant. (1)
23.1 Consent of McDonald Carano Wilson McCune Bergin Frankovich &
Hicks LLP
</TABLE>
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<PAGE> 89
<TABLE>
<S> <C>
(included in Exhibit 5.1)
23.2 Consent of KPMG LLP
27.1 Financial Data Schedule (1)
</TABLE>
------------------------
(1) Filed as an exhibit to the Company's Registration Statement on Form 10 (File
No. 0-29907), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 20, 2000, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's 2000 Proxy Statement dated August 30,
2000, and incorporated herein by reference.
II-11
