UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. COMMISSION FILE NUMBER OnLine Production Services, Inc (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEVADA 91-1833963 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) Suite 210-2323 Boundary Road Vancouver, B.C. Canada V5M 4V8 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (604) 205-5107 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) - ------------------------------------------------------------------------------- Securities registration pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value OTC Bulletin Board - ------------------------------------------------------------------------------- (Title of Class) OnLine Production Services, Inc. QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED November 30, 2000 TABLE OF CONTENTS PART I ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. PART II ITEM 3. LEGAL PROCEEDINGS ITEM 4. CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 5. DEFAULTS UPON SENIOR SECURITIES ITEM 6. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION OnLine Production Services, Inc. Consolidated Balance Sheet November 30, 2000 and 1999 Unaudited Amounts in 1,000's of Dollars US ASSETS 2000 1999 ---- ---- Current Assets Cash and Cash Equivalents $ -- $ 196 Accounts Receivable - Note 3 113 49 Current Portion of Deferred Taxes - Note 6 -- 4 Accrued Interest - Note 5 238 83 Total Current Assets 351 332 Property, Plant and Equipment Net of Depreciation - Note 4 164 224 Other Assets Net Investments - Note 5 22 77 Intangible Assets-Net of Amortization - Note 10(d)) 114 267 Other - Note 6 3 3 Total Other Assets 139 347 Total Assets $ 654 $ 903 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Bank Overdraft $ 12 $ -- Accounts Payable and Accrued Liabilities - Note 8 435 379 Bank Operating Loan - Note 7 60 -- Note Payable - Note 18 72 -- Management Fees Payable to Related Parties - Note 16 140 -- Current Portion of Mortgage Payable 1 1 Total Current Liabilities 720 380 Mortgage Payable - Note 9 74 75 Other Liabilities Loans Payable - Shareholders - Note 19 387 -- Total Other Liabilities 387 -- Stockholders' Equity - Note 11 Capital Stock Class A Common Stock, $0.001 par, 100,000,000 shares authorized, 9,626,640 issued 7 7 Preference Shares, 10,000,000 shares authorized 3,673,292 issued 2 2 Total Capital Stock 9 9 Additional Paid in Capital Issued price in excess of par value - Class A 1,318 1,318 Issued price in excess of par value - Preference Shares 180 180 Total Paid In Capital 1,498 1,498 Accumulated Deficit (2,378) (1,285) Accumulated Other Comprehensive Income 344 226 Total Stockholders' Equity (527) 439 Total Liabilities and Stockholders' Equity $ 654 $ 903 See Accompanying Notes to Financial Statements OnLine Production Services, Inc. Consolidated Statement of Loss and Accumulated Deficit Three Months Ended November 30, 2000 and 1999 Unaudited Amounts in 1,000's dollars US 2000 1999 Revenue Sales $ 122 $ 49 Other -- 4 Total Revenue $ 122 $ 53 Cost of Sales 224 217 Gross Profit (102) (164) General & Administrative Expenses 326 272 Depreciation/Amortization 45 57 Loss From Operations (473) (493) Other Income/Expense Interest Income -Notes 5 & 13 121 151 Net Loss Applicable to Common Stock $ (352) $ (342) Weighted Average Shares - Common Stock 9,626,640 10,170 Loss Per Share of Common Stock $ (0.04) $ (0.03) (stated by 1,000's) Statement of Accumulated Deficit Balance - Beginning of Year $ (2,026) $ (943) Net Loss for the Quarter (352) (342) Balance - End of Quarter $ (2,378) $ (1,285) See Accompanying Notes to Financial Statements OnLine Production Services, Inc. Consolidated Statement of Cash Flows Three Months Ended November 30, 2000 and 1999 Unaudited Amounts in 1,000's of Dollars US 2000 1999 OPERATING ACTIVITIES Cash Used In Operations: Net Loss $(352) $(342) Add (deduct) charges to items not involving cash: Amortization 45 57 $(307) $(285) Non-cash working capital items: Accounts Receivable 19 15 Accounts Payable & Accruals 139 166 $(149) $(104) FINANCING ACTIVITIES Change in Bank Operating Loan $ (4) $ (30) Related Party Loans 138 -- $ (15) $ (30) INVESTING ACTIVITIES Decrease (Increase) in Long Term Investments before discounts -- (42) Capital Asset Purchases -- (60) $ -- $(102) Translation Adjustment $ 24 $ (82) Change In Cash $ 9 $(318) Cash, start of year (21) 514 Cash, end of Quarter $ (12) $ 196 SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES: $ -- $ -- See Accompanying Notes to Financial Statements OnLine Production Services, Inc. Consolidated Statement of Changes in Equity Three Months Ended November 30, 2000 Unaudited Amounts in 1,000's dollars US Accumulated Other Comprehensive Retained Comprehensive Total Income Earnings Income ----- ------ -------- ------ Beginning Balance $ (200) $(2,026) $ 320 Comprehensive Income Net Income (Loss) (352) (352) (352) -- Prior period adjustment -- -- -- -- Other comprehesive income: -- -- Foreign currency translation adjustments 24 24 -- 24 Total Comprehensive Income (328) -- -- Preference Shares Issued -- -- -- Paid In Capital -- -- -- $ (527) $(2,378) $ 344 See Accompanying Notes to Financial Statements OnLine Production Services, Inc. Notes to the Consolidated Financial Statements November 30, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OnLine Production Services Inc. is a Nevada corporation, which invests in, represents, promotes, and delivers the products and services of its wholly owned Canadian subsidiary, OnLine Film Services, Inc. which is an internet based, e-commerce, business to business services provider of software and computer systems solutions to entertainment industry professionals. (a) Unaudited Financial Statements - Opinion of Management The November 30, 2000 and 1999 amounts included herein are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly, the financial position, results of operations, cash flows and changes in shareholders' equity have been made. (b) Foreign currency translation All balances relating to On-Line Film Services Inc. (Canadian subsidiary) have been converted to United States dollars using the current rate method of currency conversion. The use of this method resulted in a cumulative translation adjustment gain of $344 000 at the current balance sheet date and $226 000 gain at the prior period balance sheet date. (b) Investments Investments are held to maturity investments and are recorded at their amortized cost at the balance sheet date. These investments are strictly interest bearing deposits in the form of savings bonds and guaranteed interest certificates at the current and prior balance sheet dates. Investments are shown net of collateral claims against these investments. (Note 5) Subsidiaries are consolidated in these financial statements (Note 2). (c) Deferred Corporate Taxes Deferred corporate taxes arise due to temporary timing differences arising from depreciation rates used for financial statement purposes and the depreciation rates prescribed for taxation purposes. Deferred taxes are divided into a current portion, which is expected to be utilized within one fiscal year and a non-current portion, which is expected to be utilized in a future period in excess of one fiscal year. (See note 6) (d) Revenue Recognition Policy Sales (excludes Mailcard and Casting Software rights) revenue is recognized when realized. Realization occurs when the earning process is complete, or virtually complete and revenue is evidenced by the existence of an exchange transaction which provides significant certainty as to the ultimate collectibility of the revenue amount. This policy applies to all fee and general revenue but does not apply to the realization of Mailcard and Casting Software rights sales. There were no Mailcard or Casting software rights sales in the current fiscal year. Revenue relating to Casting Workbook fees is generated strictly from actors and entertainers who wish to advertise on the system, at which time the fee (non refundable) is invoiced for the next twelve month period. Once invoiced, the invoiced amount is recorded as fee revenue. The company also uses a digital watermarking system to protect its digitally created images against unauthorized resale. In the event that an unauthorized distribution of an image containing this watermark is found, the company may charge a fee for the use of this image. In this scenario, collection of the fee charged is very uncertain. As such, any revenue generated through charges for unauthorized distribution of company images will be realized when collected. At the balance sheet date, there has been no charges or collections relating to unauthorized distribution of company images. Mailcard and Casting Software rights revenue is recognized on the collection method. The ultimate collection of agreed amounts relating to the Mailcard and Casting Software rights is contingent on future sales of the software by the company. This contingency creates a significant degree of uncertainty surrounding the ultimate collection of this contingent revenue, which is based on the service of selling the software over a ten year period. As such, revenue is only recognized at such time as the funds are released to, the company. In the current and prior year, none of these collateral funds have been released at to the audit date. (See note 10 ) (e) Cash and cash equivalents Cash and cash equivalents include cash on hand, demand deposits with banks or other high credit quality financial institutions and other highly liquid investments which are immediately convertible into cash. Due to the short term nature of these instruments, the carrying value approximates fair value. (f) Accounting impairment for long lived assets The company considers impairment of value to occur when the book value of fixed assets is determined not to be recoverable. If this happens, the company has a policy of reducing the carrying value of the long lived asset to the recoverable amount and recording this reduction loss amount on the income statement in the year in which the write down has occurred. There has been no impairment of any long lived assets in the current or prior year. (g) Reorganization and reverse acquisition The company, in fiscal year 1999, completed a reorganization and reverse merger. At the time of the merger, neither OnLine Production Services Inc., or its predecessor Earth Industries Inc. , had any financial activity. With the exception of the stock of Earth Industries, which had a book value of $0 at the time of the merger, the only entity with activity was On-Line Film Services, Inc., which became the operating subsidiary company as a result of the merger. 2. CONSOLIDATED FINANCIAL STATEMENTS These financial statements show the consolidated results of operations for OnLine Production Services Inc. and its wholly owned Canadian subsidiary On-Line Film Services Inc. 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following (in 1,000's of Dollars US) November 30 2000 1999 Trade Accounts Receivable 452 51 Other Accounts Receivable 56 0 508 51 Less: Allowance for Doubtful Accounts 395 2 Accounts Receivable, Net 113 49 The company's trade accounts primarily represent unsecured receivable which are geographically disbursed throughout Canada and the United States. The increase in trade accounts is primarily due to the launch in the United States. The company has reserved a substantial portion of the United States trade accounts because of problems that the company has had collecting these accounts due to the actors strike which lasted most of the current year. The strike ended in October 2000 and though the company has implemented methods to collect these accounts there is little probability of collection. 4. PROPERTY, PLANT AND EQUIPMENT Asset Accum. Depreciation Description Amount Deprec. Net Method ----------- ------ ------- --- ------ Office Furn & Fixtures $ 20 $ 8 $ 12 20% Declining Balance Computer Software 13 13 nil 100% Declining Balance Computer Equipment 155 95 60 30% Declining Balance Building 112 20 92 4% Declining Balance $ 164 5. NET INVESTMENTS Net investments includes three separate savings bonds held in trust as follows: The first bond is a British Columbia Savings Bonds in a principal amount of $2,910,606 with an unamortized bond premium of $1,019 to be amortized over the remaining seven year period of the bonds. Accrued interest of $81,500 was unpaid at the balance sheet date. These bonds earn interest at 6% per annum (effective interest rate of 5.992%) paid semi-annually and are locked in to June 9, 2008. The accrued interest amount is calculated based on 6% of the principal for an accrual period of 173 days. The last interest payment date was June 10, 2000. The next interest payment date is expected on or around December 9, 2000. These bonds are held in trust by the Canadian Imperial Bank of Commerce for the benefit of the Mailcard rights purchasers (not controlled by company) and serve as registered collateral on the Mailcard contingent sales agreement dated September 17 1997. The amount of the collateral claim registered against these bonds is $2,910,606 which is locked in until June 9, 2008. All of the interest earned on this bond during the current quarter($42 000), included in interest income line on the consolidated statement of loss and accumulated deficit, is used to fund the minimum required Mailcard software purchase guarantee for the quarter. (See notes 10 & 13). The net investment relating to this collateralized bond included in investments on the balance sheet is as follows: Bond and related unamortized premium $2,911,625 Collateralized portion (write of setoff exists) (2,910,606) Net included in investments $ 1,019 The second bond is a Manitoba Savings Bond (Previously a Canadian Imperial Bank of Commerce weekly guaranteed interest certiificate) in a principal amount of $2,655,978 with an unamortized quarter end discount of $131,170 to be amortized over the remaining six years to bond maturity. Accrued interest of $67 000 was unpaid at the balance sheet date. The bonds earn interest at 5.10% per annum (effective interest rate 5.41%) paid semi-annually and are locked in until December 1, 2006. The accrued interest amount is calculated at 5.10% of the principal for an accrual period of 182 days. The last interest payment was on June 1, 2000. The next interest payment is expected to be on or around December 1, 2000. These bonds are held in trust These bonds are held in trust by the Canadian Imperial Bank of Commerce-Wood Gundy for the benefit of the Casting Workbook rights purchasers (not controlled by company) and serve as registered collateral relating to the Casting Workbook software contingent sale agreement dated December 31, 1997. The amount of the collateral claim registered against these bonds is $2,502,931 which is locked in until December 31, 2007. All of the interest earned on this bond during the current quarter ($33,245) is included in interest income line on the consolidated statement of loss and accumulated deficit, is used to fund the required casting workbook exclusivity payments relating to the Casting Workbook software purchase guarantee for the period. (See notes 10 & 13). The net investment relating to this collateralized bond included in investments on the balance sheet is as follows: Bond and related unamortized discount $2,524,808 Collateralized portion (write of setoff exists) (2,502,931) Net included in investments $ 21,877 The third bond is a British Columbia Savings Bond (Previously a Canadian Imperial Bank of Commerce weekly guaranteed interest certiificate ) in a principal amount of $2,938,371 with an unamortized year end premium of $5,500 to be amortized over the remaining nine years to bond maturity. Accrued interest of $83,800 was unpaid at the balance sheet date. The bonds earn interest at 6.25% per annum (effective interest rate 6.24%) paid semi-annually and are locked in until December 1, 2009. The accrued interest amount is calculated at 6.25% of the principal for an accrual period of 182 days. The last interest payment was on June 1, 2000. The next interest payment is expected to be on or around December 1, 2000. These bonds are held in trust by the Canadian Imperial Bank of Commerce-Wood Gundy for the benefit of the Casting Workbook rights purchasers (not controlled by company) and serve as registered collateral relating to the Casting Workbook software contingent sale agreement dated December 31, 1998. The amount of the collateral claim registered against these bonds is $2,944,483 which is locked in until December 31, 2008. All of the interest earned on this bond during the current quarter ($45,000) is included in interest income line on the consolidated statement of loss and accumulated deficit, is used to fund the required casting workbook exclusivity payments relating to the Casting Workbook software purchase guarantee for the year. (See notes 10 & 13). The net investment relating to this collateralized bond included in investments on the balance sheet is as follows: Bond and related unamortized discount $2,943,872 Collateralized portion (write of setoff exists) (2,944,483) Net reduction in investments $ (611) The accrued interest balance shown on the balance sheet relates to the above investments as follows: ( in 1,000's of Dollars US) 2000 1999 ---- ---- Interest accrued on Mailcard security held in trust $ 83 $ 83 Interest accrued on Casting Workbook security held in trust $155 - $238 $ 83 The above investments are considered to be held to maturity debt investments where the principal will be fully recovered and applied against the contingent revenue amounts specified above. The investments above are held in trust, with the company having no control over the investments. As a right of setoff exists between the Bond investments and the collateralized contingent revenue to the same individuals who provided the funding for the bonds, these amounts have been offset on the balance sheet to more clearly present the company's net investment asset position. In the current quarter, contingent revenue which is secured by investments held in trust have been offset against the related investments used as security. The investments are now in trust for the providers of the contingent revenue funds, leaving the company with no likely future economic benefit or future cash flow from these investments (all interest earned on the investments is paid directly to the secured parties). As there is a right to setoff relating to the contingent revenue and collateral investments held in trust, these amounts have been offset, with the net amount included in investments on the balance sheet. The prior period comparative figures have been restated to conform with current year presentation. This reclassification has resulted in a reduction in the prior year net investments by $8,345,000 and a removal of the prior year contingent revenue balance, which was previously $8,268,000 This adjustment has no impact on the statement of loss and deficit for the company in the current or prior period. 6. DEFERRED TAXES - NON CURRENT 2000 1999 Total deferred corporate taxes $9,058 $4,677 Allowance due to lack of realization certainty (9,058) -- Less: Current Portion -- (3,934) Non current portion $Nil $ 743 included in "Other Assets" In the prior year, it had been determined that virtual certainty of realizing any future deferred tax benefit is not supported based on historical results, therefore an allowance for the potential of not realizing this future benefit has been setup as shown above. 7. BANK OPERATING LOAN The company has available a $40,000 operating line of credit with the Royal Bank in Vancouver, British Columbia. The operating line of credit bears interest at the rate of Royal Bank prime plus 1.75% per annum., secured by a primary claim to specified operating assets of the company, as well as personal guarantees by two of the company directors. At the balance sheet date, the company has used $40,000 of this available operating line of credit. In addition the Company has a $20,000 loan outstanding with the same bank and branch, and having similar arrangements as the operating line of credit except that the loan shall be retired in equal monthly principal payments over the course of the three month period following the date of the balance sheet. 8. ACCOUNTS PAYABLE & ACCRUED LIABILITIES Included in accounts payable and accruals is accrued distribution and exclusivity fees of $238,000 relating to the Mailcard and Casting Workbook contractual agreements . The remaining amount relates to trade payables and operating accruals (Note 13). The breakdown of accounts payable and accruals shown on the balance sheet is as follows: (In 1,000's of dollars US) Trade Payables $175 Payroll Deductions 64 Net Sales Taxes Payable (Recoverable) (42) Distribution and exclusivity fees 238 $435 9. MORTGAGE PAYABLE Mortgage payable consists of the following: Mortgage payable to Vancity Credit Union bearing interest at 8.75% per annum with monthly payments of $632 (Renewal May 2001) Secured by real estate (office) at 208-2323 Boundary Road, Vancouver, British Columbia. The balance at November 30, 2000 is $74,000. The company expensed $1 600 in interest relating to this loan in the current quarter. Annual principal payments are: Fiscal Year Principal ----------- --------- 2001 $ 744 2002 $ 812 2003 $ 885 2004 $ 966 2005 $ 1,065 Thereafter $71,528 10. CONTINGENCIES (a) In the 1998 fiscal year, the company entered into a contingent sale agreement for the sale of Mailcard software territory rights to unrelated third parties. The company received and realized $523,000 in revenue as well as $2,910,606 in funds which are secured by the purchasing party as collateral against the purchasers portion of the projected minimum sales guaranteed by the company over a ten year period (See note 5). If the 3.2 million minimum sales units over the ten year period is met by the company, it shall receive the collateral funds as income at a rate of approx. 97% of the gross sales amount for the units sold in excess of 3.2 million units. Once all of the collateral funds have been released and realized as income by the company, it will earn 100% of the Mailcard sales revenue less a perpetual fee of 3% - 5% of gross revenue (depending on unit sale price) to the software rights purchasers. In the event that the projected minimum sales over the ten year period is not met, the company must make up this shortfall from the collateral funds and/or revenue generated by the $2,910,606 held as collateral. To date, the company has not made the minimum sales requirement and has funded the annual purchase guarantee entirely from interest generated from collateral funds, this trend is expected to continue until the end of the term. The amount of future revenue relating to this contingency agreement is not determinable until its ten year expiration date or until such time as the minimum required sales level is met. As a result, revenue is realized on the collection method, whereby deferred revenue is realized as income when funds are released from collateral. At the balance sheet date, the cumulative minimum sales has not yet been obtained, resulting in $2,910,606 included in unrealized contingent revenue relating to this agreement at the balance sheet date. This trend shows no current signs of improving. This unrealized revenue amount has been offset against the collateral investment held in trust against this contingent revenue unrealized (see note 5). The collateral funds are registered and are not accessible by the company until such time as these funds (or portion thereof) are released by the secured parties (None of these funds have been released to date). The term ending date is December 28, 2007. The contingent (deferred) revenue amount above is secured by a claim against the ten year BC Savings bonds held in trust for the company. (b) In the 1998 fiscal year, the company also entered into a contingent sale agreement for the Casting Workbook software territories rights to unrelated third parties. The company received and realized $587,000 in revenue as well as $2,503,000 in funds which are secured by the purchasing party as collateral against the purchasers portion of minimum projected revenue of approximately $5.895 million provided by the company over a ten year period (See note 5). If the minimum casting revenue over the ten year period is met by the company, it shall receive the collateral funds as income at a rate of approx. 97% of the gross revenue amount for aggregate revenue generated in excess of the approx. $5.895 million. Once all of the collateral funds have been released and realized as income by the Company, the Company shall earn 100% of the Casting software sales revenue less a perpetual fee of 3% to 5% of gross revenue (depending on sales price) to the software rights purchasers. In the event that the projected minimum revenue over the ten year period is not met, the company must make up purchasers portion of these shortfall from the collateral funds held as contingent revenue. The amount of future revenue, should it occur, relating to this contingency agreement is not determinable until its ten year expiration date or until such time as the minimum required revenue level is met. As a result, revenue is realized on the collection method, whereby deferred revenue is realized as income when funds are released from collateral. At the balance sheet date, the cumulative minimum has not yet been obtained, resulting in $2,503,000 remaining in unrealized contingent revenue relating to this agreement at the balance sheet date. To date, none of the funds held in trust have been released to the company. The collateral funds are registered funds held in trust and are not able to be used by the company until such time as these funds (or portion thereof) are released by the secured parties (none of these funds have been released to date). The term ending date is December 31, 2007. These collateral funds are in the form of Manitoba Saving Bonds held in trust. The amount of the secured contingent revenue has been offset against its related investment collateral asset on the balance sheet. (See note 5) (c) In the 1999 fiscal year, the company also entered into a contingent sale agreement for additional Casting Workbook software territories rights to unrelated third parties. The company received and realized $655,000 in revenue as well as $2,944,000 in funds which are secured by the purchasing party as collateral against the purchaser's portion of the minimum projected revenue amount of approximately $6.9 million provided by the company over a ten year period (See note 5). If the minimum casting revenue over the ten year period is met by the company, it shall receive the collateral funds as income at a rate of approx. 97% of the gross revenue amount for aggregate revenue generated in excess of the approx. $6.9 million. Once all of the collateral funds have been released and realized as income by the Company, the Company shall earn 100% of the Casting software sales revenue less a perpetual fee of 3% to 5% of gross revenue (depending on sales price) to the software rights purchasers. In the event that the projected minimum revenue over the ten year period is not met, the company must make up the purchaser's portion of the shortfall from the collateral funds held in trust as security against this contingent revenue. The amount of future revenue, should it occur, relating to this contingency agreement is not determinable until its ten year expiration date or until such time as the minimum required revenue level is met. As a result, revenue is realized on the collection method, whereby deferred revenue is realized as income when funds are released from collateral. At the balance sheet date, the cumulative minimum has not yet been obtained, resulting in $2,944,000 remaining as unrealized contingent revenue relating to this agreement at the balance sheet date. To date, none of the funds held in trust have been released to the company. The collateral funds are registered funds held in trust and are not able to be used by the company until such time as these funds (or portion thereof) are released by the secured parties (None of these funds have been released to date). The term ending date is December 31, 2008. These collateral funds are in the form of British Columbia Savings Bonds. The amount of the contingent revenue has been offset against its related investment asset on the balance sheet. (See note 5). (d) In the 1998 fiscal year, the company purchased the rights to software for use in the production of commercials. The agreement gives the company the right to the sale of commercial production service worldwide. The total purchase price was $3,950,000 . The payment of the purchase price consists of two payments of $100,000 (paid), the issuance of 250,000 common shares at a value of $1 per share (issued) and the issuance of a note payable of $ 3,500,000. In the 1999 fiscal year, the company expended an additional $8,000 relating to this agreement. The agreement was with Columbus Software Inc. The note payable is due only if the company achieves specified sales objectives on or before August 31, 2008. Due to the contingent nature of the note payable, the purchase price attributable to the note amount of $3,500,000 is not presented in the financial statements. Instead, the amount of the purchase price actually expended of $450 000 and the additional $8,000 cost is classified as an other asset and will be amortized over the estimated useful life of three years. This resulted in a charge for amortization of $38,166 in the current quarter, leaving $114,500 unamortized at the balance sheet date. The remaining purchase price of $3,500,000 will be recognized dollar for dollar against revenues generated by this service. The agreement also calls for a percentage of gross revenues to be paid to Columbus Software, Inc., on revenues generated over and above the purchase price. To date, there has been no revenue generated to the company related to this purchase agreement. 11. STOCKHOLDERS' EQUITY Statement of Changes in Stockholders' Equity (Including Accumulated Deficit Statement) Class A Common Preference Shares Paid In Shares Amount Shares Amount Capital Deficit ------ ------ ------ ------ ------- ------- Balance 8/31/00 9,626,640 $ 6,645 3,673,292 2,439 $1,497,399 ($2,025,845) Comprehensive Income (375,576) --------- ------- --------- ----- ---------- ----------- Balance 11/30/00 9,626,640 $ 6,645 3,673,292 $2,439 $1,497,795 ($2,401,421) Current Year Currency Adjustment (24,000) Accumulated Deficit 11/30/00 ($2,377,421) The preference shares above are non-voting, redeemable and retractable on or before March 1, 2004. These shares are non-cumulative and do not have a fixed dividend rate. These preferred shares earn dividends at the same rate as the class A common shares when a dividend on the class A common shares is declared. These shares may be converted to common shares at the discretion of either the company or the shareholders at a conversion rate of one common share for each preference share converted. 12. LEASE OBLIGATIONS The company has the following estimated future lease obligations based on current and projected lease agreements. DESCRIPTION 2001 2002 2003 2004 2005 Computer & Office Equip 60,000 63,000 66,000 68,000 70,000 Vancouver Office Lease 10,000 10,500 11,000 11,500 12,000 Toronto Office Lease 11,000 11,500 12,000 12,500 13,000 LA Office Lease 59,000 60,000 61,000 62,000 63,000 TOTALS 140,000 145,000 150,000 154,000 158,000 In the current quarter computer and office equipment leases totaled $14,361. Aggregate office rent totaled $ 17,630. 13. OTHER CONTINGENT LIABILITIES (a)The company is obligated to purchase a minimum of approximately $175 000 per calendar year of Mailcard software for purposes of distribution on behalf of the software vendors. This obligation remains in effect until at least December 28, 2007, at which time, the agreement may be terminated or renewed, depending on circumstances at that time. The company is also required to purchase an additional 2 560 000 copies at an estimated price of approximately $4 per copy of the Mailcard Software on or before December 28, 2007. Included in accounts payable and accruals is an accrual of $81 000 representing the portion of the obligation payable but not yet due or paid at the balance sheet date. This amount was based on the interest accrued on the collateralized BC Savings Bonds Investment (Note 5) which is to be paid directly to the collateralized party to cover the guaranteed purchase amount. This amount is paid semi-annually on or around June 10 and December 9 of each calendar year. (b) The company is also obligated to pay minimum exclusivity fees, which is the interest earned on the Manitoba and British Columbia Savings Bonds (Prevously CIBC weekly GICs, which were converted to bonds during year) (note 5), per calendar year for the right to provide management services related to the Casting Workbook. This minimum obligations remains in effect until December 28, 2007 and 2008 (note 10), at which time, the agreements may be terminated or renewed, depending on the circumstances at that time. Included in accounts payable and accrued liabilities is an accrual of approximately $159,000, which is the interest earned on the collateralized Manitoba and British Columbia Savings Bonds (Note 5) relating to this agreement from June 1, 2000 to November 30, 2000, which has not yet been paid to the Casting Workbook purchasers. In the event that sales are not sufficient to meet the minimum requirements in a & b above, any shortfall will be covered by interest generated by the security held in trust. See above. 14. INCOME TAXES The company has approximate income tax losses in the Canadian subsidiary which may in certain circumstances be applied against taxable income of the Canadian subsidiary in future years to reduce taxes otherwise payable as follows: Year of Expiry Amount of Loss 2002 10,000 2003 87,000 2004 138,000 2005 82,000 2006 120,000 2007 1,050,000 $1,487,000 The estimated net operating loss resulting from the operations of the American parent company total approximately $213,000 which may in certain circumstances be applied against taxable income of the parent company in future years. These loss carryforwards expire in $33,000 in 2020 and $180,000 in 2019. 15. DEVELOPMENT COSTS Expenditures relating to Casting Workbook enhancements and refinements are expensed in the period in which they are incurred. These costs consist primarily OF personnel related costs for programming work to maintain and improve the existing Casting Workbook software. These costs are not believed to have any alternative future uses, as such they are expensed as incurred and included in cost of sales as they relate to continuing subscription revenue. Costs relating to development of Casting Workbook enhancements which are still in development at the balance sheet date, are considered to be unfinished enhancements to the Casting Workbook at the balance sheet date. As such, these development costs (primarily personnel related) are expensed in the period in which they are incurred. These enhancements are thought to be necessary to keep the Casting Workbook software useful in the current market. As such, these costs are included in cost of sales, as they relate to the continuing usefulness of the Casting Workbook and the related subscription revenue earned through the use of the Casting Workbook software. 16. RELATED PARTY TRANSACTIONS The company had no related party management fees to be included in the Consolidated Statement of Loss and Accumulated Deficit during the quarter. At the balance sheet date, the company has approximately $140,000 payable to companies controlled by or related to directors of the company for services provided relating to management contracts. 17. ACCUMULATED OTHER COMPREHENSIVE INCOME Foreign Total Accumulated Currency Other Comprehensive Items Income Beginning balance $320 $320 Current Period change 24 24 Ending balance $344 $344 18. NOTE PAYABLE Payable to the Telus New Media and Broadcast Fund, located in British Columbia, Canada, which assists in funding new media projects in British Columbia. Principal amount of loan is $68,000. Loan bears interest at a rate of 6.75% per annum and is secured by assets of the company subordinated to the Royal Bank's claim relating to security for the operating line of credit (Note 7). At the balance sheet date, the note total includes accrued interest of $4,971. The loan principal was scheduled to be repaid as follows $34,000 on August 31, 2000 (unpaid at balance sheet date), with the remaining $34,000 to be repaid at $3,400 per month from September 2000 through June 2000 These payments have yet to be paid at the balance sheet date. 19. LOAN PAYABLE - SHAREHOLDER These are funds advanced to the company throughout the yer to help the company meet its cash flow requirements. These funds are non interest bearing, with no fixed terms of repayment. ITEM 2. MANAGEMENT'S DISCUSSION OF ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This report includes projections of future results and "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Stockholders and investors are cautioned that all forward-looking statements involve risks and uncertainty, including, without limitation, the ability to plan and execute our business, general market conditions, a general lack of public interest in either our products or securities, federal or state laws or regulations having adverse effects on small business enterprises, market competition and pricing. Although we believe the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements in this Report will prove to be accurate. Should any of these risks or uncertainties materialize, or should our underlying assumptions prove incorrect, actual results may vary materially from those described in this registration statement as anticipated, estimated or expected. BUSINESS OPERATIONS OnLine Production Services Inc. ("ONPS", a Nevada corporation), invests in, represents, promotes, and delivers the products and services of its wholly owned Canadian subsidiary, OnLine Film Services, Inc. ("OnLine"), which is an internet based, e-commerce, business-to-business services provider of software and computer systems solutions to entertainment industry professionals. During this, our fist quarter of fiscal 2001, we increased our previously established principal business activity of providing our proprietary software and services to Talent Agents and Casting Directors worldwide. As an integral part of providing services to Talent Agents and Casting Directors we host computerized / digital photographs and/or resumes and/or audio clips and / or video clips ("Portfolios") for actors and models ("Performers") for a fee (see also "Revenue Recognition Policy" and "advertise" Note 1(d) to the Financial Statements). We have provided our proprietary software and services free to Talent Agents and Casting Directors as an incentive for them to use our database of Performers. The fact that Talent Agents and Casting Directors use our software and systems provides incentive for Performers to subscribe to and pay for our services. Fees are now collected from Performers and deposited using internet e-commerce. We have also developed other complementary electronic capabilities in order to increase our direct service and contact with Performers that will work hand-in-hand with our e-commerce capabilities to further improve sales, billing and collections during the second quarter of Fiscal 2001. Performers' subscriptions to our services provide each of them with the exposure of their Portfolios to casting directors who actively audition and hire Performers for jobs in film, television, and commercials. To ensure exposure for the performers, we provide Casting Directors and Talent Agents (Performer representatives) with personalized access to the "Casting Workbook" database that facilitates the hiring of the participating Performers. During Fiscal 2001 we will be implementing a program of personalized access for self-represented performers that is tailored to their particular requirements in finding work and / or agency representation. Use of our software allows the performers" Portfolios to be viewed, extracted, sorted, and manipulated by participating talent agents and casting directors in a manner that increases the speed, accuracy and ease with which they carry out their day-to-day business and operating functions. Improvements to our software and systems are continuous, adding more time saving features to ensure that entertainment professionals continue to increase their use of our software and systems. Our software and systems are developed and tested in Canada by our internal personnel primarily in Vancouver and Toronto (the centers for the Canadian film, television, and commercials industries). Prior to deployment in Los Angeles, we tested and implemented our software in Canada between June 1995 and the spring of 1999. Development and testing was done with the assistance of Canadian Talent Agents and Casting Directors who continue to use the system to actively cast roles in film and television and commercial productions. During that period approximately 15,000 Canadian actors were entered into our databases and were provided varying trial periods without charge. In April 1999 approximately 8,000 of the original 15,000 actors on file were still actively seeking work in the industry and in agreement with the Talent Agents and Managers Association of Canada that portion of those 8,000 actors who were represented by Canadian Talent Agents were billed the annual fee for the service that we now provide them on a continuing basis. We now estimate approximately 80% of all Canadian electronic script breakdowns are cast by directors using our software and systems. We began a marketing and promotion campaign in Los Angeles California starting in the spring of 1999. We now provide professional, personalized, consultative and supporting services to Casting Directors and Talent Agents in the Los Angeles area. In addition, we have also made further professional contacts so that our supporting informational services will be provided to other types of US companies and entertainment professionals during Fiscal 2001, including, most significantly, major US production studios. We report statistical increases in key areas of our computerized business-to-business transactions as follows: Quarter Ended November 30, 1999 November 30, 2000 Increase Film Projects Processed: 706 1,079 53% Roles (Acting Jobs) Cast: 3,354 4,435 32% Audition Suggestions Processed: 93,374 155,704 67% Our internet sites now receive more than 1.5 million hits per month made mostly by talent agents and casting directors. Contracted arrangements with niche market and community based companies like Latin Heat magazine, Black Talent News, and XXI Century Model Search will provide us with increased and paid Performer Portfolio hosting throughout Fiscal 2001. During the quarter we also continued to increase business relations with industry professionals in other film production centers worldwide. We or continued negotiations with professional s in the Latin American, Australian and Asian film, television and commercial industries thus providing us with increased information that would ultimately establish the timing necessary to deploy our software and systems in all of those demographic areas. Subsequent to the quarter we formed a subsidiary corporation that will see full deployment of "The Casting Workbook" and services in Australia during Fiscal 2001. With respect to North America and in addition to increasing our business activities with Talent Agents and Casting Directors in the Los Angeles market, we also continued to deploy our software and systems in order to provide services to talented performers throughout North America and worldwide who are not presently represented by a Talent Agent (self-represented performers). Our system allows anyone, for a fee, to submit electronically their resume and other information (e.g. photos and/or sound and / or video clips) to us using access over the internet We began to collect fees from these performers using a now commonly used method called e-commerce whereby credit card information is collected and processed and money deposited to our bank account(s) electronically. In December 1999 our systems infrastructure necessary to carry out this process using the Canadian banking system was fully established and a marketing and promotional campaign has begun subsequent to this reported quarter. We estimate that many more people worldwide could subscribe to this new service than by actors who are represented by Talent Agents. Both aspiring acting and modeling talent are offered this service whereby individuals are given an opportunity to advertise themselves in front of professional Talent Agents and Casting Directors who use our software and services. Thus we are capable of providing many more individuals (customers) a chance to be discovered by Talent Agents and/or immediately obtain work from Casting Directors who are seeking that particular talent. During the period we also continued to design, develop and program software and systems that provide increasing computer automation to Agents, Casting Directors and other professionals in the film, television, commercials and modeling industries as well as tie into their other existing systems (e.g. accounting software of other suppliers). All of our present products and services are planned for continuing and future marketing and deployment. RISK FACTORS ASSOCIATED WITH THE COMPANY'S BUSINESS Risks Associated Changing and Expanding Business. The Company has experienced substantial changes in and expansion of the Company's business and operations since it commenced operations, and expects to continue to experience periods of change. The Company's past changes have placed, and any future changes would place, significant demands on the Company's administrative, operational, financial and other resources. The Company expects operating expenses and staffing levels to increase in the future. In particular, the Company intends to hire a number of additional skilled personnel, including persons with experience in both the computer and film industries. Competition for such personnel is intense, and there can be no assurance that the Company will be able to attract, assimilate or retain additional highly qualified senior managers and technical and production personnel in the future. The Company also expects to expend resources with respect to future expansion of its technology, accounting and internal management systems. This expansion will continue to challenge the Company's ability to hire, train, motivate and manage its personnel. If the Company's revenues do not increase in proportion to the Company's operating expenses, the Company's management systems do not expand to meet increasing demands, the Company fail to attract, assimilate and retain qualified personnel, or the Company's management otherwise fails to manage the Company's expansion effectively, there would be a material adverse effect on the Company's business, financial condition and operating results. The implementation of the Company's strategy for rapid growth in the use of the Company's services may strain its ability to adequately expand technologically. In addition, the Company relies on a number of third parties to process the Company's transactions, including on-line and Internet service providers, all of which will need to expand the scope of the operations they perform for the Company. Any backlog or inability to use the Company's services caused by a third party's inability to meet the Company's needs could have a material adverse effect on the Company's business, financial condition and operating results. Risk of Error and of Systems Failure. The Company's business is subject to various risks associated with systems errors and malfunctions and employee errors. Heavy stress placed on the systems during peak "breakdown" times could cause the Company's systems to operate at unacceptably low speeds or systems could fail altogether. The Company has experienced incidents of system failure in the past and there can be no assurances that such incidents will not reoccur in the future. If such system failure, or if access to the internet is disputed, it may preclude the Company from conducting normal operation for an undetermined period of time. The Company may also experience losses in connection with employee errors. Although expenses incurred by the Company in connection with employee errors have not been significant in the past, there can be no assurance that these expenses will not increase in the future. Significant Fluctuations in Quarterly Operating Results. The Company expects to experience significant fluctuations in future quarterly operating results that may be caused by many factors, including the following: the timing of introductions or enhancements of services and products by the Company or the Company's competitors; changes in pricing policies by the Company or the Company's competitors; changes in strategy; the success of or costs associated with acquisitions or other strategic relationships; changes in key personnel; seasonal trends; changes in the level of operating expenses to support projected growth; and general economic conditions. In addition, the Company has experienced fluctuations in the average number of customer transactions per day and expects that its rate of growth in customer transactions at any given time is not necessarily indicative of future transaction activity. Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and the Company believes that period-to-period comparisons of its operating results will not necessarily be meaningful and should not be relied upon as any indication of future performance. It is likely that the Company's future quarterly operating results from time to time will not meet the expectations of securities analysts or investors, which may have an adverse effect on the market price of the Company's Class A Common Stock. Competition. The Company's management is not aware of any other company in Canada that has the same type of database and/or service to film and television professionals as it is currently providing. There are several small companies who offer various television and film services but they are without a direct response element and accordingly do not, in the Company's view, present a competitive risk to the Company's operations There can be no assurance that the Company will be able to compete effectively with current or future competitors or that the competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition and operating results. Early Stage of Market Development; Dependence on the Internet. As is typical for new and rapidly evolving industries, demand and market acceptance for recently introduced services and products are subject to a high level of uncertainty. The Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as a reliable network backbone, or timely development of complementary services and products, such as high speed modems and high speed communication-lines. The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. There can be no assurance that the Internet infrastructure will continue to be able to support the demands placed on it by this continued growth. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of Internet activity or due to increased governmental regulation. Moreover, critical issues concerning the commercial use of the Internet (including security, reliability, cost, ease of use, accessibility and quality of service) remain unresolved and may negatively affect the growth of Internet use or the attractiveness of commerce and communication on the Internet. Because global commerce and on-line exchange of information on the Internet and other similar open wide area networks are new and evolving, there can be no assurance that the Internet will prove to be a viable commercial marketplace. If critical issues concerning the commercial use of the Internet are not favorably resolved, if the necessary infrastructure is not developed, or if the Internet does not become a viable commercial marketplace, the Company's retail business, financial condition and operating results will be materially adversely affected. Adoption of on-line commerce, particularly by those individuals that have historically relied upon traditional means of commerce, will require a broad acceptance by such individuals of new and substantially different methods of conducting business. Technical Changes. The information and financial services and communications industries are characterized by rapid technological change, changes in customer requirements, frequent new service and product introductions and enhancements, and emerging industry standards. The introduction of services or products embodying new technologies and the emergence of new industry standards and practices can render existing services or products obsolete and unmarketable. The Company's future success shall depend, in part, on its ability to develop leading technologies, enhance its existing services and products, develop new services and products that address the increasingly sophisticated and varied needs of its prospective customers, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of new services and products or enhanced versions of existing services and products entails significant technical risks. There can be no assurance that the Company will be successful in effectively using new technologies, adapting its services and products to emerging industry standards, developing, introducing and marketing service and product enhancements, or new services and products, or that it will not experience difficulties that could delay or prevent the successful development, introduction or marketing of these services and products, or that its new service and product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable to develop and introduce new services and products or enhancements of existing services and products in a timely manner in response to changing market conditions or customer requirements, or if new services and products do not achieve market acceptance, the Company's business, financial condition and operating results will be materially adversely affected. Proprietary Rights and Risk of Infringement. The Company's success and ability to compete are dependent to a significant degree on its proprietary technology and on the proprietary technology licensed by it. The Company relies primarily on copyright, trade secret and trade-mark law to protect its technology and the technology licensed by it from third parties. Notwithstanding the precautions taken by the Company, it may be possible for a third party to copy or otherwise obtain and use the Company's software or other proprietary information without authorization or to develop similar software independently. Policing unauthorized use of the Company's technology is difficult, particularly because the global nature of the Internet makes it difficult to control the ultimate destination or security of software or other data transmitted. The laws of other countries may afford the Company little or no effective protection of its intellectual property. There can be no assurance that the steps taken by the Company will prevent misappropriation of its technology or that agreements entered into for that purpose would be enforceable. In addition, litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources, either of which could have a material adverse effect on the Company's business, financial condition and operating results. The Company may in the future receive notices of claims of infringement of other parties' proprietary rights. There can be no assurance that claims for infringement or invalidity (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against the Company. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert the Company's management's attention and resources or require the Company to enter into royalty or licensing agreements. There can be no assurance that such licenses would be available on reasonable terms, if at all, and the assertion or prosecution of any such claims could have a material adverse effect on the Company's business, financial condition and operating results. Future Capital Needs; Uncertainty of Additional Financing. The Company would need to raise additional funds in order to support expansion, develop new or enhanced services and products, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. The Company's future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of research and development efforts and the success of such efforts, the success of the Company's existing and new service offerings and competing technological and market developments. The Company may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms attractive to the Company, or at all. Furthermore, any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. If additional funds are raised through the issuance of equity securities, the percentage ownership of the Company's shareholders will be reduced, shareholders may experience additional dilution in net book value per share, or such equity securities may have rights, preferences or privileges senior to those of the holders of the Common Stock. If adequate funds are not available on acceptable terms, the Company may be unable to develop or enhance its services and products, take advantage of future opportunities or respond to competitive pressures, any of which could have a material adverse effect on the Company's business, financial condition and operating results. Risks Associated with Acquisitions and Strategic Relationships. The Company may make acquisitions of other companies or technologies in the future, or may enter into strategic relationships, and the Company regularly evaluate such opportunities. Acquisitions and the implementation of strategic relationships entail numerous risks, including difficulties in the assimilation of acquired operations and products, diversion of management's attention from other business concerns, amortization of acquired intangible assets and potential loss of key employees of acquired companies. No assurance can be given that the Company will be able to integrate successfully any operations, personnel, services or products that might be acquired in the future, and the Company's failure to do so could have a material adverse effect on business, financial condition and operating results. The Company has established a number of relationships with on-line and Internet service providers and software, information and financial service providers. The Company will continue to seek out similar strategic opportunities in the future. There can be no assurance that any such relationships will be maintained, that if such relationships are maintained, they will be successful or profitable, or that the Company will develop any new such relationships. Further, the Company's success in any of its strategic relationships is dependent on the reputation of its strategic partners. Should any of the Company's strategic partners experience damage to their reputation, the Company may be materially adversely affected. Limited Operating History. The Company has not achieved profitability and there is no guarantee that the Company will be able to achieve profitability in the future. The Company has never paid a dividend on the Company's Class A Common Stock and does not expect to do so in the foreseeable future. Potential Future 144 Sales. Rule 144 provides, in essence, that a person holding restricted securities for a period of one year may sell those securities in unsolicited brokerage transactions or in transactions with a market maker, in an amount equal to one percent of the Company's outstanding Class A Common Stock every three months. Additionally, Rule 144 requires that an issuer of securities make available adequate current public information with respect to the issuer. Such information is deemed available if the issuer satisfies the reporting requirements of Sections 13 or 15(d) of the Exchange Act and of Rule 15c2-11 thereunder. Rule 144 also permits, under certain circumstances, the sale of shares by a person who is not an affiliate of the Company and who has satisfied a two year holding period without any quantity limitation and whether or not there is adequate current public information available. Investors should be aware that sales under Rule 144, or pursuant to a registration statement filed under the Act, may have a depressive effect on the market price of the Company's Class A Common Stock in any market that may develop for such shares. Limited Market For the Company's Class A Common Stock. There is only a limited trading market for the Company's Class A Common Stock on the National Association of Securities Dealers, Inc. ("NASD") over-the-counter Bulletin Board (the "OTCBB"), which may limit the marketability and liquidity of the shares of the Class A Common Stock. Penny Stock Rules. Under Rule 15g-9 of the Exchange Act, a broker or dealer may not sell a "penny stock" to, or effect the purchase of a penny stock by, any person unless: (a) such sale or purchase is exempt from Rule 15g-9; (b) prior to the transaction the broker or dealer has (1) approved the person's account for transactions in penny stocks in accordance with Rule 15g-9, and (2) received from the person a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased; and (c) the purchaser has been provided an propitiate disclosure statement as to penny stock investment. The United States Securities and Exchange Commission (the "Commission") has adopted regulations that generally define a penny stock to be any equity security other than a security excluded from such definition by Rule 3a51-1. Such exemptions include, but are not limited to (1) an equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operations for at least three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average revenue of at least $6,000,000 for the preceding three years; (2) except for purposes of Section 7(b) of the Exchange Act and Rule 419, any security that has a price of $5.00 or more; and (3) a security that is authorized or approved for authorization upon notice of issuance for quotation on the NASDAQ Stock Market, Inc.'s Automated Quotation System. Currently shares of the Company's Class A Common Stock will be subject to the regulations on penny stocks; consequently, the market liquidity for the Company's Class A Common Stock may be adversely affected by such regulations limiting the ability of broker/dealers to sell the Company's Class A Common Stock and the ability of shareholders to sell their securities in the secondary market. Moreover, the Company's shares may only be sold or transferred by its stockholders in those jurisdictions in which an exemption for such "secondary trading" exists or in which the shares may have been registered. Adequate Labor and Dependence Upon Key Personnel; No Employment Agreements. The Company will depend upon recruiting and maintaining qualified personnel to staff the Company's operations. The Company believes that such personnel are currently available at reasonable salaries and wages. There can be no assurance, however, that such personnel will always be available in the future. Loss of the services of any of this management team and key employees could have a material adverse effect on the Company's operations. Conflicts of Interest. From time to time certain of the Company's directors and executive officers may serve as directors or executive officers of other companies and, to the extent that such other companies may participate in the industries in which the Company may participate, such directors and officers may have a conflict of interest. In addition, the Company's dependence on directors and officers who devote time to other business interests may create conflicts of interest, i.e. that the fiduciary obligations of an individual to the other company conflict with the individual fiduciary obligations of the Company and visa versa. Directors and officers must exercise their judgment to resolve all conflicts of interest in a manner consistent with their fiduciary duties to the Company. In the event that such a conflict of interest arises at a meeting of the directors of the Company, a director who has such a conflict will abstain from voting for or against the approval of such a participation or such terms. In appropriate cases, the Company will establish a special committee of independent directors to review a matter in which several directors, or management, may have a conflict. The Company is not aware of the existence of any conflict of interest as described herein. FINANCIAL CONDITION, RESULTS AND PLAN GENERAL OnLine Production Services Inc. ("ONPS", a Nevada corporation), invests in, represents, promotes, and delivers the products and services of its wholly owned Canadian subsidiary, OnLine Film Services, Inc. ("OnLine"), which is an internet based, e-commerce, business to business services provider of software and computer systems solutions to entertainment industry professionals. An historical overview and discussion of operations is set-out above in Part I, Item 1 Business. REVENUES Agent Represented Performer Memberships: Revenues from performer memberships during the first quarter of Fiscal 2000 ($49,000 US) were received in Canadian Dollars from Canadian actors only. Most of those performers are represented by Canadian Talent Agents. This represented a 33% increase from that market group over the same period in Fiscal 1999. During this newly reported first quarter of Fiscal 2001 revenues of $121,760 (a 149% increase over the same quarter in the previous year) was nearly all received in full and nearly all from Canadian actors. Many free trial periods, set up in the prior fiscal year, for actors and models who are represented by Agents expired during the second quarter of Fiscal 2000, resulting in a substantial increase in Performers billings, and mostly in the Los Angeles area (a greater than 1,500% overall increase compared to the prior period). However, collection of those fees from US performers continue as of November 30, 2000. During the third and fourth quarters of Fiscal 2000 we granted payment extensions (without affecting service start dates) to actors and models represented by Agents in the United States. This was a gesture of goodwill toward actors affected by the US actor strike, and as a part of a competitive strategy. Approximately $300,000 US Dollars of reported accounts receivable were affected. Our historical experience indicated that our ability to collect these accounts was high due to the importance of our service to the Performers by way of their increased job audition opportunities. The professional industry in Los Angeles is still implementing our software and systems with approximately the same increasing rate as that which we experienced in Canada. However, subsequent to the reported quarter, we have written down our US accounts receivable to zero by way of full allowance for any doubtfulness in receiving payment from the US market for billings made during the period of the actors strike. We expect a more rapid rate of Los Angeles acceptance, revenue and collections than we experienced in Canada because, during the fourth quarter of Fiscal 2000 and in readiness of actor strike resolution, we concentrated on developing and launching an improved program of technical service and revenue collection. Our collection of Canadian accounts continues with the help of our new electronic customer relations and direct contact processes deployed subsequent to Fiscal 2000 year end and after the US actors' strike was resolved (October 2000). These technical improvements have aso enriched our relations with casting directors, including those employed inside major studios. We are experiencing increases in the number of script breakdowns that we process from the United States. Those script breakdowns represent job opportunities to performers and further motivate Talent Agents and their performer rosters to sign onto our system and pay our fees. We expect that these processes will decrease the amount of accounts receivable that we carry in the future because new accounts will be collected immediately and renewal accounts will be collected as they become due. Self-Represented Performer Memberships (Retail Markets): Only nominal revenues have yet to be received from that group of North American customers who are not represented by Talent / Model Agents. Full operation of our e-commerce based fee collection capabilities had been deployed during Fiscal 2000 and we planned to initiate a marketing campaign that was dependent on the development and allocation of sufficient funding for what we considered essentially a retail market. We considered that market, in traditional terms, to require print and broadcast advertising in order to accomplish adequate sales volumes. An agreement was negotiated and then abandoned, without litigation, during Fiscal 2000, for the supply of infomercials directed at the self-represented market sector. This abandonment occurred due, in part, to a lack of confirmation of value. By analyzing the approaches made by our competitors we realized that traditional retail print and broadcast advertising was to involve unjustifiably high cash expenditure requirements compared to resulting sales increases (and less profitable) when compared to our traditional services to the professional industry. During the fourth quarter of Fiscal 2000 we began to program new in-house electronic advertising facilities, now named "E-pitch" for our branding purposes. Our traditional approach, enhanced by those new facilities, now justifies our increasing entry into this market demographic. Subsequent to the currently reported Fiscal Year end, we completed and we have deployed an electronic advertising approach. Electronically we are advertising our services to all casting directors and all represented and self-represented performers and their agents. The industry throughout North America is dramatically acknowledging our new technical capabilities that link all of our traditional services with this new electronic advertising methodology. We now make these electronic advertising and thus job finding capabilities available to any individual or Agent where the appropriate performer membership fees have been paid. These new technical services are extremely competitive and acceptance in the market has been more dramatic than any we have previously experienced. Our new technical service has also been integrated with our billing and collection services, incorporating e-commerce, thus increasing our expectation of cash receipts in the near term. Development of New Revenue Sources from Agencies: During Fiscal 2000 we entered into an agreement whereby a large US Talent / Literary Agency supplied a description of certain business requirements, and we have performed for our mutual benefit the required software programming, in order to accomplish new automated data and reporting capabilities to handle extended day-to-day business functions of Talent and Literary Agents. The computer automation of a wide range of Agents' requirements is beyond that currently supplied by any of our competitors. Our new software also provides links into existing, widely distributed accounting software programming with the cooperation of the copyright owner of that software. This new software programming is useful industry-wide. Testing of our new software is ongoing on-site at the Agency with whom we have the agreement. We are confident that successful implementation will be achieved. Further arrangement for industry-wide distribution, and resulting revenue from Agents is estimated to begin during Fiscal 2001. Receipts of revenue, direct from Agents, is previously untapped by us. International Licensing / Joint Ventures / Territory Sales: We have not pursued, during the current period, and we have no intention of pursuing in the future, the sale of territory rights as in prior periods. However, revenue rights in many territories were never sold including the Los Angeles district and all territories outside of North America. Instead of selling territory rights we will continue to pursue international licensing and/or joint venture agreements in Latin America, the United Kingdom, Europe and Asia during the next fiscal year. Subsequent to our reported quarter we completed detailed negotiations in order to form a subsidiary corporation for the deployment of our software and services in Australia. We expect that the Australian market, estimated by us to be equal to 50 % of our current Canadian customer base, and our related 51 % joint venture receipts, will provide us with revenues sufficient to break even in Australia during the course of Fiscal 2001. Niche Market and Community Based Revenues: Contracted arrangements with niche market companies and performer communities like Latin Heat magazine, Black Talent News, and XXI Century Model Search, increasingly provided us with Performer Portfolios to be hosted during Fiscal 2000. The number of these types of community level service arrangements will be increased in Fiscal 2001 and they will be pursued as immediate cash receipts arrangements. COST OF SALES AND GROSS MARGIN Of our reported Cost of Sales for the quarter, $121,000 relates to sales guarantee amounts which are paid directly from interest we earned on collateralized long-term investments, in respect of CastingWorkbook exclusivity payments and Mailcard distribution payments relating our sale of territory rights in prior periods (See note 13 to the financial statements). The remaining cost of goods sold, ($103,000), was incurred to continue the direct activities of programming competitive improvements to our software and systems for continuing use by Casting Directors, Performers, and their Agents as well as other industry professionals. Costs are incurred also to maintain the computer and communications equipment / infrastructure that is necessary to deploy that software. Software and systems programming costs are expected to continue into the future in order to maintain a competitive technology position. However, the availability of communications infrastructure is a competitive environment and we seek opportunities to decrease our costs of that infrastructure component. The sunk costs of our previous improvements to software programming may now be spread over a larger customer base in the future thus providing an expectation of a more effective use of cost of goods sold and increasing gross margin. This, the first quarter of our Fiscal 2001, indicates a positive gross margin of 16% when the $121,000 sales guarantees under collatoralized agreements (see Notes 13 to the Finacial Statements) is factored out of cost of goods sold and matched directly against the related interest earned to service it. The 16% positive gross margin for this reported quarter compares favourably to a negative 75% percent gross loss reported for the same quarter in the previous fiscal year. OPERATING EXPENSES Operating Expenses for the reported quarter (326,000) includes $180,000 of one time bad debt allowance related directly to the ongoing US actor strike that continued during the period. The remaining amount ($146,000) represents a 46% decrease over the same period in the prior year due primarily to our decrease in US operations also due to the US actor strike. Operations in the Los Angeles area is expected to increase during the remainder of Fiscal 2001. Our operating expenses included no payment to executive management during this reported quarter and only nominal amounts during the same quarter in the prior year. For the remainder of Fiscal 2001 we will implement marketing strategies that include direct internet promotion to performers and their agents in order to maintain low operating costs, and particularly in the Los Angeles area. We will focus attention on the actor and model customer base using advertising and web marketing techniques that have a more direct relationship to the realization of revenues. OTHER INCOME Other sources of income earned during the period consist of interest earned on long-term investments that are collateral to secure contingent future revenues that may be realized under terms of agreements entered into in prior fiscal periods (see Financial Statements - Notes 5 and 10). LIQUIDITY FROM CAPITAL RESERVES Long-term investments are held as collateral security under agreements (see Financial Statements Notes 5 and 10) and are not money available for use in current operations, nor are they expected to be available during the course of Fiscal 2001. CASH FLOW AND WORKING CAPITAL Accounts Payable and Accruals reported as at November 30, 2000 ($435,000) includes $238,000 of accrued distribution and exclusivity payments under the Territory Sales agreements referred to above. The $238,000 would subsequently be paid from interest portions of long-term investments that will come due approximately December 10, 2000 to December 31, 2000. Reported cash and cash equivalents of ($12,000) is not sufficient to meet current demands on cash represented by $197,000 of Accounts Payable and Accruals (a $209,000 deficiency). We financed our Fiscal 2001 first quarter of operations by way of revenue receipt as well as by unsecured loans of major shareholders of ONPS. We require an increase in revenue realization as well as investment inflows in order to provide for working capital requirements during the remainder of Fiscal 2001. ONPS has entertained proposals from a number of individuals and companies that vary in their collaborative intentions, impact on OnLine's business operations and having differing financial benefits. We are prepared to cover cash flow requirements by way of accepting proposals involving the further issuance of treasury stock if circumstances necessitate. ONPS has, during and subsequent to the reported quarter, concentrated on developing reorganization structures that affectively bring in both finance and expanded business operations in order to accomplish value added for its current customer base and investors. A proposal has been provided an exclusive by us to proceed through negotiations up to February 28, 2001. The proposal involves expansion that is; a collaboration with complementary industry leaders in other entertainment based operations, an inclusion of our "Casting Workbook" and related industry software into a broader field of use, and commitment of $1,000,000 annual operating finance to our wholly owned subsidiary, OnLine. Related to our granting of this exclusive negotiation, up to $300,000 would be received by us during the negotiations until closing. We are confident that the reorganization represented by this proposal can be completed and all terms negotiated. In addition, we at ONPS are renewing our business presentations, and increasing our contacts of potential financial partners, on the premise of accessing further financing for our wholly owned subsidiary, OnLine, as may be warranted by newly developed technology and thus value added operations. This is being done subject to and still respecting the negotiations exclusivity arrangement discussed above. PART II ITEM 3. LEGAL PROCCEDINGS. No legal proceedings were ongoing or planned during the period. ITEM 4. CHANGES IN SECURITIES & USE OF PROCEEDS. None ITEM 5. DEFAULTS UPON SENIOR SECURITIES. None ITEM 6. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 7. EXIBITS & REPORT ON FORM 8-K Not filed during reporting period. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OnLine Production Services, Inc. Date January 11, 2001 /s/ Aerock Fox ---------------------- Aerock Fox, President