10-Q 1 o05604e10-q.txt FORM 10-Q FOR PERIOD ENDED MARCH 31, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2001 Commission file number ---------- -------------------------------------------------------------------------------- BLUE ZONE, INC. (Exact name of registrant as specified in its charter) -------------------------------------------------------------------------------- NEVADA 86-0863053 ---------------------------------- ---------------------------------------- (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) -------------------------------------------------------------------------------- 329 RAILWAY STREET, 5TH FLOOR VANCOUVER, BRITISH COLUMBIA CANADA V6A 1A4 (604) 685-4310 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------------------------------------------------------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of outstanding shares of the registrant's Common Stock, par value $0.001 per share, was 24,539,350 on May 10, 2001. 2 BLUE ZONE, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 TABLE OF CONTENTS PART I........................................................................ 2 ITEM 1. FINANCIAL STATEMENTS.............................................. 2 Consolidated Balance Sheet................................................. 2 Consolidated Statement of Operations....................................... 3 Consolidated Statement of Stockholders' Equity............................. 4 Consolidated Statement of Cash Flows....................................... 5 Notes to Consolidated Financial Statements (unaudited)..................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................. 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 16 PART II...................................................................... 17 ITEM 1. LEGAL PROCEEDINGS................................................ 17 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 17 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................. 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 17 ITEM 5. OTHER INFORMATION................................................ 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 17 3 PART I ITEM 1. FINANCIAL STATEMENTS BLUE ZONE, INC. Consolidated Balance Sheet (Expressed in U.S. dollars) March 31, 2001 (Unaudited - Prepared by Management) December 31, 2000

~~PAGE~~============================================================================================================ ~~PART~~2001 I.2000 ~~FINANCIAL~~------------------------------------------------------------------------------------------------------------ ~~INFORMATION~~ASSETS ~~Item~~Current 1.assets: ~~Financial~~Cash ~~Statements~~and ~~Consolidated~~cash ~~Balance~~equivalents ~~Sheets~~$ -1,003,188 ~~September~~$ 301,844,981 ~~2000~~Accounts ~~and December 31~~receivable, ~~1999~~net ~~3 Consolidated Statements~~ of ~~Operations~~allowance -for ~~Three~~doubtful ~~and~~accounts ~~nine~~of ~~months ended September 30~~$78, ~~2000 and September 30~~029, (1999 4- ~~Consolidated~~nil) ~~Statement~~121,999 of221,363 ~~Stockholders'~~Prepaid ~~Equity~~expenses ~~(Deficiency)~~171,450 144,767 ----------------------------------------------------------------------------------------------------------- ~~Nine~~1,296,637 ~~months~~2,211,111 ~~ended~~Fixed ~~September~~assets 30744,735 ~~2000~~838,897 ~~and~~----------------------------------------------------------------------------------------------------------- ~~the~~$ ~~year~~2,041,372 ~~ended~~$ ~~December 31~~3,050,008 ~~1999~~=========================================================================================================== 5LIABILITIES ~~Consolidated~~AND ~~Statements~~STOCKHOLDERS' ofEQUITY ~~Cash~~Current ~~Flows~~liabilities: -Accounts ~~Nine~~payable ~~months~~$ ~~ended~~213,596 ~~September~~$ 30258,728 ~~2000~~Accrued ~~and~~liabilities ~~September~~133,768 30198,077 ~~1999~~Deferred 6revenue ~~Notes~~38,064 to60,020 ~~Consolidated~~----------------------------------------------------------------------------------------------------------- ~~Financial~~385,428 ~~Statements~~516,825 ~~7 Item 2. Management~~Stockholders's ~~Discussion~~equity: ~~and~~Preferred ~~Analysis~~stock, ofauthorized ~~Financial~~5,000,000 ~~Condition~~shares, ~~and Results of Operations 9 Item 3~~$.01 ~~Quantitative~~par ~~and~~value, ~~Qualitative~~none ~~Disclosures~~issued ~~About~~in ~~Market~~2000 ~~Risk~~or 151999 ~~PART~~-- ~~II.~~-- ~~OTHER~~Common ~~INFORMATION~~stock, ~~Item 1~~$.001 ~~Legal~~par ~~Proceedings~~value, 16authorized ~~Item~~100,000,000 2.shares; ~~Changes~~issued ~~in Securities~~ and ~~Use~~outstanding of24,539,350 ~~Proceeds~~shares 1624,539 ~~Item~~24,539 3.Additional ~~Defaults~~paid ~~upon~~in ~~Senior~~capital ~~Securities~~8,456,527 168,446,877 ~~Item~~Deficit 4.(6,524,514) ~~Submission~~(5,738,665) ofAccumulated ~~Matters~~other tocomprehensive aloss: ~~Vote~~Foreign ofcurrency ~~Security~~translation ~~Holders~~adjustment 16(300,608) ~~Item~~(199,568) 5.----------------------------------------------------------------------------------------------------------- ~~Other~~1,655,944 ~~Information~~2,533,183 17----------------------------------------------------------------------------------------------------------- ~~Item~~$ 6.2,041,372 ~~Exhibits~~$ ~~and~~3,050,008 ~~Reports on Form 8-K 17 Signatures 20~~===========================================================================================================

See accompanying notes to consolidated financial statements. Page 2 4 BLUE ZONE, INC. Consolidated Statement of Operations (Expressed in U.S. dollars) Three months ended March 31, 2001 and 2000 (Unaudited - Prepared by Management)

~~2000~~=============================================================================================== ~~1999~~2001 ~~(Unaudited)~~2000 ~~ASSETS~~----------------------------------------------------------------------------------------------- ~~Current assets~~Revenue: ~~Cash~~Product and ~~cash~~service ~~equivalents~~ $ 4120,~~135,864~~255 $ 465,~~097,869~~902 ~~Accounts~~Exchange ~~receivable~~product ~~626,329~~and ~~97,600~~service ~~Work~~-in-~~progress~~ ~~-- 70~~8,~~581~~651 ~~Prepaid expenses 37,775 93,204~~ ----------- ------------------------------------------------------------------------------ 4120,~~799,968~~255 474,~~359,254~~553 ~~Fixed~~Cost ~~assets, net~~ of ~~accumulated~~revenues ~~depreciation 847~~24,~~435~~736 ~~425~~73,~~596~~128 ~~Deferred~~----------------------------------------------------------------------------------------- ~~finance~~Gross ~~costs~~profit ~~net~~95,519 ~~of accumulated 417~~1,~~451~~425 -- ~~amortization~~ ----------- ---------------------------------------------------------------------------------- $Operating ~~6,064,854~~expenses: $General ~~4,784,850~~and ~~===========~~administrative ~~===========~~641,092 ~~LIABILITIES~~734,676 ~~AND~~Research ~~STOCKHOLDERS'~~and ~~EQUITY~~development ~~Current~~44,790 ~~liabilities:~~49,663 ~~Accounts~~Selling ~~payable~~and $marketing ~~173~~164,~~588~~868 ~~$ 191~~71,~~675~~894 ~~Accrued~~Exchange ~~liabilities~~advertising ~~317,345~~-- ~~178~~8,~~300~~651 ~~Deferred~~Depreciation ~~revenue 79~~61,~~814~~118 ~~180~~42,~~143~~640 ~~Payable to stockholders~~ -- ~~45,559~~ ----------- ---------------------------------------------------------------------------- ~~570~~911,~~747~~868 ~~595~~907,~~677~~524 ~~Redeemable equity securities (note 3) 4,092,600~~ ----------------------------------------------------------------------------------------------- ~~Stockholders'~~Loss ~~equity:~~before ~~Common~~undernoted ~~stock~~816,349 ~~$0.001 par value~~906,099 ~~authorized~~Interest ~~100~~income 30,~~000,000~~500 ~~shares; 22~~48,~~244,817~~040 ~~issued~~----------------------------------------------------------------------------------------------- inNet ~~2000~~loss ~~and~~$ 21785,~~538,100~~849 ~~issued~~$ ~~in 1999 21~~858,~~539~~059 ~~21,538~~=============================================================================================== ~~Additional~~Net ~~paid~~loss inper ~~capital~~common 5share,~~908,680~~ ~~5,626,371~~basic ~~Deficit~~and ~~(4,357,184)~~diluted ~~(1,433,831)~~$ ~~Accumulated~~0.03 ~~other~~$ ~~comprehensive~~0.04 ~~income (loss): Foreign currency translation adjustment (171,528) (24,905)~~ ----------- ----------- ~~1,401,507 4,189,173~~ ----------- -------------------------------------------------------------- $Weighted 6average common shares outstanding,~~064,854~~ $basic 4and diluted 24,~~784~~539,~~850~~350 21,538,100 =========== ====================================================================================

See accompanying notes to consolidated financial statements. Page 3 5 BLUE ZONE, INC. Consolidated Statement of Stockholders' Equity (Expressed in U.S. dollars) Three months ended March 31, 2001 (Unaudited - Prepared by Management)

~~Three~~================================================================================================================================ ~~Months~~Paid-in ~~Nine~~Preferred ~~Months~~stock ~~Ended~~Common ~~September~~stock ~~30,~~additional ~~Ended~~Shares ~~September~~Amount ~~30,~~Shares ~~2000~~Amount ~~1999~~capital ~~2000 1999 Production and service revenue $ 481,769 $ 43,958 $ 906,574 $ 193,564 Exchange production and service revenue~~ -- ~~126,851~~ -- ~~377,797~~ ----------- ----------- ----------- ----------- ~~481,769 170,809 906,574 571,361 Cost of production and service revenue 197,064 88,910 549,276 193,237~~ ----------- ----------- ----------- ----------------------------------------------- ~~Gross profit 284~~Balance,~~705~~ ~~81,899~~December ~~357~~31,~~298~~ ~~378,124~~2000 ~~Operating~~-- ~~expenses:~~$ ~~General~~-- ~~and administrative 891~~24,~~595~~539,350 ~~171~~$24,~~193~~539 2$8,~~429~~446,~~164~~877 ~~242,749~~Amortization ~~Research~~of ~~and~~deferred ~~development~~stock ~~197,956~~compensation ~~15,182~~-- ~~475,793~~-- ~~33,708~~-- ~~Selling~~-- ~~and marketing 1~~9,~~645~~650 ~~6,872~~Net ~~99,375~~loss ~~11,400~~-- ~~Exchange~~-- ~~advertising~~-- -- ~~126,851~~ -- ~~377,797~~Cumulative ~~Depreciation~~translation ~~50,244~~adjustment ~~17,183~~-- ~~141,619~~-- ~~28,565~~-- -- -- ------- ----------- ----------- ----------- ~~1,141,440 337,281 3,145,951 694,219~~ ----------- ----------- ----------- ----------- ~~Net loss $ 856,735 $ 255,382 $ 2,788,653 $ 316,095 =========== =========== =========== =========== Net loss per common share, basic and diluted $ 0.04 $ 0.02 $ 0.13 $ 0.03~~ ----------- ----------- ----------- ----------- ~~Weighted~~Balance, ~~average~~March ~~common shares outstanding~~31, ~~basic~~2001 ~~and~~-- ~~diluted~~$ ~~21,773,672~~-- 1224,~~000~~539,~~000~~350 21$24,~~616,624~~539 12$8,~~000~~456,~~000~~527 ~~----------- ----------- ----------- -----------~~================================================================================================================================

~~Additional~~============================================================================================================ ~~Common~~Accumulated ~~stock~~other ~~paid~~comprehensive earnings (loss) -in-------------- ~~Shares~~Foreign ~~Amount~~Retained ~~Capital~~currency Total earnings translation stockholders' (deficit) adjustment equity ---------- ----------- --------------------------------------------------------------------------------------- Balance, December 31, ~~1999~~2000 21$(5,~~538~~738,~~100~~665) $ 21(199,~~538~~568) $ 52,~~626~~533,~~371~~183 ~~Issuance~~Amortization of ~~redeemable~~deferred ~~equity~~stock ~~securities~~compensation ~~(note 3) 705,467~~ -- -- ~~Exercise~~9,650 ofNet ~~stock~~loss ~~options 1~~(785,~~250~~849) ~~1 6,249 Issuance of stock options~~ -- ~~-- 403~~(785,~~215~~849) ~~Deferred~~Cumulative ~~compensation~~translation ofadjustment ~~stock options~~ -- -- (~~127~~101,~~155~~040) ~~Accretion of premium on redeemable equity securities~~ (~~note 3~~101,040) -- -- -- ~~Amortization of deferred finance costs (note 3)~~ -- -- -- ~~Net Loss Cumulative translation adjustment~~ ---------- ----------- --------------------------------------------------------------------------- Balance, ~~September~~March 3031, ~~2000~~2001 22$(6,~~244~~524,~~817~~514) $ 21(300,~~539~~608) $ 51,~~908~~655,~~680~~944 ========== =========== =======================================================================================

See accompanying notes to consolidated financial statements. Page 4 6 BLUE ZONE, INC. Consolidated Statement of Cash Flows (Expressed in U.S. dollars) Three months ended March 31, 2001 and 2000 (Unaudited - Prepared by Management)

~~Accumulated~~====================================================================================================== ~~other~~2001 ~~comprehensive~~2000 ~~earning~~ ----------- ~~Foreign Total currency stockholders' Deficit adjustment equity~~ ----------- ----------- --------------------------------------------------------------------- ~~Balance,~~Cash ~~December~~flows ~~31,~~from ~~1999~~operating activities: Net loss $ (1785,~~433,831~~849) $ (24858,~~905~~059) $Items 4not involving cash: Stock based compensation 9,~~189~~650 17,~~173~~125 ~~Issuance~~Depreciation of61,118 ~~redeemable~~42,640 ~~equity~~Changes ~~securities~~in ~~(note~~operating 3)assets --and --liabilities: --Accounts ~~Exercise~~receivable of91,932 ~~stock~~8,016 ~~options~~Prepaid expenses (33,895) 61,489 Work-in-progress -- 6(50,~~250~~609) ~~Issuance~~Accounts ofpayable ~~stock~~(39,670) ~~options~~191,100 --Accrued --liabilities ~~403~~(51,~~215~~992) (91,878) Deferred ~~compensation~~revenue of(19,636) ~~stock~~(7,658) ~~options~~ -- --------------------------------------------------------------------------------------------- Net cash provided by (~~127~~used in) operating activities (768,~~155~~342) ~~Accretion~~(687,834) ofCash ~~premium~~flows onfrom ~~redeemable~~financing ~~equity~~activities: ~~securities~~Repayment ~~(note~~to 3)stockholder -- (9250,~~600~~280) ----------------------------------------------------------------------------------------------- Net cash provided by financing activities -- (9250,~~600~~280) ~~Amortization~~Cash offlows ~~deferred~~from ~~finance~~investing ~~costs~~activities: ~~(note~~Purchase 3of fixed assets (6,135) (42233,~~100~~022) ----------------------------------------------------------------------------------------------- Net cash used in investing activities (426,~~100~~135) ~~Net~~(233,022) ~~Loss~~Effect of exchange rate changes on cash and cash equivalents (267,~~788,653~~316) (222,~~788,653~~231) ~~Cumulative~~Net ~~translation~~increase ~~adjustment~~(decrease) in cash and cash equivalents (~~146~~841,~~623~~793) (~~146~~993,~~623~~367) Cash and cash equivalents, beginning of period 1,844,981 4,097,869 ----------- ----------- -------------------------------------------------------------------------------- ~~Balance,~~Cash ~~September~~and 30cash equivalents, ~~2000~~end of period $(4 1,~~357~~003,~~184)~~188 $ ~~(171~~3,~~528)~~104,502 $====================================================================================================== Supplementary information: Interest paid -- 1,~~401,507~~352 Income taxes paid -- -- =========== =========================================================================================== Non-cash transactions: Revenue received in exchange for advertising expense -- 8,651 ======================================================================================================

See accompanying notes to consolidated financial statements. Page 5 7 BLUE ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. dollars) Three months ended March 31, 2001 and 2000 (Unaudited -- Prepared by Management) -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying unaudited interim financial statements have been prepared in conformity with generally accepted accounting principles applicable to interim financial information and with the rules and regulations of the United States Securities and Exchange Commission. 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 such rules and regulations. In the opinion of management, the unaudited interim financial statements include all adjustments 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 and notes thereto for the year ended December 31, 2000, included in Blue Zone's annual report on Form 10-K, dated March 29, 2001, filed with the Securities and Exchange Commission. The results of operations for the 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 presentation adopted in the current period. 2. GOING CONCERN These unaudited interim consolidated financial statements have been prepared on the going concern basis, which presumes the realization of assets and the settlement of liabilities in the normal course of operations. The application of the going concern basis is dependent upon the Company achieving profitable operations to generate sufficient cash flows to fund continued operations, or, in the absence of adequate cash flows from operations, obtaining additional financing. The Company has reported losses in the last three fiscal years, and has an accumulated deficit of $6,524,514 at March 31, 2001. Management continues to review operations in order to identify additional strategies, including obtaining future sales contracts, designed to generate cash flow, improve the Company's financial position, and enable the timely discharge of the Company's obligations. If management is unable to identify sources of additional cash flow in the short term, it may be required to reduce or limit operations. Page 6 8 BLUE ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. dollars) Three months ended March 31, 2001 and 2000 (Unaudited - Prepared by Management) -------------------------------------------------------------------------------- 3. SUBSEQUENT EVENTS Subsequent to March 31, 2001, the Company entered into a term sheet agreement with a related party setting forth the principal terms of up to $1,000,000 in financing in exchange for secured convertible debentures. Blue Zone may draw upon this funding from time to time by authority of its Board of Directors. The debentures will be secured by certain assets of the Company and will carry interest at bank prime rate plus two percent. Each debenture will be convertible at the option of the investor into common stock of the Company at a price per share equal to the prevailing market price for the Company's common stock on the date of issue of the debenture. The lending agreement has a term of two years from the date of the agreement. Subsequent to March 31, 2001, the Company effected an operational restructuring, resulting in the elimination of 14 administration and production positions. 4. CONTINGENCY During the year ended December 31, 2000, the Company was audited by the Consumer Taxation Branch of the British Columbia Ministry of Consumer and Corporate Affairs for provincial sales tax for the period from November 1, 1997 to October 31, 2000. The Ministry proposed an assessment of approximately $182,000 relating to various items from this period, including tax on revenue and tax on capital assets purchased outside the province for use in B.C. The Company believes the proposed assessment applies tax to items that are not taxable and has disputed the proposed assessment. As at March 31, 2001, $15,700 remains accrued in the accounts, representing management's best estimate of the amount that will likely be payable in respect of the possible assessment. Page 7 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Blue Zone's actual results could differ materially from those anticipated in these forward-looking statements. The following discussion should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in Part I - Item 1 of this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Conditions and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2000. FORWARD LOOKING STATEMENTS ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY US OR BY OFFICERS, DIRECTORS OR EMPLOYEES ACTING ON OUR BEHALF, THAT ARE NOT STATEMENTS OF HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO BE MATERIALLY DIFFERENT FROM HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. READERS SHOULD CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVE," "BELIEF," "EXPECT," "PLAN," "ANTICIPATE," "INTEND" OR THE LIKE TO BE UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR. IN THIS CONNECTION, READERS SHOULD CONSIDER THE RISKS DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 AND SHOULD NOT PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS. OVERVIEW Blue Zone has used in-depth knowledge acquired from working closely with broadcasting companies to develop proprietary technology for use in media applications. Our experience with live news delivery, including the large variety of filming, graphics and editing equipment for audio and video production, combined with our understanding of the specific communication standards that exist inside a newsroom between equipment and employees, has provided us with the opportunity to develop software to service the unique needs of the broadcast community. The business has historically been focused on providing Website design and content services and interactive consulting to a range of Canadian-based media and broadcasting companies. This focus has now expanded to include convergence technology targeted at North American broadcast, media, and wireless communication companies. Bruce Warren, the Company's President and Chief Executive Officer, and Jamie Ollivier, the Executive Creative Director, have worked in the broadcast field for over ten years. During this time they have acquired valuable insights into the technology requirements for traditional television and radio broadcast companies to access the World Wide Web Page 8 10 through set-top-boxes and other interactive devices. In 1997, the Company began development of a proprietary product, now trademarked as the MediaBZ(TM) suite of products, to facilitate convergence of television, radio, and print media content to the interactive environment. In the latter half of 1999, Blue Zone contracted with CTV, Canada's largest private television network, to plan, design, and implement CTV News' interactive broadcasts on the Internet, focused around the MediaBZ product. The interactive news service, CTVNEWS.com, was launched on September 21, 2000. CTVNEWS.com utilizes Blue Zone's NewsBZ(TM) software to publish its content to Web-enabled desktop and laptop computers, interactive television, WAP-enabled cellular telephones, and personal digital assistants. Blue Zone has also been retained as an ongoing consultant to CTV. Approximately 83% of the Company's revenue for the three-month period ended March 31, 2001 is derived from delivering product and services related to this CTV contract. At March 31, 2001, Blue Zone continues to work closely with CTV in accordance with the contract. The Company has incurred losses in each of the last three fiscal years and for the quarter ended March 31, 2001, and as of March 31, 2001, had an accumulated deficit of $6,525,000. The net loss was $786,000 for the period ended March 31, 2001. Blue Zone continues to incur losses as a result of the focus on executing the Company's business plan, which is built around marketing of the MediaBZ product line to a broad range of broadcast, media, and wireless communication companies throughout North America. Subsequent to the quarter end, the Company implemented an operational restructuring with the objective of reinforcing Blue Zone's core technology and increasing the Company's sales focus. Blue Zone eliminated 14 positions in administration and production, while maintaining the Company's core competency as a software solutions company. Concurrent with the operational restructuring, the Company has also refocused its business plan. Blue Zone is broadening the scope of its sales efforts to include other verticals such as telecommunication companies, Internet portals and corporate intranets. The Company believes that companies in these sales verticals are more "convergence ready" and provide the Company with opportunities to reduce the duration of our sales cycle. The Company expects to hire a senior level sales executive to help execute on this refined plan. The restructuring, combined with other cost savings measures in the areas of travel and entertainment, professional fees, and administrative costs, positions the Company to capitalize on future business opportunities while reducing the cash utilization rate. The focus of the next several fiscal quarters will be controlling discretionary costs, while still supporting growth of the business. Page 9 11 SOURCES OF REVENUE AND REVENUE RECOGNITION PRODUCT AND SERVICE: The Company generates product and service revenue through the sale of the MediaBZ solution and associated professional services. More specifically, Blue Zone generates revenue from: interactive broadcasting development and maintenance, strategic and business process improvement consulting services for broadcasting, media, and wireless communication companies, integration, implementation and production services related to the MediaBZ solution, and software licensing from Blue Zone's family of MediaBZ software applications. Consulting service revenues are recognized upon delivery of the service. Interactive broadcasting maintenance revenue is recognized over the term of the contracts, typically month to month. Software licensing revenue is recognized over the term of the license. For long-term development projects such as the CTV contract, revenue is recognized on a percentage completion basis, based upon achievement of specifically identifiable milestones. Revenue that has been prepaid or invoiced but does not yet qualify for recognition under the Company's policies is reflected as deferred revenue. EXCHANGE PRODUCT AND SERVICE: In fiscal 2000, the Company adopted EITF No. 99-17 "Accounting for Advertising Barter Transactions". EITF 99-17 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 has not recorded barter transactions during the three-month period ended March 31, 2001. Page 10 12 RESULTS OF OPERATIONS The following table sets forth consolidated statement of operations data for the three-month periods ended March 31, 2001 and 2000, expressed as a percentage of total revenues:

~~Nine~~Quarter ~~Months Nine Months~~ Ended ~~Ended~~March ~~September 30~~31, ~~2000 September 30, 1999 Cash flows from operating activities: Net loss $(2,788,653) $ (316,095) Items not involving cash: Stock based compensation 276,060~~ -------------------------------------------------------------------------------- ~~Depreciation~~2001 ~~141,619~~2000 ~~28,565 Changes in operating assets and liabilities Accounts receivable (528,729)~~ -- ~~Work~~-in-~~progress 70,581~~ ---------------------------------------------------------------------------- ~~Prepaid~~CONSOLIDATED ~~expenses~~STATEMENT ~~55,429~~OF ~~(9,614)~~OPERATIONS ~~Accounts~~DATA: ~~payable~~Revenue ~~and~~100.0% ~~accrued~~100.0% ~~liabilities~~Cost ~~(25,666)~~of ~~44,608 Deferred~~ revenue ~~(100,329)~~20.6 ~~43,861~~98.1 ~~Income taxes payable~~ -- ~~(2,589)~~ ----------- ------------------------------------------------------------------- ~~Net~~Gross ~~cash~~profit ~~used~~79.4 in1.9 ~~operating~~Operating ~~activities~~expenses: ~~(2,899,688)~~General ~~(211,264)~~and ~~Cash~~administrative ~~flows~~533.1 ~~from~~985.4 ~~financing~~Research ~~activities:~~and ~~Increase~~Development in37.2 ~~short~~66.6 ~~term~~Selling ~~loan~~and --marketing 137.1~~,996,463~~ ~~Increase~~108.0 inDepreciation ~~payable~~50.8 to57.2 ~~stockholders~~ -- ~~48,487 Repayment of payable to shareholder (45,559)~~ -- ~~Issuance of redeemable equity securities 4,000,000~~ -- ~~Increase in deferred finance costs (459,551)~~ -- ~~Issuance of common shares 6,250~~ -- ----------- ----------------------------------------------------------- ~~Net~~Total ~~cash~~operating ~~provided~~expenses by758.2 ~~(used in) financing activities 3~~1,~~501,140~~ 217.2~~,044,950~~ ~~Cash flows from investing activities: Purchase of fixed assets (563,457) (174,298)~~ ----------- ----------- ~~Net cash used in investing activities (563,457) (174,298)~~ ----------- ----------------------------------------------- ~~Net~~Loss ~~increase~~before ~~(decrease)~~interest ~~in cash~~ and ~~cash~~income ~~equivalents~~taxes ~~37,995~~678.8 1,~~659,388~~215.3 ~~Cash~~Interest ~~and~~income ~~cash~~25.4 ~~equivalents, beginning of period~~ 64.4~~,097,869~~ ~~891~~ ----------- --------------------------------------------------------------------- ~~Cash~~Net ~~and~~loss ~~cash equivalents, end of period $~~ 653.4~~,135,864~~ $ 1,~~660,279~~150.9 =========== =========== ~~Supplementary information: Interest paid $ 488 $ 14,517 Income taxes paid -- 2,589~~ =========== =========== ~~Non-cash transactions Exchange production and service revenue $ -- $ 126,851~~ =========== =========================

REVENUE Product and service revenue increased to $120,000 for the quarter ended March 31, 2001, an increase of 60% over revenue of $75,000 for the quarter ended March 31, 2000. The increase in revenue is mainly attributable to more ongoing work with CTV. CTV accounted for approximately 83% of the revenue for the first quarter of fiscal 2001, compared to 60% for the same period in 2000. Blue Zone recorded no revenue under barter exchange agreements for the quarter ended March 31, 2001, compared to $9,000 for the quarter ended March 31, 2000. This decrease was attributable to the completion of our three-year website evolution project contract with BCTV on December 31, 1999. As a result, revenue for which Blue Zone received cash consideration increased 82%, from $66,000 in 2000 to $120,000 in 2001. COST OF REVENUE The principal components of cost of revenue include labor, materials, and overhead expenses incurred in the delivery of software and services. Cost of revenue decreased by 66% to $25,000 in the quarter ended March 31, 2001 from $73,000 for the same period in 2000. This decrease is mainly as a result of the different nature of the work performed during the periods. In 2001, most of the revenue was derived from support and Page 11 13 maintenance and small projects, which are high margin activities, compared to consulting and implementation work in 2000, which are lower margin tasks. The gross profit percentage increased to 79% from 2% in 2000 because of this change. 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 are no assurances that Blue Zone will be able to maintain gross margins in future periods. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the quarter ended March 31, 2001 were $641,000, a decrease of $94,000 compared to the quarter ended March 31, 2000 expenses of $735,000. The lower level of general and administrative expenses is directly attributable to efforts to control discretionary costs, such as travel and entertainment, professional fees, and general office expenses, offset by higher payroll costs associated with a higher headcount in 2001. The significant components of general and administrative costs are discussed below. Labor costs comprised approximately 55% of general and administrative expenses during the quarter ended March 31, 2001, or $352,000. This is an increase of $139,000 over the 2000 quarter one labor component of $213,000. The increase can be explained by the overall headcount increase; Blue Zone employed 28 employees at March 31, 2000 and 45 employees at March 31, 2001. Accounting, legal, and investor relations fees were $132,000 for the quarter ended March 31, 2001, a decrease of 53% over 2000's expenses of $281,000. The majority of this decrease is attributable to lower legal fees, which decreased as a result of several factors, including high legal costs incurred in the first quarter of fiscal 2000 associated with filing the Company's Form 10, and a greater effort to control legal costs in 2001. Investor relations fees decreased 56% during quarter one of 2001 because of less activity and lower disbursements incurred by the external investor relations firm employed by the Company. Blue Zone conducted an investor road show in 2000, but not in 2001. Blue Zone cancelled the external investor relations contract in March 2001 in order to reduce costs. Travel and entertainment costs charged to general and administrative expenses decreased 42% to $71,000 for the quarter ended March 31, 2001, compared to $123,000 for the same period last year. During the quarter ended March 31, 2000, travel costs were incurred to service the CTV contract and for presentations to the investment community and corporate financing activities. The travel costs incurred in 2001 were mainly for general corporate purposes, as well as some travel in connection with CTV. Facilities costs, which include rent, utilities, and operating costs, were $51,000 for the first quarter of fiscal 2001, an increase of $13,000 over the prior year. Blue Zone had additional space in Vancouver and an apartment in Toronto during the quarter ended March 31, 2001 compared to the same period in fiscal 2000. Page 12 14 General office expenses decreased to $46,000 during the quarter ended March 31, 2001 from $71,000 in the prior year. This decrease of $25,000 can be attributed mainly to lower printing costs and lower membership fees in fiscal 2001. Printing costs were incurred in 2000 for the printing of corporate brochures. Network, internet and telecommunications costs decreased to $32,000 from $64,000 for the same period in the prior year. The decrease can be explained by costs incurred in the first quarter of 2000 to install the Company's communications line, together with overall lower phone charges in 2001. RESEARCH AND DEVELOPMENT Based on the development and anticipated success of the MediaBZ suite of software products and contingent upon our ability to raise additional funds, Blue Zone expects to invest funds to improve the existing MediaBZ products by providing features and options requested by existing and prospective clients. Research and development costs decreased to $45,000 in the first quarter of fiscal 2001 from $50,000 for the same period last year. The change from the prior year can be explained by the different labor mix utilized for research and development activities in 2001 compared to 2000. Labor is the main component of research and development costs. Blue Zone cannot provide any assurance 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 $165,000 for the quarter ended March 31, 2001 from $72,000 for the same period in the prior year, an increase of 129%. The increase in sales and marketing costs is directly tied to the execution of Blue Zone's business plan, as discussed above. As the Company continues to evolve into a product and solutions focused operation, more of Blue Zone's President and Chief Executive Officer's time is focused on selling and marketing activities. In addition, Blue Zone had employees working full time on selling and marketing activities in 2001, and not in 2000. The Company's sales and marketing activities during the first quarter of fiscal 2001 were focused on securing new customers throughout North America. The Company incurred higher costs in the areas of salaries and wages, travel, advertising and promotions, and other related costs in 2001. Selling and marketing costs will likely increase in the future as the Company attempts to expand business in North America and throughout the world. There can be no assurances that these expenditures will result in secure, long-term customers or reliable revenue sources. Page 13 15 DEPRECIATION Depreciation is 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 term of the leases to which the improvements relate. Depreciation expense for the quarter ended March 31, 2001 increased to $61,000 from $43,000 for the same period in the prior year, reflecting higher fixed asset balances in fiscal 2001 compared to fiscal 2000. INCOME TAXES No income taxes were payable in the first quarter of fiscal 2001 or 2000, as a result of the operating loss recorded during those periods. Based on a number of factors, including the lack of a history of profits, management believes that there is sufficient uncertainty regarding the realization of future tax assets, and, accordingly, has not booked an income tax benefit at March 31, 2001 or 2000. The loss incurred in the current year can be carried forward for seven years for Canadian income tax purposes. INTEREST INCOME The Company recorded interest income of $31,000 in the first quarter of fiscal 2001, relating to interest earned on short-term investments (see Liquidity and Capital Resources section below). This is a decrease of $17,000 over the same period in 2000, reflecting lower average short-term investment balances in fiscal 2001. OTHER COMPREHENSIVE INCOME Blue Zone recorded other comprehensive loss of $101,000 during the quarter ended March 31, 2001, compared to $22,000 during the same period in 2000, resulting in accumulated other comprehensive loss of $301,000 at March 31, 2001. Other comprehensive loss relates entirely to the foreign currency translation adjustment arising from the translation of the Company's subsidiary financial statements from Canadian dollars into US dollars upon consolidation. The loss increased as a result of the devaluation of the Canadian dollar against the United States dollar during the first quarter of 2001. The U.S. dollar exchange rate changed from $1.4995 at December 31, 2000 to $1.5763 at March 31, 2001. LIQUIDITY AND CAPITAL RESOURCES The Company does not currently have an adequate source of reliable, long-term revenue to fund operations. As a result, Blue Zone is reliant on outside sources of capital funding. There can be no assurances that the Company will in the future achieve a consistent and reliable revenue stream adequate to support continued operations. In addition, there are no assurances that the Company will be able to secure adequate sources of new capital funding, whether it be in the form of share capital, debt, or other financing sources. The Company currently has one customer that accounted for approximately 83% of the revenue recorded during the quarter ended March 31, 2001. Blue Zone had cash and cash equivalents of $1,003,000 and working capital of $912,000 at March 31, 2001. This compares to cash and cash equivalents of $1,845,000 and working capital of $1,694,000 at December 31, 2000. The Company continued to incur Page 14 16 costs but did not secure any significant new revenue or financing, and this contributed to an erosion of working capital during the quarter ended March 31, 2001. Surplus cash is invested in high grade corporate securities and guaranteed investment certificates with terms to maturity at the date of purchase of less than three months. During the quarter ended March 31, 2001, Blue Zone used cash of $768,000 in operating activities compared to using $688,000 in the same period in the prior year. The increase in cash used for operations can be explained chiefly by a change in the timing of the payments made and received in 2001 compared to 2000. Blue Zone invested $6,000 in fixed assets for the quarter ended March 31, 2001, compared to $233,000 in the same period in 2000. The higher expenditures in 2000 reflect the Company's focus on installing the infrastructure to support growth of the business. Such expenditures were not required in 2001. Subsequent to quarter end, the Company announced that it had negotiated a debt financing of up to $1,000,000 in exchange for the issuance of secured convertible debentures. The funds will be advanced to the Company from time to time in order to fund working capital requirements. The debentures are convertible into common stock of the Company. This financing will enable Blue Zone to continue to work towards achieving its business goals. 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. When additional capital is required, we may sell additional equity, debt or convertible securities or establish credit facilities. There can be no assurances that additional capital will be available when we need it on terms that we consider acceptable. Page 15 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 31, 2001, Blue Zone had not entered into or acquired financial instruments that have material market risk. The Company has no financial instruments for trading 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 report. The fair value of all financial instruments at March 31, 2001 is not materially different from their carrying value. Blue Zone regularly invests funds in excess of 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 at the date of purchase of 90 days or less, does not differ significantly from their face value. To March 31, 2001, substantially all revenues and the majority of cash costs have been realized or incurred in Canadian dollars. To date, Blue Zone has 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, the Company attempts to manage our risk of exchange rate fluctuations by maintaining sufficient net assets in Canadian dollars to retire our liabilities as they come due. Page 16 18 PART II ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any litigation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None. (b) REPORTS ON FORM 8-K None. Page 17 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BLUE ZONE, INC. By: /s/ Bruce Warren ------------------------- Bruce Warren Chief Executive Officer Date: May 10, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Blue Zone and in the capacities and on the dates indicated:

~~THREE~~Signature ~~MONTHS~~Title ~~ENDED~~Date ~~NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 Production and service revenue 100% 26% 100% 34% Exchange production and service revenue 0% 74% 0% 66%~~ --------- ------ ---- By: /s/ Bruce Warren President and Chief May 10, 2001 ---------------------------~~---~~ ~~100%~~Executive ~~100%~~Officer ~~100%~~Bruce ~~100%~~Warren ~~Cost~~and ofDirector ~~production~~(Principal ~~and~~Executive ~~service~~Officer) ~~revenues~~By: ~~41%~~/s/ ~~52%~~Jamie ~~61%~~Ollivier ~~34%~~Executive Creative May 10, 2001 ---------------------------~~----------------------~~ ~~Gross~~Director ~~profit 59% 48% 39% 66% Operating expenses General~~ and ~~administrative~~Director ~~185%~~Jamie ~~100%~~Ollivier ~~268%~~By: ~~42%~~/s/ ~~Research~~F. ~~and~~Michael ~~development~~P. ~~41%~~Warren 9%Chairman ~~52% 6% Selling~~ and ~~marketing~~Director 0%May ~~4% 11% 2% Exchange advertising 0% 74% 0% 66% Depreciation 11%~~ 10%, ~~16%~~2001 5% ---------------------------~~----------------------~~ ~~237%~~F. ~~197%~~Michael ~~347%~~P. ~~121%~~Warren By: /s/ Tryon Williams Director May 10, 2001 --------------------------- Tryon Williams By: /s/ Jay Shecter Director May 10, 2001 --------------------------- ~~Net~~Jay ~~loss~~Shecter ~~178%~~By: ~~149%~~/s/ ~~308%~~Dave ~~55%~~Thomas Director May 10, 2001 --------------------------- Dave Thomas By: /s/ Jeremy Black Chief Financial Officer May 10, 2001 --------------------------- (Principal Financial Jeremy Black and Principal Accounting Officer)

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Filing Compare · BLUE ZONE INC