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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
[X] Registration statement pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934
or
[ ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended_____________________
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]
For the transition period from___________________to__________________
Commission file number__________________
Videoflicks.com Inc.
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(Exact name of registrant as specified in its charter)
Province of Ontario, Canada
___________________________
(Jurisdiction of incorporation or organization)
106 Orenda Road, Brampton, Ontario L6W 3W6
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (905) 459-5471
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Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
None
_________________________ _________________________________________
_________________________ _________________________________________
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
________________________________________________________________________________
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
________________________________________________________________________________
(Title of Class)
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Indicate the number of outstanding shares of each of the issuer's classes of
capital or common shares as of the close of the period covered by the annual
report - ____________ common shares outstanding.
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 . No X .
Indicate by check mark which financial statement item the Registrant has
elected to follow.
Item 17 X . Item 18 .
Unless otherwise indicated, all references herein are expressed in U.S.
dollars.
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE HISTORY
The Internet business of Videoflicks.com Inc. (the "Company") began operations
as a division of Videoflicks Canada Limited on September 1, 1995 with the
recording of its first sales on the Internet. The Domain Name "Videoflicks.com"
was registered with InterNIC Registration Services in January of 1995.
Videoflicks Canada Limited is in the business of rental and sales of videotape
movies through its corporate owned stores and franchise stores. Videoflicks
Canada Limited began operations as a video movie rental store in 1981 and
expanded into 4 corporate owned stores with 43 franchise video rental stores
operating under the Videoflicks name in Canada in 1999.
The Internet division of Videoflicks Canada Limited initially consisted of 2
employees who developed software and procedures to offer videos for sale and
receive payment over the Internet. As sales began to increase more employees
were added to ship movie videos and correspond with customers and web site
visitors. Initially, the video movie orders were filled by the inventory of
Videoflicks Canada Limited and by ordering directly from the movie distributor
or movie studio. The product was shipped to Videoflicks Canada Limited,
packaged and shipped out to the customer. As the number of sales transactions
grew the company began to fill some orders by drop shipment, where the order and
payment is taken through the company's web site, the video is then ordered from
the distributor and shipped directly from the distributor to the customer. This
method accounts for 8% of current shipments in 1999. Videoflicks.com Inc.
currently employs 35 people.
In November of 1998 Videoflicks Canada Limited transferred the assets of its
Videoflicks.com Internet division to its wholly-owned private shell company
which it had incorporated on July 4, 1997, Videoflicks.com Limited, in
contemplation of amalgamating Videoflicks.com Limited with two arm's length
companies, Mantaur Petroleum Corporation, a public shell company which had no
operating business and no material assets or liabilities, and 1318780 Ontario
Limited, a private company which was formed to raise financing for the
amalgamated company and which otherwise had no business operations. Following
arm's length negotiations the amalgamating companies entered into
Pre-Amalgamation and Amalgamation Agreements reflecting their relative
contributions to the amalgamated company, being the
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Videoflicks.com Internet business of Videoflicks.com Limited, the public
company status of Mantaur Petroleum Corporation as a reporting issuer under the
Securities Act (Ontario) and the $1.2 million raised in 1318780 Ontario
Limited. The objective of the amalgamation was to create a new company having
the Videoflicks.com Internet business, $1.2 million in cash, and public company
status as a reporting issuer under the Securities Act (Ontario).
The Company, Videoflicks.com Inc.,was formed on March 23, 1999 by the
amalgamation of Mantaur Petroleum Corporation, 1318780 Ontario Limited and
Videoflicks.com Limited, on a reverse take-over basis, by means of Articles of
Amalgamation issued under the Business Corporations Act (Ontario). The legal
effect of the amalgamation was that upon the filing of the Articles of
Amalgamation each of the amalgamating companies ceased to exist as a distinct
legal entity but were combined into one new legal entity, Videoflicks.com Inc.
Under the Business Corporations Act (Ontario) the Articles of Amalgamation are
deemed to be the Articles of Incorporation of Videoflicks.com Inc. Upon
amalgamation the shares of each of the amalgamating companies were converted
into shares of the amalgamated company with the effect that all of the assets,
liabilities and contractual obligations of the amalgamating companies became
the assets, liabilities and contractual obligations of the amalgamated
company, Videoflicks.com Inc.
Upon amalgamation an aggregate of approximately 16,760,400 common shares and
4,180,200 Series A warrants of the Company were issued on the following basis
as set forth in the Amalgamation Agreement:
a)every five issued and outstanding common shares of Mantaur Petroleum
Corporation were converted into one common share and one-half of one Series A
warrant of the Company;
b) every one common share of Videoflicks.com Limited was converted into
one common share of the Company;
c)every one common share of 1318780 Ontario Limited was converted into
one common share and one-half of one Series A warrant of the Company; and
d) every one Class A share of Ontco was converted into one common share of
the Company,
with the result that, upon amalgamation, approximately 5,960,400 common
shares and 2,980,200 Series A warrants of the Company were issued to
shareholders of Mantaur Petroleum Corporation, 8,000,000 common shares of the
Company were issued to the shareholder of Videoflicks.com Limited and 2,800,000
common shares and 1,200,000 Series A warrants of the Company were issued to
shareholders of 1318780 Ontario Limited. Each Series A warrant of the Company
entitled the holder to purchase, for the price of$0.75, one common share and
one Series B Warrant of the company on or before July 23, 1999, after which the
Series A warrants expired. Each Series B warrant of the Company entitled the
holder thereof to purchase one common share of the Company for $1.15 on or
before November 23, 1999, their expiry date.
An aggregate of 1,047,670 Series A Warrants were exercised up to July 23, 1999,
the date of expiry of the Series A Warrants, yielding aggregate gross proceeds
of $785,752.50. The remaining 1,932,530 Series A Warrants expired, unexercised
at the close of business on July 23, 1999. Pursuant to the exercise of the
aforementioned 1,047,670 Series A Warrants an aggregate of 1,047,670 Series B
Warrants were issued. As of the close of business on November 23, 1999, the
date of expiry of the Series "B" Warrants, 112 Series "B" Warrants had been
exercised, yielding aggregate gross proceeds of $128.80 to the Company, and the
remaining 1,047,648 Series "B" Warrants expired, unexercised.
Videoflicks.com Inc. currently has no officers or directors who were with
Mantaur Petroleum Corporation or 131870 Ontario Limited and has no contracts or
commitments with any former officers or directors of these companies. Michael
Kavanagh, director and President of the Company is a director of Videoflicks
Canada Limited and beneficially owns 50% of the stock of Videoflicks
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Canada Limited, the other 50% being owned by his spouse Beverley Kavanagh.
Michael Kavanagh and his spouse, through their ownership of Videoflicks Canada
Limited, are beneficial owners of approximately 47.3% of the outstanding common
shares of the Company. The Company has entered into an agreements with
Videoflicks Canada Limited relating to the supply of inventory products for
sale and a rental agreement for office space. (These agreements are Exhibits
2.4 and 2.5 to this Form)
GENERAL
The Company is engaged in the business of selling movie videos on VHS videotape
and DVD ("Digital Video Disk") formats through its web site on the Internet
(www.videoflicks.com), utilizing software developed by the Company.
Videos may be searched for on the web site by title, category, or
actor/character. Reviews by professional critics as well as customer reviews
are provided to assist the customer. The web site also provides announcements
of forthcoming releases together with release dates. At the present time the
Company's web site has over 200,000 pages, listing more than 70,000 movies.
Sales to date include more than 23,000 different titles on videocassette and
digital video disc ("DVD") to over 60,000 customers in more than 30 countries.
The web site currently receives more than 1,000,000 visitors per month. The
database not only lists nearly all commercially available videos known to the
Company, but also those announced for forthcoming release, together with the
release date.
The Company offers search and browse features, e-mail services, web-based
credit card payment, direct shipping to customers, and customer profiled
shopping services where the customer determines the method of searching the
video database either by title, actor, category, or director. Customers
determine if they would like to be notified of the upcoming specials, new or
re-leases of videos in their interest categories either through e-mail, fax or
mail and the customer determines the method of payment and shipping of product.
The Company intends over time to expand its catalogue into other products,
such as music and video games. The Company has virtually unlimited "shelf
space" and offers customers a vast selection of videos accessible through a
data search and information retrieval page on the company's web site.
The Company strives to offer an online shopping experience that involves
discovery and fulfilment for its customers. The Company believes that the sale
of videos and other products and services over the web offers attractive
benefits to consumers, including, without limitation, enhanced selection,
convenience, ease-of-use, competitive pricing, depth of content and information
and personalization. Customers entering the Videoflicks.com web site can, in
addition to ordering videos and other products, purchase gift certificates,
conduct targeted searches, browse highlighted selections, video best sellers
and other features, search for videos by subject category, stars, directors,
and the like, read and post reviews, register for personalized services,
participate in promotions and check order status. The key features of the web
site include browsing, reviews and content, interaction with the online
community (users logged on to the Company's web site) through movie trivia and
e-mail discussion available on the web site, recommendations and
personalization, and other unique services, including the availability of
multilingual videos.
The web site offers visitors a variety of highlighted subject areas and special
features arranged in a fashion intended to enhance video/movie search,
selection and discovery. In addition, the home page presents a variety of
products and information of topical or current-event interest. To enhance the
shopping
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experience and increase sales, the Company features a variety of videos on a
rotating basis throughout the site.
A significant feature of the web site is its interactive, searchable catalogue
of more than 70,000 titles, including most of the English language movies
commercially available on video, and a small number of CD's, videos, audiotapes
and other products. The Company provides a selection of search tools to find
videos and other products based on title, subject, star and director.
Utilizing proprietary software, the Company has designed a fully scalable
systems architecture for the Internet shopping marketplace (i.e. the web server
and connection utilized by the Company's web site can be expanded to
accommodate increased web site "traffic"). The web site accommodate up to
500,000,000 'hits' per month, 50 times the current number of users on existing
hardware. It has integrated all aspects of retail transaction processing,
including order placement, secure payment verification, inventory control,
order fulfilment and vendor invoicing in one seamless and automated process.
The system's credit card encryption uses state of the art 128 bit technology.
The system being used now by the Company to sell videos and DVD's can be used
to sell any other products that the Company chooses to sell.
The employment of this specialized information system by the Company allows its
customers to access an automated marketplace of video movies from the
inventories of a large number of manufacturers and distributors and provides
detailed product descriptions, product availability, delivery times, delivery
status and back-order information. All sales and payments are processed
electronically 24 hours a day, with limited employee involvement.
The Company does not maintain an inventory of videos but instead places its
customers' orders with a number of manufacturers and distributors who ship the
video products ordered directly to the Company's customers, thereby minimizing
the Company's handling, delivery and maintenance expenses. The Company does
not have written supply agreements with such manufacturers and distributors,
most of whom have been supplying the Company's Internet business since 1995.
Notwithstanding the risks inherent in such lack of written supply agreements
(See Risk Factors - Lack of Written Contracts With Distributors and
Manufacturers), Company management believes that, because of the number of
available suppliers of videos, such risks are nominal and that the Company
would be able to quickly replace any supply of product. The Company also has a
Supply Agreement with its controlling shareholder, Videoflicks Canada Limited,
pursuant to which Videoflicks Canada Limited has agreed to supply videos to the
Company from its inventory at the wholesale catalogue price charged by
wholesalers on an arm's length basis on videos, plus shipping charges and
applicable taxes. A copy of this agreement is shown in exhibit 2.4.
The Company can capture information from orders received through its web site
to develop individual and overall customer profiles with which to focus its
marketing efforts by, for example, marketing specific movies or products or
offering personalized services to customers based on such profiles. The
Company has no current plans to resell this information to other parties.
Total sales and revenues during the past three fiscal years ending August 31,
1998 for the Videoflicks.com Internet division of Videoflicks Canada Limited
were earned almost entirely through the sales of video movies over the Internet
to unrelated customers. No significant sales or revenue was earned through the
Videoflicks.com Internet division of Videoflicks Canada Limited nor by the
Company through any other method of sales or product except for a small
quantity of recorded music in compact discs ("CDs")format. Historically, sales
of videos on VHS and DVD formats and sales of CDs have represented
approximately 87%, 11%
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and 2% respectively of total sales revenues. Total sales for the nine months
ending May 31 1999 are $1,240,000 and for fiscal year ending August 31, 1998
were $820,000, August 31 1997 $431,000 and August 31 1996 $71,000. Repeat
customers account for 20% to 25% of sales. The total loss for each of these
periods are, nine months ended May 31 1999 ($356,000), August 31, 1998
($113,000), August 31, 1997 ($69,000) and August 31, 1996 ($45,000). In each
of these periods the geographical breakdown of sales has remained constant with
75% to the United States, and the balance of sales being less than 5% for any
other country.
BUSINESS PLAN
The Company's business strategy and plan of operations for the next twelve
months is to build strong brand recognition, strengthen customer loyalty and
increase customer traffic to the Videoflicks.com web site, enhance supplier
relationships, maximize repeat purchasers and develop incremental revenue
opportunities such as offering rental space for banner advertising on the site,
while creating an economic model that is superior to that of the capital and
real estate intensive traditional retailing business. Achieving increased
profitability is dependent upon the Company's continued growth through its
ability to generate and sustain substantially increased revenue levels. The
objective of Company management is to achieve growth in both revenues and
profits in a fiscally responsible and sustainable manner.
The Company's business strategy and plan of operations for both the remainder
of this fiscal year and for the first six months of the next year is to build
strong brand recognition, strengthen customer loyalty and increase customer
traffic to the Videoflicks.com web site, enhance supplier relationships,
maximize repeat purchasers, develop incremental revenue opportunities through
affiliated or related sites, related product areas, acquisition of
complementary businesses, products or technologies and by offering rental space
for banner advertising on the site,while creating an economic model that is
superior to that of the capital and real estate intensive traditional retailing
business. Achieving increased profitability is dependent upon the Company's
continued growth through its ability to generate and sustain substantially
increased revenue levels. The objective of Company management is to achieve
growth in both revenues and profits in a fiscally responsible and sustainable
manner.
To continue this growth, the Company must maintain and increase its customer
base, implement and successfully execute its business and marketing strategy,
continue to develop and upgrade its technology and transaction-processing
systems, improve its web site, provide superior customer service and order
fulfilment, respond to competitive developments and attract, retain and
motivate talented personnel and management experienced in large and
fast-growing organizations.
The Company believes that success will depend on its ability to extend its
brand position, to provide its customers with outstanding value and a superior
shopping experience and the ability to achieve sufficient sales volume to
realize economies of scale. The company plans to grow the customer base
through advertising campaigns, creating marketing relationships with other Web
based retailers and information providers and expansion of the company's
affiliate program. Our customer service representatives are movie enthusiasts
who can offer superior service to customers looking for hard to find videos and
can answer inquiries about movies, actors etc. to help a client locate the
movie of their choice, through e-mail, Chat lines or voice. The company is
also implementing technical improvements to its web site which will enable more
text and graphics to be added to its movie/actor information feature to
further enhance the customer shopping experience. The Company believes that
its emphasis on customer service as well as management's experience in both
Internet retail since 1995 and its 10 to 18 years of experience in storefront
retail of videos to be the Company's primary competitive advantages.
To date the business of the Company has operated with little or no advertising
support, relying upon word-of-mouth publicity. Notwithstanding the lack of
advertising support, sales generated by the Company's business for the nine
months ended May 31, 1999 increased 100% to $1,240,000 as compared to sales for
the nine months ended May 31, 1998. Repeat customers represent 20 to 25% of
orders. For each of the last 3 fiscal years approximately 75% of the Company's
sales were made to customers in the United States and of the remaining sales,
no more than 5% was concentrated in any one country. Despite this historical
organic growth, the Company believes that continuing to strengthen its brand is
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critical to achieving widespread acceptance of Videoflicks.com, particularly in
light of the competitive nature of the Company's market. Promoting and
positioning its brand will depend largely on the success of the Company's
marketing efforts and the ability of the Company to provide high quality
services. In order to promote its brand, the Company will need to increase its
marketing budget and otherwise increase its financial commitment to creating
and maintaining brand loyalty among users. Although sales are increasing, to
date the company has not achieved profitability and has sustained losses in
each period. The Company expects to continue to incur net losses for the next
few years.
A pilot-program for advertising utilizing on-line media and print conducted in
fiscal 1998, suggested to management of Videoflicks Canada Inc. that
expenditures for advertising would result in an increase in the number of
visitors to its web site and correspondingly an increase in sales volumes.
Accordingly, management of the Company had committed $600,000 to an initial
advertising campaign, focussing on banner advertising, that is the placement of
the Company's advertisements on other web sites, which was to have commenced in
August, 1999. However management of the Company subsequently determined that
the initial advertising campaign would not be a sufficiently cost effective
means of generating new customers and therefore decided not to proceed with the
proposed campaign. Although advertising will continue to be a part of the
Company's business plan, management of the Company is also reviewing
alternative means of marketing including arrangements whereby the Company would
have access to other companies' customer bases on a sharing-of-revenue basis.
Web site development and operating infrastructure development will also be a
priority. Company management believes that the development of a high volume of
traffic on its web site will be a key element of its success. Therefore, the
satisfactory performance, reliability and availability of the web site,
transaction-processing systems and network infrastructure are critical to the
Company's reputation, and its ability to attract and retain customers and
maintain customer service levels. In this regard, during fiscal 1999 the
Company hired additional programmers to develop its web site and additional
staff to fulfill orders and ensure timely product shipments. The Company's web
site development group has increased the efficiency of the data and systems
management, thereby streamlining the order-processing system. The Company plans
to continue to implement technology-driven enhancements to its web site to
provide increasingly valuable personal service programs, make the
user-interface as intuitive, engaging and fast as possible and continuously
improve the efficiency of its order fulfilment activities. To meet the demands
of anticipated future growth in traffic on the Company's web site the Company
intends to expand and upgrade its network infrastructure by adding another T1
transmission line (a 40 megabyte per second data connection line)or similar
expansion which will be required if the average number of 'users' (i.e. unique
visitors signing on to access the Company's web site) per day increases to
100,000 from the present rate of approximately 33,000 or if the number of
'hits' (i.e. number of individual pages on the web site which are viewed by
users) per month increases to 45,000,000 from the present rate of 15,000,000.
Upon amalgamation the Company succeeded to all of the assets and liabilities
of each of the amalgamating companies which ceased to exist as distinct
entities but merged to form the Company. Included in the assets to which the
Company succeeded was the $1.2 million which one of the amalgamating companies,
1318780 Ontario Limited, had raised for the purpose of funding the Company.
The Company obtained additional funding through the exercise of warrants which
it issued pursuant to the amalgamation. In this regard, as of the close of
business on July 23, 1999, the date of expiry of the Series "A" Warrants, an
aggregate of 1,047,670 Series "A" Warrants had been exercised from which the
Company realized aggregate gross proceeds of $785,752.50 and an aggregate of
1,047,670 Series "B"
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Warrants were issued pursuant to the exercise of the aforementioned Series "A"
Warrants. As of the close of business on November 23, 1999, the date of expiry
of the Series "B" Warrants, 112 Series "B" Warrants had been exercised, yielding
aggregate gross proceeds of $128.80 to the Company, and the remaining 1,047,558
Series "B" Warrants expired, unexercised. The Company has outstanding and
contingent stock options, granted under the Company's Stock Option Plan,
exercisable to purchase up to 2,240,000 Company common shares at $0.50 per share
from which the Company would realize an additional $1,120,000 if all such
options were exercised. On October 26, 1999 the Company also granted a stock
option to Thomson Newspapers Inc., outside of its Stock Option Plan, to purchase
up to 750,000 common shares of the Company at $0.48 per share which would yield
aggregate proceeds to the Company of $360,000 if all the shares were purchased
under such option. The Company intends to allocate approximately 70%-75% of the
funds obtained during the current fiscal year from the amalgamation and through
the exercise of its Warrants and stock options principally for marketing to
increase the Company's sales and the remaining 25%-30% for hardware and software
improvements to the Company's web site and for general working capital purposes.
Planned expansion, growth through advertising, and upgrades to the
Company's web site will require an additional estimated $5,000,000 over the next
12 months. A portion of these funds may or may not be raised through the
exercising of the stock options however the Company will likely need to raise
additional equity or debt financing in order to execute its business plan.
The Company views its producers and distributors as customers and seeks to
utilize its competitive advantages in customer service and industry experience
to build strong relationships with them. In addition, the demographic and
purchasing data accumulated by the Company will enable it to target video
studios for particular product offerings to the company's customers. Through
targeted marketing and virtually unlimited shelf space the Company intends to
offer suppliers enhanced promotional opportunities for new products, new video
titles and second and third tier titles.
The Company intends to leverage its brand, on-line commerce experience,
operating infrastructure and customer base to broaden its presence and develop
additional revenue opportunities. Management of the Company believes that it
can further its growth opportunities through revenue sharing programs with
companies that send customers to the company for video purchases, and
advertising sharing programs where the company offers advertising space on the
web site for equal space on other web sites or with Internet Service Providers.
The Company will also look to other International video retail companies and
distributors to service customers that require video and DVD in a format other
than that available in North America. In return the company can fulfill their
requirements for their North American customers. The Company will also
consider developing incremental revenue opportunities through affiliated or
related sites, related product areas and acquisition of complementary
businesses, products or technologies . The Company will also consider
exploiting opportunities presented by its customer demographic and substantial
web site traffic to sell banner advertising on its web site.
Commitment to research and development is an important policy of the Company as
management of the Company realizes that to stay competitive the Company must be
on the leading edge of computer hardware and software development of the web
for retail transactions and information technology. The Company has expended
$69,000 in fiscal year ended August 31, 1999 for research and development,
$39,000 for August 31, 1997, and $8,000 in fiscal year ended August 31, 1996.
For the none months ended May 31, 1999 this expenditure has grown to $102,000
and is expected to increase further in the future as the Company develops new
applications and procedures. Although management of the Company does not
expect that increased web site traffic will necessitate web site capacity
upgrades in the next 12 months, the Company intends to increase its web site
capacity in any
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case within the next 12 months from the present 990,000 users and 15,000,000
hits per month to 35,000,000 users and 750,000,000 hits per month, at a cost of
approximately $10,000.
COMPETITIVE ENVIRONMENT
The online commerce market, particularly over the World Wide Web, is new,
rapidly evolving and intensely competitive. In addition, the retail video
industry is intensely competitive. The company's current or potential
competitors include (i) various online video sellers such as vendors of other
information-based products such as CDs and books, including entrants into
narrow specialty niches, (ii) a number of indirect competitors that specialize
in online commerce, through which retailers other than the Company may offer
products and (iii) publishers, distributors and retail vendors of videos, music
and books, including Amazon.com, Blockbuster Video, Reel.com and other large
specialty videosellers and integrated media corporations. These characteristics
of the Industry may have a material impact on the future financial performance
of the company. See "Risk Factors Affecting the Company" for further discussion
of competition.
INTELLECTUAL PROPERTY
A trademark registration application was filed with the U.S. Patent and
Trademark Office in January 1999 for the mark "Videoflicks.com". All rights in
respect of the trademark application were acquired by the Company upon
amalgamation. The mark Videoflicks.com was first used in 1995, in connection
with the business of the Company, by Videoflicks Canada Limited from which all
rights in the mark were acquired by Videoflicks.com Limited and subsequently by
the Company upon amalgamation.
HUMAN RESOURCES
On November 23, 1999, the Company had 32 full-time employees and 3 part-time
employees. As the Company encourages share ownership, it has established an
option plan (see "Item 12. - Compensation - Stock Option Plan") to attract,
motivate and retain key employees and consultants. The Company's employees are
not governed by a collective bargaining agreement. The Company believes that
its employee relations are good.
RISK FACTORS AFFECTING THE COMPANY
The business of the Company entails significant risks, and an investment in the
securities of the Company should be considered highly speculative. An
investment in the securities of the Company should only be undertaken by
persons who have sufficient financial resources to enable them to assume such
risks. The following is a general description of all material risks which can
adversely affect the business and in turn the financial results which can
affect the value of an investment in common stock.
The company has a limited operating history in an industry that is new and
quickly evolving with changing markets. With the company being in the
development stage with no long term operating history or history of
profitability an investor should consider the risks and difficulties early
stage companies will encounter in the new and rapidly changing market of
online commerce.
COMPETITION
THE MARKET FOR VIDEO SALES OVER THE INTERNET IS NEW, RAPIDLY EVOLVING AND
INTENSELY COMPETITIVE. THE COMPANY MAY NOT BE ABLE TO SUCCEED AGAINST
COMPETITORS
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WHICH HAVE LARGER CUSTOMER BASES, GREATER BRAND RECOGNITION AND SIGNIFICANTLY
GREATER FINANCIAL, MARKETING, TECHNICAL AND OTHER RESOURCES THAN THE COMPANY.
The market for video sales over the Internet is new, rapidly evolving and
intensely competitive, and the Company expects competition to intensify further
in the future. Barriers to entry are relatively low, and current and new
competitors can launch new sites at relatively low cost using commercially
available software.
The Company potentially faces competition from other large online communities
and services that have expertise in developing online commerce and in
facilitating online video sales interaction. Other large companies with strong
brand recognition and experience in online commerce, such as large media
companies may also seek to compete in the online video sales market.
Competitive pressures created by any one of these companies, or by the
Company's competitors collectively, could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company believes that the principal competitive factors in its market are
volume and selection of videos, population of buyers, customer service,
reliability of delivery, brand recognition, web site convenience and
accessibility, price, quality of search tools and system reliability.
Many of the Company's current and potential competitors have larger customer
bases, greater brand recognition and significantly greater financial,
marketing, technical and other resources than the Company. In addition, other
online video sales companies may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies as use of the Internet and other online services
increases. Therefore, some of the Company's competitors with other revenue
sources may be able to devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing policies, obtain more favourable terms
from manufacturers and distributors and devote substantially more resources to
web site and systems development than the Company or may try to attract traffic
by offering videos at
a lower price.
The Company expects that competition in the online commerce market will
intensify in the future. For example, as various market segments obtain large,
loyal customer bases, participants in those segments may seek to leverage their
market power to the detriment of participants in other market segments. In
addition, new technologies and the expansion of existing technologies may
increase the competitive pressures on online retailers, including the Company.
For example, "shopping agent" technologies will permit customers to quickly
compare the Company's prices with those of its competitors.
Increased competition may result in reduced operating margins, loss of market
share and diminished value in the Company's brand. There can be no assurance
that the Company will be able to compete successfully against current and
future competitors.
Companies that control access to transactions through network access or web
browsers could promote the Company's competitors or charge the Company
substantial fees for inclusion. New technologies and the expansion of existing
technologies may increase the competitive pressures on the Company by enabling
the Company's competitors to offer a lower-cost service. Web-based applications
that direct Internet traffic to web sites may channel users to trading
services that compete with the Company. Any and all of these events could have
a material adverse effect on the Company's business, results of operations,
prospects and financial condition.
<PAGE> 11
-11-
There is no assurance that the Company's responses to its competitive
environment will have a positive competitive effect.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
IF THE COMPANY FAILS TO PROMOTE AND MAINTAIN ITS BRAND OR INCURS SUBSTANTIAL
EXPENSES IN AN ATTEMPT TO PROMOTE AND MAINTAIN ITS BRAND OR IF THE COMPANY'S
EXISTING OR FUTURE STRATEGIC RELATIONSHIPS FAIL TO PROMOTE THE COMPANY'S BRAND
OR INCREASE BRAND AWARENESS, THE COMPANY'S BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION WOULD BE MATERIALLY ADVERSELY AFFECTED.
Failure of the Company to promote and maintain its brand may have an adverse
effect on its sales revenues. However, there can be no assurance that brand
promotion activities will result in increased sales revenues in the short term
and the longer term or that any such revenues would offset the expenses
incurred by the Company in building its brand.
RAPID TECHNOLOGICAL CHANGE
THE MARKET IN WHICH THE COMPANY COMPETES IS CHARACTERIZED BY RAPIDLY CHANGING
TECHNOLOGY AND EVOLVING INDUSTRY STANDARDS. THE FAILURE OF THE COMPANY TO ADAPT
TO SUCH CHANGES WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS,
RESULTS OF OPERATIONS, PROSPECTS AND FINANCIAL CONDITION.
The Company's future success will depend, in part, on its ability to adapt to
rapidly changing technologies, to adapt its services to evolving industry
standards and to continually improve the performance, features and reliability
of its service in response to competitive service and product offerings and
evolving demands of the marketplace.
There is the potential for emerging technologies to replace the need, or demand
for consumers to physically own video movies, such as digital cable and
on-demand movie rental. These technologies can reduce the market for movie
videocassettes and DVD. The widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by the Company to modify or adapt its services or
infrastructure, failing which could result in material adverse effects on the
Company's business, results of operations, financial condition and continued
viability.
WEB SITE CAPACITY
ANY INABILITY OF THE COMPANY'S WEB SITE TO ACCOMMODATE INCREASES IN WEB SITE
TRAFFIC COULD HAVE A MATERIAL ADVERSE IMPACT ON FUTURE RESULTS.
Current usage amounts could increase beyond the current capacity of the
Company's hardware and software limits. Failure of the Company's web site to
accomodate increases in web site traffic could result in material adverse
effects on the Company's business, results of operations, financial condition
and continued viability. The proprietary software has been developed to be
fully scaleable to accommodate up to 12,000,000 'users' (i.e. unique visitors
signing on to access the Company's web site) each month, being approximately 12
times the current number of users. Current usage, being approximately 33,000
users per day (approximately 990,000 users per month) and 15,000,000
'hits'(i.e. individual web site pages viewed by users) per month is at 33% of
the capacity of the existing T1 transmission line (a 40 megabyte per second
data connection line), being 100,000 users per day (3,000,000 users per month)
and 45,000,000 hits per month.
<PAGE> 12
-12-
The company also has a backup system capable of running if the primary server
system becomes overused. The system has been tested to run at 80% of capacity.
RISKS RELATED TO CONSUMER TRENDS
ANY DECLINE IN DEMAND FOR THE GOODS OFFERED THROUGH THE COMPANY'S SERVICE AS A
RESULT OF CHANGES IN CONSUMER TRENDS COULD HAVE A MATERIAL ADVERSE EFFECT ON
THE COMPANY'S BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The Company derives substantially all of its revenues from selling video
movies. The Company's future revenues will depend upon continued demand for the
types of goods that are offered by the Company. Changes or trends in consumer
preferences may also cause significant fluctuations in the Company's operating
results from one quarter to the next.
Any new or complementary services, products or transaction formats introduced
by the Company or any expansion of the breadth and depth of services offered by
the Company to address such trends may not be accepted by the consumer. The
lack of market acceptance of such services or the Company's inability to
generate satisfactory revenues from such expanded services to offset their cost
could have a material adverse effect on the Company's business, results of
operations, prospects and financial conditions. There can be no assurance that
the Company would be able to expand its operations to offer such new
technologies in a cost-effective or timely manner or that any such efforts
would maintain or increase overall market acceptance. Furthermore, any new
business or service launched by the Company that is not favorably received by
consumers or wholesalers could damage the Company's reputation and diminish the
value of its brand name. Expansion of the Company's operations in this manner
would also require significant additional expenses and development, operations
and other resources and would strain the Company's management, financial and
operational resources.
LACK OF WRITTEN CONTRACTS WITH DISTRIBUTORS AND MANUFACTURERS
THE COMPANY HAS NO WRITTEN AGREEMENTS WITH MANUFACTURERS AND DISTRIBUTORS OF
VIDEOS WITH WHOM THE COMPANY PLACES ITS CUSTOMERS' ORDERS.
Except for the Supply Agreement with Videoflicks Canada Limited, the Company
has no written agreements with manufacturers and distributors of videos with
whom the Company places its customers' orders If such manufacturers and
distributors of videos should stop shipping videos ordered by the Company or
unilaterally and adversely change the terms and conditions of the present
arrangements and the Company was unable to, in a timely fashion, secure an
alternative supplier of videos, or if an alternative supplier of videos was
secured but on terms less favorable, then this could have a significant adverse
effect on the financial performance of the Company and thereafter the continued
viability of the Company and the Company may have no recourse as against such
manufacturers and distributors.
ONLINE COMMERCE SECURITY RISKS
SECURITY BREACHES COULD AFFECT THE SECURE TRANSMISSION OF CONFIDENTIAL
INFORMATION, INCLUDING CUSTOMER CREDIT CARD NUMBERS AND EXPOSE THE COMPANY TO
LIABILITY.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Currently, a
significant number of the Company's customers authorize direct billing of their
credit card accounts directly for all videos purchased. The use of credit cards
account for 96% of all transactions. The balance of sales are paid for by
check
<PAGE> 13
-13-
or money order. The Company relies on encryption and authentication technology
licensed from third parties to provide the security and authentication
technology to effect secure transmission of confidential information, including
customer credit card numbers. There can be no assurance that advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments will not result in a compromise or breach of the
technology used by the Company to protect customer transaction data. If any
such compromise of the Company's security were to occur, it could have a
material adverse effect on the Company's reputation and, therefore, on its
business, results of operations, prospects and financial condition.
To the extent that activities of the Company involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could damage the Company's reputation and expose the Company to a risk
of loss or litigation and possible liability. A party who is able to circumvent
the Company's security measures could misappropriate proprietary information or
cause interruptions in the Company's operations. The Company may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. Concerns over the
security of transactions conducted on the Internet and other online services
and the privacy of users may also inhibit the growth of the Internet and other
online services generally, and the web in particular, especially as a means of
conducting commercial transactions. The Company's insurance policies carry a
$2,000,000 coverage limits, which may not be adequate to reimburse the Company
for losses caused by security breaches. There can be no assurance that the
Company's security measures will prevent security breaches or that failure to
prevent such security breaches will not have a material adverse effect on the
Company's business, results of operations and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS
THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO IDENTIFY, NEGOTIATE
OR FINANCE FUTURE ACQUISITIONS SUCCESSFULLY, OR TO INTEGRATE SUCH ACQUISITIONS
WITH ITS CURRENT BUSINESS.
If appropriate opportunities present themselves, the Company intends to acquire
businesses, technologies, services or products that the Company believes will
promote the growth required under the business plan. The process of integrating
an acquired business, technology, service or product into the Company may
result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of the Company's business. Moreover, there can be no assurance that
the anticipated benefits of any acquisition, will be realized. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities and/or amortization
expenses related to goodwill and other intangible assets, which could
materially adversely affect the Company's business, results of operations,
prospects and financial condition.
DEPENDENCE ON THE WEB INFRASTRUCTURE
THERE CAN BE NO ASSURANCE THAT THE INFRASTRUCTURE OR COMPLEMENTARY PRODUCTS OR
SERVICES NECESSARY TO MAKE THE WEB A VIABLE COMMERCIAL MARKETPLACE FOR THE LONG
TERM WILL BE DEVELOPED OR THAT IF THEY ARE DEVELOPED, THAT THE WEB WILL BECOME
A VIABLE COMMERCIAL MARKETPLACE FOR SERVICES SUCH AS THOSE OFFERED BY THE
COMPANY.
The success of the Company's service will depend in large part upon the
development and maintenance of the web infrastructure, such as a reliable
network backbone with the necessary speed, data capacity and security, or
timely
<PAGE> 14
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development of complementary products such as high-speed modems, for providing
reliable web access and services. This service is provided by third parties to
the company. Because global commerce and the online exchange of information is
new and evolving, it is difficult to predict with any assurance whether the web
will prove to be a viable commercial marketplace in the long term. The web has
experienced, and is expected to continue to experience, significant growth in
the numbers of users and amount of traffic. To the extent that the web
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements of users, there can be no assurance that the
web infrastructure will continue to be able to support the demands placed on it
by this continued growth or that the performance or reliability of the web will
not be adversely affected.
Outages and delays could adversely affect the level of web usage and also the
level of traffic. This could have a significant negative impact on the
Company's sales. In addition, the web could lose its viability due to delays
in the development or adoption of new standards and protocols to handle
increased levels of activity or due to increased governmental regulation. The
web has experienced a variety of outages and other delays as a result of damage
to portions of its infrastructure, and could face such outages and delays in
future, including outages and delays resulting from the inability of computers
or software to distinguish dates in the 21st century from dates in the 20th
century. See "-- Year 2000 Implications".
There can be no assurance that the infrastructure or complementary products or
services necessary to make the web a viable commercial marketplace for the long
term will be developed or that if they are developed, that the web will become
a viable commercial marketplace for services such as those offered by the
Company. If the necessary infrastructure, standard or protocols or
complementary products, services or facilities are not developed, or if the web
does not become a viable commercial marketplace, the Company's business,
results of operations, prospects and financial condition will be materially and
adversely affected. Even if the infrastructure, standards or protocols or
complementary products, services or facilities are developed and the web
becomes a viable commercial marketplace in the long term, the Company might be
required to incur substantial expenditures in order to adapt its service to
changing web technologies, which could have a material adverse effect on the
Company's business, results of operations, prospects and financial condition.
RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH THE COMPANY'S
SERVICE
THERE IS THE RISK THAT CLAIMS COULD BE MADE AGAINST THE COMPANY UNDER BOTH
UNITED STATES AND FOREIGN LAW FOR DEFAMATION, LIBEL, INVASION OF PRIVACY,
NEGLIGENCE, COPYRIGHT OR TRADEMARK INFRINGEMENT, OR OTHER THEORIES BASED ON THE
NATURE AND CONTENT OF THE MATERIALS DISSEMINATED THROUGH THE COMPANY'S SERVICE
OR THIRD PARTY ON LINE SERVICE PROVIDERS.
The law relating to the liability of online services companies for information
carried on or disseminated through their services is currently unsettled.
Several private lawsuits seeking to impose such liability upon other online
services companies are currently pending. Certain countries and jurisdictions
limit or prohibit the sales of certain videos which the Company sells. For
example, the company may not ship erotic videos into the Islamic Republic of
Iran which prohibits their importation.
New legislation could be enacted in any jurisdiction which would have the
effect of imposing liability, limiting, or prohibiting transmission over the
Internet of information that appears on the Company's web site. For example,
the
<PAGE> 15
-15-
Company's service features a Movie Review Publication section for each video it
sells, which includes information from users regarding their thoughts about
that movie. Although all such feedback is generated by users and not by the
Company, it is possible that a claim of defamation or other injury could be
made against the Company for content posted in the Movie Review Pages. The
imposition upon the Company and other online services providers of potential
liability for information carried on or disseminated through their services
could require the Company to implement measures to reduce its exposure to such
liability, which may require the Company to expend substantial resources and/or
to discontinue the affected service offerings.
Increased attention focussed upon liability issues as a result of these
lawsuits and legislative proposals could impact the growth of Internet use.
While the Company carries liability insurance in the amount of $2,000,000, it
may not be adequate to fully compensate the Company in the event the Company
becomes liable for information carried on or disseminated through its service.
Any costs not covered by insurance incurred as a result of such liability or
asserted liability could have a material adverse effect on the Company's
business, results of operations and financial condition.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
THE COMPANY MAY NOT BE IN FULL COMPLIANCE WITH CANADIAN AND UNITED STATES LAWS
AND REGULATIONS OR THOSE OF OTHER JURISDICTIONS.
The Company believes that it is currently in material compliance with Canadian
and United States laws and regulations applicable to access to and commerce on
the Internet, including regulations applicable to businesses generally.
However, due to the increasing popularity and use of the Internet and other
online services, it is possible that a number of laws and regulations may be
adopted with respect to the Internet or other online services covering issues
such as user privacy, freedom of expression, pricing, content and quality of
products and services, taxation, advertising, intellectual property rights and
information security. Although sections of the Communications Decency Act of
1996 (the "CDA") that, among other things, proposed to impose criminal
penalties on anyone distributing "indecent" material to minors over the
Internet, were held to be unconstitutional by the U.S. Supreme Court, there can
be no assurance that similar laws will not be proposed and adopted. Certain
members of the U.S. Congress have recently discussed proposing legislation that
would regulate the distribution of "indecent" material over the Internet in a
manner that they believe would withstand challenge on constitutional grounds.
The nature of such similar legislation and the manner in which it may be
interpreted and enforced cannot be fully determined and, therefore, legislation
similar to the CDA could subject the Company and/or its customers to potential
liability, which in turn could have an adverse effect on the Company's
business, results of operations, prospects and financial condition. The
adoption of any such laws or regulations might also decrease the rate of growth
of Internet use, which in turn could decrease the demand for the Company's
service or increase the cost of doing business or in some other manner have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy is
uncertain. The vast majority of such laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the and related technologies. The Company does not
believe that such regulations, which were adopted prior to the advent of the
Internet, govern the operations of the Company's business nor have any claims
been filed by any state implying that the Company is subject to such
legislation. There can be no assurance, however, that
<PAGE> 16
-16-
a state, province or other jurisdiction will not attempt to impose these
regulations upon the Company in the future or that such imposition will not
have a material adverse effect on the Company's business, results of
operations, prospects and financial condition.
Several states and provinces have also proposed legislation that would limit
the uses of personal user information gathered online or require online
services to establish privacy policies. The Company is not collecting data on
customers or visitors for later resale. The United States Federal Trade
Commission has also initiated action against at least one online service
regarding the manner in which personal information is collected from users and
provided to third parties. Changes to existing laws or the passage of new laws
intended to address these issues, including some recently proposed changes,
could create uncertainty in the marketplace that could reduce demand for the
services of the Company or increase the cost of doing business as a result of
litigation costs or increased service delivery costs, or could in some other
manner have a material adverse effect on the Company's business, results of
operations, prospects and financial condition.
Because the Company's services are accessible worldwide, and the Company sells
videos to users worldwide, there is a risk that other jurisdictions may claim
that the Company is required to qualify to do business as a foreign corporation
in a particular state or foreign country. The Company is qualified to do
business in Canada, and failure by the Company to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject the
Company to taxes and penalties for the failure to qualify and could result in
the inability of the Company to enforce contracts in such jurisdictions. Any
such new legislation or regulation, or the application of laws or regulations
from jurisdictions whose laws do not currently apply to the Company's business,
could have a material adverse effect on the Company's business, results of
operations, prospects and financial condition.
SALES AND OTHER TAXES
A JURISDICTION MAY IMPOSE SALES TAX COLLECTIONS OR OTHER TAX OBLIGATIONS ON THE
COMPANY.
The Company does not collect sales or other similar taxes in respect of goods
sold. However, one or more states, provinces or other jurisdictions may seek to
impose sales tax collection obligations on out-of-state or foreign companies
such as the Company which engage in or facilitate online commerce, and a number
of proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of electronic
commerce, and could adversely affect the Company's opportunity to derive
financial benefit from such activities. Moreover, a successful assertion by one
or more states or provinces or any foreign country that the Company should
collect sales or other taxes on the sale of videos on its system could have a
material adverse effect on the Company's business, results of operations,
prospects and financial condition.
Legislation limiting the ability of the states and provinces to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. There can
be no assurance that this legislation will ultimately be enacted into law or
that the final version of this legislation will not contain a limited time
period in which such tax moratorium will apply. In the event that the tax
moratorium is imposed for a limited time period, there can be no assurance that
the legislation will be renewed at the end of such period. Failure to enact or
renew this legislation could allow various states or provinces to impose taxes
on Internet-based commerce and the imposition of such taxes could have a
material adverse affect on the Company's business, results of operations,
prospects and financial condition.
<PAGE> 17
-17-
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
THE COMPANY MAY BE UNABLE TO GENERATE REVENUES FROM FOREIGN OPERATIONS AND
EXPAND ITS INTERNATIONAL PRESENCE.
The risks inherent in doing business on an international basis include meeting
regulatory requirements, legal uncertainty regarding liability, tariffs, and
other trade barriers, difficulties in staffing and managing foreign operations
and potentially adverse tax consequences. These conditions could adversely
affect the success of the Company's international operations. A component of
the Company's business plan is to expand internationally. Approximately 75% of
the Company's current sales are made to residents of the United States and
Company management believes that the sales of its principal competitors are
also concentrated in the increasingly competitive U.S. market. Expansion in the
international markets will require management attention and resources. The
Company has limited experience in establishing its service in new local
markets, and the Company believes that many of its competitors are also
undertaking expansion into foreign markets. There can be no assurance that the
Company will be successful in expanding into international markets. There can
be no assurance that one or more of the factors discussed above will not have a
material adverse effect on the Company's future international operations and,
consequently, on the Company's business, results of operations, prospects and
financial condition.
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
THE COMPANY'S RELIANCE ON TRADEMARK REGISTRATION, CONTRACTUAL ARRANGEMENTS OR
APPLICABLE LAWS WILL PROVE INSUFFICIENT TO PREVENT MISAPPROPRIATION OF THE
COMPANY'S TECHNOLOGY OR TO DETER INDEPENDENT THIRD-PARTY DEVELOPMENT OF SIMILAR
TECHNOLOGIES.
The Company regards the protection of its trademark copyright, service marks,
trade dress and trade secrets as critical to its future success and relies on a
combination of trademark registration and copyright, trademark, service mark
and trade secret laws and contractual restrictions to establish and protect its
proprietary rights in products and services. The Company has entered into
confidentiality and invention assignment agreements with its employees and
contractors, and non-disclosure agreements with parties with which it conducts
business in order to limit access to and disclosure of its proprietary
information. The Company pursues the registration of its trademarks and
service marks in the U.S. and internationally. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which the Company's services are made available online. The Company
expects that it may license in the future its proprietary rights, such as
trademarks or copyrighted material, to third parties. While the Company
attempts to ensure that the quality of the Videoflicks.com brand is maintained
by such licensees, there can be no assurance that such licensees will not take
actions that might materially adversely affect the value of the Company's
proprietary rights or reputation, which could have a material adverse effect on
the Company's business, results of operations, prospects and financial
condition.
AVAILABILITY OF THIRD PARTY TECHNOLOGIES
THIRD-PARTY TECHNOLOGIES UTILIZED BY THE COMPANY MAY CEASE TO BE AVAILABLE TO
THE COMPANY AND OR CEASE TO BE AVAILABLE ON COMMERCIALLY REASONABLE TERMS.
The Company relies on technologies that it has purchased from third parties
under shrink-wrap licence agreements, such as Microsoft and O'Rilieys Web Site,
the suppliers of key database technology, the operating system and specific
<PAGE> 18
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hardware components from which the systems for operating the Company's web site
have been developed. The loss of such technologies could require the Company,
in the course of upgrading or changing their systems, to obtain substitute
technologies of lower quality or performance standards or at greater cost,
which could materially adversely affect the Company's business, results of
operations, prospects and financial condition.
INFRINGEMENT CLAIMS
THIRD PARTIES MAY CLAIM INFRINGEMENT BY THE COMPANY WITH RESPECT TO PAST,
CURRENT OR FUTURE TECHNOLOGIES.
The Company expects that participants in its markets will be increasingly
subject to infringement claims as the number of services and competitors in the
Company's industry segment grows. Any such claim, whether meritorious or not,
could be time-consuming, result in costly litigation, cause service upgrade
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms acceptable
to the Company or at all. As a result, any such claim could have a material
adverse effect upon the Company's business, results of operations, prospects
and financial condition.
YEAR 2000 IMPLICATIONS
THE COMPANY MAY BE EXPOSED TO YEAR 2000 COMPUTER RISKS.
Installed computer systems and software products run the risk of not being year
2000 compatible. These systems are coded to accept only two-digit entries in
the date code field and cannot reliably distinguish dates beginning on January
1, 2000 from dates prior to the year 2000. Many companies' software and
computer systems may need to be upgraded or replaced in order to correctly
process dates beginning in 2000 and to comply with the "Year 2000"
requirements.
All of the Company's hardware and software systems used in connection with its
web site, data systems and order processing systems have been purchased during
the past three years and have all been certified by the manufacturers and
developers of same to be Year 2000 compliant. Testing by the Company of such
systems has confirmed that they are Year 2000 compliant. Consequently, the
Company does not believe that it presently has a material Year 2000 compliance
problem and accordingly does not presently anticipate having to incur any
material expenses in connection therewith.
The Company's business plan includes potential expansion through the
acquisition of businesses, technologies, products and services from other
businesses. As the Company continues to expand in this manner throughout
calendar 1999, Year 2000 issues could result causing the Company to have to
commit resources to address same.
The Company's various vendors, utility companies, telecommunications service
companies, delivery service companies and other service providers who are
outside its control may not be year 2000 compliant. There is no assurance that
such companies will not suffer a Year 2000 business disruption which could harm
the Company's business and financial condition. Furthermore, if third-party
equipment or software the Company uses in its business fails to operate
properly with regard to the Year 2000, it may need to incur significant
unanticipated expenses to remedy any such problems.
The Company's failure to resolve any Year 2000 issues which may arise with
respect to its products and services could damage its business and revenues and
result in liability on its part for such failure. The Company's business and
its
<PAGE> 19
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prospects may be permanently affected by either the liability it incurs to
third parties or the negative impact on its business reputation.
LACK OF MARKET FOR COMPANY'S SHARES
THERE IS NO ASSURANCE THAT A LIQUID MARKET WILL BE DEVELOPED OR BE SUSTAINED IN
THE UNITED STATES FOR THE COMMON SHARES OF THE COMPANY
Although the common shares of the Company trade on the over the counter market
in Toronto, Ontario (see "Item 5. Nature of Trading Market"), there is no
trading market at present in the United States for the common shares of the
Company and there is no assurance that a liquid market for the common shares of
the Company in the United States will be developed or be sustained. The lack of
a liquid market in the United States for the common shares of the Company could
have a negative impact on the ability of investors to buy and sell the common
shares of the Company and on the value of the shares.
POSSIBLE VOLATILITY OF SHARE PRICE
THE TRADING PRICE OF THE COMMON SHARES IS LIKELY TO BE HIGHLY VOLATILE AND
COULD BE SUBJECT TO WIDE FLUCTUATIONS
The trading price of the common shares is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in the Company's quarterly operating results,
announcements of technological innovations, or new services by the Company or
its competitors, changes in financial estimates by securities analysts,
conditions or trends in the Internet and online commerce industries, changes in
the market valuations of other Internet or online service companies,
announcements by the Company or its competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments, additions or
departures of key personnel, sales of common shares or other securities of the
Company in the open market and other events or factors, many of which are
beyond the Company's control. Further, the stock markets in general, and the
NASDAQ National Market and the market for Internet-related and technology
companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of such companies. The trading prices of many technology companies' stocks are
at or near historical highs and reflect valuations substantially above
historical levels. There can be no assurance that these trading prices and
valuations will be sustained. These broad market and industry factors may
materially and adversely affect the market price of the common shares
regardless of the Company's operating performance. Market fluctuations, as well
as general political and economic conditions such as recession or interest rate
or currency rate fluctuations, may also adversely affect the market price of
the common shares. In the past, following periods of volatility in the market
price of a company's securities, securities class-action litigation has often
been instituted against such company. Such litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on the Company's
business, results of operations, prospects and financial condition.
LIQUIDITY AND CAPITAL NEEDS
THE COMPANY MAY NOT BE ABLE TO ACQUIRE THE FUNDS NEEDED TO IMPLEMENT AND
COMPLETE ITS BUSINESS PLAN.
Planned expansion, growth through advertising, and upgrades to the Company's
web site will require an additional estimated $5,000,000 over the next 12
months. A portion of these funds may or may not be raised through the
exercising of the
<PAGE> 20
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stock options. The Company will likely need to raise additional equity or debt
financing. There can be no assurance that additional funding will be available
or, if available, that it will be available on acceptable terms. The inability
of the Company to obtain additional funding could have a material adverse impact
on the business, financial condition and future prospects of the Company. There
can be no assurance that the Company will be able to raise additional capital
if its capital resources are exhausted.
CONTROL OF SHARES
MICHAEL KAVANAGH AND HIS ASSOCIATES EXERCISE EFFECTIVE VOTING CONTROL
Michael Kavanagh, President, CEO and a director of the Company and his spouse
together beneficially own approximately 47% of the outstanding common shares of
the Company. Accordingly, Mr. Kavanagh and his spouse will be able to
influence the election of the Company's Board of Directors and the outcome of
corporate actions requiring shareholder approval. This level of ownership by
such persons may have the effect of delaying, deterring, or preventing a change
of control of the Company's Board of Directors and management.
MANAGEMENT
NOT ALL KEY MANAGEMENT PERSONNEL DEVOTE THEIR FULL TIME TO THE COMPANY'S
AFFAIRS
Michael Kavanagh and Robert Bray devote 75% and 70% of their time respectively
to the business and affairs of the Company. If Messrs. Kavanagh and Bray have
conflicting demands placed on their time such that they are unable to
effectively carry out their managerial functions in a timely and effective
manner the business of the Company could be detrimentally affected.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Some of the statements contained in or incorporated by reference in this
registration statement discuss the Company's plans and strategies for our
business or state other forward-looking statements. The words "anticipate",
"believe", "estimate", "expect", "plan", "intent", "should", "seek", "will" and
similar expressions are intended to identify these forward-looking statements,
but are not the exclusive means of identifying them. These forward-looking
statements reflect the current views of Company management; however, various
risks, uncertainties and contingencies could cause the Company's actual
results, performance or achievements to differ materially from those expressed
in, or implied by, these statements, including the following:
o the success or failure of the Company's efforts to implement its business
strategy;
o the other factors discussed under the heading "Risk Factors" and elsewhere
in this memorandum.
For a discussion of important risks of an investment in the Company's
securities, including factors that could cause actual results to differ
materially from results referred to in the forward-looking statements, see
"Risk Factors". You should carefully consider the information set forth under
the caption "Risk Factors". In light of these risks, no certainties and
assumptions, the forward-looking events discussed in this registration
statement might not occur.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal facility, which is sub-leased from Videoflicks Canada
Limited, is located at 1654 Avenue Road, Toronto, Ontario. The sub-lease
expires
<PAGE> 21
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on July 30, 2000. The sub-lease covers approximately 1,300 square feet and, if
required, can be expanded to 2,500 square feet at this location. The Company
pays a proportionate amount of the lease obligations of Videoflicks Canada
Limited based on the amount of space covered by the sub-lease relative to the
total floor space leased by Videoflicks Canada Limited. Management believes
that they will outgrow this capacity in the near future and are looking at
alternative locations to meet the needs of anticipated future growth.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings of a material nature pending or known to be
contemplated against the Company by any party, including any governmental
authorities.
ITEM 4. CONTROL OF REGISTRANT
(a) At November 23, 1999, there were 17,809,055 common shares of the Company
outstanding with an authorized capital of an unlimited number of shares.
To the best of Management's knowledge, the only person beneficially owning
10% or more of the Company's outstanding shares as of November 23, 1999
was Videoflicks Canada Limited which owned 8,000,000 common shares of the
Company, comprising approximately 44.9% of the outstanding common shares
of the Company. All of the shares of Videoflicks Canada Limited are
beneficially owned by Michael Kavanagh and his spouse, as to 50% each
through their respective holding companies. As a result, Mr. Kavanagh and
his spouse, through their ownership of Videoflicks Canada Limited, also
have beneficial ownership of the shares owned by Videoflicks Canada
Limited and have effective voting control with respect to all matters
requiring shareholder approval except for those matters which pursuant to
the Business Corporations Act (Ontario) require approval by special
resolution of shareholders (i.e. a resolution passed by at least two
thirds of the votes cast at a special meeting of shareholders called for
the purpose of considering the resolution).
(b) The following table lists each person who as at November 23, 1999 is
known to the Registrant to be the owner of more than 10% of the
Registrant's outstanding common shares, the only class of voting
securities of the Registrant, and the total amount of common shares owned
by the directors and officers of the Registrant as a group:
<TABLE>
<CAPTION>
Identity of Person or Group Amount Owned Percent of Class
<S> <C> <C>
Michael Kavanagh 8,800,000(1) 47.3%
106 Orenda Road
Brampton, Ontario L6W 3W6
Videoflicks Canada Limited 8,000,000 44.9%
106 Orenda Road
Brampton, Ontario L6W 3W6
All directors and others as a 8,800,000(2) 47.3%
group
</TABLE>
1) Consists of the 8,000,000 common shares owned by Videoflicks Canada
Limited, of which Mr. Kavanagh and his spouse each own 50% of the
<PAGE> 22
-22-
outstanding capital stock, together with the presently exercisable options
to purchase 800,000 common shares held by Mr. Kavanagh.
2) Consists of 8,000,000 common shares owned by Videoflicks Canada Limited,
of which Mr. Kavanagh and his spouse each beneficially own 50% of the
outstanding capital stock, together with the presently exercisable options
to purchase 800,000 common shares held by Mr. Kavanagh. Options held by
the other directors and officers are subject to vesting requirements none
of which are exercisable prior to March, 2000. See "Item 12. Options to
Purchase Securities from Registrant or Subsidiaries - Stock Option Plan".
At November 23, 1999, officers and directors, as a group, owned no
shares of the Company other than the 8,000,000 common shares of the
Company owned by Videoflicks Canada Inc., all of the shares of which
are beneficially owned by Michael Kavanagh and his spouse, as to 50%
each through their respective holding companies.
c) There are no arrangements, known to the Company, the operation of
which may at a subsequent date result in a change in control of the
Company.
ITEM 5. NATURE OF TRADING MARKET
The Company's shares commenced trading over-the-counter on The Canadian Dealing
Network Inc., Toronto, Ontario on April 26, 1999. The following is a summary of
trading in the common shares of the Company on The Canadian Dealing Network
Inc.(stated in U.S. dollars):
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Third Quarter (1) $1.80 $0.90
Fourth Quarter(2) $0.95 $0.35
First Quarter(3) $0.75 $0.20
</TABLE>
1. For quarter ending May 31, 1999, from commencement of trading on April
26,1999.
2. For quarter ending August 31, 1999, for trades up to and including August
31,1999.
3. For quarter ending November 30, 1999, for trades up to and including
November 23,1999.
The closing sales price of the shares as quoted on The Canadian Dealing Network
Inc. on November 23, 1999 was $0.24 per share.
Although the Company intends to apply to have its common shares quoted on the
NASD (National Association of Securities Dealers) Bulletin Board, there is no
trading market at present in the United States for the common shares of the
Company (see "Item 1, Business of the Company - Risk Factors Affecting the
Company - Lack of Market for Company's Shares").
At November 23, 1999, the Company had 2,961 shareholders of record. At November
23,1999, there were 2,149 United States shareholders of record, holding
2,700,536 shares, which represented approximately 15.2% of the outstanding
shares.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
<PAGE> 23
-23-
a) There are no laws or governmental decrees or regulations in Canada that
restrict the export or import of capital, or affect the remittance of
dividends, interest or other payments to holders of the Company's
securities who are not residents of Canada, other than withholding tax
requirements. Reference is made to "Item 7. Taxation".
b) There are no limitations imposed by the laws of Canada, the laws of
Ontario or by the charter or other governing documents of the Company on
the right of a non-resident to hold or vote common shares of the
Company, other than as provided in the Investment Canada Act (the
"Investment Act"). The following summarizes the principal features of
the Investment Act for a non-resident who proposes to acquire common
shares. The summary is of a general nature only and is not intended to
be nor is it, a substitute of independent advice from an investor's own
advisor. The summary does not anticipate statutory or regulatory
amendments:
The Investment Act generally prohibits implementation of a reviewable investment
by an individual, government or agency thereof, corporation, partnership, trust
or joint venture that is not a "Canadian" as defined in the Investment Act (a
"non-Canadian"), unless after review, the minister responsible for the
Investment Act (the "Minister") is satisfied that the investment is likely to be
of a net benefit to Canada. Under the Investment Act, a United States citizen
qualifies as a "World Trade Organization Investor." Subject to the restrictions
noted below, an investment in a Canadian business by a World Trade Organization
Investor would be reviewable under the Investment Act only if it is an
investment to acquire control of such Canadian business and the value of the
assets of the Canadian business as shown on its financial statements is not less
than a specified amount, which for 1999 is $184 million. An investment in the
shares of a Canadian business by a non-Canadian other than a "World Trade
Organization Investor" when the Company is not controlled by a World Trade
Organization Investor, would be reviewable under the Investment Act if it is an
investment to acquire control of the Canadian business and the value of the
assets of the Canadian business as shown on its financial statements is CDN$5
million or more, or if an order for review is made by the federal cabinet on the
grounds that the investment relates to Canada's cultural heritage or national
identity.
The acquisition by a World Trade Organization Investor of control of a Canadian
business in any of the following sectors is also subject to review if the value
of the assets of the Canadian business exceeds CDN$5 million (as shown on its
financial statements): uranium, financial services (except insurance),
transportation services and cultural businesses, which include broadcast media
(publication, distribution or sale of books, magazines, periodicals, newspapers,
music, film and video products and the exhibition of film and video products),
television and radio services. As the Company's business falls under the
aforementioned broadcast media sub-category, the acquisition of control of the
Company, in excess of the CDN$5 million threshold, by a World Trade Organization
Investor would be subject to such review.
A non-Canadian would acquire control of the Company for purposes of the
Investment Act if the non- Canadian acquired a majority of the common shares.
The acquisition of less than a majority but one-third or more of the common
shares would be presumed to be an acquisition of control of the Company unless
it could be established that, on acquisition, the Company was not controlled in
fact by the acquirer through the ownership of common shares. Notwithstanding
the review provisions, any transaction involving the acquisition of control of
a Canadian business or the establishment of a new business in Canada by a
non-Canadian is a notifiable transaction and must be reported to Industry
Canada by the non-
<PAGE> 24
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Canadian making the investment either before or within thirty (30) days after
the investment.
Certain transactions relating to common shares are exempt from the Investment
Act, including:
a) an acquisition of common shares by a person in the ordinary course of
that person's business as a trader or dealer in securities;
b) an acquisition of control of the Company in connection with the
realization of security granted for a loan or other financial assistance
and not for a purpose related to the provisions of the Investment Act; and
c) an acquisition of control of the Company by reason of an amalgamation,
merger, consolidation or corporate reorganization, following which the
ultimate direct or indirect control in fact of the Company, through the
ownership of common shares, remained unchanged.
COMPETITION ACT REVIEW
Investments giving rise to the acquisition or establishment, directly or
indirectly, by one or more persons of control over, or a significant interest
in the whole or part of a business of a competitor, supplier, customer or other
person are subject to substantive review by Canada's Competition Law Authority,
the Director of Investigation and Research (the "Director"). If or when the
Director concludes that a merger, whether by purchase or lease of shares or
assets, by amalgamation or by combination, or otherwise, prevents or lessens,
or is likely to prevent or lessen competition substantially, he may apply as
may be necessary to eliminate the substantial lessening or prevention of
competition. Such substantive merger review power applies to all mergers,
whether or not they meet limits for pre- notification under the Competition
Act.
In addition to substantive merger review, the Competition Act provides for a
pre-notification regime respecting mergers of certain size. The regime applies
in respect of share acquisitions, asset acquisitions, amalgamations and
combinations, for ease of reference. This filing refers specifically to share
acquisition, although the pre-notification regime applies, with the appropriate
modification, to other types of acquisition of control as well.
In order for a share acquisition transaction to be pre-notifiable, the parties
to the transaction (being the person or persons who proposed to acquire shares,
and the Corporation the shares of which are to be acquired), together with
their affiliates (being all firms with a 50% or more voting shares linkage up
and down the chain) must have:
(i) aggregate gross assets in Canada that exceed $400,000,000 in value, as
shown on their audited financial statements for the most recently
completed fiscal year (which must be within the last fifteen (15)
months); or
(ii) aggregate gross revenue from sales in, from or into Canada that exceed
$400,000,000 for the most recently completed fiscal year shown on the
said financial statements; and
<PAGE> 25
-25-
(iii) the party being acquired or corporations controlled by that party must
have gross assets in Canada, or gross revenues from sales in or from
Canada, exceeding $35,000,000 as shown on the said financial statements.
Acquisition of shares carrying up to 20% of the votes of a publicly
traded corporation, or 35% of the votes in a private corporation will not
be subject to pre-notification, regardless of the above thresholds.
However, exceeding the 20% or the 35% threshold, and again exceeding the
50% threshold, gives rise to an obligation of notification if the size
threshold is met.
If a transaction is pre-notifiable, a filing must be made with the Director
containing the prescribed information with respect to the parties, and a
waiting period, (either seven or twenty-one days, depending on whether a long
or short form filing is chosen) must expire prior to closing.
As an alternative to pre-notification, the Director may grant an Advance Ruling
Certificate which exempts the transaction from pre-notification. Advance Ruling
Certificates are granted where the Director concludes, based on the information
provided to him, that he would not have sufficient grounds on which to apply to
the Competition Tribunal to challenge the Merger.
ITEM 7. TAXATION
The following summary describes the principal Canadian federal income tax
considerations generally applicable to a holder of the Company's shares who,
for purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") and the
Canada-United States Income Tax Convention, 1980 (the "Convention") and at all
relevant times is resident in the United States and not resident in Canada,
deals at arm's length with the Company, holds the Company's shares as capital
property, and does not use or hold and is not deemed to use or hold the
Company's shares in or in the course of carrying on business in Canada (a
"United States Holder").
This following summary is based upon the current provisions of the Canadian Tax
Act, the regulations there under, all specific proposals to amend the Canadian
Tax Act and the regulations announced by the Minister of Finance (Canada) prior
to the date hereof and the Company's understanding of the published
administrative practices of Revenue Canada, Customs, Excise and Taxation. This
summary does not take into account or anticipate any other changes in the
governing law, whether by judicial, governmental or legislative decision or
action, nor does it take into account the tax legislation or considerations of
any province, territory or non-Canadian (including U.S.) jurisdiction, which
legislation or considerations may differ significantly from those described
herein.
This summary is of a general nature only and is not intended to be, and should
not be interpreted as, legal or tax advice to any prospective purchaser or
holder of the Company's shares and no representation with respect to the
Canadian federal income tax consequences to any such prospective purchaser is
made. Accordingly, prospective purchasers of the Company's shares should
consult with their own tax advisors with respect to their individual
circumstances.
DIVIDENDS ON THE COMPANY'S SHARES
Generally, dividends paid by Canadian corporations to non-resident shareholders
are subject to a withholding tax of 25% of the gross amount of such dividends.
However, pursuant to the Convention, the withholding tax rate on the gross
amount of dividends paid to residents of the United States is reduced to 15%
or, in the
<PAGE> 26
-26-
case of a U.S. corporation which owns at least 10% of the voting stock of the
Canadian corporation paying the dividends, to 5% of the gross amount of such
dividends.
Pursuant to the Convention, certain tax-exempt entities resident in the United
States may be exempt from Canadian withholding taxes, including any withholding
taxes levied in respect of dividends received on the Company's shares.
DISPOSITION OF THE COMPANY'S SHARES
In general, a United States shareholder will not be subject to Canadian income
tax on capital gains arising on the disposition of the Company's shares, unless
such shares are "taxable Canadian property" within the meaning of the Canadian
Tax Act and no relief is afforded under any applicable tax treaty. The shares
of the Company would be taxable Canadian property of a non-resident if at any
time during the five year period immediately preceding a disposition by the
non-resident of such shares, not less than 25% of the issued shares of any
class or series of all classes of shares of the Company belonged to the
non-resident, to persons with whom the non-resident did not deal at arm's
length, or to the non-resident and persons with whom the non-resident did not
deal at arm's length for purposes of the Canadian Tax Act. For this purpose,
issued shares includes options to acquire such shares (including conversion
rights) held by such persons. Under the Convention, a capital gain realized by
a resident of the United States will not be subject to Canadian tax unless the
value of the shares of the Company is derived principally from real estate (as
defined in the Convention) situated in Canada.
ITEM 8. SELECTED FINANCIAL DATA
The following selected financial data has been extracted from the financial
statements dated June 15, 1999 for the years ended August 31, 1998, 1997 and
1996 and for the periods ended May 31, 1999 and 1998. This financial data
reflects the carved-out operations of the business of Videoflicks Canada
Limited on a continuity of interest basis. The selected financial data is
presented for the life of the Videoflicks.com Internet business which began
operations on September 1, 1995 as a division of Videoflicks Canada Limited.
<PAGE> 27
-27-
VIDEOFLICKS.COM INC.
SELECTED FINANCIAL DATA
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
MAY 31 MAY 31
1999 1998 AUGUST 31 AUGUST 31 AUGUST 31
9 MONTHS 9 MONTHS 1998 1997 1996
(UNAUDITED) (UNAUDITED) 12 MONTHS 12 MONTHS 12 MONTHS
<S> <C> <C> <C> <C> <C>
Net Operating $1,240,000 $621,000 $820,000 $431,000 $71,000
Revenues
Operating Loss $ 356,000 $ 87,000 $113,000 $ 69,000 $45,000
Loss Per Share $ 0.02 $ 0.01 $ 0.01 $ 0.01 $ 0.01
Total Assets $1,478,000 $ 12,000 $ 12,000 $ 18,000 $27,000
Long Term Obligations $ 0 $ 0 $ 0 $ 0 $ 0
Redeemable Preferred $ 0 $ 0 $ 0 $ 0 $ 0
Stock
Cash Dividends $ 0 $ 0 $ 0 $ 0 $ 0
Declared
Per Common Share
EXCHANGE RATES
(CDN$ TO US$)
Period End 0.6784 0.6866 0.6396 0.7203 0.7314
Average 0.6602 0.7042 0.6949 0.7310 0.7335
Low 0.6379 0.6809 0.6311 0.7130 0.7212
High 0.6922 0.7307 0.7307 0.7540 0.7535
EXCHANGE RATE @
JULY 21, 1999 - .6673
</TABLE>
The above selected financial data has been prepared in accordance with
generally accepted accounting principles in Canada which conform in all
material respects with accounting principles generally accepted in the United
States. In the preparation of the above selected financial data there were no
material issues requiring reconciliation of Canadian with United States
generally accepted accounting principles.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<PAGE> 28
-28-
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto included herein (see "Item 17. Financial
Statements"). The financial statements have been prepared in accordance with
generally accepted accounting principles in Canada which conform in all
material respects with accounting principles generally accepted in the United
States. In addition to historical information, the following discussion and
analysis includes forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those expressed in the forward-looking statements as a result of certain
factors, including those described in "Risk Factors" and elsewhere herein.
OVERVIEW
The Company sells movies on VHS videotape and DVD formats through its Internet
web site at www.videoflicks.com. The Company is in its early stages as a public
company, having been formed as a public company under Ontario securities
legislation by amalgamation in March, 1999. The Company is not public in the
United States. Prior thereto the business of the Company was, since 1995,
operated as a division of Videoflicks Canada Limited, a private company which,
as its principal business, owned , operated and franchised video retail
outlets. Management of Videoflicks Canada Limited, recognizing the potential of
the Internet as a retail medium, determined that it was essential to the
success of its Internet business that it have access to the public financial
markets to raise the necessary funds for advertising and web site development.
Effective November 30, 1998 Videoflicks Canada Limited completed a 'spin-out'
of its Internet business, transferring it to its wholly-owned subsidiary,
Videoflicks.com Limited which, in March, 1999 amalgamated with two other
companies to form the Company. As a consequence of the amalgamation in March
1999, the Company obtained $1,200,000 which had been raised by 1318780 Ontario
Limited, one of the amalgamating companies, in contemplation of the
amalgamation.
The historical financial statements presented herein for the fiscal years ended
August 31, 1998, 1997, and 1996 reflect the carved-out operations of the
Internet business of Videoflicks Canada Limited on a continuity of interest
basis. During these fiscal periods acquisitions by the Company's business were
financed as a division of Videoflicks Canada Limited. The financial results of
the individual companies which amalgamated to form the Company are not
presented or commented on as they do not reflect the business activity the
Company is currently involved.
Sales are recognized when products are shipped to customers and are net of any
allowances for returns. Sales figures include sale of products and shipping
revenue. For the periods 1995 through 1999 the average selling price of the
products has remained consistent. The Company includes in cost of sales all
products purchased and shipped to customers, discounts from credit card
purchases and costs of shipping. The Company incurred no significant
advertising expenses for the periods covered by the financial statements
herein. Site operating expenses include all costs associated with maintaining
the Internet web server. These costs include rental of the T1 transmission line
(40 megabyte per second data connection line), hardware maintenance and
software upgrade costs. Capital expenditures are recorded at book value.
RESULTS OF OPERATIONS
Nine Months Ended May 31, 1999 Compared with the Corresponding Nine Months
Ended May 31, 1998
<PAGE> 29
-29-
For the nine months ended May 31,1999 sales increased to $1,240,000 compared to
$621,000 for the same period ended May 31,1998, an increase of 100%. This
sales growth was achieved without the aid of advertising and resulted from
competitive product pricing, high customer service and prompt delivery meeting
customers' needs. Also, in 1999 a decision was made to reduce the shipping
charges to customers to a level that competitive companies were charging.
Repeat customers represented 20% to 25% of orders. Cost of sales for the nine
month period ending May 31,1999 was $893,000.
Inventory of product for sale increased as the Company purchased hard to find
and specialized products for inventory for the nine month period ended May
31,1999. Prior to this period the company operated as a division of
Videoflicks Canada Limited, which held the inventory. The Company has entered
into an agreement with Videoflicks Canada Limited to purchase product for sale
at prices that are the same as those purchased from a third party vendor. This
agreement allows the Company to purchase product from a secure source without
having to set up terms with suppliers or maintain a sizeable inventory. The
advances from Videoflicks Canada Limited reflect the accounts payable owed to
it for these purchases.
Due primarily to the increase in sales volumes, additional staff were hired to
fulfill orders and ship product in a timely manner. Since this time, Company
management has invested in streamlining the order processing system by
increasing efficiencies in data management and systems management. As a result,
management believes that future increases in sales will not lead to
corresponding increases in personnel to process orders and that the average
shipping costs per order will decrease. The increase in wages also reflects the
hiring of additional programmers for the nine months ending May 1999 to
enhance the web site and program better tracking of customers products from
ordering product through to the shipping stages.
Increased administration costs, which include all office wages and general
expenses needed to run the Company, also reflect the increased business
activity; however these are not expected to significantly increase in the near
future.
The investor relations expenses, incurred shortly after the Company's shares
became publicly traded, relate to advertising the Company to the investment
community to increase the awareness of the stock. Management believes these
costs should be expensed when they are incurred instead of amortizing them over
a period of time, as the residual factor of the value after the advertising
cannot be determined.
The increased prepaid expenses account includes retainers paid to an
advertising company and to an investor relations company. These prepaid items
will be expensed prior to the end of calendar 1999. They are cash deposits
made to the suppliers for services that are to be provided at a later date. As
such they are recorded as prepaid items.
The Company made significant investments in assets of computer hardware and
software in the nine months ending May 31,1999 to upgrade the web site and
increase capacity for the future. The Company believes that the continued
development of its software and systems to allow the consumer to purchase
product more easily, to increase their selection of product and to make the
shopping experience more personalized and enjoyable will increase its sales and
customer base over the coming periods.
The increase in net cash used in operating activities for the nine months ended
May 31,1999 was primarily due to the $1,200,000 cash acquired on amalgamation
plus the $458,000 proceeds from the exercise of the Series A Warrants less the
<PAGE> 30
-30-
net loss of $356,000 as well as the purchase of $113,000 in capital assets and
$354,000 in prepaid expenses.
Depreciation of capital assets has increased for the nine month period ended
May, 1999 over 1998 from $4,000 to $13,000 due to the increase in asset
purchases.
The decrease in the gross profit rate for the nine-month period ended May 31,
1999 from 33% of revenues in 1998 to 28% of revenues in 1999 was due to
management's decision to reduce shipping charges to competitor's rate, as
mentioned above, and to the implementation of partial shipments which increased
the shipping costs with no increase in revenues. This change has reduced the
margin on the gross profit figures in 1999.
The net loss for the period ended May 31, 1999 of $356,000 was comprised mostly
of the $221,000 charge for investor relations. The balance of $135,000 loss is
made up of increased costs of order processing, systems upgrades and preparing
for expansion in the near future.
Fiscal 1998 Compared to Fiscal 1997
Net sales increased to $820,000 for the fiscal year ended August 31,1998
compared to $431,000 for the year ended August 31,1997. Sales have increased
dramatically year over year. This increase in sales dollars is due to an
increase in volume of product sold and not to an increase in prices. Prices have
been steady for the past year.
Advertising expenses include all marketing and advertising expenses. The figures
shown in 1998 reflect an initial on-line media buy and print purchase to see if
advertising has an effect on the number of visitors to the site and an increase
in sales. The results indicated there is an increase that has led management to
commit $600,000 of the funds raised in March of 1999 for an initial advertising
campaign to begin in August of 1999. However management of the Company
subsequently determined that the initial advertising campaign would not be a
sufficiently cost effective means of generating new customers and therefore
decided not to proceed with the proposed campaign.
Cost of sales for the year ended August 31,1998 were $553,000 compared to
$290,000 for the year ended August 31,1997. This amount as a percentage of
sales has remained constant from the previous year at 67%.
Wages increased significantly as compared to 1997 as a result of increased
business activity. More staff was hired to fulfil orders due to the increased
volume of sales. The increase in Information Technology wages is due to more
programmers being hired to upgrade the web site and develop better software
systems.
Capital expenditures are recorded at book value and have been minimal during
this period.
Gross profit remained constant for the years ending August 31,1998 and August
31,1997 at 33%. This is due to management's decision to concentrate on selling
video product that has a higher mark-up, and sourcing various suppliers to
attain the least cost on purchases of video product for sale.
Fiscal 1997 Compared to Fiscal 1996
Net sales increased to $431,000 for the year ended August 31,1997 compared to
$71,000 for the year ended August 31,1996. This increase in sales is largely due
to an increase in volume by users surfing the Internet, finding the site and
making a purchase. A small portion of the increase in sales is due to management
raising the price of products for sale.
Cost of sales for the year ended August 31,1997 were $290,000 compared to
$54,000 for the year ended August 31, 1996.
Gross profit for the year ending August 31,1997 increased to 33% of revenues
from 24% of revenues in the year ended August 31,1996.
The lower margin in 1996 reflects the beginning
<PAGE> 31
-31-
of the business and management determining the margins which they want to
achieve in the operation. Prices were increased to achieve higher margins
through the year 1997 compared to 1996 on product for sale as management
recognized the expenses of purchasing and shipping various video products. In
1997 management also began sourcing product from other suppliers which had the
same good for lower cost. This also contributed to the high margins.
Capital expenditures are recorded at book value and have been minimal this
period.
Wages increased significantly as compared to 1996 as a result of increased
business activity. The largest increase is in Information Technology wages as a
full time programmer was hired to further develop the site. Wages and benefits
increased in 1997 as a result of the increased volume of sales compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
Supplementary to the $1,200,000 obtained by the Company in connection with the
amalgamation, an aggregate of 610,900 Series A Warrants of the Company were
exercised up to May 31, 1999 from which the Company realized aggregate gross
proceeds of $458,175 and subsequent to May 31, 1999 an additional 436,770
Series A Warrants of the Company were exercised from which the Company realized
aggregate gross proceeds of $327,577.50; in total 1,047,670 Series A Warrants
were exercised up to July 23, 1999, the date of expiry of the Series A
Warrants, yielding aggregate gross proceeds of $785,752.50. Upon the exercise
of the aforementioned Series A Warrants an aggregate of 1,047,670 Series B
Warrants were issued. Each Series B Warrant was exercisable to purchase one
common share of the Company at the price of $1.15 per share on or before
November 23, 1999. As of the close of business on November 23, 1999, the date
of expiry of the Series "B" Warrants, 112 Series "B" Warrants had been
exercised, yielding aggregate gross proceeds of $128.80 to the Company, and the
remaining 1,047,648 Series "B" Warrants expired, unexercised. The Company also
has outstanding and contingent stock options exercisable to purchase up to
2,240,000 Company common shares at $0.50 per share and 750,000 Company common
shares at $0.48 per share.
The Company has no short term or long term debt. Management believes cash on
hand of approximately $600,000 together with cash flow from operations will be
sufficient to fund operations and planned capital expenditures for the short
term, covering the next six months. In the longer term the Company will need
to raise additional equity or debt financing to fund operations after this
period to cover working capital, operating losses and capital expenditures.
There can be no assurance that additional funding will be available or, if
available, that it will be available on favorable terms. The inability of the
Company to obtain additional funding could have an adverse impact on the
business, financial condition and future prospects of the Company.
YEAR 2000
All of the Company's hardware and software systems used in connection with its
web site, data systems and order processing systems have been purchased during
the past three years and have all been certified by the manufacturers and
developers of same to be Year 2000 compliant. Testing by the Company of such
systems has confirmed that they are Year 2000 compliant. Consequently, the
Company does not believe that it presently has a material Year 2000 compliance
problem and accordingly does not presently anticipate having to incur any
material expenses in connection therewith.
The Company's business plan includes potential expansion through the
acquisition of businesses, technologies, products and services from other
businesses. As the Company continues to expand in this manner throughout
calendar 1999, Year 2000 issues could result causing the Company to have to
commit resources to address same.
The Company also relies upon various vendors, utility companies,
telecommunications service companies, delivery service companies and other
service providers who are outside its control. There is no assurance that such
companies will not suffer a Year 2000 business disruption which could harm the
Company's business and financial condition. Furthermore, if third-party
equipment
<PAGE> 32
-32-
or software the Company uses in its business fails to operate properly with
regard to the Year 2000, it may need to incur significant unanticipated
expenses to remedy any such problems.
Management of the Company believes that if it does encounter any Year 2000
problems, it will be able to quickly remedy same through the purchase
off-the-shelf systems or by switching to other Year 2000 compliant suppliers.
The Company's failure to resolve any Year 2000 issues which may arise with
respect to its products and services could damage its business and revenues and
result in liability on its part for such failure. The Company's business and
its prospects may be permanently affected by either the liability it incurs to
third parties or the negative impact on its business reputation.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company has not invested in any market risk sensitive items for trading
purposes or other than trading purposes.
The Company is exposed to market risk through foreign currency exchange rate
risk. The functional currency of sales is the same as the reporting currency,
$US, whereas the functional currency of cost of sales and expenses other than
investor relations is $Canadian. A decrease in the exchange rate differential
between $Canadian and $US would increase the cost of expenses relative to the
sales revenue and would decrease the operating income.
During the period from the beginning of Internet operations in September 1995
to May 31, 1999, the exchange rates ($CDN to $US) have varied from a low of
0.6379 to a high of 0.7540 with a weighted average of 0.7079 as disclosed in
Item 8, of this Form 20-F.
Applying these exchange rates to the operations for the nine months ended May
31, 1999 would result in the following variations:
<TABLE>
<CAPTION>
PER WEIGHTED
FINANCIAL LOW HIGH AVERAGE
STATEMENTS (0.6379) (0.7540) (0.7079)
<S> <C> <C> <C> <C>
Sales $1,240,000 $1,240,000 $1,240,000 $1,240,000
Cost of sales 893,000 863,000 1,020,000 957,000
---------- ---------- ---------- ----------
Gross profit 347,000 377,000 220,000 283,000
Investor
relations 221,000 221,000 221,000 221,000
Other expenses 482,000 466,000 550,000 517,000
---------- ---------- ---------- ----------
Operating loss $356,000 $ 310,000 $ 551,000 $ 455,000
========== ========== ========== ==========
Loss per share (0.02) (0.02) (0.03) (0.03)
========== ========== ========== ==========
</TABLE>
<PAGE> 33
-33-
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table outlines the names and municipalities of residence of each
of the directors and officers of the Company and their principal occupations.
All persons have served in these capacities since March 23,1999. Each director
is expected to hold these positions until the next Annual General Meeting of
shareholders.
<TABLE>
<CAPTION>
Name and Municipality
of Residence Office
<S> <C>
Michael P. Kavanagh Director, President and
Toronto, Ontario Chief Executive Officer
John Waddell Director, Vice-President
Toronto, Ontario Information Technology
Robert Bray* Director, Secretary-Treasurer,
Toronto, Ontario Chief Financial Officer
Allen Karp* Director
Toronto, Ontario
</TABLE>
Notes:
1. Denotes a member of the Audit Committee of the Board of Directors.
2. The Company does not have an executive committee of the Board of
Directors.
DIRECTORS AND OFFICERS
Michael P. Kavanagh is the President and a director of Videoflicks Canada
Limited which he founded in 1981. Videoflicks Canada Limited presently has 35
video rental/sales stores of which 31 are franchised. Mr. Kavanagh is also
Chief Executive Officer of MSO Construction Co., a private company with 300
employees and CDN$25 million in annual sales, and T.J. Pounder (Ontario) Ltd.,
a private family manufacturing company. Mr. Kavanagh devotes 75% of his time
to the company.
John Waddell has been chief programmer in charge of information technology for
Videoflicks Canada Limited since 1983. Mr. Waddell has developed many
proprietary systems for tracking and processing sales and managing inventory
and is responsible for developing and maintaining the computerized data base
and hardware requirements for systems management. He functions as the chief
programmer for the Videoflicks.com web site. Mr. Waddell received his Masters
of Science degree from the University of Guelph, Ontario in 1973. Mr. Waddell
devotes 100% of his time to the Company.
Robert Bray is the chief financial officer of Videoflicks Canada Limited since
1989, during the course of which he has designed and implemented accounting
systems and related corporate structures. Mr. Bray holds an MBA degree from the
<PAGE> 34
-34-
University of Toronto, an Honours BA in Economics from York University, and is
a Certified General Accountant. Mr. Bray devotes 70% of his time to the
company.
Allen Karp, Q.C. is Chairman and Chief Executive Officer of Cineplex Odeon
Corporation, the Canadian subsidiary of Loews Cineplex Entertainment
Corporation and a Director of Loews Cineplex Entertainment Corporation. For the
past eight years, Mr. Karp has served as President and Chief Executive Officer
of Cineplex Odeon. Mr. Karp practised corporate law, ultimately as a senior
partner with the law firm of Goodman and Carr, Toronto, from 1966 until 1986,
the year in which he also received his appointment as Queen's Counsel. During
his career as a business lawyer, he became a Director and senior legal advisor
to many Canadian and U.S. corporations, both private and public. Mr. Karp is
also the author of a variety of legal articles and papers and lectured
extensively in the fields of taxation, corporate and commercial law and, his
primary specialty, the field of franchising and licensing. In addition to the
Board of Cineplex Odeon Corporation, Mr. Karp sits on the Boards of Loews
Cineplex Entertainment Corporation, Speedy Muffler King Inc., Alliance/Atlantis
Communications Inc., Teknion Corporation. He is also involved in various
community activities including the Boards of Canadian Film Centre, for which he
is Chair of the "Fast Forward" Capital Campaign, the Toronto International Film
Festival/Cinematheque Ontario, for which he is Chairman, the Motion Picture
Pioneers and the Council for Canadian Unity. As well, Mr. Karp is a member of
the Canadian Civil Liberties Association. Mr. Karp is available for discussion
of significant events within the company and regularly attends board meetings.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
EMPLOYMENT CONTRACTS
The Company is party to Employment Agreements with each of Michael Kavanagh,
Chief Executive Officer, President and a director, John Waddell,
Vice-President, Information Technology and a director, and Robert Bray,
Secretary-Treasurer, Chief Financial Officer and director, pursuant to which,
respectively:
(a) Michael Kavanagh is entitled to an annual salary of $1.00 and an
annual bonus equal to 2% of annual revenues up to $10 million and 1%
of annual revenues in excess of $10 million. In the event of a change
of control of the Company he will receive a lump sum payment equal to
three (3) times the amount of the last annual bonus paid, or will have
his employment extended for a further three (3) year period on the same
terms and conditions. If his employment is terminated without cause, at
any time he will receive a lump sum payment equal to two (2) times the
most recent annual bonus paid to him.
(b) John Waddell is entitled to an annual salary CDN$125,000 per annum
and in the event that his employment is terminated without cause prior
to the end of its one year term, or any renewal thereof, a lump sum
payment equal to two (2) years' annual salary.
(c) Robert Bray is entitled to an annual salary of CDN$75,000 per annum
and in he event that his employment is terminated without cause prior
to the end of its one year term, or any renewal thereof, a lump sum
payment equal to two (2) years' annual salary.
COMPENSATION OF DIRECTORS
The company has no pension, retirement or similar benefits for directors or
officers of the company. Total compensation paid to all board members and
<PAGE> 35
-35-
officers for the fiscal year ended August 31,1999 was CDN$112,572. Pursuant to
their employment agreements John Waddell was paid CDN$59,460, Robert Bray was
paid CDN$31,250, Michael Kavanagh received CDN$21,862. Allen Karp received no
compensation as a director for the fiscal year ended August 31,1999.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
WARRANTS
Pursuant to the amalgamation forming the Company on March 23, 1999, the Company
issued an aggregate of 4,180,200 Series A Warrants. Each Series A Warrant was
exercisable on or before July 23, 1999 at the exercise price of $0.75 to acquire
one (1) common share and one (1) Series B Warrant of the Company. An aggregate
of 1,047,670 Series A Warrants were exercised up to July 23, 1999, the date of
expiry of the Series A Warrants, yielding aggregate gross proceeds of
$785,752.50. The remaining 1,932,530 Series A Warrants
expired, unexercised at the close of business on July 23, 1999. Pursuant to the
exercise of the aforementioned 1,047,670 Series A Warrants an aggregate of
1,047,670 Series B Warrants were issued. As of the close of business on November
23, 1999, the date of expiry of the Series "B" Warrants, 112 Series "B" Warrants
had been exercised, yielding aggregate gross proceeds of $128.80 to the Company,
and the remaining 1,047,648 Series "B" Warrants expired, unexercised.
STOCK OPTION PLAN
The Company maintains a stock option plan pursuant to which the Board of
Directors of the Company may grant options exercisable to purchase up to a
maximum of 4,000,000 common shares of the Company to executive officers,
directors, employees and consultants of the Company in such numbers, for such
periods of time and at the exercise prices as the Board may approve and
according to the rules and regulations of any stock exchange or
over-the-counter market on which the common shares may be listed or quoted for
trading from time to time.
The following table sets out information relating to options to purchase common
shares granted by the Company under its stock option plan that are outstanding
as at the date hereof with the number of persons in each category shown in
parentheses:
<TABLE>
<CAPTION>
Number of
Common Exercise
Shares Price Expiry
Optioned Per Share Date
<S> <C> <C> <C>
Directors & Officers
M. Kavanagh 800,000 $0.50 March 23, 2004
J. Waddell 400,000 $0.50 March 23, 2004
R. Bray 400,000 $0.50 March 23, 2004
A. Karp 300,000 $0.50 April 22, 2004
- - - - - -
1,900,000
All Other Option Holders 140,000(1) $0.50 April 22, 2004
- - - - - -
Total 2,040,000(1)(2)
</TABLE>
<PAGE> 36
-36-
1. Options to acquire an additional 200,000 common shares at $0.50 per share on
or before April 22, 2004 have been granted subject to compliance of such grant
with applicable securities legislation.
2. All Options vest as to one third thereof on each of the first, second and
third anniversaries of their date of grant except for 800,000 Options granted
to Michael Kavanagh, Director, President and Chief Executive Officer, all of
which vest immediately.
THOMSON OPTION
Pursuant to an agreement entered into with Thomson Newspapers Inc. ("Thomson")
on October 26, 1999, the Company granted an option to Thomson to acquire, at any
time and from time to time, on or after August 10, 2000 up to 750,000 common
shares of the Company at the price of $0.48 per share. This option has no
expiry date.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
a) Upon amalgamation, the Company succeeded to the following agreements:
1) A Supply Agreement which was made between Videoflicks
Canada Limited, a Company of which Michael Kavanagh and his spouse
together beneficially own 100% of equity shares, and its
wholly-owned subsidiary, Videoflicks.com Limited, under which
Videoflicks Canada Limited agreed to sell videos to
Videoflicks.com Limited at the wholesale catalogue price charged
by arm's length wholesalers of videos, plus shipping and
applicable taxes. The value of purchases from Videoflicks Canada
Limited for the nine months ended May 31, 1999 was $893,000 of
video product;
2) A Sub-Lease Agreement made between Videoflicks Canada
Limited and Videoflicks.com Limited pursuant to which the Company
sub-leases 15% of the space leased by Videoflicks Canada Limited
at 1654 Avenue Road, Toronto, Ontario. The amount of rent paid to
Videoflicks Canada Limited for the nine months ended May 31, 1999
was $15,000; and
3) Employment Agreements made between Videoflicks.com
Limited and each of Michael Kavanagh, John Waddell and Robert Bray
as described in more detail under "Employment Contracts" under
Item 11 hereof.
Subsequent to the amalgamation the Company entered into stock option agreements
with its directors and officers pursuant to which the Company granted options
to purchase up to 1,900,000 common shares of the Company at $0.50 per share, as
described under "Stock Option Plan" above.
b) None of the officers or directors of the Company or any of their
associates are currently indebted to the Company or has been so
indebted at any time in the last three years.
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
<PAGE> 37
-37-
The holders of the common shares ("Common Shares") of the Company shall be
entitled to vote at all meetings of shareholders except meetings at which only
holders of a specified class of shares are entitled to vote, and holders of
common shares shall be entitled to one vote for each Common Share held and,
subject to the rights, privileges, restrictions and conditions attaching to any
other class of shares of the Company, to receive the remaining property of the
Company upon the dissolution of the Company. Holders of the Common Shares shall
not have pre-emptive rights or any liability for further calls or assessments
by the Company. Holders of Common Shares have no right to receive dividends
unless same are declared by the board of directors to be payable in respect of
the Common Shares. The Common Shares are not redeemable by the Company.
ITEM 17. FINANCIAL STATEMENTS
Audited balance sheet as at August 31, 1998 and August 31, 1997 and the audited
statements of operations, deficit and cash flow for the years ended August
31,1998, August 31, 1997 and August 31, 1996, which are reported on by BDO
Dunwoody LLP. Also included are unaudited balance sheet and statements of
operations, deficit and cash flow for period ended May 31, 1999 and May 31,
1998 which have not been reported on by BDO Dunwoody LLP. The historical
financial statements for the years ended August 31, 1998, 1997 and 1996
reflects the carved-out operations of the Internet business of Videoflicks
Canada Limited on a continuity of interest basis. The financial statements have
been prepared by management of the Company in accordance with generally
accepted accounting principles in Canada which are not materially different
from generally accepted accounting principles in the United States. In the
preparation of the financial statements there were no material issues requiring
reconciliation of Canadian with United States generally accepted accounting
principles.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
Audited balance sheet as at August 31, 1998 and August 31, 1997 and the audited
statements of operations, deficit and cash flow for the years ended August
31,1998, August 31, 1997 and August 31, 1996, reported on by BDO Dunwoody LLP.
Also included are unaudited balance sheet and statements of operations, deficit
and cash flow for the periods ended May 31, 1999 and May 31, 1998 which have
not been reported on by BDO Dunwoody LLP. The historical financial statements
for the years ended August 31, 1998, 1997 and 1996 reflects the carved-out
operations of the business of Videoflicks Canada Limited on a continuity of
interest basis. The financial statements have been prepared by management of
the Company in accordance with generally accepted accounting principles in
Canada which are not materially different from generally accepted accounting
principles in the United States. In the preparation of the financial statements
there were no material issues requiring reconciliation of Canadian with United
States generally accepted accounting principles.
(2) Exhibits
All of the following exhibits were previously filed with the Securities and
Exchange Commission:
1. Articles of Amalgamation and By-laws
2. Material Agreements
<PAGE> 38
-38-
2.1 Employment Agreement with Michael Kavanagh
2.2 Employment Agreement with Robert Bray
2.3 Employment Agreement with John Waddell
2.4 Supply Agreement with Videoflicks Canada Limited
2.5 Sub-lease Agreement with Videoflicks Canada Limited
2.6 Stock Option Agreement with Michael Kavanagh
2.7 Stock Option Agreement with Robert Bray
2.8 Stock Option Agreement with John Waddell
2.9 Stock Option Agreement with Alan Karp
2.10 Coverstory Agreement with Thomson Target Media
2.11 Stock Option Agreement with Thomson Newspapers Inc.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIDEOFLICKS.COM INC.
By: /s/ MICHAEL KAVANAGH
Michael P. Kavanagh
President and Chief
Executive Officer
December 21, 1999
<PAGE> 39
VIDEOFLICKS.COM INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
AND FOR THE PERIODS ENDED MAY 31, 1999 AND 1998
<PAGE> 40
VIDEOFLICKS.COM INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
AND FOR THE PERIODS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
AUDITOR'S REPORT 2
Financial Statements
Balance Sheet 3
Statement of Deficit 4
Statement of Operations 5
Statement of Cash Flows 6
Summary of Significant Accounting Policies 7-8
Notes to Financial Statements 9-15
</TABLE>
<PAGE> 41
AUDITOR'S REPORT
TO THE DIRECTORS OF
VIDEOFLICKS.COM INC.
We have audited the balance sheet of Videoflicks.com Inc. as at August 31, 1998
and August 31, 1997 and the statements of operations, deficit and cash flow for
the years ended August 31, 1998, August 31, 1997 and August 31, 1996. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at August 31, 1998 and
August 31, 1997 and the results of its operations and its cash flows for the
years ended August 31, 1998, August 31, 1997 and August 31, 1996 in accordance
with Canadian generally accepted accounting principles.
/s/ BDO Dunwoody LLP
BDO Dunwoody LLP
Chartered Accountants
Owen Sound, Ontario
June 15, 1999
2
<PAGE> 42
VIDEOFLICKS.COM INC.
BALANCE SHEET
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, August 31,
1999 1998 1997
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT
Cash $ 944,000 $ - $ -
Accounts receivable 35,000 - -
Inventory 33,000 - -
Prepaid expenses and deposits 354,000 - -
---------- ---------- ----------
1,366,000 - -
CAPITAL ASSETS (Note 5) 112,000 12,000 18,000
---------- ---------- ----------
$1,478,000 $12,000 $18,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities $ 136,000 $ - $ 6,000
Due to related company (Note 6) 220,000 - -
---------- ---------- ----------
356,000 - 6,000
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Share capital (Note 4) 1,471,000 - -
Net assets (deficit) (Page 4) (349,000) 12,000 12,000
---------- ---------- ----------
1,122,000 12,000 12,000
---------- ---------- ----------
$1,478,000 $12,000 $18,000
========== ========== ==========
</TABLE>
Approved by:
/s/Michael Kavanagh Director
/s/Robert Bray Director
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
3
<PAGE> 43
VIDEOFLICKS.COM INC.
STATEMENT OF DEFICIT
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR For the year
MONTHS ENDED ENDED ended
MAY 31, AUGUST 31, August 31,
1999 1998 1997
(UNAUDITED)
<S> <C> <C> <C>
NET ASSETS, beginning of the period $ 12,000 $ 12,000 $ 12,000
NET LOSS FOR THE PERIOD (Page 5) (356,000) (113,000) (69,000)
CAPITAL CONTRIBUTION TO INTERNET OPERATIONS
PRIOR TO ACQUISITION (Note 8) 7,000 113,000 69,000
RECLASSIFICATION OF NET ASSETS ACQUIRED OF
INTERNET OPERATIONS TO SHARE CAPITAL (12,000) - -
--------- ----------- -----------
NET ASSETS (DEFICIT), end of the period $(349,000) $ 12,000 $ 12,000
========= =========== ===========
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
4
<PAGE> 44
VIDEOFLICKS.COM INC.
STATEMENT OF OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
MAY 31/99 MAR 22/99 MAY 1998
70 DAYS 203 DAYS 9 MONTHS AUGUST 1998 AUGUST 1997 AUGUST 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) 12 MONTHS 12 MONTHS 12 MONTHS
(AS A (AS A (AS A (AS A
DIVISION OF DIVISION OF DIVISION OF DIVISION OF
VIDEOFLICKS VIDEOFLICKS VIDEOFLICKS VIDEOFLICKS
CANADA CANADA CANADA CANADA
LIMITED) LIMITED) LIMITED) LIMITED)
(NOTE 2) (NOTE 2) (NOTE 2) (NOTE 2) (NOTE 2) (NOTE 2)
FOR THE PERIODS ENDED
<S> <C> <C> <C> <C> <C> <C>
REVENUE $ 368,000 $ 872,000 $621,000 $ 820,000 $431,000 $ 71,000
COST OF SALES - RELATED
PARTY (Note 6) 264,000 629,000 419,000 553,000 290,000 54,000
--------- ---------- -------- --------- -------- --------
GROSS PROFIT 104,000 243,000 202,000 267,000 141,000 17,000
--------- ---------- -------- --------- -------- --------
EXPENSES (Note 6)
Advertising 4,000 -- 23,000 23,000 -- --
Site operating 15,000 36,000 71,000 88,000 26,000 15,000
Wages and benefits 81,000 150,000 86,000 124,000 89,000 10,000
Information Technology
Dept. Wages 37,000 65,000 52,000 69,000 39,000 --
Rent 5,000 10,000 16,000 21,000 22,000 21,000
Administration 24,000 42,000 37,000 49,000 26,000 7,000
Amortization on capital
assets 7,000 6,000 4,000 6,000 8,000 9,000
Investor relations 221,000 -- -- -- -- --
-------- ---------- -------- --------- -------- --------
394,000 309,000 289,000 380,000 210,000 62,000
-------- ---------- -------- --------- -------- --------
OPERATING LOSS FOR PERIOD $(290,000) $ (66,000) $(87,000) $(113,000) $(69,000) $(45,000)
========= ========== ======== ========= ========= ========
LOSS PER SHARE (Note 7) $ (0.02)
========= ========== ======== ========= ========= ========
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
5
<PAGE> 45
VIDEOFLICKS.COM INC.
STATEMENT OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
MAY 31/99 MAR 22/99 MAY 1998 AUGUST 1998 AUGUST 1997 AUGUST 1996
70 DAYS 203 DAYS 9 months 12 MONTHS 12 MONTHS 12 MONTHS
For the periods ended (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period $(290,000) $ (66,000) $(87,000) $(113,000) $(69,000) $(45,000)
Amortization of capital
assets 7,000 6,000 4,000 6,000 8,000 9,000
Accounts receivable (35,000) -- -- -- -- --
Inventory (33,000) -- -- -- -- --
Prepaid expenses (354,000) -- -- -- -- --
Accounts payable 142,000 (6,000) (4,000) (6,000) (8,000) (9,000)
--------- -------- --------- ---------- ---------- ----------
563,000 (66,000) (87,000) (113,000) (69,000) (45,000)
INVESTING ACTIVITIES
Purchase of capital assets 113,000 -- -- -- -- --
--------- -------- ---------- ---------- ---------- ----------
FINANCING ACTIVITIES
Advances (to) from
Videoflicks Canada Limited 161,000 59,000 -- -- -- --
Proceeds from Series A
warrants 458,000 -- -- -- -- --
Cash acquired upon
amalgamation (note 3(b)) 1,200,000 59,000 -- -- -- --
Capital contribution
internet operations
prior to acquisition (Note 8) -- 7,000 87,000 113,000 69,000 45,000
Net issue costs (199,000) -- -- -- -- --
---------- --------- ---------- ---------- ---------- ----------
1,620,000 66,000 87,000 113,000 69,000 45,000
---------- --------- ---------- ---------- ---------- ----------
INCREASE IN CASH
DURING THE PERIOD 944,000 -- -- -- -- --
CASH, beginning of
period -- -- -- -- -- --
---------- --------- ---------- ---------- ---------- ----------
CASH, end of period $ 944,000 -- $ -- $ -- $ -- $ --
========== ========= ========== ========== ========== ==========
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
6
<PAGE> 46
VIDEOFLICKS.COM INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
NATURE OF BUSINESS Videoflicks.com Inc. ("The Company") was
amalgamated under the laws of Ontario March 23,
1999. The company is engaged in the business of
selling pre-recorded video/movie cassettes
through an internet world wide site.
BASIS OF FINANCIAL STATEMENTS The financial statements are stated in United
States dollars "the reporting currency". The
transactions of the company have been recorded
during the period in Canadian dollars, "the
functional currency". The translation of
Canadian dollars into United States dollars have
been made at the period end exchange rate for
balance sheet items and the average exchange
rate for the period for revenues, expenses,
gains and losses. Translation adjustments for
the periods presented are not material.
These financial statements have been prepared by
management in accordance with generally accepted
accounting principles in Canada, which are not
materially different from generally accepted
accounting principles in the United States.
REVENUE RECOGNITION The Company sells merchandise to consumers over
the internet. These transactions are paid by
credit card and the Company is the credit card
merchant of record. These transactions are
recorded at the aggregate retail value at the
time of the shipment net of any discounts or
rebates. Revenues include sales of merchandise
and freight charges for delivery of the
merchandise to the customer. Costs of sales
include all direct costs incurred to fulfill the
order (product costs, handling etc.). The Company
provides an allowance for sales returns based on
its actual experience.
PREPAID EXPENSE Payments made for advertising and investor
relation services are expensed when the services
are provided. Retainers and advances paid prior
to the providing of the contracted services are
recorded as a prepaid expense.
ACCOUNTING ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and the reported amounts
of revenues and expenses during the reporting
period. Actual results could differ from those
estimated.
INVENTORY Inventory is stated at the lower of cost and net
realizable value. Cost is determined on a
weighted average cost basis
7
<PAGE> 47
VIDEOFLICKS.COM INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
CAPITAL ASSETS Management reviews long-lived assets for
impairment whenever events or changes in
circumstances indicate that the carrying amount
of an asset may not be recoverable, and, if
deemed impaired, measurement and recording of an
impairment loss is based on the fair value of the
asset.
Capital assets are recorded at cost less
accumulated amortization. Office equipment is
being amortized over three years on a straight
line basis.
Furniture and fixtures - 20% declining balance
Computer equipment - 30% declining balance
Computer software - 30% declining balance
INCOME TAXES The company accounts for income taxes under the
assets and liability method. Under the assets and
liability method, deferred income taxes are
recognized for the tax consequences of temporary
differences by applying enacted tax rates
applicable to future years to differences between
the financial statement carrying amounts and tax
bases of existing assets and liabilities.
FINANCIAL INSTRUMENTS The carrying amounts of financial instruments of
the company approximate their fair value because
of their short maturity.
8
<PAGE> 48
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
1. UNAUDITED INFORMATION
The financial statements include the unaudited balance sheet as of May 31,
1999 and the related statements of operations, deficit and cash flows for the
nine months ended May 31, 1998 and 1999. This unaudited information has been
prepared by the Company on the same basis as the audited statements and, in
management's opinion, reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
information, in accordance with Canadian generally accepted accounting
principles, for the periods presented. Results for interim periods are not
necessarily indicative of the results to be expected for the entire year.
2. REPORTING PERIODS
The internet business began operations September 1, 1995 as a division of
Videoflicks Canada Limited and operated as such until November 30, 1998 when
the internet business was acquired by Videoflicks.com Limited as described in
note 3(a). For the period December 1, 1998 to March 22, 1999, the internet
business was carried on in the predecessor company Videoflicks.com Limited.
Subsequent to the amalgamation described in note 3(b), the internet business
operations have been carried on Videoflicks.com Inc.
3. BUSINESS COMBINATIONS AND BASIS OF ACCOUNTING
(a) INCORPORATION AND BUSINESS ACQUISITION
Videoflicks.com Limited was incorporated under the laws of Ontario on
July 4, 1997 and issued 100 common shares for $100.
Effective November 30, 1998, Videoflicks.com Limited acquired from
Videoflicks Canada Limited the business of selling pre-recorded
video/movie cassettes through an internet world wide web site (the
"Business") in exchange for 7,999,900 common shares. For purposes of the
exchange the Business acquired was valued at $5,148,000, however, for
accounting purposes the assets acquired are valued at their carrying
values and goodwill as well as other intangible assets including the
domain name "Videoflicks.com" of $5,136,000 is not recorded because the
companies were under common control.
The net assets acquired at carrying values as at November 30, 1998 were
as follows:
<TABLE>
<S> <C>
Computer equipment $11,000
Software 1,000
-------
Total consideration attributed to shares of Videoflicks.com Limited $12,000
=======
</TABLE>
The historical financial statements for the years ended August 31, 1998,
1997 and 1996 reflect the carved-out operations of the internet business
of Videoflicks Canada Limited on a continuity of interest basis. The
internet business began operations September 1, 1995 as a division of
Videoflicks Canada Limited and operated as such until November 30, 1998
when the internet business was acquired by Videoflicks.com Limited as
described above.
9
<PAGE> 49
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
3. BUSINESS COMBINATIONS AND BASIS OF ACCOUNTING (CONTINUED)
(b) AMALGAMATION AND REVERSE TAKE OVER
Pursuant to an amalgamation agreement effective March 23, 1999,
Videoflicks.com Limited was amalgamated with Mantaur Petroleum
Corporation (Mantaur) and 1318780 Ontario Limited (Ontco). The
Amalgamated Company continues under Videoflicks.com Inc.
Upon amalgamation all issued common shares of Mantaur and Ontco were
exchanged for units of Videoflicks.com Inc., each unit consisting of one
common share and one-half Series A Share Purchase Warrant. The
transaction results in the former shareholders of Videoflicks.com Limited
owning 47.7% of Amalgamated Videoflicks.
If all of the Series A warrants referred to in Note 4(iii) are exercised
the former shareholders' holdings will be diluted to 38.2%. The former
shareholders of Videoflicks.com Limited will still own the controlling
block of shares and will have the majority representation on the Board of
Directors of Amalgamated Videoflicks, therefore, the amalgamation has
been treated for accounting purposes as an acquisition of Mantaur and
Ontco by Videoflicks.com Limited (the acquirer for accounting purposes),
referred to as a "reverse take-over". Application of "reverse take-over"
accounting results in the following:
(i) Videoflicks.com Limited is deemed to be the acquirer for
accounting purposes; its assets and liabilities are included in the
balance sheet at their carrying values.
(ii) The acquisition of Mantaur and Ontco is accounted for under
the purchase method. The net assets acquired at fair value as at
March 23, 1999 were as follows:
<TABLE>
<CAPTION>
ONTCO MANTAUR
<S> <C> <C>
Cash $1,200,000 $ -
Capital assets - 6,000
---------- ----------
1,200,000 6,000
Less: Liabilities assumed
Accounts payable - 83,000
---------- ----------
Total consideration attributed to shares
of Amalgamated Videoflicks $1,200,000 $(77,000)
========== ==========
</TABLE>
The deficit of Mantaur was recorded as a cost of issue
10
<PAGE> 50
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
4. SHARE CAPITAL
<TABLE>
<S> <C> <C> <C>
(i) AUTHORIZED
Unlimited number of common shares
(ii) ISSUED
Videoflicks.com Limited
Issued on incorporation $ 100 $ -
Shares issued upon purchase
of "Business" (Note 3(a)) 7,999,900 12,000
Mantaur Petroleum Corporation shareholders 5,960,462 -
1318780 Ontario shareholders 2,400,000 1,200,000
Advisory services fees 400,000 200,000
Cost of issue - (399,000)
----------- ----------
16,760,462 1,013,000
Series A Warrants exercised 610,900 458,000
----------- ----------
$17,371,362 $1,471,000
=========== ==========
</TABLE>
Advisory service fees are share remuneration to an arm's-length
investment dealer for assistance in raising $1,200,000 in Ontco. These
have been included as a cost of issue.
Prior to the amalgamation, Mantaur was at arm's-length with
Videoflicks.com Limited and Videoflicks Canada Limited, Ontco was
incorporated to raise capital for the amalgamated company and
Videoflicks.com Limited was a 100% owned subsidiary of Videoflicks Canada
Limited
<TABLE>
<S> <C> <C> <C>
(iii) WARRANTS
Videoflicks.com Inc. has the following warrants to issue common shares
outstanding:
SERIES A SERIES B
----------- -----------
Warrants issued on amalgamation 4,180,200 -
Warrants exercised during the period (610,900) -
Warrants issued during the period - 610,900
----------- -----------
Unexercised warrants at May 31, 1999 3,569,300 610,900
=========== ===========
</TABLE>
Series A Warrants are exercisable at $0.75 per warrant until four (4)
months following the effective date of the amalgamation to purchase one
Class B Unit; each Class B Unit consists of one Videoflicks.com Inc.
common share and one Videoflicks.com Inc. Series B Warrant. Each Series B
Warrant will enable the holder to subscribe for one Videoflicks.com Inc.
common share at $1.15 until eight (8) months following the effective date
of the amalgamation.
Subsequent to May 31, 1999 an additional 436,770 Series A Warrants were
exercised. The remaining 3,132,530 Series A Warrants expired on July 23,
1999. A total of 1,047,670 Series B Warrants were issued and 11 were
exercised by July 23, 1999.
11
<PAGE> 51
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
4. SHARE CAPITAL (CONTINUED)
(iv) STOCK OPTION PLAN
Videoflicks.com Inc. has established a directors, officers, eligible
employees and consultants stock option plan (the "Plan"). The maximum
number of common shares that may be reserved for issuance under the
Plan is limited to 4,000,000 common shares.
Subsequent to the Amalgamation on March 23, 1999, options were granted
to purchase 2,040,000 common shares at an exercise price of $0.50 per
share expiring in March and April, 2004. All options vest as to
one-third thereof on each of the first, second and third anniversaries
of their date of grant except for 800,000 options granted to one
director, all of which vest immediately. Options to acquire an
additional 200,000 common shares at $0.50 per share on or before April
22, 2004 have been granted subject to compliance of such grant with
applicable securities legislation.
5. CAPITAL ASSETS
<TABLE>
<CAPTION>
MAY 1999 AUGUST 1998
(UNAUDITED)
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Furniture and fixtures $ 18,000 $ 5,000 $ - $ -
Computer equipment 117,000 32,000 31,000 20,000
Computer software 17,000 3,000 2,000 1,000
----------- ----------- ----------- -----------
$152,000 $ 40,000 $ 33,000 $21,000
=========== =========== =========== ===========
Net book value $112,000 $12,000
=========== =========== =========== ===========
</TABLE>
12
<PAGE> 52
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
6. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
Amounts due to related parties are as follows:
MAY 1999 AUGUST 1998 August 1997
(UNAUDITED)
<S> <C> <C> <C>
----------- ----------- -----------
Videoflicks Canada Limited $220,000 $ - $ -
=========== =========== ===========
</TABLE>
The company has entered into the following transactions with a related party,
Videoflicks Canada Limited. Videoflicks Canada Limited owns the controlling
block of shares of the Company. These transactions are in the normal course
of operations and are measured at the exchange value (the amount of
consideration established and agreed to by related parties), which
approximates the arm's-length equivalent value for sales of product.
<TABLE>
<CAPTION>
MAY 1999 May 1998 AUGUST 1998 August 1997 August 1996
9 MONTHS 9 months 12 MONTHS 12 months 12 months
(UNAUDITED) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cost of sales $ 893,000 $ 419,000 $553,000 $ 290,000 $54,000
Wages and benefits 150,000 86,000 124,000 89,000 10,000
Information Technology
Department wages 65,000 52,000 69,000 39,000 -
Rent 15,000 16,000 21,000 22,000 21,000
Administration 42,000 37,000 49,000 26,000 7,000
----------- ----------- ----------- ----------- -----------
$1,165,000 $ 610,000 $ 816,000 $ 466,000 $ 92,000
=========== =========== =========== =========== ===========
</TABLE>
The company has entered into a supply agreement with Videoflicks Canada
Limited under which Videoflicks Canada Limited has agreed to sell videos to
Videoflicks.com Inc. at the wholesale catalogue price charged by arm's-length
wholesalers of videos, plus shipping and applicable taxes.
Cost of sales and operating expenses do not include any mark-up from the
costs of Videoflicks Canada Limited.
Wages include a 15% mark-up on actual wages for payroll taxes and benefits.
Rent reflects the actual cost of the space maintained specifically for the
Internet Operations.
Administration expense is recorded at 15% of other operating expenses for the
period September 1, 1995 to March 23, 1999. This charge to Internet
Operations reflects an allocation of overhead costs including management,
administration, accounting services and office costs. Subsequent to March
23, 1999, administrative costs were incurred directly by the company.
All costs of operating the internet business have been included in the
financial statements as a direct cost or charged through administration for
management, administration, accounting services and office costs.
13
<PAGE> 53
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
7. LOSS PER SHARE
For the period ended May 31, 1999 the weighted average number of shares is
16,829,822.
The Company had losses for the period presented, therefore, the exercise
of the warrants and employee stock options would have an antidilutive effect
on loss per share.
8. CAPITAL CONTRIBUTION TO INTERNET OPERATIONS PRIOR TO ACQUISITION
The statements of operations represent the results of operations of the
internet operations on a continuity of interest basis. All losses incurred
prior to the acquisition on November 30, 1998 are losses of Videoflicks
Canada Limited which operated the internet operations. The capital
contributions, net of the losses, are presented as the assets of the internet
division.
9. INCOME TAXES
The reconciliation of income taxes calculated at the effective rate of 44.5%
to the total tax provision as follows:
<TABLE>
<CAPTION>
FOR THE 9
MONTHS ENDED
MAY 31, 1999
(UNAUDITED)
<S> <C>
Income taxes (recovery) at statutory rates $ 155,000
Adjustment to valuation adjustment (155,000)
---------
$ -
=========
Tax losses available to reduce taxable income of future years $ 155,000
Less: Deferred tax assets valuation allowance (155,000)
---------
Net tax assets $ -
=========
</TABLE>
The Company has net operation loss carry-forwards to reduce taxable income of
approximately $349,000 which expire during 2006.
14
<PAGE> 54
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
10. UNCERTAINTY DUE TO YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise
in some systems which use certain dates in 1999 to represent something other
than a date. The effects of the Year 2000 Issue may be experienced before,
on, or after January 1, 2000.
If the Year 2000 Issue is not addressed by the company and its major
customers, suppliers and other third party business associates, the impact on
the company's operations and financial reporting may range from minor errors
to significant systems failure which could affect the company's ability to
conduct normal business operations. It is not possible to be certain that all
aspects of the Year 2000 Issue affecting the company, including those related
to the efforts of customers, suppliers, or other third parties, will be fully
resolved.
11. SEGMENTED INFORMATION
Approximately 75% of the Company's sales are to the United States with the
remaining 25% having no more than 5% concentrated in any one country. The
assets of the company are in Canada.
15
