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FORM 20-F
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number _________
CINEMA INTERNET NETWORKS INC.
(Name of Registrant as specified in its charter)
Canada
(state or other jurisdiction of incorporation or organization)
Pier 32, Granville Island, Suite 320
1333 Johnston Street
Vancouver, British Columbia Canada V6H 3R9
(Address of principal executive offices and zip code)
(604) 602-1280
(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Shares, no par value per share
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the
registration statement: 7,960,207 Common Shares were outstanding as of July 31,
2000.
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 statements item the registrant has
elected to follow:
[ITEM 17 [X] ITEM 18 [ ]]
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FORWARD LOOKING STATEMENTS
Cinema Internet Networks Inc. ("CinemaWorks" or the "Company") cautions
readers that certain important factors (including without limitation those set
forth in this Form 20-F) may affect the Company's actual results and could cause
such results to differ materially from any forward-looking statements that may
be deemed to have been made in this Form 20-F registration statement, or that
are otherwise made by or on behalf of the Company. For this purpose, any
statements contained in the registration statement that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "expect," believe,"
"anticipate," "intend," "could," "estimate" or "continue" or the negative or
other variations of comparable terminology, are intended to identify forward-
looking statements.
Part I
Item 1. DESCRIPTION OF BUSINESS
CinemaWorks is a Canadian corporation whose business is the installation of
high-speed (broadband) Internet networks and connections, using both wireline
and wireless connections, for hotels and other commercial customers. The
Company's corporate offices are located at Pier 32, Granville Island, Suite 320,
1333 Johnston Street, Vancouver, British Columbia, Canada V6H 3R9. The
telephone number of the Company is (604) 602-1280. The Company's Common Stock
is currently traded on the Canadian Venture Exchange (the "CDNX") under the
trading symbol CWK.V. The Company's corporate Web site can be viewed on the
World Wide Web at http://www.cinemaworks.com.
Unless otherwise stated, all currency denominations in this Form 20-F are
in U.S. dollars. For certain information concerning the exchange rate of
Canadian dollars into U.S. dollars, see "Item 8. Selected Financial Data--
Exchange Rates."
Company History and Corporate Structure
CinemaWorks was incorporated on December 27, 1985, under the laws of Canada
as T.E.N. Private Cable Systems, Inc. Effective July 28, 1999, the Company
changed its name to Cinema Internet Networks Inc. in order to reflect the change
in its business focus from owning and operating pay per view ("PPV") movie
programming services for the hospitality industry to its current business of
Internet infrastructure installations for the hospitality industry. The Company
has one wholly owned subsidiary, T.E.N. Private Cable Systems USA (the
"Subsidiary"), a Washington state corporation. The Subsidiary was incorporated
on June 9, 1986, and offers contract high-speed Internet infrastructure
installation services in the U.S. The Subsidiary's offices are located at 4800
SW Macadam Avenue, Suite 280, Portland, Oregon 97201. From this office, the
Company conducts all of its U.S. installation administrative activities and
oversees its U.S. business development activities.
The Company's original business was owning and operating PPV services in
hotels across Canada and the U.S. The Company initially entered the hotel PPV
business by contracting with various Canadian hotels, primarily in the
Vancouver, British Columbia area. Following its initial private financing, in
1986 the Company became a public company listed on the Vancouver Stock Exchange,
which consolidated with the Alberta Stock Exchange, and is now known as the
Canadian Venture Exchange. By 1999, the Company had contracts for PPV services
in 8 hotels (792 rooms) throughout the Canadian province of British Columbia and
14 hotels (2,455 rooms) in the U.S.
By 1998, the Company's aging hospitality PPV technology was in critical
need of replacement in order for the Company to remain competitive with other
companies, which were offering expanded and enhanced pay television services.
After evaluating the current status of the PPV industry and the costs of
acquiring and financing the assets that would be required for the Company to
become competitive as a provider of PPV services, the Company's management
determined that a fundamentally new business direction
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for the Company should be planned and implemented that both took advantage of
the Company's prior experience and existing relationships and offered the
potential for significant revenues in the immediate future.
Concurrent with its assessment of the Company's existing PPV business, the
Company's management observed the emerging demand for high-speed Internet access
throughout society and its logical need by business travelers. As a result, the
Company chose to direct its new business efforts toward the task of building
broadband Internet infrastructure, with special emphasis on the hospitality
industry, where the Company had extensive prior experience and relationships.
In order to minimize the capital required to enter into and compete in this new
area, and to accelerate the timing for generating revenues in this business, the
Company elected to become an installer of Internet networks and connections
rather than a supplier/operator (a "S/O") of the equipment used for these
networks and connections.
The Company has historically financed its continuing operations and growth
through cash generated from its operations and by issuing shares of the Company
to cancel outstanding indebtedness. In March 2000, in order to fund the change
in its business from owning and operating PPV services in hotels to installing
high-speed Internet networks and connections in hotels and other commercial
concerns, and to reduce outstanding indebtedness, the Company completed an
offering to the public through the facilities of the Canadian Venture Exchange
for 950,000 units (the "Units") at CDN$0.675 per Unit. Each Unit consisted of
one share of common stock ("Common Stock") and one half of a warrant, each
whole warrant entitling its holder to purchase one share of Common Stock at a
price of CDN$0.75 per share for a one-year period. The Company realized
CDN$641,250 from the offering.
In May, 2000, the Company agreed to sell its PPV assets to Chequemate
International, Inc. (AMEX: DDD) ("Chequemate"), thus completing its move from
the PPV business to the high-speed Internet network and connections installation
business. In the transaction, which was subsequently completed, the Company
received 95,000 shares of Chequemate, 40,000 shares of which are restricted
under the Securities Act of 1933 (the "Securities Act"), and 55,000 of which are
to be registered by Chequemate. The Company will seek on behalf of Chequemate
to sell the Canadian portion of the PPV assets acquired by Chequemate from the
Company. The Company will be entitled to retain the proceeds from this sale, if
consummated by September 2001, but Chequemate will be entitled to cancel a
number of the restricted shares it delivered to the Company equal to the total
sale proceeds divided by $3 per share. Pending the sale of the Canadian PPV
assets, the Company will be responsible for certain lease payments relating to
those assets, with revenues generated by the Canadian PPV business being
available to satisfy those lease obligations and any excess revenues being
distributed to Chequemate. The Company recorded a gain on the disposition of
its PPV operations of $281,057 in its fiscal year ended July 31, 2000.
Business of the Company
CinemaWorks is an Internet-related company that installs high-speed
Internet networks and connections, using both wireline and wireless connections,
on a contract basis for hotels and other commercial concerns. The terms "high-
speed" and "broadband" are used to describe constant, "dedicated" Internet
bandwidth delivering T-1 ( ~ 1.5 Mbs ) data rates or greater. The term
"dedicated" contrasts with "shared," which is descriptive of most commercial
xDSL Internet and cable-based services, which advertise similar data rates of 1
to 2 Mbs but which can only deliver these rates intermittently depending on
whether other customers are simultaneously online within the area.
The Company's primary market niche is the hospitality industry, which the
Company believes will be in the forefront of the construction and deployment of
"last mile" broadband Internet networks worldwide, due to the importance of
world travel and the need for business executives to be able to access the
Internet from hotel locations throughout the world. The Company previously
owned and operated pay-per-view ("PPV") movie programming services during the
first 15 years of its operations. The Company believes that its prior
experience and relationships in providing these PPV services to hotels has
materially assisted the Company to date in developing its Internet
infrastructure installation business for customers in the hospitality industry.
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The hospitality industry services both the business traveler and the
vacationer. The Company's business is principally targeted at hotels whose
clientele are primarily business travelers. Today's fast-paced business world
creates more travel, longer working days, greater access to and demand for the
use of laptop computers for business purposes and the need for the business
person to have access to the Internet, email and his or her home office network.
In addition, many three-, four-and-five star rated hotels rely on convention and
business meetings for increased revenues. Hotels that can support large numbers
of laptop computers simultaneously accessing the Internet through high-speed
connections are better positioned to attract the most such meetings and thus
maximize revenues.
Hotels are increasingly seeking opportunities to compete for customers by
offering business travelers the particular services and amenities they need in
order to be successful. High-speed Internet access and networks enable hotels
to offer important advantages over their competitors. Business travelers have
choices when deciding where to locate their temporary remote offices, and the
Company can provide hotels with installation of the necessary Internet
infrastructure to attract larger numbers of business travelers. The Company
believes that the hospitality Internet infrastructure industry offers a large
potential market opportunity. There are approximately 55,000 hotels (4.4
million rooms) in the U.S. and Canada, with only approximately 1% of these
hotels already equipped with high-speed Internet networks and access.
The Company generates or anticipates generating revenues (i) by installing
high-speed Internet networks and access equipment upon receiving installation
request orders directly from a supplier with whom the Company has an existing
relationship, such as Internet network and connections equipment manufacturer
Elastic Networks, Inc. ("Elastic Networks"); (ii) through requests to install
Internet access equipment provided to the Company on a regular basis as a result
of the Company's membership in the newly formed hospitality consortium,
"Wiredinn"(the "Consortium"); or (iii) by acting as an agent for S/Os of
networks and high-speed Internet access equipment, such as network providers and
distributors Darwin Networks, Inc. ("Darwin") and Sprint Canada Inc. Under all
three of these sales models, the Company is paid by the S/O or the Consortium
upon either a time and materials basis or upon a per-Internet-connection-
installed basis at the time the installation work is performed. The Company
may, in the case of certain installation projects, also earn additional on-going
revenue based upon Internet usage by the hotel's guests.
The Company's current business strategy is to build a highly competitive
and profitable contract business installing high-speed (broadband) Internet
technology, using both wireline and wireless connections, primarily for the
hospitality industry. Complementary to its installation business for third
parties, the Company intends to develop a wireless broadband Internet services
installation business that competes with wireline T-1 offerings offered by
established telecommunications companies. This product will be primarily
targeted toward commercial entities not involved with the hospitality industry.
The Company is also considering opportunities related to providing broadband
Internet content and other Internet-related business opportunities that
complement or enhance its core business relationships.
Internet Infrastructure Installation Industry Overview
In both the U.S. and Canada, the broadband Internet infrastructure is being
built at a dizzying pace. The demand for bandwidth by consumers and businesses
continues to grow rapidly. Although fiber networks span the U.S. and Canada,
there still remains the problem of taking broadband data pathways the "last
mile" to the end-user. This is the niche that CinemaWorks seeks to serve,
focusing its efforts on the hospitality industry.
The paying public demands that the Internet evolve to deliver increasingly
more information. This is convincingly demonstrated by the relentless demand for
faster, wider, and better access to the Internet shown by the evolution of
modems (14.4k to 28.8k to 56k and now, xDSL), as well as the deployment of cable
Internet. The Company believes that the business of installing high-speed
Internet technology in the U.S. and Canada will expand continually for the
foreseeable future. As each level of user expectation is met by technology
providers, new and exciting cutting edge developments continue to drive demand
for bandwidth
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higher and higher. By remaining informed and open to changes, developments and
improvements in data delivery technology, the Company believes it can rapidly
grow its installation business in Canada and the U.S.
There are few barriers to entry in the Internet infrastructure installation
industry--start-up costs are low and demand is high in this new industry.
Currently, the greatest barrier to entry is the low supply of well-trained
technicians who can expertly evaluate a hotel's needs, its installation problems
and its budget and install an effective high-speed Internet network and
connections system ("Lead Technicians"). To date, the Company has been able to
hire and retain on a contract basis sufficient numbers of qualified Lead
Technicians, but in order to expand its current level of installations, the
Company intends to both hire on a contract basis more trained Lead Technicians
as may be available and implement an internal training program during the fall
of 2000 to ensure adequate numbers of qualified personnel are on staff or are
available on a contract basis to handle all installation projects the Company
engages in.
The Company's Services
CinemaWorks' business is installing high-speed Internet infrastructure
equipment, primarily for the hospitality industry. When requested, the Company
also installs Internet connections in commercial buildings and other multi-unit
structures. The Company enters into contracts with a S/O of Internet networks
and connections equipment to install this Internet infrastructure equipment in
hotel guest rooms and meeting rooms, sometimes acting as a sales agent for S/O.
The S/O provides all necessary equipment to be installed, and the Company
provides all installation services. T1 lines are typically ordered by the S/O.
Once the lines and all related equipment are installed, the Company tests the
connections to ensure proper installation. Because each hotel is built
differently and presents its own set of challenges and installation
specifications, the Company must tailor its services for each installation
project.
A typical installation project begins with a "site survey" of the hotel,
which is a detailed description of the property and its guest rooms and meeting
rooms. Lead Technicians take digital photographs of guest rooms, the phone room
and the meeting/conference rooms so that they can engineer an installation plan
that will effectively serve the location's needs. An example of a specific need
a hotel may have is that some hotels are multi-structured "campus" type
locations which require additional amplification equipment to be installed. In
some cases in newer buildings, a complete re-wire using Cat5 ethernet cabling
may be appropriate.
After conducting a properly completed site survey, the Company's technical
staff then determines the amounts and types of equipment to be used for the
installation. The Company arranges work scheduling with the hotel management.
The Company orders the T-1 line from a carrier and typically the S/O provides
the equipment that allows high-speed Internet connections from hotel guest rooms
and meeting rooms. When the Company has completed a hotel installation on
behalf of a S/O using hardware and software provided by the S/O, the hotel guest
is able to (i) connect a laptop computer via an ethernet card or cable; (ii)
start up his or her computer; (iii) open the Internet browser; and (iv)
automatically establish the high-speed Internet connection. There is no need to
reconfigure IP addresses or make any other adjustments to the user's software,
because the equipment software installed by the Company acts as a proxy for the
Internet session, thereby allowing the guest to avoid adjusting his or her
individual laptop when connecting to the Internet from the hotel. The hotel
directly bills the guest user for the high-speed Internet access via the hotel's
billing system or via credit card by the S/O, which operates its credit card
payment system online via the Internet. The payment method choice is the option
of hotel management. In the case of the Consortium, the high speed access is
provided "free" to the guest.
The S/O, e.g., Darwin or the Consortium, as the operating company for the
installed network, typically performs ongoing maintenance of the network at all
points, including directly to in-room high-speed modems that the Company
installs out-of-sight, usually beneath desks located in the hotel rooms. In
addition, the S/O (e.g., Darwin or the Consortium) typically operates a 24/7
call center whose job it is to help sort through and solve minor customer
service problems sometimes encountered by first time users of the high-speed
Internet services. After the installation is complete, the Company may contract
with the S/O for the Company to provide ongoing maintenance on a time and
materials basis for the life of the hotel service contract.
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Managing the installation process requires close monitoring of scheduling
and progress. A critical variable in the Company's profitability is the amount
of annual revenue generated by each Lead Technician. Time mismanagement in the
use of Lead Technicians can lead to significant revenue loss if the Company does
not have sufficient availability of its Lead Technicians and can erode the
profitability of particular installation projects. The Company can minimize
time waste in the multi-task environment of each installation job by ensuring
that all parties know in daily real time how all others are progressing on their
portions of each project. The Company has developed certain proprietary project
management software to assist it in the process of project management. For a
description of the Company's proprietary software, see "Intellectual Property."
Although the Company performs some of its work on a time and materials
basis, the Company believes that its major customers will eventually require
installers to charge a rate based on a "per Internet connection." This fact
emphasizes the Company's need to maximize its efficiency when installing each
project. In addition, the Company believes that pricing its services on a
performance-based "per Internet connection" basis will be a competitive
advantage in an environment where most competitors currently work on a time and
materials payment model.
Strategic Partners
CinemaWorks currently has certain business relationships that are integral
to its success in the high-speed Internet infrastructure installation business
for the hospitality industry. The Company has formed several strategic
relationships and alliances with its customers, who are the S/Os of Internet
infrastructure equipment. The Company anticipates that these alliances will
provide opportunities for the Company to grow and generate potentially
significant revenues in the foreseeable future. The following are the Company's
principal strategic partners:
Sprint Canada, Inc. ("Sprint Canada"). In September, 2000, the Company
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signed a four-way Memorandum of Understanding (the "Consortium MOU") with Sprint
Canada, Wiredinn.com, Inc. ("Wiredinn") and TIV Operations Group, Inc. ("TIV").
The Consortium MOU's primary purpose was to name all parties as members of the
newly created Consortium. Under the Consortium MOU, Sprint Canada would name
the Company as a Sprint Alliance Partner under Sprint Canada's "Solutions
Alliance Program." More specifically, it is expected that the Company will be
named Sprint Canada's preferred installation and maintenance company for high-
speed Internet services in the hospitality industry throughout Canada. This
agreement will likely apply to all of Sprint Canada's high-speed Internet
business in hotels, including both the Consortium and other solutions such as
that provided by CAIS Internet Inc., a major North American S/O of high-speed
Internet services to the hospitality industry that is currently allied with
Sprint Canada under a formal service agreement. It is further anticipated that
Sprint Canada will be the preferred supplier of bandwidth to the hospitality
properties installed by the Company regardless of the S/O of the equipment.
Sprint Canada will play a major role in the Consortium by sourcing, assembling,
and shipping equipment to each hotel site where the Company's installation
technicians will begin their work. In addition, it is planned that Sprint Canada
will operate the Consortium's 24/7 customer help desk, as well as the network
operations center for North America.
The Company anticipates that Sprint Canada, as an important member of the
Consortium, will use its size and influence in the telecommunications industry
to sign hotels to Internet infrastructure installation projects throughout
Canada and the U.S. Sprint Canada will provide networking equipment as well as
bandwidth for these installation projects. Sprint Canada's Tier 1 IP data
telecommunications network currently spreads across Canada, and through the
lines it owns or has access to through its numerous alliances, it can provide
service to any area in North America, and in many international locations.
The Consortium (Wiredinn.com, Inc. ("Wiredinn") and TIV Operations Group,
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Inc. ("TIV"). The intent of the Consortium is to pool the resources,
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relationships and expertise of several companies to provide high-speed Internet
services under a business model that allows hotels to dictate the terms and
conditions under which the services are offered to their guests. This is
fundamentally different from business models in which a S/O pays for the
Internet equipment under a revenue sharing arrangement with the hotel
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and then dictates to the hotel what prices will be charged to the guests. Under
the Consortium's business model, the hotel is encouraged to provide guest rooms
with free high-speed Internet access. TIV's proprietary data generated from
millions of hotel call records around the world indicates that current "charged"
guest use of the high speed services may increase substantially when these
services are provided for free. Under the Consortium's business model, the
Consortium or the Company will charge for Internet services in
meeting/conference rooms, and the hotel will be able to keep up to 100% of this
revenue.
In the commercial agreement following the Consortium MOU, the Company will
be named the Consortium's preferred installation and maintenance company for
high-speed Internet services throughout North America and in select
international locations requested by other Consortium members, such as Granada
Business Group (U.K.) and ViewInternet.com Pte. Ltd. (Singapore). For example,
ViewInternet.com Pte. Ltd. has recently signed agreements with Shangri-La Hotels
and the Taj Hotels Resorts and Palaces, and the Company may be requested to
provide installation services for some or all of these world class hotels
located throughout Asia. TIV's role is as a financial guarantor for hotels
purchasing the Consortium's high-speed Internet equipment and services. In
addition, TIV provides the means for hotels to substantially increase telephone
department revenue, which in many cases can pay for the high-speed Internet
services.
Wiredinn provides a worldwide hospitality Internet "portal" for travelers
accessing the Internet from hotel rooms and from their homes and businesses.
Wiredinn is a true Internet portal, featuring local and regional information for
each individual hotel. In addition, the Wiredinn portal has consummated
advertising agreements with international corporations such as Mercedes,
American Express and Hertz which are expected to provide long term recurring
advertising revenues to the portal. It is anticipated that the Consortium
members will have an equity interest in the portal.
Consortium Members Currently Under Consortium MOU or Commercial
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Agreement
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Granada Business Group. Granada Business Technology ("GBT"), a division
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of Granada Media, provides interactive television, video-on-demand and data
services to approximately 100,000 hotel rooms in Europe. In addition, GBT has
contracts signed to install an additional 70,000 rooms. The parent of GBT,
Granada Compass, owns 400 hotels operating under the Le Meridien, Heritage, and
Posthouse brands, as well as nearly 200 Travelodge units. GBT's short-term
desire is to lock out potential future competition by owning the copper network
in addition to the coaxial network inside the hotels. GBT's membership in the
Consortium would be highly advantageous for all parties involved, and a
memorandum of understanding is now in place between GBT and the Consortium. The
Company does not have an agreement with GBT, but anticipates that it will
benefit from GBT's intended membership in the Consortium.
ViewInternet.com Pte Ltd. ViewInternet.com Pte. Ltd. ("ViewInternet") is
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a private telecommunications services company with headquarters in Singapore.
In March 2000, ViewInternet won a contract to install high-speed Internet access
to 37 hotels (19,000 rooms) under the Shangri-La chain. ViewInternet also
recently announced a memorandum of understanding with the Taj Hotels Resorts and
Palaces to be the provider of high-speed Internet connectivity solutions to that
hospitality chain. The Taj is a prestigious hospitality chain with over 7,500
guestrooms across 59 properties located in 9 countries. The majority of its
properties are located in the Indian subcontinent. The chain has a range of
leisure, luxury and business hotels. The Company has not entered into an
agreement with ViewInternet, but anticipates that it will benefit from
ViewInternet's proposed membership in the Consortium.
Darwin Networks, Inc. In June 1999, the Company signed one of the first
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non-exclusive, third-party agent agreements with Darwin Networks, Inc.
("Darwin"), allowing the Company to sell and install Darwin's high-speed
Internet network systems in hotels throughout Canada and the U.S., acting as an
agent for Darwin. Darwin offers turnkey high-speed Internet services to the
hospitality industry in Canada and the U.S. Darwin is currently one of about a
dozen companies in Canada and the U.S. offering these services. Under the terms
of this agreement, the Company makes the initial contacts with each hotel and
conducts initial surveys to determine whether the hotel qualifies as a candidate
for the high-speed Internet networks and connections equipment offered by
Darwin. The Company negotiates the sale of the networks and connections with
the
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hotel, according to sales criteria specified by Darwin. Darwin has final
approval over the sale to each hotel. Once the specifics of the Internet
infrastructure sale and installation have been determined, the Company installs
the high-speed Internet infrastructure equipment in the hotel's guest rooms and
meeting rooms using the equipment provided by Darwin. The Company generally
receives a sales fee per room installed for the hotel plus installation charges
per room installed.
In September 2000, Darwin indicated to the Company that approval of future
hotel contracts will likely require the hotel to pay each month for the Darwin
high-speed internet equipment and services. The exact amount will be determined
on a case-by-case basis. This is a distinctly different business model than
what was used by Darwin during the previous year. This financial requirement is
expected to be duplicated by other competitors of Darwin (e.g., CAIS Internet)
in the marketplace simply because revenues and guest use rates of the high-speed
Internet services have not proven high enough to support a pure revenue sharing
business model.
To date, the Company has provided installation services for Darwin's high-
speed Internet network systems in 8 hotels (1330 rooms), representing all of
the Company's completed installations. The Company believes that Darwin may
change its focus from the hospitality industry to other commercial customers in
the near future. Therefore, the Company anticipates that it will be performing
fewer hospitality installations for Darwin, and will therefore perform most of
its hospitality installations for the Consortium. The Company will, however,
continue to work with Darwin, installing high-speed Internet networks for other
commercial customers.
Elastic Networks, Inc. In August 2000, the Company entered into a two-
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year, renewable independent contractor services agreement with Elastic Networks,
Inc. ("Elastic Networks"), whereby Elastic Networks can request on a project-by-
project basis that the Company provide installation and testing services for
Elastic Network's EtherLoop modems, multiplexers, servers and associated high-
speed Internet access equipment in hotels. Elastic Networks manufactures its
products and sells them directly to hotels or uses agents such as Darwin to sell
the equipment and services on its behalf. The Company currently installs
Elastic Networks equipment in hotels directly for Elastic Networks or on behalf
of Darwin. To date, the Company has not completed any installations of any
Elastic Networks properties. Elastic Networks pays the Company on either a time
and materials basis of on a per-line-installed basis.
GalaVu Entertainment, Inc. In addition to the Company's strategic
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alliances with its principal customers, the Company has established a strategic
relationship with GalaVu Entertainment, Inc. ("GalaVu"). The Company signed a
memorandum of understanding with GalaVu, a subsidiary of Networks North
Communications (NASDAQ:NETN) of Toronto, Ontario, in May, 2000. GalaVu is one
of the three largest hotel PPV movie operators in Canada, with over 200 hotels
(30,000 rooms) under contract. The memorandum of understanding anticipates that
the Company will share its expertise and its relationship with Darwin in order
to assist Gala Vu to sell Darwin's high-speed Internet services to GalaVu-
serviced hotels in Canada, which the Company will install on behalf of Darwin.
As an alternative to Darwin, the Company anticipates that a number of GalaVu-
serviced hotels will choose the Consortium as their high-speed Internet
provider.
Business Strategy
CinemaWorks' strategy in the near term is to develop and expand its high-
speed Internet networks and connections installation business in Canada and the
U.S., relying primarily on its new relationship with the Consortium, as well as
its existing or new relationships with Sprint Canada, Darwin and Elastic
Networks. Over the longer term, the Company intends to expand this business
internationally, relying primarily on its new relationship with the Consortium,
an expansion that is anticipated to initially include Western Europe, Asia, and
Latin America. The Company also plans to expand into new businesses, including
wireless Internet and Internet content, in order to fully support the
Consortium's efforts. To implement the Company's strategy, the Company intends
to take the actions described below.
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A. Expand Current Business Operations in Canada and the U.S.
In order to expand its current operations in Canada and the U.S.,
CinemaWorks plans to implement the following strategies:
1. Strengthen Existing Alliances. The Company plans to rely heavily
on its existing strategic alliances to develop installation projects as part of
the Company's strategy to leverage the marketing budgets of the largest, well-
capitalized suppliers and operators (i.e., Sprint Canada, the Consortium,
Darwin, CAIS Internet and Elastic Networks).
i. The Consortium. The Consortium, led in Canada by Sprint
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Canada, hopes to sell and install high-speed Internet connections in up to 300
Canadian hotels within the next twelve months. To date, projections for the U.S.
have not been determined.
Sprint Canada. As a member of the Sprint Canada
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Alliance Partner Program, the Company is anticipated to be the preferred
installation company for hospitality-related high-speed Internet services
throughout Canada. These service requests may come from a variety of sources,
primary of which is anticipated to be through the Consortium. However, because
Sprint Canada does not exclusively represent the Consortium in Canada, other
companies, such as CAIS Internet, may request Sprint Canada to provide turnkey
Internet services to hotels in Canada. In such cases, the Company would likely
perform the installation component under contract with Sprint Canada.
GalaVu. The Company plans to move forward with
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GalaVu under the umbrella of the Consortium and Darwin, should the latter
continue to develop its hospitality business in Canada. GalaVu currently
operates movie and television services in 200 hotels (30,000 rooms) across
Canada.
ii. Darwin Networks. The Company plans to continue its
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alliance with Darwin by assisting Darwin in its deployment of high-speed
Internet services in the hospitality sector, as well as in non-hospitality
commercial concerns and multiple dwelling units throughout North America.
iii. Elastic Networks. Elastic Networks is expected to
----------------
contract with the Company for various hospitality and non-hospitality high-speed
Internet installation projects in Canada and the Western U.S. This work will be
performed under direct contract with Elastic Networks, an S/O, and may involve a
number of other S/Os. The Company is one of only four companies selected by
Elastic Networks as of September 2000, to do this work in North America.
2. Expand Geographical Coverage Through Strategic Installation
Alliances. The Company plans to enter into arrangements with regional
installation companies to attain nationwide coverage for the Company's services
in Canada. These companies will become an active part of the Company's business
strategy as strategic installation partners. These alliances will enable the
Company to gain access to a professional pool of qualified and experienced Lead
Technicians without incurring the expenses involved in hiring them as employees.
For example, the Company's chosen strategic partner for Canada, east of British
Columbia, is APCI Communications (Oakville, ON), whose current regional and
national customer base includes companies such as Ford Canada, Molson Canada,
Imperial Oil and Canadian Tire Corporation. The Company expects to consummate a
formal strategic alliance agreement with APCI during the Fall of 2000.
3. Retain Highly Qualified Personnel. An important component of the
Company's strategy is to ensure that its work force is highly trained, informed
and expert in installation techniques for a variety of Internet network
equipment and connections. Recruiting and training qualified individuals,
particularly Lead Technicians, is often difficult in the Internet infrastructure
installation industry, because demand for these individuals has increased
significantly and all competitors in the industry are simultaneously competing
for the most experienced workers. Where possible, the Company intends to
recruit qualified individuals with experience in the business. However, because
such individuals are not at present available in adequate numbers, the Company
expects to implement in the fall of 2000 a training program for individuals
interested in
9
<PAGE>
becoming Lead Technicians. The Company is participating in a Canadian government
program, ScienceLink, which reimburses qualifying companies for 60% of a
trainee's salary for up to six months. Highly qualified technology-specific
training will be provided by the Company's management. The Company expects this
arrangement to enable it to train and employ highly qualified personnel at a
substantially lower cost than that associated with using standard recruiting
channels. Although the Company has not to date experienced personnel shortages
and expects that its training program should adequately supplement its current
work force, many companies are competing for quality employees in this industry,
and the Company cannot guarantee that it will have access to enough qualified
technicians to meet its expansion plans.
4. Remain Technologically Sophisticated. The Company intends to
familiarize and train its Lead Technicians to install all preferred types of
quality high-speed Internet infrastructure equipment that its alliance partner
suppliers provide and their customers request. This policy will help the
Company to avoid becoming dependant upon only one or two types of equipment and
installation techniques, thus enabling it to possibly create alliances with a
wider variety of Internet network providers.
B. Expand High-Speed Internet Networks and Connections Installation
Business Internationally.
Substantial international opportunities exist for CinemaWorks outside
North America. The Company believes that its membership in the Consortium will
provide greater means for expansion of the Company's business by taking
advantage of TIV's hospitality international contacts, thereby establishing
connections in areas of the world that are on the verge of experiencing the type
of explosion in demand for data communications currently occurring in North
America.
Through its membership in the Consortium, the Company expects
significant initial expansion outside of North America will occur in Western
Europe and Asia, where other intended Consortium partners are located (i.e., GBT
in the U.K. and ViewInternet in Singapore, although both companies may elect to
do their own installations in certain or all cases). These markets together
represent a market approximately equal in size to North America according to
data provided by the International Hotel and Restaurant Association. It has yet
to be determined if the Company's role in these international markets will be
that of advisors via the Company's Lead Technicians or if the Company will
organize and manage the complete installation process.
Other parts of the world, including Eastern Europe, the Middle East
and Africa, are also promising areas for eventual expansion by the Consortium
and the Company. However these regions may occasionally present barriers to
foreign investment and excessive governmental regulation. Until such time as
these conditions are improved or otherwise overcome, the Company will likely
focus most of its expansion efforts in Western Europe and Asia in conjunction
with Consortium partners, GBT and ViewInternet.
C. Expand into New Businesses
1. Wireless Internet Services.
Two wireless products form an important complementary business to
CinemaWorks' high-speed Internet installation services. These are the Company's
provisioning of two-way broadband IP services via satellite (to remote areas)
and last mile line-of-sight high-speed wireless services.
The Company's last mile and satellite data services are complementary
and may often be used together in conjunction with the Consortium. For example,
the Company could provide satellite-delivered Internet bandwidth to a hotel in
Asia and simultaneously serve surrounding businesses with its line-of-sight
wireless connections.
Two-way broadband Internet data delivered via satellite is either non-
existent or very expensive in many areas of the world. The Company has developed
a value-added turnkey end-to-end total wireless solution for businesses
(including hotels) that requires these cost-effective and
10
<PAGE>
reliable services. In North America, it is anticipated that Sprint Canada will
provide the Internet backbone connection for the Company's satellite Internet
customers.
The Company expects to provide broadband wireless Internet connections
to businesses via wireless rooftop rights agreements with hotels and other
buildings located in under-served areas. To accomplish its goals, the Company
anticipates using strategic vendors and alliances (e.g., Sprint Canada) for
equipment, installation, financing, field maintenance and Internet Service
Provider services, as well as sales and marketing.
The Company plans to price its wireless services competitively with
local wireline services. In addition, discounts are expected to be given for
long-term contracts with direct customers. Business arrangements with wholesale
customers such as Sprint Canada, who would resell the Company's services, will
yield lower profit margins, but these lower profit margins will be offset by
greater business volume. Overall, the Company's management anticipates that its
wireless services will generate high profit margins for the foreseeable future.
Maintenance of the Company's wireless services will be contracted with
third parties. Maintenance services in international locations (e.g., Asia) will
likely be contracted through Consortium partners.
The Company plans to launch a "last mile" wireless Internet connection
beta project in the Vancouver, BC metropolitan area by October, 2000. The
Company plans to install a dedicated 11.0 Mbs wireless broadband connection
between the Company's office building and the Executive Inn hotel across False
Creek, an inlet located in downtown Vancouver. A dedicated wired T1 connection
will be the "pipe" that delivers the wireless data to the Internet backbone in
downtown Vancouver. The Executive Inn is a Darwin/CinemaWorks Internet customer
and Darwin has agreed to allow the Company to share the T1 connection, thereby
saving the Company over $1,000 per month in recurring T1 access fees.
2. Content Provision.
Because of the Company's 15 years of experience in hospitality PPV
movie and television programming, the Company's long-term plans include the
provision of entertainment content delivered over the Internet. The Company is
now closely evaluating proposed strategic alliances which will allow the Company
to utilize its prior business experience with major movie studios. The first and
most likely venue for the Company's Internet content is expected to be the
Consortium's worldwide hospitality portal, Wiredinn.com.
The Company has entered into a memorandum of understanding with
Earthramp.com Communications, Inc. ("Earthramp"), under which the parties intend
to work together to provide real time streaming of financial data from all North
American stock exchanges. The memorandum of understanding anticipates that
Earthramp would be the exclusive provider of Internet-based financial
information to the Company and the Company would market and sell Earthramp's
services to its strategic partners, including the Consortium.
The Company's Customers
CinemaWorks' sales are currently generated from installation projects
in Canada and the U.S. Net sales to customers by geographic area are determined
by reference to the customer's physical location. Payments are made by customers
in either U.S. or Canadian currency. Net PPV services sales as a percentage of
net sales to customers by geographic area consisted of the following for the
years ended July 31, 1998, 1999 and 2000:
11
<PAGE>
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Geographic Areas (PPV Business):
--------------------------------
Canada 27.62% 27.62% 29.6%
United States 72.38% 72.38% 72.4%
</TABLE>
During the fiscal year ended July 31, 2000, the Company's business changed
from the provision of PPV services in hotels to installing high-speed Internet
infrastructure equipment, and by the end of that fiscal year, the Company was
no longer in the PPV services business. The Company's customers for its high-
speed Internet network installation business are S/Os, which are the
manufacturers and distributors of high-speed Internet networks and connections.
The customers for these suppliers, in turn, are individual hotels who are
contracting with the S/O for the installation of their equipment. The primary
S/O for the Company to date has been Darwin, which accounted for 100% of its
revenues for the fiscal year ended July 31, 2000. The Company's indirect
customers for its PPV services have been individual hotels, such as Comfort Inn,
Richmond, Virginia, and Blue Horizon, Vancouver, British Columbia, in Canada,
and Wilson World, Dallas, Texas, Bilmar Beach Resort, Treasure Island and
Ramada Denver Airport, Denver, Colorado, in the U.S.
Net sales as a percentage of net sales of Internet infrastructure
installation to customers by geographic area consisted of the following for the
fiscal years ended July 31, 1998, 1999 and 2000:
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Geographic Areas (Internet Infrastructure
-----------------------------------------
Installation Business):
-----------------------
Canada 0.0% 0.0% 81.0%
United States 0.0% 0.0% 19.0%
</TABLE>
Net sales as a percentage of net sales to customers by business area
consisted of the following for the fiscal years ended July 31, 1998, 1999 and
2000:
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Business Areas:
---------------
PPV Business 100.0% 100.0% 33.3%
Internet Infrastructure Installation 0.0% 0.0% 66.7%
Business
</TABLE>
The Company's Suppliers
CinemaWorks' suppliers for the high-speed Internet networks and connections
equipment it installs are its customers, the S/Os. These S/O's include Darwin,
Elastic Networks, Sprint Canada and the Consortium. These companies supply the
actual T1 lines and connections equipment, including hardware and software, that
the Company needs to install to connect hotels, other commercial entities and
multiple dwelling units to the Internet. Darwin and Elastic Networks are based
in the U.S. The Company has elected to form alliances with these companies
based on the quality and availability of their products and services. The high
quality Internet infrastructure equipment these companies supply to the Company
is plentifully available and has not to date been subject to any type of
seasonal cessation of or decrease in availability. The Company has also
selected these suppliers because of their relationships with end users of the
Company's services in the hospitality industry. See "Strategic Partners."
The Company utilizes ordinary Cat5 ethernet cabling which it purchases from
the S/Os. The Company's installations generally require Cat5 ethernet cabling
commonly available from a number of
12
<PAGE>
manufacturers. In addition, the Company's available personnel are factory
trained by companies such as Siemens and Alcatel, and can provide manufacturer-
certified cabling solutions with both copper and fiber. There are multiple
sources of supply for this ethernet cabling and the Company has not to date
experienced any difficulty in obtaining an adequate supply on a timely basis of
this cabling.
CinemaWorks anticipates using Cisco Systems routers and switches for
installations in North America and other locations worldwide with Consortium
members. Cisco Systems has an outstanding reputation for field maintenance and
service which the Company hopes to utilize in its long-term equipment
maintenance responsibilities.
The Company's Marketing Strategy
CinemaWorks has implemented a targeted and specific marketing program to
become involved in the construction of the worldwide broadband Internet
infrastructure. In order to increase its name recognition and be able to enter
into strategic alliances for high-speed Internet networks and connections
installations, the Company engages in direct marketing targeted to manufacturers
and distributors of high-speed Internet technology as well as new and existing
telecommunications S/Os of this equipment. This direct marketing is the primary
focus of the Company's efforts. In addition, the Company plans to attend
selected trade shows, most likely only in conjunction with its business alliance
and Consortium partners. The Company does not currently promote its
capabilities through on-line and traditional advertising. However, the Company
may in the future employ limited traditional advertising efforts in selected
trade journals in the hospitality, telephony and Internet industries.
Intellectual Property
CinemaWorks is developing a proprietary software system with integrated
data bases and project management capabilities to enhance the Company's ability
to manage its installation costs while providing better customer service. This
software system is designed to coordinate on a real-time basis the
installation-related activities of the equipment vendors and equipment shippers,
the bandwidth provider, the project manager, the local labor provider, the
management of the hotel of other property owner and other parties. The
Company's software system is in beta testing, and the Company plans to fully
implement this system before the end of 2000.
Competition
CinemaWorks competes with a variety of companies offering Internet
infrastructure installation services in hotels, including divisions of Xerox,
Inc., GTE, Inc. and UNISYS, Inc. In addition, there are numerous small local
providers of installation services throughout Canada. The Company's strategy
includes plans to contract with selected smaller companies under non-disclosure
and non-compete agreements that are specific to the Company's business with the
Consortium, Sprint Canada, Elastic Networks and Darwin.
Barriers to entry into the industry are minimal, and current and new
competitors can launch new installation businesses at a relatively low cost.
However, competition for competent Lead Technicians is both a barrier to entry
for new, small companies, as well as a source of continuing competition among
existing providers of high-speed Internet installation services. Current labor
statistics released by the U.S. Government indicate a shortage in the
foreseeable future in the computer and telecommunications technician-level
workforce. The push to install high-speed Internet technology is recent and
currently causing a severe shortage of qualified Lead Technicians to competently
perform available work industry-wide. Of the qualified Lead Technicians
available in North America, most are employed by local exchange carriers
("LECs"), with most of the remaining qualified workers divided between large
companies such as Xerox Connect, Inc., UNISYS, Inc., and others. Because of the
timeliness of the Company's current business efforts, as well as the experience
and personal networks of the Company's management, the Company believes it has
access to highly qualified personnel, some of whom have taken early retirement
from major LECs and are now back in the work force. The Company also plans to
train qualified individuals itself. There can be no guarantee, however, that
the
13
<PAGE>
Company will be able to continue to attract and retain enough qualified Lead
Technicians to fulfill the expected growing demand for high-speed Internet
connection installations.
The Company believes that in addition to competition for qualified
personnel, the principal competitive factors in the Internet infrastructure
installation industry are reputation for quality of service, reliability in
completing jobs on-time, possession of expertise with respect to a variety of
available technologies and technical trouble-shooting capability to solve
unexpected problems in the field. The Company believes that it is well
positioned to compete based on these features, as it has a highly qualified work
force, a 15-year history of providing reliable, quality service in the
hospitality field of hotel PPV operations, and, as a member of the Consortium,
is positioned to gain a wide variety of technology expertise and trouble-
shooting capabilities.
Many of the Company's current, anticipated and potential competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
The Company is aware that certain of its proposed competitors have and may
continue to adopt more aggressive marketing policies and perhaps more aggressive
pricing policies, although that is currently not the case. However, increased
competition may result in reduced operating margins and loss of market share for
the Company.
Employees
CinemaWorks, including the Subsidiary, employs eight full-time and two
part-time individuals. Of the eight full-time employees, one is in New Business
Development, two are in Operations, one is a Lead Technician, one is a Trainee
Technician, one is in Sales, one is in Human Resources and one is in
Administration. Of the two part-time employees, one is in Business Development
and the other is a Lead Technician. The Company also contracts with 50
additional persons hired on a project basis (Lead Technicians and other
technicians).
Research and Development.
CinemaWorks' research and development activities during the past three
years have been limited to development of a software program to track and manage
the Company's installation business. The Company's only research and
development expenditures during the last three fiscal years were $9,162 in the
fiscal year ended July 31, 2000.
Risk Factors
An investment in CinemaWorks' securities involves a high degree of risk.
These risks include without limitation the following:
New Business Model. As a result of its inability to compete effectively
------------------
in its prior PPV services provider business, CinemaWorks made the transition
during 1999 to becoming an installer of high speed Internet networks and
connections for hotels and other commercial customers. The Internet networks
and connections installation business is a new and rapidly evolving industry
that is subject to significant on-going changes resulting from factors such as
advances in technology and in the uses of the Internet by businesses and
consumers. The Company has had only limited experience operating in this
industry and may encounter difficulties in planning for and operating its
business, including in anticipating and adapting to changes in technologies
utilized for the Internet and in the business models of its existing or
potential customers for the use of the Internet.
No Assurance of Profitability. CinemaWorks has been unable to sustain
-----------------------------
profitability in recent years, due primarily to declining revenues in its PPV
business. The Company had an accumulated deficit of $4,162,112 as of July 31,
2000. There can be no assurance that the Company will be able to maintain or
increase its operating profits in future periods. To generate profits in the
future, the Company will need to
14
<PAGE>
increase its revenues, which will require the Company, among other things, to
successfully execute its strategy of partnering with certain suppliers of
Internet equipment, to effectively market its services to potential customers,
to perform installations in an efficient and timely manner and to have access to
a sufficient number of Lead Technicians.
Limited Financial Resources and Potential Need for Additional Financing.
-----------------------------------------------------------------------
CinemaWorks has only limited financial resources, with working capital of
$388,763 as of July 31, 2000. The Company anticipates that it will require
additional capital during its current fiscal year to finance the expected growth
in its current installation business (including growth that may be generated
through the Consortium), as well as its planned entry into the wireless high
speed Internet services business and potential future entry into other Internet-
related content, software or hardware businesses. In addition, the Company
could require additional capital to fund its current operations should these
operations not be profitable in the future. The Company does not have any
commitments from third parties to provide debt or equity financing to the
Company, and there can be no assurance that any financing will be available to
the Company on attractive terms or at all. Any equity financing could
substantially dilute the Company's existing shareholders. Failure to obtain any
needed financing on a timely basis could have a material adverse effect on the
Company's ability to expand its businesses or to maintain the competitiveness or
scope of its existing operations.
Dependence on Continued and Increasing Use of Internet. CinemaWorks'
------------------------------------------------------
future revenues will depend in significant part upon the continued and growing
acceptance and use of the Internet and other online services as a medium of
commerce. Rapid growth in the use of the Internet, the Web and online services
is a recent phenomenon. As a result, acceptance and use may not continue to
develop at historical rates, and a sufficiently broad base of customers may not
adopt or continue to use the Internet and other online services as a medium of
commerce and entertainment. Demand and market acceptance for recently
introduced services and products over the Internet are subject to a high level
of uncertainty and there exist few proven services and products. In addition,
the Internet may not be accepted as a viable long-term commercial tool for a
number of reasons, including potentially inadequate development of the necessary
network infrastructure or delayed development of enabling technologies and
performance improvements. If the Internet continues to experience significant
expansion in the number of users, frequency of use or bandwidth requirements,
the infrastructure for the Internet may be unable to support the demands placed
upon it. In addition, the Internet could lose its viability as a commercial
medium due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased governmental regulation. Changes in, or insufficient availability of,
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Internet generally.
Dependence on Strategic Relationships. CinemaWorks' business strategy
-------------------------------------
involves dependence on certain strategic relationships to provide the Company
with access to the Internet networking and connection equipment that it installs
and to market its services to customers. All of its installations to date have
been done by the Company as an installer of equipment owned and installed by
Darwin. The Company also has recently entered into an agreement with Elastic
Networks, pursuant to which the Company also will install Internet networking
and connection equipment in hotels for this vendor. The Company's agreements
with Darwin and Elastic Networks are not exclusive, so that the Company will
have to compete with others for the business of these two vendors. To the
extent that Darwin or Elastic Networks encounter difficulties in marketing their
products or services to hotels or other customers or should these vendors shift
the focus of their efforts to other markets, the Company's current installation
business could be materially and adversely affected as a result of its being
unable to service the new customers of Darwin or Elastic Networks or its being
unable to generate new installation business through new strategic alliances
with equipment vendors or through its own marketing efforts. Notwithstanding
its relationships with Darwin and Elastic Networks, the Company anticipates that
its installation business in the future will be primarily dependent on its new
strategic relationships with Sprint Canada and the Consortium. The terms of
these relationships have not yet been fully defined in definitive agreements,
which are expected to permit Sprint Canada and the Consortium members to utilize
the services of installers other than the Company under certain circumstances,
and which may permit Sprint Canada or the members of the Consortium to terminate
their relationships with the Company under certain circumstances.
15
<PAGE>
Dependence on Lead Technicians. CinemaWorks' current business is
------------------------------
dependent on its access to a sufficient number of Lead Technicians. The Company
retains Lead Technicians on a contract, nonexclusive basis. Accordingly there
can be no assurance that Lead Technicians will be available to the Company for
specific installation projects of the Company at the times and in the
geographical markets where required, there is intense competition for the
services of Lead Technicians among installation companies. The Company's
planned expansion of its installation business will require an additional supply
of Lead Technicians, including in geographic markets where the Company has not
previously recruited these technicians. The Company is implementing a training
program to increase the number of Lead Technicians available to it, but there
can be no assurance that the Company will be able to enroll a sufficient number
of candidates in this program or that this program will be effective in training
Lead Technicians or securing individuals trained in this program to work for the
Company. The Company is actively seeking alliances with local, regional and
national installation companies in order to secure access to Lead Technicians by
utilizing these companies on a subcontract basis. There can be no assurance
that the Company will be able to develop alliances with or acquire those firms.
Any use of these firms on a subcontract basis will reduce the profitability of
the installation project for the Company, and the Company may encounter
difficulties with any local firm that it subcontracts with or acquires in the
quality or timeliness of the installation work performed by that firm. Any
potential future shortages in the supply of Lead Technicians that result in
higher contract prices for these individuals could have a materially adverse
effect on the Company's profitability.
Risks of Wireless Internet Services Business. CinemaWorks has not yet
--------------------------------------------
identified or secured customers for its wireless Internet services business.
The Company may encounter stiff competition from local companies who may price
bandwidth below levels at which the Company can profitably deliver its wireless
services. In such cases, the Company may be forced to de-install and remove its
wireless equipment to other more financially promising areas not competitively
served with broadband Internet services. The Company may have difficulty in
managing the contract personnel in areas that do not represent its core
business.
Competition. The market for CinemaWorks' installation services is highly
-----------
competitive, and competition may increase in the future. There are no
significant proprietary, financial or other barriers to entry that could keep
potential competitors from developing and providing competing services in the
Company's current or future markets. The Company's principal competitors
include XEROX Connect and UNISYS, as well as numerous locally based competitors.
A number of competitors have longer operating histories, greater name
recognition, larger installed customer bases, and substantially greater
financial, technical and marketing resources than the Company. The Company
believes that the principal factors affecting competition in its market include
name recognition, ability to build a reputation of extremely high quality,
punctual service and customer confidence, ability to respond to changing
customer needs, and ability to engineer and solve unexpected problems in the
field, thereby saving the customer substantial unbudgeted monies. The Company's
ability to compete successfully will depend in large part on its ability to
attract top quality employees and new customers and respond effectively to
continuing technological changes by continuing with advanced training programs
for the Company's technicians. There can be no assurance that the Company will
be able to compete successfully in the future or that future competition will
not have a material adverse effect on the business, operating results or
financial condition of the Company.
Dependence on Key Management Personnel. CinemaWorks' success is
--------------------------------------
substantially dependent on the performance of its executive officers and key
employees. The Company is particularly reliant upon the experience and
relationships that its Chief Executive Officer, William Massey, has in the
hospitality industry. The Company does not have an employment agreement with
William Massey and does not carry key man life insurance with respect to him.
The loss of William Massey's services would have a material adverse effect on
the Company's business. Given the Company's early stage of development in the
Internet technology installation business, the Company business also will be
dependent on its ability to retain and motivate other high quality personnel.
Although the Company believes it will be able to attract, retain and motivate
qualified personnel for such purposes, an inability to do so could materially
adversely affect the Company's ability to market, sell, and enhance its
services. The loss of one or more of its key employees or the Company's
inability to hire and retain other qualified employees could have a material
adverse effect on the Company's business.
16
<PAGE>
Uninsured Losses. CinemaWorks' installation activities expose the
----------------
Company to potential liability, including for personal, property and business
interruption damages. Although the Company maintains comprehensive liability
and property insurance, there can be no assurance that such insurance coverage
will be sufficient to cover any claims made against the Company or that
insurance will be available to the Company in the future at affordable rates or
at all.
Need to Protect Intellectual Property. While CinemaWorks' operations do
-------------------------------------
not rely on significant proprietary intellectual property, the Company has
developed a proprietary software system to enhance its ability to manage its
installation related activities. This system is not covered by a patent or
copyright, and third parties may be able to develop and commercially utilize
functionally equivalent systems. There also can be no assurance that the
Company's system will not infringe the patent or other rights of third parties,
which could require the Company to modify its system, pay a royalty to one or
more third parties or discontinue using the system.
Risks Associated with International Operations. CinemaWorks' operations
----------------------------------------------
have been conducted to date in both Canada and the U.S. As a result,
fluctuations in the currency rates of those two countries could have an impact
on the Company's reported earnings. At the present time, the Company has no
plans to use currency hedging transactions to minimize this exposure or any
exposure to currency fluctuations in other countries where it may do business in
the future, and even if the Company sought to implement these measures, there
can be no assurance that such arrangements will be available, will be cost-
effective or will be able to fully offset such currency risks. The Company
plans to expand its operations into other countries. This expansion will
increase the risks inherent in doing business on an international basis,
including 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. The Company has limited experience in establishing its service in
new local markets and the Company believes that local competitors in those
markets will affect expansion into foreign markets. There can be no assurance
that the Company will be successful in expanding into international markets or
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 or financial condition.
Control by Insiders. CinemaWorks' executive officers and directors own
-------------------
directly or indirectly approximately 39.46% of the Company's Common Stock.
Accordingly, the Company's executive officers and directors are able to exert
effective control over the election of the Company's Board of Directors and all
business decisions affecting the Company and its shareholders.
Volatility of Common Stock Trading Price. The market price for
----------------------------------------
CinemaWorks' common stock has been and is likely to continue to be highly
volatile and subject to wide fluctuations in response to various factors,
including without limitation 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 technology
installation industry; changes in the economic performance and/or market
valuations of other Internet infrastructure companies; announcements by
management or competitors of significant acquisitions, strategic partnerships,
joint ventures or capital commitments; additions or departures of key personnel;
and potential litigation. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations. These broad market
fluctuations may adversely affect the market price of the Company's common
stock.
Limited Market for Common Stock. CinemaWorks anticipates that a trading
-------------------------------
market will develop for its Common Stock following the registration of the
Common Stock under the Securities Exchange Act of 1934, although there can be no
assurance that such market will develop or that significant trading will take
place in such market. It is likely that any U.S. trading market for the Common
Stock will at least initially be on the electronic bulletin board and be subject
to the "penny stock rules" under the Securities Exchange Act of 1934.
17
<PAGE>
Penny stocks are stocks (i) with a price of less than five dollars per
share; (ii) that are not traded on a "recognized" national exchange; (iii) whose
prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed
stocks must still meet requirement (i) above); or (iv) in issuers with net
tangible assets of less than $2,000,000 (if the issuer has been in continuous
operation for at least three years) or $5,000,000 (if in continuous operation
for less than three years), or with average revenues of less than $6,000,000 for
the last three years. Broker-dealers dealing in penny stocks are required to
provide potential investors with a document disclosing the risks of penny stocks
and to obtain a manually signed and dated written receipt of the document before
effecting any transaction in a penny stock for the investor's account.
Moreover, broker-dealers in penny stocks must approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. Compliance with these requirements may make it more difficult for
investors in the Common Stock to resell their shares to third parties or to
otherwise dispose of them.
Lack of Dividends. CinemaWorks does not currently anticipate declaring
-----------------
and paying dividends to its shareholders for the foreseeable future. It is the
Company's current intention to apply net earnings, if any, to increasing its
capital base and funding the growth of its operations. There can be no
assurance that the Company will ever have sufficient earnings to declare and pay
dividends to the holders of the Company's Common Stock, and, in any event, a
decision to declare and pay dividends is at the sole discretion of the Company's
Board of Directors.
Item 2. DESCRIPTION OF PROPERTY
Canada.
CinemaWorks occupies 1,411 square feet of commercial office space at Suite
320, 1333 Johnston Street, Vancouver, BC Canada V6H 3R9. This facility is the
Company's headquarters and also houses all of the Company's Canadian operations,
including administrative, marketing and project management. The Company
subleases this office space and pays an annual rent of approximately $9.52 per
square foot, payable in equal monthly installments. The term of the sublease
runs through September 29, 2003. The Company does not have a renewal option for
this space. The Company believes that this space is adequate for its current
and planned operations for the foreseeable future.
United States.
CinemaWorks shares 750 square feet of office space with two other tenants
located at 4800 SW Macadam Avenue, Suite 280, Portland, Oregon 97201. The term
of the lease is one year, renewable in December of each year. At present the
Company is not charged any rent. The Company believes that this space is
adequate for its current and planned operations for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
CinemaWorks is not involved in any material litigation.
Item 4. CONTROL OF REGISTRANT
To the best of the CinemaWorks' knowledge, the Company is not directly or
indirectly owned or controlled by any other corporation or any foreign
government. The following table sets forth, as of July 31, 2000, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each person known by the Company to own beneficially more than 10%
of the Common Stock outstanding as of such date and (ii) the directors and
officers of the Company as a group.
18
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Person or Group Number of Common Shares Percent Beneficially
Beneficially Owned Owned
<S> <C> <C>
North American Movie Network, Inc(1) 1,852,320 23.27%
1822 Lakeland Drive
Dallas, TX, 75218
Gene Yamagata Trust 799,380 10.04%
275 East Tropicana suite 200
Las Vegas, NV, 89109
All Directors and Officers as a Group (5 persons) 965,346 (2) 12%
</TABLE>
__________________
(1) William Massey, the Company's President, Chief Executive Officer and
Chairman of the Company's Board of Directors, owns 100% of the capital
stock of North American Movie Network, Inc.
(2) Does not include shares beneficially owned by William Massey through North
American Movie Network, Inc. Assumes exercise of all 20,000 options held
by the group indicated which are currently exercisable or will become
exercisable before November 30, 2000. See "Item 12. Options to Purchase
Securities from Registrant or Subsidiaries."
Item 5. NATURE OF THE TRADING MARKET
There is a public trading market for CinemaWorks' Common Stock on the
Canadian Venture Exchange. The trading symbol for the Common Stock is "CWK.V."
Currently, there is no established trading market for the Company in the U.S.,
although the Company anticipates that the Common Stock will trade on the
electronic bulletin board following the registration of the securities under the
Securities Exchange Act of 1934. As of September 25, 2000, there were 78
shareholders of record of the Company's Common Stock, of which approximately 39%
of the outstanding shares were held of record by 25 shareholders in the U.S.
The Company's registrar and transfer agent is CIBC Mellon Trust.
The high and low trades for the Common Stock on the Canadian Venture
Exchange for each quarter of the Company's past two fiscal years are set forth
below:
<TABLE>
<CAPTION>
Quarter Ended High ($CDN) Low ($CDN)
------------- ---- ---
<S> <C> <C>
July 31, 2000 $1.50 $0.76
April 30, 2000 $2.90 $0.32
January 31, 2000 $0.40 $0.20
October, 1999 $0.25 $0.15
July 31, 1999 $0.05 $0.02
April 30, 1999 $0.03 $0.02
January 31, 1999 $0.04 $0.02
October 31, 1998 (1) - -
</TABLE>
____________
(1) As a result of the Company's failure to file certain reports with the
Canadian Venture Exchange, trading in the Company's stock was suspended on
February 20, 1996, and resumed on August 28, 1998. There was no trading in the
fiscal quarter ended October 31, 1998.
19
<PAGE>
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
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 CinemaWorks' securities who are not
residents of Canada, other than withholding tax requirements. See "ITEM 7.
Taxation".
There are no limitations imposed by the laws of Canada, the laws of British
Columbia 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 or
non-Canadian citizen who proposes to acquire common shares. The summary below is
of a general nature only and is not intended to be nor is it, a substitute for
independent advice from an investor's own advisor. The summary does not
anticipate any future 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 "Canadian" as defined in the
Investment Act (a "non-Canadian"), unless after review, the minister responsible
for enforcing 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 2000 is CDN$192
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 were 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, if the Company's Canadian assets were then 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 of 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-Canadian making the investment either before or within 30 days after the
investment.
Certain transactions relating to common shares are exempt from the
Investment Act, including: (i) an acquisition of common shares by a person in
the ordinary course of that person's business as a trader or dealer in
securities; (ii) 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 (iii) an
acquisition of control of the Company by reason of an amalgamation, merger,
consolidation or
20
<PAGE>
corporate reorganization, following which the ultimate direct or indirect
control in fact of the Company, through the ownership of common shares, remained
unchanged.
Item 7. TAXATION
Canadian Federal Income Taxation
The following summary describes the principal Canadian federal income tax
considerations generally applicable to a holder of the shares of CinemaWorks'
Common Stock who, for purposes of the Income Tax Act (Canada) (the "Canada 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 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
The ITA provides that dividends and other distributions deemed to be
dividends paid or deemed to be paid by a Canadian resident corporation (such as
CinemaWorks) to a non-resident of Canada shall be subject to a non-resident
withholding tax equal to 25% of the gross amount of the dividend or deemed
dividend. Provisions in the ITA relating to dividend and deemed dividend
payments to and gains realized by non-residents of Canada, who are residents of
the United States, are subject to the Treaty. The Treaty may reduce the
withholding tax rate on dividends as discussed below.
Article X of the Treaty as amended by the US-Canada Protocol ratified on
November 9, 1995 provides a 5% withholding tax on gross dividends or deemed
dividends paid to a United States corporation which beneficially owns at least
10% of the voting stock of the Company paying the dividend. In cases where
dividends or deemed dividends are paid to a United States resident (other than a
corporation) or a United States corporation which beneficially owns less than
10% of the voting stock of the Company, a withholding tax of 15% is imposed on
the gross amount of the dividend or deemed dividend paid. The Company will be
required to withhold any such tax from the dividend and remit the tax directly
to Revenue Canada for the account of the investor.
The reduction in withholding tax from 25%, pursuant to the Treaty, will not
be available:
(a) if the shares in respect of which the dividends are paid formed part of
the business property or were otherwise effectively connected with a permanent
establishment or fixed base that the holder has or had in Canada within the 12
months preceding the disposition; or
(b) the holder is a U.S. LLC which is not subject to tax in the U.S.
The Treaty generally exempts from Canadian income tax dividends paid to a
religious, scientific, literary, educational or charitable organization or to an
organization exclusively administering a pension, retirement or employee benefit
fund or plan, if the organization is resident in the U.S. and is exempt from
income tax under the laws of the U.S.
21
<PAGE>
Capital Gains
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a share of CinemaWorks unless the
share represents "taxable Canadian property" to the holder thereof. The Common
shares of the Company will be considered taxable Canadian property to a non-
resident holder only if:
(a) the non-resident holder;
(b) persons with whom the non-resident holder did not deal at arm's
length; or
(c) the non-resident holder and persons with whom he did not deal at arm's
length;
owned not less than 25% of the issued shares of any class or series of the
Company at any time during the five-year period preceding the disposition. In
the case of a non-resident holder to whom shares of the Company represent
taxable Canadian property and who is resident in the United States, no Canadian
taxes will generally be payable on a capital gain realized on such shares by
reason of the Treaty unless:
(a) the value of such shares is derived principally from real property
(including resource property) situated in Canada;
(b) they formed part of the business property or were otherwise
effectively connected with a permanent establishment or fixed base that the
holder has or had in Canada within the 12 months preceding the disposition; or
(c) the holder is a U.S. LLC which is not subject to tax in the U.S.
If subject to Canadian tax on such a disposition, the taxpayer's capital
gain (or capital loss) from a disposition is the amount by which the taxpayer's
proceeds of disposition exceed (or are exceeded by) the aggregate of the
taxpayer's adjusted cost base of the shares and reasonable expenses of
disposition. For Canadian income tax purposes, the "taxable capital gain" is
equal to three-quarters of the capital gain.
United States Federal Income Taxation
The following is a discussion of the material United States Federal income
tax consequences, under current law, applicable to a U.S. Holder (as defined
below) of Common Stock of CinemaWorks who holds such shares as capital assets.
This discussion does not address all potentially relevant Federal income tax
matters and it does not address consequences peculiar to persons subject to
special provisions of Federal income tax law, such as those described below as
excluded from the definition of a U.S. Holder. In addition, this discussion
does not cover any state, local, or foreign tax consequences. (See "Canadian
Federal Income Taxation" above.)
The following discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, published Internal Revenue Service
("IRS") rulings, published administrative positions of the IRS and court
decisions that are currently applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive basis, at any time. In
addition, this discussion does not consider the potential effects, both adverse
and beneficial, of any recently proposed legislation which, if enacted, could be
applied, possibly on a retroactive basis, at any time.
THE DISCUSSION BELOW DOES NOT ADDRESS POTENTIAL TAX EFFECTS RELEVANT TO THE
COMPANY OR THOSE TAX CONSIDERATIONS THAT DEPEND UPON CIRCUMSTANCES SPECIFIC TO
EACH INVESTOR. IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS THE TAX
CONSEQUENCES THAT MAY BE RELEVANT TO PARTICULAR INVESTORS SUBJECT TO SPECIAL
TREATMENT UNDER CERTAIN U.S. FEDERAL INCOME
22
<PAGE>
TAX LAWS, SUCH AS, DEALERS IN SECURITIES, TAX-EXEMPT ENTITIES, BANKS, INSURANCE
COMPANIES AND NON-U.S. HOLDERS. PURCHASERS OF THE COMMON STOCK SHOULD THEREFORE
SATISFY THEMSELVES AS TO THE OVERALL TAX CONSEQUENCES OF THEIR OWNERSHIP OF THE
COMMON STOCK, INCLUDING THE STATE, LOCAL AND FOREIGN TAX CONSEQUENCES THEREOF
(WHICH ARE NOT REVIEWED HEREIN), AND SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
U.S. Holders
As used herein, a "U.S. Holder" includes a beneficial holder of Common
Stock of CinemaWorks who is a citizen or resident of the United States, a
corporation or partnership created or organized in or under the laws of the
United States or of any political subdivision thereof, any trust if either a US
court is able to exercise primary supervision over the administration of the
trust or one or more US persons have the authority to control all substantial
decisions of the trust, any entity which is taxable as a corporation for U.S.
tax purposes and any other person or entity whose ownership of Common Stock of
the Company is effectively connected with the conduct of a trade or business in
the United States. A U.S. Holder does not include persons subject to special
provisions of Federal income tax law, such as tax-exempt organizations,
qualified retirement plans, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers, non-
resident alien individuals or foreign corporations whose ownership of the common
shares of the Company is not effectively connected with the conduct of a trade
or business in the United States and shareholders who acquired their shares
through the exercise of employee stock options or otherwise as compensation.
Dividend Distribution on Shares of the Company
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to the Common Stock of CinemaWorks are required to
include in gross income for United States Federal income tax purposes the gross
amount of such distributions to the extent that the Company has current or
accumulated earnings and profits, without reduction for any Canadian income tax
withheld from such distributions. Such Canadian tax withheld may be deducted or
may be credited against actual tax payable, subject to certain limitations and
other complex rules, against the U.S. Holder's United States Federal taxable
income. See "Foreign Tax Credit" below. To the extent that distributions
exceed current or accumulated earnings and profits of the Company, they will be
treated first as a return of capital to the extent of the shareholder's basis in
the common shares of the Company and thereafter as gain from the sale or
exchange of the common shares of the Company. Preferential tax rates for net
long term capital gains may be applicable to a U.S. Holder which is an
individual, estate or trust.
In general, dividends paid on the Common Stock of the Company will not be
eligible for the dividends received deduction provided to corporations receiving
dividends from certain United States corporations.
Foreign Tax Credit
A U.S. Holder who pays (or who has had withheld from distributions)
Canadian income tax with respect to the ownership of the Common Stock of
CinemaWorks may be entitled, at the election of the U.S. Holder, to either a
deduction or a tax credit for such foreign tax paid or withheld. This election
is made on a year-by-year basis and generally applies to all foreign income
taxes paid by (or withheld from) the U.S. Holder during that year. There are
significant and complex limitations which apply to the credit, among which is
the general limitation that the credit cannot exceed the proportionate share of
the U.S. Holder's United States income tax liability that the U.S. Holder's
foreign source income bears to his or its world-wide taxable income. In
determining the application of this limitation, the various items of income and
deduction must be classified into foreign and domestic sources. Complex rules
govern income such as "passive income", "high withholding tax interest",
"financial services income", "shipping income" and certain other classifications
of income. A U.S. Holder who is treated as a domestic U.S. corporation owning
10% or more of the voting stock of the
23
<PAGE>
Company is also entitled to a deemed paid foreign tax credit in certain
circumstances for the underlying foreign tax of the Company related to dividends
received or Subpart F income received from the Company. (See the discussion
below of Controlled Foreign Corporations). The availability of the foreign tax
credit and the application of the limitations on the foreign tax credit are fact
specific and holders and prospective holders of the common shares of the Company
should consult their own tax advisors regarding their individual circumstances.
Disposition of Common Stock
If a "U.S. Holder" is holding shares as a capital asset, a gain or loss
realized on a sale of the Common Stock of CinemaWorks will generally be a
capital gain or loss, and will be long-term if the shareholder has a holding
period of more than one year. However, gains realized upon sale of the Common
Stock of the Company may, under certain circumstances, be treated as ordinary
income, if the Company were determined to be a "collapsible corporation" within
the meaning of Code Section 341 based on the facts in existence on the date of
the sale (See below for definition of "collapsible corporation"). The amount of
gain or loss recognized by a selling U.S. Holder will be measured by the
difference between (i) the amount realized on the sale and (ii) his tax basis in
the common shares of the Company. U.S. Holders who are individuals may offset
up to $3,000 of ordinary income per year ($1,500 for married individuals filing
separately) and may carryover unused capital losses to offset capital gains
realized in subsequent years. For U.S. Holders which are corporations (other
than corporations subject to Subchapter S of the Code), any unused capital
losses may only be carried back three and forward five years from the year in
which such losses are realized.
Other Considerations for U.S. Holders
In the following circumstances, the above sections of this discussion may
not describe the United States Federal income tax consequences resulting from
the holding and disposition of Common Stock of CinemaWorks. Management of the
Company is of the opinion that there is little, if not any, likelihood of the
Company being deemed a "Foreign Personal Holding Company", a "Foreign Investment
Company" or a "Controlled Foreign Corporation" (each as defined under the Code)
under current and anticipated conditions.
ITEM 8. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five-year
period ended July 31, 2000, is derived from the consolidated financial
statements of CinemaWorks for the five fiscal years ended July 31, 2000, 1999,
1998, 1997 and 1996, audited by the Company's independent auditors. The
selected information is qualified in its entirety by reference to, and should be
read in conjunction with, such consolidated financial statements, related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included as Item 9 of this Form 20-F. The financial data presented
below reflects the discontinuation and sale of the Company's prior PPV services
business in the fiscal year ended July 31, 2000.
24
<PAGE>
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------
1996 (1) 1997 (1) 1998 (1) 1999 (1) 2000 (1)
----------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data
---------------------
Revenues $ - $ - $ - $ - $ 222,980
Gross profit - - - - 127,968
Income (loss) from continuing
operations (84,723) (74,691) (82,895) (122,349) (214,093)
Income (loss) from discontinued
operations (150,818) (75,483) 247,752 (409,257) 99,244
Net income (loss) (235,541) (150,174) 164,857 (531,606) (114,849)
Dividend paid - - - - -
Per share amounts
Net income (0.07) (0.05) 0.05 (0.16) (0.02)
Dividend paid - - - - -
Balance Sheet Data
------------------
Working capital $ (259,176) $(234,082) $ 7,658 $(487,161) $ 388,763
Total assets 647,317 449,149 390,621 417,885 488,351
Long term debt - - - 102,074 -
Shareholders' equity 266,234 114,817 279,139 (253,363) 356,182
</TABLE>
____________
(1) The Company changed its business from the provision of PPV services to the
installation of Internet infrastructure equipment during its fiscal year
ended July 31, 2000. Revenues exclude revenues generated from discontinued
operations, which totaled $1,064,011 for the fiscal year ended July 31,
1996, $753,490 for the fiscal year ended July 31, 1997, $612,014 for the
fiscal year ended July 31, 1998, $510,198 for the fiscal year ended July
31, 1999 and $113,068 for the fiscal year ended July 31, 2000.
Exchange Rates
CinemaWorks transacts its business in U.S. dollars and Canadian dollars.
Since June 1, 1970, the government of Canada has permitted a floating exchange
rate to determine the value of the Canadian dollar as compared to the U.S.
dollar. On September 1, 2000, the exchange rate for Canadian dollars exchanged
into U.S. dollars was 0.67100, while for the fiscal years ended July 31, 1996,
1997, 1998, 1999 and 2000, the following exchange rates were in effect for
Canadian dollars exchanged into U.S. dollars, expressed in terms of Canadian
dollars (based on the noon buying rates in New York City, for cable transfers in
Canadian dollars, as certified for customs purposes by the Federal Reserve Bank
of New York):
<TABLE>
<CAPTION>
-------------------------------------------------------
Fiscal Average High Low Year
Year End
-------------------------------------------------------
<S> <C> <C> <C> <C>
2000 0.67929 0.69830 0.66010 0.67650
-------------------------------------------------------
1999 0.66227 0.69170 0.63070 0.66330
-------------------------------------------------------
1998 0.70132 0.73040 0.66070 0.66310
-------------------------------------------------------
1997 0.73147 0.75370 0.70970 0.72440
-------------------------------------------------------
1996 0.73416 0.75320 0.72090 0.72760
-------------------------------------------------------
</TABLE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Change in Business
The fiscal year ended July 31, 2000 saw a major change in Cinema Works'
business. Having committed in 1998 to change its business focus from its prior
business of owning and operating PPV services
25
<PAGE>
for the hospitality industry to the installation of high-speed Internet networks
and connections for the hospitality industry, the Company first signed an
agreement with Darwin to act as a sales agent for Darwin's high-speed Internet
services and data services for hotels in North America. Second, in March, 2000,
the Company completed an offering to the public of the Company's capital stock
via the Canadian Venture Exchange that brought the Company CDN$641,250. The
third step in changing the Company's business focus was completed in July, 2000,
when the Company finalized a transaction to sell its PPV assets, and the Company
has now exited the PPV services business.
The Company's high-speed Internet infrastructure installation operations in
Canada and the U.S. are conducted through independent contractor agreements with
O/S companies such as Sprint Canada, Elastic and Darwin. The Company intends to
strengthen these alliances and pursue new business areas, including wireless
broadband Internet services installation and opportunities related to providing
broadband Internet content, during the current fiscal year.
Results from Operations
The Company's revenues currently are derived from the sale and installation
of high-speed Internet networks and connections equipment for the hospitality
industry. The Company carries out all of its sales and installation operations
in Canada and the U.S., where demand for Internet bandwidth is high and
continues to increase.
Fiscal Year Ended July 31, 2000 Compared to Fiscal Year Ended July 31, 1999
The Company's operating results for the fiscal year ended July 31, 2000
reflect only revenues generated from the Company's "new" Internet networks and
connections installation business. Revenues of the prior pay-per-view ("PPV")
business, which was sold in July 2000, are only presented in the footnotes to
the Company's financial statements, which reflect the PPV operating results and
disposition as "income (loss) from discontinued operations." Any comparisons
made between the Company's continuing business to prior years' revenues,
therefore, would not be meaningful.
Revenues. The Company's revenues for the year ended July 31, 2000 from
continuing operations were $222,980, all of which were generated in the last
quarter. During the fiscal year ended July 31, 2000, the Company's efforts were
focused on this change of business, including selling the Company's PPV assets
and raising capital through the public offering of the Company's capital stock.
For the fiscal year ended July 31, 2000, the Company's revenues from its new
high-speed Internet networks and connections installation business were
generated in conjunction with the Company's sales agency agreement with Darwin.
Cost of Good Sold. The Company's cost of goods sold (direct costs) for its
new business as a percentage of revenues was 43%, leaving 57% gross profit. The
costs of goods sold associated with the Company's new high-speed Internet
infrastructure installation business are lower than the costs of providing PPV
services to the hospitality industry, and consist primarily of salaries for Lead
Technicians, semi-skilled labor to assist the Lead Technicians, installation
equipment (for the Company's direct employees) and the low cost of plentiful
ethernet cable lines the Company installs for its customers. The S/O entities
with whom the Company contracts for installations provide the more costly
networks and connections components to be installed. The PPV movie and
television services business carried higher costs associated with the services
sold, including commissions to hotels, maintenance of cable television systems,
marketing supplies, the PPV programming, movie studio royalties, videotapes and
shipping.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended July 31, 2000 were $342,061,
amounting to 153.40% of total revenues. The Company had no bad
26
<PAGE>
debts to record during the fiscal year ended July 31, 2000, and the Company had
no amortization expenses related to its installation assets to record in the
fiscal year ended July 31, 2000. In addition, during the fiscal year ended July
31, 2000, the Company reduced its rent expense, travel and promotion expenses
and management fees due in large part to the discontinuation of the Company's
PPV services business. The Company's reduction in selling, general and
administrative expenses in the fiscal year ended July 31, 2000 did not improve
the Company's net income for that year, as revenues also decreased as a result
of the Company's contraction and cessation of its PPV services business and its
change to the new high-speed Internet infrastructure installation business. As
anticipated revenues increase in 2001, the general and administrative expenses
as a percentage of revenues should be reduced.
Net Loss. The Company recorded a net loss for the fiscal year ended July 31,
2000 of $114,849. The decrease in net loss in the fiscal year ended July 31,
2000 was primarily due to the Company's change of its business. Another reason
for the decrease in net loss connected to the Company's change of business in
the fiscal year ended July 31, 2000 was the income of $99,244 generated from
discontinued operations.
Fiscal Year Ended July 31, 1999 Compared to Fiscal Year ended July 31, 1998.
The following discussion relates solely to the prior discontinued business of
the Company and should not be considered indicative of the current or future
operations of the Company's new business.
Revenues. The Company's revenues for the year ended July 31, 1999 were
generated entirely from its discontinued PPV services business and totaled
$510,198, a decrease of $101,816, or 16.64% compared to revenues generated for
the fiscal year ended July 31, 1998. The decrease in revenues was a result of
the continuing decrease in the Company's PPV business due to the decrease in the
number of hotel rooms the Company was able to service under contract, resulting
from the expiration of certain hotel PPV service agreements and the Company's
inability to attract the necessary equipment lease financing to replace the
Company's aging PPV technology or to expand its PPV operations. This difficulty
rendered the Company increasingly unable to effectively compete with other PPV
providers that could offer expanded and enhanced PPV services to hotels such as
sophisticated video-on-demand ("VOD") systems that were far superior to the
Company's older scheduled pay movie systems.
Cost of Good Sold. The Company's cost of goods sold for its discontinued
business for the fiscal year ended July 31, 1999 was $53,714, a decrease of
$5,260 or 8.92% as compared to the fiscal year ended July 31, 1998. This
decrease was due to the general contraction of the Company's PPV business and
its increasing inability to compete in that industry. The costs associated with
owning and operating PPV services included commissions to hotels, maintenance of
the sensitive pay movie and television equipment, point of sale marketing
supplies, the PPV movie programming (VHS tape format), movie studio royalties,
videotapes and shipping. The overall gross profit for the fiscal year ended July
31, 1999 was $138,873, representing a gross profit margin of 27.24%. This
compared with the overall gross profit margin of $293,881 or 48.02% for the
fiscal year ended July 31, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended July 31, 1999 were $525,512,
amounting to 103.00% of total revenues, as compared to $321,818, or 52.58% of
total net sales for the fiscal year ended July 31, 1998. Selling, general and
administrative expenses for both years consisted of amortization, listing fees
and transfer agent fees, management fees, office services and related expenses,
professional fees, rent, telephone and communications expenses, travel and
promotion and wages, benefits and consulting fees. In the fiscal year ended
July 31, 1999, the Company also incurred bad debt and interest expenses that it
did not incur in the fiscal year ended July 31, 1998. Management fees increased
from $20,700 in the fiscal year ended July 31, 1998 to $65,000 in the fiscal
year ended July 31, 1999. In addition, the Company's telephone and
communications fees, travel and promotion expenses and wages, benefits and
consulting fees increased to $20,013, $41,148 and $164,680, respectively,
compared to $11,478, $27,989 and $94,109 respectively for the fiscal year ended
July 3l, 1998. These increases were due to the Company's efforts during the
fiscal year ended July 31, 1999 to sell its aging PPV assets while
27
<PAGE>
simultaneously seeking strategic alliances and financing for the Company's
planned change of business to the installation of high-speed Internet networks
and connections.
Gross Profit. The overall gross profit for the fiscal year ended July 31,
1999 was $138,973, representing a gross profit margin of 27.24%. This compared
with the overall gross profit and gross profit margin of $293,881 or 48.02% for
the fiscal year ended July 31, 1998.
Net Loss. The Company recorded a net loss for the fiscal year ended July 31,
1999 of $531,606, compared to net income for the fiscal year ended July 31, 1998
of $164,857. The decrease in net income in the fiscal year ended July 31, 1999
was primarily due to the Company's increasing challenges in competing in the PPV
services industry as a result of the aging of the Company's PPV technology. The
Company's overall sales efforts in the PPV services industry in the fiscal year
ended July 31, 1999 decreased compared to the fiscal year ended July 31, 1998 as
the Company explored alternative businesses to the owning and operating of PPV
services.
Liquidity and Capital Resources
Traditionally, the Company has relied upon a combination of funds generated
from its operations, the issuance of shares of its Common Stock in repayment of
indebtedness and funds generated from issuing shares of its Common Stock to fund
the costs of its operations, although the Company has also partly funded its
continuing operations with long term debt during the fiscal year ended July 31,
2000, including a capital lease that was disposed of during the fiscal year
ended July 31, 2000 as part of the asset sale to Chequemate. In March, 2000,
the Company completed a public offering of its securities that generated net
proceeds of CDN$641,250, which were used by the Company to carry receivables
during the initial stages of growing its new high-speed Internet infrastructure
installation business with Darwin. The Company plans to dispose of the
Chequemate stock it received in the PPV asset sale, which may provide additional
modest cash funds for the Company during the current fiscal year.
At July 31, 2000, the Company had working capital of $388,763. This
compares with negative working capital of $487,161 at July 31, 1999. The
increase in working capital was primarily due to the sale of the Company's PPV
assets in July, 2000, the receipt of funds from the Company's public offering
of capital stock completed in March, 2000, and the issuance of shares of Common
Stock in repayment of debt.
The Company anticipates that it will require additional capital during its
current fiscal year to finance the expected growth in its current installation
business (including growth that may be generated through the Consortium), as
well as its planned entry into the wireless high speed Internet services
business and potential future entry into other Internet-related content,
software or hardware businesses. In addition, the Company could require
additional capital to fund expected new business resulting from the Consortium's
expansion and its current operations should these operations not be profitable
in the future. The Company does not have any commitments from third parties to
provide debt or equity financing to the Company, and there can be no assurance
that any financing will be available to the Company on attractive terms or at
all.
Impact of Inflation
CinemaWorks believes that inflation and changing prices have not had a
material effect on its business during the past three fiscal years.
Item 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
28
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
CinemaWorks' directors are elected by the Company's shareholders and serve
until the next annual shareholders meeting or until their successors are
otherwise elected by the shareholders. The Company's executive officers are
appointed by the Company's Board of Directors and serve as officers until their
successors are appointed by the Board of Directors. The directors and executive
officers of the Company are as follows:
----------------------------------------------------------------------------
Name Office
----------------------------------------------------------------------------
William E. Massey Director, Chairman, President, Chief Executive
Officer
----------------------------------------------------------------------------
Thomas C. Bower Director
----------------------------------------------------------------------------
Alan R. Murphy Director
----------------------------------------------------------------------------
Robert L. Hahn Chief Financial Officer
----------------------------------------------------------------------------
Anna J. Menlove Secretary
----------------------------------------------------------------------------
William E. (Bill) Massey. Mr. Massey has fifteen years executive
experience in the hospitality pay movie/cable television and telecommunications
industries. William Massey has been CEO and Chairman of the Company since 1997.
Previously, he had served as President and a director of the Company since 1994.
Mr. Massey's prior experience includes founding and developing several
successful startup pay movie/television companies that were eventually merged or
sold to larger concerns. William Massey has a Bachelors of Education from the
University of Hawaii, with graduate studies in Chemical Engineering at the
University of Michigan, and in Library and Information Science at the University
of Texas.
Robert L. Hahn. Mr. Hahn has over thirty years of corporate experience in
executive and financial management with several technology-related companies.
Since joining the Company in January, 1999 as its Chief Financial Officer, he
has guided and advised the Company with respect to its long-term capital
requirements and needs. While President of Continental Resources, a high
technology equipment rental company, from 1965 to 1988, Mr. Hahn managed the
company from startup through an aggressive expansion to include 11 offices and
250 employees generating over $100 million in annual sales. After 1975 the
Company was in the computer and peripheral distribution business. While
operating as an independent consultant from 1992 to 1999, Mr. Hahn assisted in
securing debt and equity financing for in excess of $150 million for
entrepreneurial telecommunications companies. Mr. Hahn has a Bachelor of Science
in Business and Finance from the University of Maryland.
Alan R. Murphy. Mr. Murphy has over twenty years experience in
entrepreneurial enterprises. He was one of the co-founders of T.E.N. Private
Cable Systems, Inc., the predecessor of the Company, where he served as
President and a director of the Company from 1986 to 1989. In 1989, Mr. Murphy
founded and subsequently served until 1999 as President of Daval Productions
Inc., a video production business producing video tapes for the travel industry
and for retail sales. Mr. Murphy was formerly a regional sales manager for
Xerox in Western Canada and along with managing his portfolio of investments,
currently owns and operates a yacht chartering business in Vancouver, British
Columbia.
Thomas C. Bower. Mr. Bower has been a director of the Company since July,
1997. Mr. Bower has 15 years of executive experience in applied engineering and
is currently Executive Vice President of Engineering for Cascade General Inc., a
major shipyard located in Portland, Oregon. Prior to this VP position,
29
<PAGE>
Mr. Bower was the site technical Manager for MAN B&W, Seattle, WA and Portland,
OR from 1999 to June 2000. From 1995 - 2000 he held the position of Director and
VP Engineering and Operations for Comprehensive Water Management Ltd., Delta,
BC. Mr. Bower holds a B.S. from the Royal Military College (1978), a Diploma in
Marine Engineering from the Royal Navy Engineering College (1980), a M.S. in
Applied Science from the University of British Columbia (1985), and completed a
Management Development Program at the University of New Brunswick (1990).
Anna J. Menlove. Ms. Menlove has been the Secretary of the Company since
January, 1999, and has served as the Company's Office Manager since 1998. Prior
to joining the Company, Ms. Menlove was Office Manager for a Travelers Clinic in
New Zealand in 1998, and prior to this worked in London, England as a Registered
Nurse. Ms. Menlove holds a diploma in Comprehensive Nursing from Southland
Polytechnic in New Zealand.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
CinemaWorks does not pay the members of its board of directors for their
services. The aggregate amount of compensation the Company and its subsidiaries
paid during the fiscal year ended July 31, 2000 to all officers as a group (five
individuals) for services in all capacities was approximately $132,000. No
amounts were paid or accrued by the Company during the last fiscal year for
pension, retirement or other similar plans.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
Stock Options Outstanding
The following table sets forth all outstanding stock options or warrants to
purchase shares of CinemaWorks' Common Stock as of August 31, 2000 held by the
Company's officers and directors:
<TABLE>
<CAPTION>
Name of Optionee Director / No. of Exercise Expiry Date
Officer Shares of Price
Common Stock CDN $
<S> <C> <C> <C> <C> <C>
(a) Bower, Thomas Director 33,000 $0.88 May 10, 02
20,000 $0.25 Nov 01, 00
(b) Hahn, Robert Officer 33,000 $0.88 May 10, 02
(c) Massey, William Director and 324,723 $0.88 May 10, 02
Officer
(d) Menlove, Anna Officer 33,000 $0.88 May 10, 02
(e) Murphy, Alan Director 33,000 $0.88 May 10, 02
(f) All directors and 476,723 $0.88 May 10, 02
officers as a group
(five individuals)
</TABLE>
In addition to the options held by the Company's officers and directors,
there are options outstanding to purchase a total of 297,000 shares of Common
Stock at an exercise price of CDN$0.88 and an expiration date of May 10, 2002.
There are warrants outstanding to purchase a total of 479,250 shares of Common
Stock at an exercise price of CDN$0.88 and an expiration date of March 31,
2001.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Except as set forth below, CinemaWorks is not aware of any transactions or
proposed transactions in respect of which the Company or the Subsidiary was or
is to be a party within the last three fiscal years, in which (i) any director
or executive officer of the Company or the Subsidiary, (ii) any entity that
controls the
30
<PAGE>
Company, or (iii) any relative or spouse (or any relative of such spouse) who
has the same home as any such previously named persons, had or has a direct or
indirect interest in the transaction.
During the fiscal years ended July 31, 2000 and 1999, the Company paid the
spouse of William Massey $53,000 and $46,278, respectively, for services
rendered to the Company in her capacity as an employee of the Company.
During the fiscal year ended July 31, 1998, the Company entered into an
agreement with North American Movie Network ("NAMN"), which is 100% owned by
William Massey, for the sale to the Company by NAMN of certain "on-demand" PPV
movie system assets, including equipment and contracts located in the U.S.
These systems were installed and operating at the time the contract was
executed. NAMN sold the PPV assets to the Company for NAMN's cost, plus the
amount of revenues received from continuing operations of these PPV assets
between the effective date of the asset purchase agreement and the closing of
the asset sale, which occurred on March 15, 1999. The total sale price of the
PPV assets was $276,927. The Company then sold the equipment to CapitalPlus
Equity, LLC, formerly known as Richlund Capital, Inc., in Utah for $126,176 on
March 15, 1999. CapitalPlus Equity, LLC then leased the equipment back to the
Company starting March 15, 1999, for a 60-month term, automatically renewable
for a term of 12 to 72 months, as determined by the parties. The lease payments
for the first 60-month term were $2,717 per month. During the fiscal year ended
July 31, 2000, this lease was disposed of as a part of the PPV asset sale by the
Company to Chequemate. See "Company History and Corporate Structure."
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
The securities to be registered pursuant to this Form 20-F are all of the
authorized Common Stock of Cinema Internet Networks Inc. Holders of the Common
Stock are entitled to dividends if, as and when the Board of Directors
determines that a dividend should be distributed out of funds legally available
for distribution. Holders of the Common Stock are entitled to cast one vote for
each share held at all shareholder meetings for all purposes. A majority of the
Company's directors, under applicable law, are required to be citizens of
Canada. There are no preemptive rights associated with the securities and no
cumulative voting is authorized by the Company's Articles of Incorporation or
Byaws. The total number of shares of Common Stock authorized by the Company's
Articles of Incorporation is unlimited; there are 10,000,000 shares of
Cumulative, Convertible, Non-Voting, Non-Participating Preferred Stock
authorized. To date, there has been no issuance of any Preferred Stock.
Dividend, voting, conversion, liquidation and other rights of the Preferred
Stock are set forth in the Articles of Incorporation. Neither the Company's
Articles of Incorporation nor its Bylaws restrict the repurchase or redemption
of shares by the Company while there is an arrearage in payment of dividends.
The Company has never declared or paid cash dividends on the Common Stock
of the Company. The Company intends to retain all available funds and any future
earnings for use in the operation and expansion of the business and does not
anticipate paying any cash dividends in the foreseeable future.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not Applicable
31
<PAGE>
ITEM 17. FINANCIAL STATEMENTS
The Company's financial statements, including its consolidated balance
sheets as at July 31, 2000 and 1999 and its consolidated statements of
operations and deficit, cash flows and shareholders' equity for the
years ended July 31, 2000, 1999 and 1998, are set forth herein at page
F-1.
ITEM 18. FINANCIAL STATEMENTS
Not applicable
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Consolidated Balance Sheets as of July 31, 2000 and 1999
Consolidated Statements of Operations and Deficit for the Years
ended July 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years ended July 31,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the Years
ended July 31, 2000, 1999 and 1998
(b) Exhibits
The exhibits for this registration statement have been filed in paper
form with the Securities and Exchange Commission and not pursuant to
the Securities and Exchange Commission's EDGAR rules, and are not
available herein.
Articles of Incorporation
Bylaws
Certificate of Existence/Authorization of TEN Private Cable
Systems (USA), Inc.
Chequemate/CinemaWorks: CinemaWorks Asset Purchase Agreement
Sprint Canada, Inc./TIV Inc./Wiredinn, Inc./Cinema Internet
Networks Inc: Memorandum of Understanding
Darwin Networks, Inc./Cinema Internet Networks Inc.: Sales
Representation Agreement*
Elastic Networks, Inc./Cinema Internet Networks Inc.: Master
Services Agreement*
GalaVu Entertainment, inc./Cinema Internet Networks Inc.:
High-Speed Internet Services Memo of Understanding*
North American Movie Network/Cinema Internet Networks Inc.:
Asset Sale Agreement
Offer to Sublease
* Certain portions of this Exhibit have been omitted pursuant to a
request for confidential treatment submitted to the Securities and
Exchange Commission. The omitted portions of this Exhibit have been
filed separately with the Securities and Exchange Commission.
32
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Title Page
----- ----
<S> <C>
Report of Independent Auditors ......................................... F-2
Consolidated Balance Sheets as of July 31, 2000 and 1999 ............... F-3
Consolidated Statements of Operations and Deficit for the
Years ended July 31, 2000, 1999 and 1998 ............................ F-4
Consolidated Statements of Cash Flows for the Years ended July 31,
2000, 1999 and 1998 ................................................. F-5
Consolidated Statements of Shareholders' Equity for the Years ended
July 31, 2000, 1999 and 1998 ........................................ F-6
Notes to Consolidated Financial Statements ............................. F-7
</TABLE>
F-1
<PAGE>
[LETTERHEAD OF DAVISON & COMPANY]
AUDITORS' REPORT
To the Shareholders of
Cinema Internet Networks Inc.
We have audited the consolidated balance sheets of Cinema Internet Networks Inc.
as at July 31, 2000 and 1999 and the consolidated statements of operations and
deficit, cash flows and shareholders' equity for the fiscal years ended July 31,
2000, 1999 and 1998. These consolidated financial statements, expressed in U.S.
dollars, are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements, based on
our audits.
We conducted our audits in accordance with 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 consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 2000 and
1999 and the results of its operations and changes in its cash flows and
shareholders' equity for the fiscal years ended July 31, 2000, 1999 and 1998,
expressed in U.S. dollars, in accordance with generally accepted accounting
principles. As required by the Company Act of British Columbia, we report that,
in our opinion, these principles have been applied on a consistent basis.
"DAVIDSON & COMPANY"
Vancouver, Canada Chartered Accountants
September 18, 2000
A Member of SC INTERNATIONAL
--------------------------------
F-2
<PAGE>
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
AS AT JULY 31
<TABLE>
<CAPTION>
==============================================================================================
2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash $ 114,785 $ 7,766
Accounts receivable 156,179 71,530
Receivable on disposal of assets (Note 9) 190,000 -
Prepaid expenses 2,098 2,717
----------- -----------
463,062 82,013
Capital assets (Note 3) 25,289 323,834
Intangible assets (Note 4) - 12,038
----------- -----------
$ 488,351 $ 417,885
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 69,399 $ 546,515
Current portion of long-term debt 4,900 -
Current portion of obligation under capital lease - 22,659
----------- -----------
74,299 569,174
Long-term debt (Note 5) 57,870 -
Obligation under capital lease (Note 6) - 102,074
----------- -----------
132,169 671,248
----------- -----------
Shareholders' equity
Capital stock (Note 7) 4,518,294 3,628,702
Deficit (4,162,112) (4,047,263)
Cumulative translation adjustment - 165,198
----------- -----------
356,182 (253,363)
----------- -----------
$ 488,351 $ 417,885
==============================================================================================
</TABLE>
Nature and continuance of operations (Note 1)
Subsequent events (Note 16)
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in U.S. dollars)
YEAR ENDED JULY 31
<TABLE>
<CAPTION>
=====================================================================================================
2000 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 222,980 $ - $ -
DIRECT COSTS (95,012) - -
----------- ----------- -----------
GROSS PROFIT 127,968 - -
----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Amortization 4,421 - -
Foreign exchange loss 4,785 - -
Listing fees and transfer agent 14,898 5,457 7,281
Management fees 32,500 32,500 10,350
Office services and miscellaneous 20,466 10,619 4,700
Professional fees 28,913 11,138 15,112
Rent 19,072 22,587 14,596
Telephone and communications 6,617 8,370 3,781
Travel, promotion and marketing 28,835 8,275 5,136
Wages, benefits and consulting fees 181,554 23,403 21,939
----------- ----------- -----------
(342,061) (122,349) (82,895)
----------- ----------- -----------
Loss from continuing operations (214,093) (122,349) (82,895)
Income (loss) from discontinued operations (Note 9) 99,244 (409,257) 247,752
----------- ----------- -----------
Income (loss) for the year (114,849) (531,606) 164,857
Deficit, beginning of year (4,047,263) (3,515,657) (3,680,514)
----------- ----------- -----------
Deficit, end of year $(4,162,112) $(4,047,263) $(3,515,657)
=====================================================================================================
Loss per share from continuing operations $ (0.04) $ (0.04) $ (0.03)
Earnings (loss) per share from discontinued operations 0.02 (0.12) 0.08
----------- ----------- -----------
Earnings (loss) per share $ (0.02) $ (0.16) $ 0.05
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
YEAR ENDED JULY 31
<TABLE>
<CAPTION>
================================================================================================================
2000 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations $(214,093) $(122,349) $ (82,895)
Item not affecting cash
Amortization 4,421 - -
Changes in non-cash working capital items
Increase in accounts receivable (114,328) (68,405) (1,156)
(Increase) decrease in prepaid expenses (2,098) (2,717) 13,667
Increase (decrease) in accounts payable and accrued liabilities 91,907 435,033 (30,056)
--------- --------- ---------
Net cash provided by (used in) continuing operating activities (234,191) 241,562 (100,440)
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of capital assets (29,710) (276,927) (7,671)
Proceeds on disposal of capital assets - 131,860 -
--------- --------- ---------
Net cash used in investing activities (29,710) (145,067) (7,671)
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of capital stock 428,617 - -
Long-term debt 62,770 - -
Repayment of obligation under capital lease (5,829) (7,127) -
Translation adjustment - (896) (535)
--------- --------- ---------
Net cash provided by (used in) financing activities 485,558 (8,023) (535)
--------- --------- ---------
Net cash provided by (used in) discontinued operations (Note 9) (114,638) (136,863) 140,047
--------- --------- ---------
Change in cash position during the year 107,019 (48,391) 31,401
Cash position, beginning of year 7,766 56,157 24,756
--------- --------- ---------
Cash position, end of year $ 114,785 $ 7,766 $ 56,157
================================================================================================================
</TABLE>
Supplemental disclosures with respect to cash flows (Note 14)
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
=========================================================================================================
Cumulative
Number Translation
of Shares Amount Deficit Adjustment Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1997 17,193,334 $3,628,702 $(3,680,514) $ 166,629 $ 114,817
Translation adjustment - - - (535) (535)
Income for the year - - 164,857 - 164,857
----------- ---------- ----------- --------- ---------
Balance, July 31, 1998 17,193,334 3,628,702 (3,515,657) 166,094 279,139
Cancellation of escrow shares (750,000) - - - -
Share consolidation (5:1) (13,154,667) - - - -
Translation adjustment - - - (896) (896)
Loss for the year - - (531,606) - (531,606)
----------- ---------- ----------- --------- ---------
Balance, July 31, 1999 3,288,667 3,628,702 (4,047,263) 165,198 (253,363)
Shares issued for cash
Private placement 950,000 379,256 - - 379,256
Exercise of warrants 40,250 20,406 - - 20,406
Exercise of options 170,000 28,955 - - 28,955
Agent's fee 95,000 - - - -
Settlement of debt 3,416,290 460,975 - - 460,975
Translation adjustment - - - (165,198) (165,198)
Loss for the year - - (114,849) - (114,849)
----------- ---------- ----------- --------- ---------
Balance, July 31, 2000 7,960,207 $4,518,294 $(4,162,112) $ - $ 356,182
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
1. NATURE AND CONTINUANCE OF OPERATIONS
During the current year, the Company disposed of its hotel pay-per-view
assets (Note 9) in order to concentrate its resources on contract sales and
installation of broadband, high speed internet services to the hospitality
industry and other commercial customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Generally accepted accounting principles
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles. Information with
respect to differences between generally accepted accounting principles of
Canada and the United States is provided in Note 13.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the period. Actual results could differ from these estimates.
Principles of consolidation
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, T.E.N. Private Cable Systems (U.S.A.) Inc.
("T.E.N."), a company incorporated under the laws of Washington, U.S.A.
Financial instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and long-term debt. Unless otherwise noted, it is
management's opinion that the Company is not exposed to significant
interest, currency or credit risks arising from these financial
instruments. The fair value of these financial instruments approximate
their carrying values, unless otherwise noted.
Capital assets and amortization
Capital assets are recorded at cost. Amortization is provided using the
declining balance basis at rates of 20% to 30% per annum.
Foreign currency translation
In prior years, the Company and its U.S. subsidiary, T.E.N., operated as
separate self-sustaining operations. Using the current rate method, assets
and liabilities were translated into the reporting currency at the rate of
exchange in effect at the balance sheet date and revenues and expenses were
translated at the average exchange rate for the year. Exchange gains and
losses were deferred and included in a separate component of shareholders'
equity.
During the current year, the Company disposed of its hotel pay-per-view
assets (Note 9) and consolidated its operations into its Canadian office.
The balance of the exchange gains accumulated in the separate component of
shareholders' equity was included in the determination of the gain on
disposal of discontinued operations.
For its continuing operations, the Company now uses the temporal method of
translation. Monetary items are translated at the rate of exchange in
effect at the balance sheet date. Non-monetary items and amortization of
capital assets are translated at historical exchange rates. Revenues and
expenses are translated at the average exchange rate for the year.
F-7
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd...)
Foreign currency translation (cont'd...)
As in prior years, the Company continues to use the U.S. dollar as its
reporting currency. Most of its sales have been, and continue to be, to
U.S. based customers.
Revenue recognition
Revenue is recognized when services are rendered and collection is
reasonably certain.
Stock-based compensation
The Company grants stock options as described in Note 8. No compensation
expense is recognized when stock options are granted. Any consideration
paid on exercise of stock options is credited to capital stock.
Earnings (loss) per share
Earnings (loss) per share is calculated over the weighted average number of
common shares outstanding during the year. Fully diluted earnings per
share consider the dilutive impact of the conversion of outstanding stock
options and warrants as if the event had occurred at the beginning of the
year. For the years ended July 31, 2000 and 1999, this calculation proved
to be anti-dilutive. At July 31, 1998, there were no outstanding stock
options or warrants.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
=================================================================================================
Net Book Value
----------------------------------
Accumulated
Cost Amortization 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hotel installation equipment $ - $ - $ - $318,984
Test equipment - - - 3,327
Office equipment 726 73 653 1,523
Computer equipment 7,440 1,116 6,324 -
Vehicle 21,544 3,232 18,312 -
------- ------ ------- --------
$29,710 $4,421 $25,289 $323,834
=================================================================================================
</TABLE>
Included in capital assets are assets under capital lease having a cost of
$Nil (1999 - $131,860) and related accumulated amortization of $Nil (1999 -
$13,186).
4. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
=====================================================================================================
Net Book Value
--------------------------------
Accumulated
Cost Amortization 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Software and hardware rights $ - $ - $ - $12,038
=====================================================================================================
</TABLE>
F-8
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
===============================================================================================
2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Loan payable, $428 per month principal and interest,
due July 20, 2004, secured by the Company's vehicle. $20,190 $ -
Notes payable to related parties, bearing interest at 8% per annum,
due December 31, 2001 42,580 -
------- -------------
62,770 -
Current portion of long-term debt (4,900) -
------- -------------
$57,870 $ -
===============================================================================================
</TABLE>
6. OBLIGATION UNDER CAPITAL LEASE
The capital lease bore interest at an effective annual rate of
approximately 8.5%, and monthly payments were $2,717, principal and
interest. During the current year, the assets held pursuant to the capital
lease were disposed of (Note 9).
7. CAPITAL STOCK
<TABLE>
<CAPTION>
========================================================================================================================
Number
of Shares Amount
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized
Unlimited number of common shares without par value
2,500,000 cumulative 12% dividends first payable September 15, 1991,
convertible, non-voting, non-participating Series A preferred shares
2,500,000 cumulative 12% dividends first payable September 15, 1991,
convertible, non-voting, non-participating Series B preferred shares
2,500,000 cumulative, convertible, non-voting, non-participating Series C
preferred shares
2,500,000 cumulative, convertible, non-voting, non-participating Series D
preferred shares
Common shares issued
As at July 31, 1998 and 1997 17,193,334 $3,628,702
Cancellation of escrow shares (750,000) -
Share consolidation (5:1) (13,154,667) -
----------- ----------
As at July 31, 1999 3,288,667 3,628,702
Settlement of debt 3,416,290 460,975
Private placement 950,000 379,256
Agent's fee 95,000 -
Exercise of stock options 170,000 28,955
Exercise of warrants 40,250 20,406
----------- ----------
As at July 31, 2000 7,960,207 $4,518,294
================================================================================================================
</TABLE>
F-9
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
8. OPTIONS AND WARRANTS
The Company, in accordance with the policies of the Canadian Venture
Exchange, is authorized to grant options to directors, employees and
consultants, to acquire up to 10% of issued and outstanding common stock.
The exercise price of each option equals the average market price of the
Company's stock as calculated over the ten trading days preceding the date
of grant. The options can be granted for a maximum term of 5 years.
The following incentive stock options and share purchase warrants were
outstanding at July 31, 2000:
<TABLE>
<CAPTION>
========================================================================================================================
Number Exercise
of Shares Price Expiry Date
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options 20,000 Cdn $ 0.25 November 27, 2000
753,723 Cdn $ 0.88 April 15, 2002
Warrants 482,250 Cdn $ 0.75 March 31, 2001
========================================================================================================================
</TABLE>
9. DISCONTINUED OPERATIONS
Pursuant to a letter agreement, dated August 3, 2000, the Company sold its
hotel pay-per-view assets ("PPV") to Chequemate International Inc.
("Chequemate"), a publicly traded company listed on the American Stock
Exchange.
Chequemate took immediate possession of the U.S.A. PPV assets and granted
the company the exclusive right to sell the Canadian PPV assets, subject to
the Company using its best efforts to maximize the sale price of the
assets. Title to the Canadian PPV assets will remain with the Company
until they are sold. Chequemate will be responsible for operating the
business, receiving all revenues and incurring all expenses.
As consideration, Chequemate will issue to the Company 95,000 of its common
shares having a value of $190,000. Of these shares, 40,000 will be held in
escrow and released under the following terms:
i) If the Company sells the Canadian PPV assets, all proceeds of the sale
will be retained by the Company. Escrowed shares, at a rate of $3 per
share, equal to the sales proceeds, will be returned to Chequemate.
The remaining shares will be released to the Company.
ii) If, after one year, the Company has been unable to sell the Canadian
PPV assets, all 40,000 escrowed shares will be released to the Company
and title to the assets will be transferred to Chequemate.
Income (loss) from discontinued operations is comprised of the following:
<TABLE>
<CAPTION>
================================================================================================================
2000 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from discontinued operations $(181,813) $(264,190) $247,752
Gain on disposal of discontinued operations 281,057 - -
Loss on disposal of capital assets - (145,067) -
--------- --------- --------
$ 99,244 $(409,257) $247,752
================================================================================================================
</TABLE>
Sales revenue applicable to discontinued operations totalled $113,068 (1999
- $510,198; 1998 - $612,014).
F-10
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
9. DISCONTINUED OPERATIONS (cont'd...)
Cash flows from discontinued operations are comprised of the following:
<TABLE>
<CAPTION>
=================================================================================================================
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from discontinued operations $ 99,244 $(409,257) $ 247,752
Items not affecting cash
Amortization 67,175 67,469 85,089
Loss on disposal of capital assets - 145,067 -
Bad debts - 59,858 -
Gain on settlement of debt - - (192,794)
Gain on disposal of discontinued operations (281,057) - -
--------- --------- ---------
$(114,638) $(136,863) $ 140,047
=================================================================================================================
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Company entered into the following transactions (continuing and
discontinued operations combined) with a director, a director's spouse and
a company with a common director:
<TABLE>
<CAPTION>
=======================================================================================================================
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management fees $65,000 $65,000 $20,700
Wages, benefits and consulting fees 48,000 41,278 36,881
=======================================================================================================================
</TABLE>
Included in accounts payable and accrued liabilities is $11,304 (1999 -
$351,185) owing to a director, the spouse of a director and companies
controlled by a director.
During the year ended July 31, 1999, the Company acquired capital assets
from a company controlled by a director, for $276,927. The assets were
subsequently sold for $131,860 under a sale and leaseback arrangement (Note
6).
11. INCOME TAXES
The Company has not recorded the future income tax benefits of operating
losses incurred, under Canadian and U.S. income tax laws, which may be
utilized to reduce taxable income of future years.
12. SEGMENTED INFORMATION
The Company provides contract sales and installation of broadband, high
speed internet services to the hospitality industry and other commercial
customers in two geographic segments, Canada and the United States. During
the year ended July 31, 2000, sales totalling $220,956 were made to one
customer in the United States. This represented 99% of the Company's total
sales.
F-11
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada. Except as set out
below, these consolidated financial statements also comply, in all material
respects, with accounting principles generally accepted in the United
States and the rules and regulations of the Securities and Exchange
Commission.
Stock based compensation
SFAS No. 123, "Accounting for Stock Based Compensation", requires expanded
disclosure of stock-based compensation arrangements with employees and
encourages, but does not require, the recognition of compensation expense
related to stock compensation based on the fair value of the equity
instrument granted. Companies that do not adopt the fair value recognition
provisions of SFAS No. 123 and continue to follow the existing APB Opinion
No. 25 rules to recognize and measure compensation are required to disclose
the pro-forma amounts of net income and earnings per share that would have
been reported had the Company elected to follow the fair value recognition
rules of SFAS No. 123. The Company has elected to continue to use the
intrinsic value-based method of APB Opinion No. 25 and has adopted the
disclosure requirements of SFAS No. 123.
Had compensation costs been recognized for the Company's stock option plan
based on fair value at grant date and the re-pricing of certain remaining
options, the pro-forma net loss for the year ended July 31, 2000 would have
been increased by $649,286 (1999 - $4,328; 1998 - $Nil) and pro-forma loss
per share increased by $0.12 (1999 - $Nil; 1998 - $Nil) per share. In
calculating these amounts, the Company has utilized the Black-Scholes model
to estimate the fair value of the options granted in the year using the
following key assumptions:
<TABLE>
<CAPTION>
===============================================================================================================================
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 6.58% 4.34% -
Expected life 2 years 2 years -
Expected volatility 270% 328% -
Expected dividends - - -
===============================================================================================================================
</TABLE>
The following is a summary of the status of stock options outstanding at
July 31, 2000:
<TABLE>
<CAPTION>
===============================================================================================================================
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life (Years) Price Number Price
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.25 20,000 0.33 $0.25 20,000 $0.25
0.88 753,723 1.75 0.88 753,723 0.88
=================================================================================================================================
</TABLE>
F-12
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Cont'd...)
Following is a summary of the stock based compensation plan during 2000,
1999 and 1998:
<TABLE>
<CAPTION>
===============================================================================================================================
Weighted
Average
Number Exercise
of Shares Price
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding and exercisable at August 1, 1997 - $ -
Granted - -
Exercised - -
Expired/cancelled - -
---------------
Outstanding and exercisable at July 31, 1998 - $ -
=============== ===============
Weighted average fair value of options granted during 1998 $ -
=====
Outstanding and exercisable at August 1, 1998 - $ -
Granted 285,000 0.75
Exercised - -
Expired/cancelled - -
---------------
Outstanding and exercisable at July 31, 1999 285,000 $ -
=============== ===============
Weighted average fair value of options granted during 1999 $0.02
=====
Outstanding and exercisable at August 1, 1999 285,000 $ 0.75
Repriced/cancelled (285,000) 0.75
Repriced 190,000 0.25
Granted 753,723 0.88
Exercised (170,000) 0.25
Expired/cancelled - -
---------------
Outstanding and exercisable at July 31, 2000 773,723 $ 0.86
=============== ===============
Weighted average fair value of options granted during 2000 $1.08
===============================================================================================================================
</TABLE>
Income taxes
Under United States GAAP, income taxes are provided in accordance with SFAS
No. 109, "Accounting for Income Taxes". A deferred tax asset or liability
is recorded for all temporary differences between financial and tax
reporting and net operating loss carryforwards. Deferred tax expenses
(benefit) results from the net change during the year of deferred tax
assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
For the years ended July 31, 2000, 1999 and 1998, no deferred tax assets or
liabilities would have resulted from the implementation of SFAS No. 109.
F-13
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (cont'd...)
Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income", addresses standards for the
reporting and display of comprehensive income and its components.
Comprehensive income includes net income and other comprehensive income.
Other comprehensive income represents revenues, expenses, gains and losses
that are excluded from net income under generally accepted accounting
principles.
For the years ended July 31, 2000, 1999 and 1998, there were no other items
of comprehensive income.
Financial statement balances under United States GAAP
The impact of the above differences between Canadian and United States
generally accepted accounting principles on loss for the year would be as
follows:
<TABLE>
<CAPTION>
================================================================================================================================
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) for the year as reported $(114,849) $(531,606) $164,857
Less: Compensation expense on granting of
stock options (815,105) (4,328) -
--------- --------- --------
Income (loss) for the year, in accordance with United States
generally accepted accounting principles $(929,954) $(535,934) $164,857
================================================================================================================================
</TABLE>
The impact of the above difference between Canadian and United States
generally accepted accounting principles on the deficit, as reported, is as
follows:
<TABLE>
<CAPTION>
================================================================================================================================
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deficit, as reported $(4,162,112) $(4,047,263) $(3,515,657)
Cumulative compensation expense (819,433) (4,328) -
----------- ----------- -----------
Deficit in accordance with United States generally
accepted accounting principles $(4,981,545) $(4,051,591) $(3,515,657)
================================================================================================================================
</TABLE>
F-14
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (cont'd...)
The impact of the above difference between Canadian and United States
generally accepted accounting principles on the statements of stockholders'
equity, as reported, is as follows:
<TABLE>
<CAPTION>
==========================================================================================================================
Share Capital Cumulative
-------------------------
Number Translation
of Shares Amount Deficit Adjustment Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stockholders' equity as reported
July 31, 1998 17,193,334 $3,628,702 $(3,515,657) $166,094 $ 279,139
Retroactive restatement of share capital
pursuant to 5:1 share consolidation (13,754,667) - - - -
----------- ---------- ----------- --------- ----------
Stockholders' equity in accordance with
United States generally accepted
accounting principles at July 31, 1998 3,438,667 $3,628,702 $(3,515,657) $166,094 $ 279,139
=================================================================
Stockholders' equity as reported
July 31, 1999 3,288,667 $3,628,702 $(4,047,263) $165,198 $(253,363)
Compensation expense on granting of
stock options - 4,328 (4,328) - -
----------- ---------- ----------- --------- ----------
Stockholders' equity in accordance with
United States generally accepted
accounting principles at July 31, 1999 3,288,667 $3,633,030 $(4,051,591) $165,198 $(253,363)
=================================================================
Stockholders' equity as reported
July 31, 2000 7,960,207 $4,518,294 $(4,162,112) $ - $ 356,182
Compensation expense on granting of
stock options - 815,105 (815,105) - -
----------- ---------- ----------- --------- ----------
Stockholders' equity in accordance with
United States generally accepted
accounting principles at July 31, 2000 7,960,207 $5,333,399 $(4,977,217) $ - $ 356,182
==========================================================================================================================
</TABLE>
14. SUPPLEMENTAL DISCLOSURES WITH RESPECT TO CASH FLOWS
<TABLE>
<CAPTION>
==========================================================================================================================
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for interest $ - $ 6,361 $ -
==========================================================================================================================
Cash paid during the year for income taxes $ - $ - $ -
==========================================================================================================================
</TABLE>
F-15
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
14. SUPPLEMENTAL DISCLOSURES WITH RESPECT TO CASH FLOWS (cont'd...)
Significant non-cash transactions during the year ended July 31, 2000:
i) The Company issued 3,416,290 common shares to settle debt
totalling $460,975.
ii) The Company issued 95,000 common shares as an agent's fee pursuant
to a private placement.
iii) The Company disposed of its hotel pay-per-view movie assets for
95,000 common shares of Chequemate (Note 9).
Significant non-cash transaction during the year ended July 31, 1999:
The Company acquired capital assets, totalling $131,860, through a
capital lease.
15. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
The Company provides credit to its customers in the normal course of
business. However, the Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses. The
Company places its temporary cash with high quality financial institutions.
At times such cash accounts may be in excess of insurance limits.
16. SUBSEQUENT EVENTS
Subsequent to July 31, 2000:
a) The Company issued 3,000 common shares for total proceeds of $2,040,
pursuant to the exercise of share purchase warrants.
b) The Company's legal counsel received 95,000 common shares from
Chequemate pursuant to the sale of the Company's hotel pay-per-view
movie business (Note 9). The shares will be held in escrow until the
transaction receives regulatory approval.
F-16
<PAGE>
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.
CINEMA INTERNET NETWORKS INC.
Date: 9/28/00 By: /s/ William E. Massey
--------- ---------------------------
William E. Massey, Chief Executive Officer
<PAGE>
EXHIBIT INDEX/(1)/
--------------------------------------------------------------------------------
Exhibit Title Page
Number
--------------------------------------------------------------------------------
1 Articles of Incorporation and Bylaws of the Company
--------------------------------------------------------------------------------
1.1 Articles of Incorporation 34
--------------------------------------------------------------------------------
1.2 Bylaws 52
--------------------------------------------------------------------------------
1.3 Certificate of Existence/Authorization of TEN Private
Cable Systems (USA), Inc., dated January 5, 1999 65
--------------------------------------------------------------------------------
3 Material Contracts
--------------------------------------------------------------------------------
3.1 Chequemate/CinemaWorks: CinemaWorks Asset Purchase
Agreement, May 25, 2000 66
--------------------------------------------------------------------------------
3.2 Sprint Canada, Inc./ TIV Inc./ Wiredinn, Inc./ Cinema
Internet Networks Inc.: Memorandum of Understanding,
September 15, 2000 98
--------------------------------------------------------------------------------
3.3 Darwin Networks, Inc./ CinemaWorks: Sales Representation
Agreement, August 17, 1999* 102
--------------------------------------------------------------------------------
3.4 Elastic Networks, Inc./ CinemaWorks: Master Services
Agreement, August 23, 2000* 110
--------------------------------------------------------------------------------
3.5 Gala Vu Entertainment, Inc./ CinemaWorks: High Speed
Internet Services Memo of Understanding, May 12, 2000* 120
--------------------------------------------------------------------------------
3.6 North American Movie Network/ CinemaWorks: Asset Sale
Agreement, January 15, 1998 and Master Lease, March 15,
1999 125
--------------------------------------------------------------------------------
3.7 Offer to Sublease, March 2, 2000 148
--------------------------------------------------------------------------------
(1) The exhibits for this registration statement have been filed in paper form
with the Securities and Exchange Commission and not pursuant to the
Securities and Exchange Commission's EDGAR rules, and are not available
herein.
* Certain portions of this Exhibit have been omitted pursuant to a request
for confidential treatment submitted to the Securities and Exchange
Commission. The omitted portions of this Exhibit have been filed separately
with the Securities and Exchange Commission.
33
