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FORM 20-F/A
(Amendment No. 1)
[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
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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. cautions readers that certain important
factors (including without limitation those set forth in this Form 20-F) may
affect CinemaWorks' 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, or that are otherwise made by or on behalf of
CinemaWorks. For this purpose, any statements contained in this Form 20-F 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.
CinemaWorks' corporate offices are located at Pier 32, Granville Island, Suite
320, 1333 Johnston Street, Vancouver, British Columbia, Canada V6H 3R9. The
telephone number of CinemaWorks is (604) 602-1280. CinemaWorks' common stock is
currently traded on the Canadian Venture Exchange under the trading symbol
CWK.V. CinemaWorks' 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."
CinemaWorks 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, CinemaWorks
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 movie programming
services for the hospitality industry to its current business of Internet
infrastructure installations for the hospitality industry. CinemaWorks has one
wholly owned subsidiary, T.E.N. Private Cable Systems USA, a Washington state
corporation. T.E.N. Private Cable Systems USA was incorporated on June 9, 1986,
and offers contract high-speed Internet infrastructure installation services in
the U.S. T.E.N. Private Cable Systems USA's offices are located at 4800 SW
Macadam Avenue, Suite 280, Portland, Oregon 97201. From this office, CinemaWorks
conducts all of its U.S. installation administrative activities and oversees its
U.S. business development activities.
CinemaWorks' original business was owning and operating pay per view
services in hotels across Canada and the U.S. CinemaWorks initially entered the
hotel pay per view business by contracting with various Canadian hotels,
primarily in the Vancouver, British Columbia area. Following its initial private
financing, in 1986 CinemaWorks 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, CinemaWorks had contracts for
pay per view 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, CinemaWorks' aging hospitality pay per view technology was in
critical need of replacement in order for CinemaWorks to remain competitive with
other companies, which were offering expanded and enhanced pay television
services. After evaluating the current status of the pay per view industry and
the costs of acquiring and financing the assets that would be required for
CinemaWorks to become competitive as a provider of pay per view services,
CinemaWorks' management determined that a fundamentally new business direction
for CinemaWorks should be planned and implemented that both took
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advantage of CinemaWorks' prior experience and existing relationships and
offered the potential for significant revenues in the immediate future.
Concurrent with its assessment of CinemaWorks' existing pay per view
business, CinemaWorks' management observed the emerging demand for high-speed
Internet access throughout society and its logical need by business travelers.
As a result, CinemaWorks chose to direct its new business efforts toward the
task of building broadband Internet infrastructure, with special emphasis on the
hospitality industry, where CinemaWorks 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, CinemaWorks elected to become an installer of Internet
networks and connections rather than a supplier/operator of the equipment used
for these networks and connections.
CinemaWorks has historically financed its continuing operations and growth
through cash generated from its operations and by issuing shares of CinemaWorks
to cancel outstanding indebtedness. In March 2000, in order to fund the change
in its business from owning and operating pay per view services in hotels to
installing high-speed Internet networks and connections in hotels and other
commercial concerns, and to reduce outstanding indebtedness, CinemaWorks
completed an offering to the public through the facilities of the Canadian
Venture Exchange for 950,000 units at CDN$0.675 per unit. Each unit consisted of
one share of 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. CinemaWorks realized CDN$641,250 from
the offering.
In May 2000, CinemaWorks agreed to sell its pay per view assets to
Chequemate International, Inc. (AMEX: DDD), thus completing its move from the
pay per view business to the high-speed Internet network and connections
installation business. In the transaction, which was subsequently completed,
CinemaWorks received 95,000 shares of Chequemate stock. The closing price of
Chequemate's common stock on the American Stock Exchange on August 3, 2000, just
prior to the closing of the asset sale, was $2.37. All of the Chequemate shares
are restricted under the Securities Act of 1933, which means that CinemaWorks
can only sell the shares through a resale registration statement or in
compliance with the Securities and Exchange Commission's rule regarding sales of
restricted stock, which include, among other requirements, a one-year holding
period before the stock can be sold. Chequemate has agreed to file a
registration statement covering 55,000 of the shares, which would allow
CinemaWorks to sell all those registered shares immediately upon the
effectiveness of the registration statement without any other restrictions.
CinemaWorks will seek on behalf of Chequemate to sell the Canadian portion
of the pay per view assets acquired by Chequemate from CinemaWorks. CinemaWorks
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 CinemaWorks equal to the total sale proceeds
divided by $3 per share. Pending the sale of the Canadian pay per view assets,
CinemaWorks will be responsible for certain lease payments relating to those
assets, with revenues generated by the Canadian pay per view business being
available to satisfy those lease obligations and any excess revenues being
distributed to Chequemate. CinemaWorks recorded a gain on the disposition of its
pay per view operations of $281,057 in its fiscal year ended July 31, 2000.
Business of CinemaWorks
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.
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CinemaWorks' primary market niche is the hospitality industry, which
CinemaWorks 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. CinemaWorks previously owned
and operated pay-per-view movie programming services during the first 15 years
of its operations. CinemaWorks believes that its prior experience and
relationships in providing these pay per view services to hotels has materially
assisted CinemaWorks to date in developing its Internet infrastructure
installation business for customers in the hospitality industry.
The hospitality industry services both the business traveler and the
vacationer. CinemaWorks' 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
CinemaWorks can provide hotels with installation of the necessary Internet
infrastructure to attract larger numbers of business travelers. CinemaWorks
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 less than 2% of these hotels already
equipped with high-speed Internet networks and access, according to recent
hospitality industry publications.
CinemaWorks generates or anticipates generating revenues in the following
ways:
. by installing high-speed Internet networks and access equipment upon
receiving installation request orders directly from a supplier with
whom CinemaWorks has an existing relationship, such as Internet
network and connections equipment manufacturer Elastic Networks, Inc.;
. through requests to install Internet access equipment received by
CinemaWorks on an ongoing basis from members of a newly-formed
hospitality consortium, of which CinemaWorks is a member; or
. by acting as an agent for supplier/operators of networks and high-
speed Internet access equipment, such as network providers and
distributors Darwin Networks, Inc. and Sprint Canada Inc.
Under all three of these sales models, the supplier/operator or the
hospitality consortium member or its customer pays CinemaWorks upon either a
time and materials basis or upon a per-Internet-connection-installed basis at
the time the installation work is performed. CinemaWorks may, in the case of
certain installation projects, also earn additional on-going revenue based upon:
. Internet usage by the hotel's guests;
. CinemaWorks providing ongoing maintenance for the installed equipment;
and
. CinemaWorks owning and leasing or renting the installed equipment to
the customer.
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CinemaWorks' 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, CinemaWorks 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.
CinemaWorks 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. CinemaWorks 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 higher and higher. By remaining informed and open to changes,
developments and improvements in data delivery technology, CinemaWorks 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. In
addition, no government regulations exist in either Canada or the U.S. that
impose significant restrictions on the activities of installers. 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. To
date, CinemaWorks 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, CinemaWorks intends to both hire on a contract
basis or employ more trained lead technicians as may be available and implement
an internal training program in early 2001 to ensure adequate numbers of
qualified personnel are on staff or are available on a contract basis to handle
all installation projects CinemaWorks engages in.
CinemaWorks' Services
CinemaWorks' business is installing high-speed Internet infrastructure
equipment, primarily for the hospitality industry. When requested, CinemaWorks
also installs Internet connections in commercial buildings and other multi-unit
structures. CinemaWorks enters into contracts with a supplier/operator 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 the supplier/operator. The supplier/operator
provides all necessary equipment to be installed, and CinemaWorks provides all
installation services. T1 lines are typically ordered by the supplier/operator.
Once the lines and all related equipment are installed, CinemaWorks tests the
connections to ensure proper installation. Because each hotel is built
differently and presents its own set of challenges and installation
specifications, CinemaWorks 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
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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, CinemaWorks' technical
staff then determines the amounts and types of equipment to be used for the
installation. CinemaWorks arranges work scheduling with the hotel management.
CinemaWorks orders the T-1 line from a carrier and typically the
supplier/operator provides the equipment that allows high-speed Internet
connections from hotel guest rooms and meeting rooms. When CinemaWorks has
completed a hotel installation on behalf of a supplier/operator using hardware
and software provided by the supplier/operator, the hotel guest is able to do
the following:
. connect a laptop computer via an ethernet card or cable;
. start up his or her computer;
. open the Internet browser; and
. 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
CinemaWorks 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 supplier/operator, 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 hospitality consortium, the high speed access is provided
"free" to the guest.
The supplier/operator, e.g., Darwin or Wiredinn, 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 CinemaWorks
installs out-of-sight, usually beneath desks located in the hotel rooms. In
addition, the supplier/operator 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, CinemaWorks may contract with the supplier/operator
for CinemaWorks to provide ongoing maintenance on a time and materials basis for
the life of the hotel service contract.
Managing the installation process requires close monitoring of scheduling
and progress. A critical variable in CinemaWorks' 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 CinemaWorks does not
have sufficient availability of its lead technicians and can erode the
profitability of particular installation projects. CinemaWorks 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. CinemaWorks has developed certain proprietary project
management software to assist it in the process of project management. For a
description of CinemaWorks' proprietary software, see "Intellectual Property."
Although CinemaWorks performs some of its work on a time and materials
basis, CinemaWorks believes that its major customers will eventually require
installers to charge a rate based on a "per Internet connection." This fact
emphasizes CinemaWorks' need to maximize its efficiency when installing each
project. In addition, CinemaWorks 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 Alliances and Other 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. CinemaWorks has formed several strategic
relationships and alliances with its customers, who are the supplier/operators
of Internet
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infrastructure equipment. CinemaWorks anticipates that these alliances will
provide opportunities for CinemaWorks to grow and generate potentially
significant revenues in the foreseeable future. The following describes
CinemaWorks' principal strategic alliances and partners:
Strategic Alliances
1. Sprint Canada, Inc. In a memorandum of understanding, Sprint Canada
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has named CinemaWorks as a Sprint Canada "Solutions Alliance Partner" for
installation and maintenance of high-speed Internet services in the hospitality
industry throughout Canada. This arrangement applies to all of Sprint Canada's
high speed Internet business in hotels, including installation projects
CinemaWorks completes in conjunction with the newly formed hospitality
consortium of which CinemaWorks and Sprint Canada are both members, as well as
installations CinemaWorks completes for Sprint Canada with other solutions such
as that provided by CAIS Internet, Inc., a major North American
supplier/operator of high-speed Internet services to the hospitality industry.
Sprint Canada and CinemaWorks are currently finalizing the terms of their
relationship to be set forth in a final agreement that CinemaWorks expects to
complete in the near future.
2. The Hospitality Consortium. In September 2000, CinemaWorks signed a
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memorandum of understanding with Sprint Canada, Wiredinn.com, Inc. and
Wiredinn's parent company, TIV Operations Group, Inc. to form a hospitality
industry high-speed Internet services consortium. The discussion that follows is
based in part on the memorandum of understanding among the hospitality
consortium members and reflects the proposed terms of their relationships; and
no formal agreement yet binds the parties as a hospitality consortium. The
hospitality consortium's primary purpose is to develop and deploy high-speed
Internet access connectivity in hotels throughout North America. The hospitality
consortium will provide high-speed Internet services under a business model in
which the hotel pays for the installation of the high-speed Internet services
equipment and its continued use. CinemaWorks receives payment up front for its
installation services and on an ongoing, monthly basis for its maintenance and
equipment leasing services (in cases where CinemaWorks purchases the equipment
and leases it to the hotel). The hotel determines the terms and conditions under
which hotel guests can utilize the services. This business model is
fundamentally different from early high-speed Internet services business models
in which a supplier/operator paid for the high-speed Internet services equipment
in a revenue sharing arrangement with the hotel and then dictated to the hotel
the price charged to hotel guests for using the services. Under the hospitality
consortium's business model, the hotel has the incentive to improve guest
satisfaction by providing high-speed Internet services to its guests free of
charge. TIV has analyzed millions of global hotel call records that indicate
that "charged" hotel guest use of high speed Internet services may increase
substantially when these services are provided for free. The hospitality
consortium's business model allows hotels to charge for hotel Internet services
in meeting and conference rooms and to keep up to 100% of that revenue.
As the "preferred" installation and maintenance provider for the
hospitality consortium's high-speed Internet services, CinemaWorks will enjoy
what is essentially a "first right of refusal" to provide installation and
maintenance services to the hospitality consortium's customers throughout Canada
and the U.S. Sprint Canada, Wiredinn and any future hospitality consortium
members may, however, in their sole discretion, choose to use other providers in
the event CinemaWorks fails in its installation and maintenance obligations or
the hospitality consortium members present projects to CinemaWorks that are
beyond CinemaWorks' capabilities. Notwithstanding CinemaWorks' "preferred"
installer status under the hospitality consortium memorandum of understanding,
CinemaWorks is not legally bound to any exclusive agreements and is free to
provide installation services for any company.
The hospitality consortium memorandum of understanding contemplates that in
Canada, Sprint Canada will lead the hospitality consortium's efforts by
obtaining service contracts for high speed Internet services, often in
properties where Sprint Canada currently provides telecommunications services.
Wiredinn will provide a sophisticated Internet portal customized for each hotel.
TIV, Wiredinn's parent company, will consult with each hotel to assist it to
realize greater telecommunications revenues to enable the hotel to pay for the
high-speed Internet services equipment CinemaWorks installs in the hotel.
CinemaWorks will install and
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maintain the equipment, and in most cases, will own the equipment and lease or
rent it to the hotel, thereby earning continuing revenues from each hotel.
Current Hospitality Consortium Members
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In addition to CinemaWorks, the following companies are the members of the
hospitality consortium:
Sprint Canada. Based upon its discussions and negotiations with
Sprint Canada regarding the parties' intended written agreement, CinemaWorks
anticipates that Sprint Canada will serve as the integrator for the hospitality
consortium in Canada by sourcing, assembling, and shipping equipment to each
hotel site where CinemaWorks' installation technicians will begin their work. In
addition, CinemaWorks anticipates that Sprint Canada will provide IP data
bandwidth to the Canadian hotel customers of the hospitality consortium, operate
the consortium's 24/7 customer help desk and manage the hospitality consortium's
network operations center for North America. Sprint Canada has a strong presence
in the Canadian hospitality industry and will use its size and influence in the
hospitality and telecommunications industries, including a nationwide sales
force of over 100 individuals, to market and sell the hospitality consortium's
high-speed Internet services to hotels throughout Canada.
Sprint Canada will provide equipment as well as bandwidth for these
installation projects. Sprint Canada's Tier 1 IP data telecommunications network
currently extends across Canada, and through the lines it owns or has access to
through its numerous alliances, it can provide service to any area of North
America, and in many international locations.
Wiredinn.com, Inc. 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. CinemaWorks signed an agreement
with Wiredinn in October 2000, under which CinemaWorks will receive equity in
Wiredinn based upon its ability to sign hospitality consortium hotel customers
to Wiredinn's portal. The agreement names CinemaWorks the "preferred"
installation and maintenance company for Wiredinn for high-speed Internet
services equipment throughout the U.S. and Canada.
TIV Operations Group, Inc. Founded in 1987, TIV is a global provider
of telecommunications auditing and consulting services for luxury hotels. TIV
has established long-term consulting and client relationships with more than 600
of the world's most prestigious hotels in more than 65 countries. TIV will
provide the hotel customers of the hospitality consortium with consulting
services to enable them to best utilize their new high speed Internet services
and to help them realize additional telephone department revenues via
sophisticated pricing models for long distance phone calls to pay for the high-
speed Internet systems equipment installed by CinemaWorks. In some cases, TIV
may act as a financial guarantor for hotels purchasing the hospitality
consortium's equipment and services.
Proposed International Consortium Members
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CinemaWorks anticipates that in addition to North America, it will install
high-speed Internet equipment internationally through relationships with
additional hospitality consortium members who may join the consortium.
CinemaWorks expects that these new international hospitality consortium members
will include the following:
Granada Business Group. Granada Business Technology, a division of
Granada Media, provides interactive television, video-on-demand and data
services to approximately 100,000 hotel rooms in Europe. In addition, Granada
Business Technology has contracts signed to install an additional 70,000 rooms.
Granada Business Technology's parent company, Granada Compass, owns 400 hotels
operating under the Le Meridien, Heritage, and Posthouse brands, as well as
nearly 200 Travelodge units. Granada Business Technology's short-term desire is
to lock out potential future competition by owning the copper network in
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addition to the coaxial network inside the hotels. Granada Business Technology's
membership in the hospitality consortium could potentially be highly
advantageous for all parties involved.
ViewInternet.com Pte Ltd. ViewInternet.com Pte. Ltd. is a private
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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.
CinemaWorks does not currently have an agreement with either Granada
Business Technology or ViewInternet. However, CinemaWorks is, at present, the
only hospitality consortium member offering high-speed Internet services
equipment and, therefore, CinemaWorks expects that these potential hospitality
consortium members would see CinemaWorks as a likely source of high quality
installation and maintenance services. Granada Business Technology and
ViewInternet and other potential members of the hospitality consortium may elect
to do their own installations in certain or all cases, unless CinemaWorks signs
specific agreements with these companies. In order to provide installation and
maintenance services for Granada Business Technology, ViewInternet or any other
future international hospitality consortium member, CinemaWorks expects it would
retain lead technicians locally through a joint venture, subcontract or other
partnering arrangements with high-speed Internet services and equipment
installations companies. CinemaWorks currently does not have any such
relationships, nor does it have sufficient lead technicians that it could make
available in international locations for installation projects for the
hospitality consortium.
Other Strategic Partners
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Darwin Networks, Inc. In June 1999, CinemaWorks signed one of the first
non-exclusive (i.e., Darwin may use other installers and CinemaWorks may provide
installation services for other supplier/operators), third-party agent
agreements with Darwin Networks, Inc., allowing CinemaWorks 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 the parties' agreement, CinemaWorks 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. CinemaWorks negotiates the sale of the
networks and connections with the 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, CinemaWorks installs the high-speed Internet infrastructure
equipment in the hotel's guest rooms and meeting rooms using the equipment
provided by Darwin. CinemaWorks generally receives a sales fee per room
installed for the hotel plus installation charges per room installed.
In September 2000, Darwin indicated to CinemaWorks that approval of future
hotel contracts will likely require the hotel to pay each month for the Darwin
high-speed Internet network and equipment, in addition to connectivity and other
ongoing Internet services. The exact amount will be determined on a case-by-case
basis. This is a distinctly different business model than that used by Darwin
during the previous year. The previous business model was based on the pay per
view model hotels were familiar with - Darwin installed the high speed Internet
equipment at no cost to the hotel and shared revenue with the hotel based on
per-guest actual usage. Darwin calculated that guest use rates would pay for
the equipment over time. The flaw in this business model has been that while
each hotel guest is a potential pay per view user, a much smaller percentage of
hotel guests currently carry ethernet-ready laptop computers. CinemaWorks
anticipates that as high-speed Internet services become increasingly available
in hotels and elsewhere in the near future, hotel guest user rates of those
services will rise commensurately. CinemaWorks believes that Darwin's new
business model will be duplicated by Darwin's competitors (e.g., CAIS Internet)
in the marketplace because revenues and guest use rates of the high-speed
Internet services have not proven high enough to support a pure
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revenue sharing business model. Notwithstanding Darwin's decision to change its
business model, demand for CinemaWorks' high-speed Internet installations
services has been increasing steadily.
To date, CinemaWorks has provided installation services for Darwin's high-
speed Internet network systems in 8 hotels (1330 rooms), representing all of
CinemaWorks' completed installations. CinemaWorks believes that Darwin may
change its focus from the hospitality industry to other commercial customers in
the near future. Therefore, CinemaWorks anticipates that it will be performing
fewer hospitality installations for Darwin, and will therefore perform most of
its hospitality installations for the hospitality consortium. CinemaWorks will,
however, continue to work with Darwin, installing high-speed Internet networks
for other commercial customers.
Elastic Networks, Inc. In August 2000, CinemaWorks entered into a
two-year, renewable, non-exclusive, independent contractor services agreement
with Elastic Networks, Inc., whereby Elastic Networks can request on a project-
by-project basis that CinemaWorks 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. CinemaWorks currently installs
Elastic Networks equipment in hotels directly for Elastic Networks or on behalf
of Darwin. To date, CinemaWorks has not completed any installations of any
Elastic Networks properties. Elastic Networks pays CinemaWorks on either a time
and materials basis or on a per-line-installed basis.
GalaVu Entertainment, Inc. In addition to CinemaWorks' strategic
alliances with its principal customers, CinemaWorks has established a strategic
relationship with GalaVu Entertainment, Inc. CinemaWorks 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 pay per view movie operators in Canada, with over 200 hotels
(30,000 rooms) under contract. The memorandum of understanding anticipates that
CinemaWorks 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 CinemaWorks will install on behalf of Darwin.
As an alternative to Darwin, CinemaWorks 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 relationships with Sprint Canada and Wiredinn
through the hospitality consortium, as well as its existing or new relationships
with Darwin and Elastic Networks. Over the longer term, CinemaWorks intends to
expand this business internationally, relying primarily on expected new
relationships with other hospitality consortium members, an expansion that is
anticipated to initially include Western Europe, Asia, and Latin America.
CinemaWorks also plans to expand into new businesses, including wireless
Internet and Internet content, in order to fully support the hospitality
consortium's efforts. To implement CinemaWorks' strategy, CinemaWorks intends to
take the actions described below.
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. CinemaWorks plans to rely heavily
on its existing strategic alliances to develop installation projects as part of
CinemaWorks' strategy to leverage the marketing budgets of the largest, well-
capitalized suppliers and operators (i.e., Sprint Canada, the hospitality
consortium, Darwin, CAIS Internet and Elastic Networks).
10
<PAGE>
i. The Hospitality Consortium. The hospitality consortium, led
--------------------------
in Canada by Sprint 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.
ii. Sprint Canada. As a member of the Sprint Canada Alliance
-------------
Partner Program, CinemaWorks is anticipated to be the preferred installation
company for hospitality-related high-speed Internet services throughout Canada
under the written agreement the parties are currently negotiating. These service
requests may come from a variety of sources, with the hospitality consortium
anticipated to be the principal one. 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, CinemaWorks would likely perform the
installation component under contract with Sprint Canada.
iii. GalaVu. CinemaWorks plans to move forward with GalaVu 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.
iv. Darwin Networks. CinemaWorks plans to continue its alliance
---------------
with Darwin by assisting Darwin in its deployment of high-speed Internet
services in the non-hospitality commercial concerns and multiple dwelling units
throughout North America.
v. Elastic Networks. CinemaWorks expects to contract with
----------------
Elastic Networks 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, a supplier/operator. CinemaWorks is
one of only four companies selected by Elastic Networks as of September 2000, to
do this work in North America.
11
<PAGE>
2. Expand Geographical Coverage Through Strategic Installation
Alliances. CinemaWorks is currently negotiating an agreement with APCI
Communications Inc., of Oakville, Ontario, Canada, a national wireline and cable
installation company. CinemaWorks anticipates that APCI will assist CinemaWorks
to attain greater geographical coverage for CinemaWorks' services in Canada by
contributing lead technicians on a per project basis where CinemaWorks cannot
provide sufficient lead technicians for a project itself due to distance or the
size of the project. APCI and select other, regional companies will become an
active part of CinemaWorks' business strategy, functioning as strategic
installation partners. These alliances will enable CinemaWorks to gain access to
a professional pool of qualified and experienced lead technicians without
incurring the expenses involved in hiring them as employees. Based on
discussions between CinemaWorks and APCI, CinemaWorks anticipates that its
agreement with APCI will provide for contract services to be performed for
CinemaWorks on a fixed cost project basis.
3. Retain Highly Qualified Personnel. An important component of
CinemaWorks' 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. John Boyce, CinemaWorks' Vice President of
Technology, who has extensive training experience from his 30 years in the
telecommunications business, will lead this effort. 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 in the U.S., and to a lesser extent in
Canada, and all competitors in the industry are simultaneously competing for the
most experienced workers. Where possible, CinemaWorks intends to recruit
qualified individuals with experience in the business. However, because such
individuals are not at present available in adequate numbers, CinemaWorks
expects to implement in early 2001 a training program for individuals interested
in becoming lead technicians. CinemaWorks plans to train prospective lead
technicians in pairs on an ongoing basis to enable CinemaWorks to meet the
demand for its services. CinemaWorks anticipates that it will require
approximately 10 lead technicians, working on an ongoing basis, to meet the
expected demand for its services.
CinemaWorks also participates in a Canadian government program,
ScienceLink, which reimburses qualifying companies for 60% of a trainee's salary
for up to six months. Participants in the ScienceLink program must be Canadian
residents who have been unemployed and actively seeking employment for six
months. Although CinemaWorks 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 CinemaWorks cannot guarantee that it will have access to enough qualified
technicians to meet its expansion plans.
4. Remain Technologically Sophisticated. CinemaWorks 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
CinemaWorks 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. CinemaWorks believes that its membership in the hospitality consortium
will provide greater means for expansion of CinemaWorks' business in 2001 by
taking advantage of TIV's international hospitality 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 hospitality consortium, CinemaWorks expects
significant initial expansion outside of North America will occur in Western
Europe and Asia, where other intended hospitality consortium partners are
located (e.g., Granada Business Technology in the U.K. and ViewInternet in
Singapore, although both companies may elect to do their own installations in
certain or all cases, unless
12
<PAGE>
CinemaWorks signs specific agreements with companies that join the hospitality
consortium). 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 CinemaWorks' role in
these international markets will be that of advisors via CinemaWorks' lead
technicians or if CinemaWorks 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 hospitality
consortium and CinemaWorks. However, these regions, unlike Canada and the U.S.,
may occasionally present barriers to foreign investment and excessive
governmental regulation. Until such time as these conditions are improved or
otherwise overcome, CinemaWorks will likely focus most of its expansion efforts
in Western Europe and Asia in conjunction with international hospitality
consortium partners, such as Granada Business Technology 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 CinemaWorks'
provisioning of two-way broadband IP services via satellite (to remote areas)
and last mile line-of-sight high-speed wireless services. CinemaWorks expects
to provide wireless Internet connections and services separately from the
hospitality consortium.
CinemaWorks' last mile and satellite data services are complementary and
may often be used together in conjunction with the hospitality consortium's
wireline services. For example, CinemaWorks 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. CinemaWorks anticipates being able to add value as a
reseller for satellite bandwidth providers, who typically do not offer their
services to the hospitality industry at the present time. In North America, it
is anticipated that Sprint Canada will provide the Internet backbone connection
for CinemaWorks' satellite Internet customers. However, Sprint Canada has not
yet asked CinemaWorks to perform any such services.
CinemaWorks 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, CinemaWorks
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.
CinemaWorks 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 CinemaWorks' services, will yield lower
profit margins, but these lower profit margins will be offset by greater
business volume.
Maintenance of CinemaWorks' wireless services will be contracted with third
parties. Maintenance services in international locations (e.g., Asia) will
likely be contracted through the hospitality consortium partners.
CinemaWorks plans to launch its first wireless Internet connection beta
project in the Vancouver, BC metropolitan area by December 2000. CinemaWorks
plans to install a dedicated 11.0 Mbs wireless broadband connection between
CinemaWorks' 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 CinemaWorks to share the T1 connection, thereby
saving CinemaWorks over $1,000 per month in recurring T1 access fees.
13
<PAGE>
2. Internet Content and eCommerce Services.
---------------------------------------
Because of CinemaWorks' 15 years of experience in hospitality pay per view
movie and television programming, CinemaWorks' long-term plans include the
provision of entertainment content delivered over the Internet. CinemaWorks is
now closely evaluating proposed strategic alliances which will allow CinemaWorks
to utilize its prior business experience with major movie studios. The first and
most likely venue for CinemaWorks' Internet content is expected to be the
hospitality consortium's worldwide hospitality portal, Wiredinn.com.
CinemaWorks 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 CinemaWorks and CinemaWorks would market and sell Earthramp's
services to its strategic partners, including GalaVu and Wiredinn. The parties
have not yet entered into a written agreement, and neither party is providing
services under this memorandum of understanding.
CinemaWorks expects to include additional services featuring eCommerce to
Wiredinn, along with other potential content providers in the future.
However, no service of this type is currently beyond the discussion stage, and
CinemaWorks does not expect to generate any revenues from its potential Internet
content and eCommerce activities in the foreseeable future.
CinemaWorks' 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.
Pay Per View Services Customers (Discontinued)
----------------------------------------------
Net pay per view services sales, now discontinued as CinemaWorks disposed
of its pay per view assets in July 2000, 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:
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------
1998 1999 2000
---- ---- ----
Geographic Areas Discontinued Pay Per View
-------------------------------------------
Business):
---------
<S> <C> <C> <C>
Canada 27.62% 27.62% 29.6%
United States 72.38% 72.38% 72.4%
</TABLE>
CinemaWorks' customers for its now discontinued pay per view services were
individual hotels such as Comfort Inn, Richmond, Virginia, Blue Horizon,
Vancouver, British Columbia, Wilson World, Dallas, Texas and Bilmar Beach
Resort, Treasure Island and Ramada Denver Airport, Denver, Colorado. During the
fiscal year ended July 31, 2000, CinemaWorks' business changed from providing
pay per view movie services in hotels to installing high-speed Internet
infrastructure equipment, and by the end of that fiscal year, CinemaWorks was no
longer in the pay per view services business.
High Speed Internet Infrastructure Installation Customers
---------------------------------------------------------
CinemaWorks' customers for its high-speed Internet network installation
business are hotels and supplier/operators (manufacturers and distributors of
high-speed Internet networks and connections), integrators, value added
resellers and distributors of high-speed Internet networks and connections. The
customers for suppliers/operators, in turn, are individual hotels who are
contracting with the supplier/operator
14
<PAGE>
for the installation of their equipment. The primary supplier/operator for
CinemaWorks to date has been Darwin, which accounted for 100% of its revenues
for the fiscal year ended July 31, 2000.
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
---- ---- ----
Geographic Areas (Internet Infrastructure
-----------------------------------------
Installation Business):
----------------------
<S> <C> <C> <C>
Canada 0.0% 0.0% 81.0%
United States 0.0% 0.0% 19.0%
</TABLE>
Comparison of Pay Per View and High Speed Internet Infrastructure
-----------------------------------------------------------------
Installation Businesses
-----------------------
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
---- ---- ----
Industry:
---------
<S> <C> <C> <C>
Pay Per View Business 100.0% 100.0% 33.3%
Internet Infrastructure Installation Business 0.0% 0.0% 66.7%
</TABLE>
CinemaWorks' Suppliers
CinemaWorks' suppliers for the high-speed Internet networks and connections
equipment it installs are also often important potential customers, the
supplier/operators. These supplier/operators include Darwin, Elastic Networks
and Sprint Canada. These companies supply the bandwidth and equipment that
CinemaWorks installs in hotels and commercial entities. Wiredinn is another
important supplier. Wiredinn provides the hospitality portal hotel guests can
access from their guest rooms and hotel meeting and conference rooms.
Wiredinn's Internet portals adds value to the high speed Internet networks
CinemaWorks installs for the supplier/operators. CinemaWorks 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
and services these companies supply to the hospitality market place are
plentifully available and have not to date been subject to any type of seasonal
cessation of or decrease in availability.
For re-wiring projects in hotels, CinemaWorks utilizes ordinary Cat5
ethernet cabling which it purchases from the supplier/operators. CinemaWorks'
installations generally require Cat5 ethernet cabling commonly available from a
number of manufacturers. In addition, CinemaWorks' 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 CinemaWorks 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, switches and line-of-
sight wireless equipment for installations in North America and other locations
worldwide with the hospitality consortium's members. Cisco Systems has an
outstanding reputation for field maintenance and service which CinemaWorks hopes
to utilize in its long-term equipment maintenance responsibilities.
CinemaWorks' Marketing Strategy
CinemaWorks' marketing plan relies primarily upon its relationships with
the hospitality consortium members and their relationships with hotels to market
the total package of high speed Internet access
15
<PAGE>
components. CinemaWorks markets its services directly to members of the
hospitality consortium that provide equipment and services for which
installation services are required. For example, CinemaWorks has signed an
agreement with Wiredinn to become Wiredinn's "preferred" installer and has
become a Strategic Alliance Partner with Sprint Canada. In Canada, Sprint Canada
has directed its sales force to acquire maximum market share during 2001, which
will likely benefit CinemaWorks as the "preferred installation partner" for the
hospitality consortium throughout Canada and the U.S. Wiredinn has launched a
sales initiative targeted at gaining market share in the U.S. for the four-and-
five-star hotel market. TIV, as Wiredinn's parent company, can assist in this
effort because of its existing relationship with over 600 hotels worldwide.
Intellectual Property
CinemaWorks is developing a proprietary software system with integrated
data bases and project management capabilities to enhance CinemaWorks' 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. CinemaWorks'
software system is in beta testing, and CinemaWorks 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., which accounted in 1999 for the majority of
the Internet infrastructure installation market, respectively, in North America.
In addition, there are numerous small local providers of installation services
throughout Canada. CinemaWorks' strategy includes contracting with selected
regional and national wiring and telecommunications - related installation
companies under non-disclosure/non-compete agreements that are specific to
CinemaWorks' business with the hospitality consortium (Sprint Canada and
Wiredinn), Elastic Networks and Darwin. Once the parties complete their current
negotiations and enter into an agreement, APCI Communications Inc. will be the
first company to become an active part of CinemaWorks' business strategy as a
contract strategic installation partner. Through this strategy, some potential
competitors of CinemaWorks may become instead partners. See "Business Strategy:
Expand Geographic Coverage Through Strategic Installation Alliances."
Barriers to entry into the high-speed Internet installation 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, 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 CinemaWorks' current business efforts, as well as
the experience and personal networks of CinemaWorks' management, CinemaWorks
believes it has access to highly qualified personnel, some of whom have taken
early retirement from major local exchange carriers and are now back in the work
force. CinemaWorks also plans to train qualified individuals and retain these
trained individuals as employees. There can be no guarantee, however, that
CinemaWorks 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.
CinemaWorks 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
16
<PAGE>
technologies and technical trouble-shooting capability to solve unexpected
problems in the field. CinemaWorks 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 pay per view operations, and, as a member of the hospitality consortium,
is positioned to gain a wide variety of technology expertise and trouble-
shooting capabilities.
Many of CinemaWorks' current, anticipated and potential competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than CinemaWorks.
CinemaWorks 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
CinemaWorks.
Employees
CinemaWorks, including its 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. CinemaWorks 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
CinemaWorks' installation business. CinemaWorks' 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:
The Internet Infrastructure Installation Business is a New Industry in
----------------------------------------------------------------------
Which CinemaWorks Has Limited Experience. During 1999, CinemaWorks became 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
ongoing changes resulting from factors such as advances in technology and in the
uses of the Internet by businesses and consumers. CinemaWorks 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.
CinemaWorks Has Not Been Profitable to Date and Will Need to Increase
---------------------------------------------------------------------
Revenues to Achieve Profitability. CinemaWorks has been unable to sustain
---------------------------------
profitability in recent years, due primarily to declining revenues in its pay
per view business. CinemaWorks had an accumulated deficit of $4,162,112 as of
July 31, 2000. There can be no assurance that CinemaWorks will be able to
maintain or increase its operating profits in future periods. To generate
profits in the future, CinemaWorks will need to increase its revenues, which
will require CinemaWorks, 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, none of which is a certainty, given CinemaWorks' limited
experience in this new industry.
17
<PAGE>
CinemaWorks Has Limited Financial Resources and Will Likely Need Additional
---------------------------------------------------------------------------
Financing in the Near Future. CinemaWorks has only limited financial resources,
----------------------------
with working capital of $388,763 as of July 31, 2000. CinemaWorks 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 hospitality 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, CinemaWorks could require additional capital to fund
its current operations should these operations not be as profitable as
CinemaWorks expects in the near future. CinemaWorks does not have any
commitments from third parties to provide debt or equity financing to
CinemaWorks, and there can be no assurance that any financing will be available
to CinemaWorks on attractive terms or at all.
CinemaWorks' Revenues Depend Upon Continuing and Increasing Demand for
----------------------------------------------------------------------
Internet Access by Travelers. CinemaWorks' business depends upon travelers' and
----------------------------
conference attendees' increased use of the Internet for email access,
entertainment, commerce and information. If hotels should find that their
guests do not choose their hotels based in part on whether the hotel offers high
speed Internet access, the demand for CinemaWorks' installation services could
decrease. 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 from hotels. 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.
CinemaWorks Plans to Rely on its Membership in the Hospitality Consortium
-------------------------------------------------------------------------
for Continuing Business Opportunities. CinemaWorks' business strategy involves
-------------------------------------
dependence on certain strategic relationships to provide CinemaWorks with access
to the Internet networking and connection equipment that it installs and to
market its services to customers. CinemaWorks anticipates that its installation
business in the future will be primarily dependent on its new strategic
relationships with Sprint Canada and the hospitality consortium. The terms of
most of these relationships have not yet been fully defined in definitive
agreements, which are expected to permit Sprint Canada and the hospitality
consortium members to utilize the services of installers other than CinemaWorks
under certain circumstances, and which may permit Sprint Canada or the other
members of the hospitality consortium to terminate their relationships with
CinemaWorks under certain circumstances. Outside of the hospitality consortium,
CinemaWorks has written arrangements with only two other supplier/operators,
Darwin and Elastic Networks. Neither of these relationships is exclusive.
CinemaWorks can only be as successful as these strategic partners are at signing
hotels to utilize CinemaWorks' installation services and finding viable revenue
models in this emerging industry.
CinemaWorks' Success Requires Access to Scarce Lead Technicians.
---------------------------------------------------------------
CinemaWorks' current business is dependent on its access to a sufficient number
of lead technicians. CinemaWorks currently retains lead technicians on a
contract, nonexclusive basis. Accordingly there can be no assurance that
sufficient lead technicians will be available to CinemaWorks for specific
installation projects of CinemaWorks at the times and in the geographical
markets where required. Intense competition for the services of lead
technicians among installation companies may disrupt CinemaWorks' planned
expansion of its installation business. If CinemaWorks cannot recruit, train
or contract sufficient lead technicians to meet the demand for its installation
services, it could lose customers and perhaps lose its strategic alliance
partners on whom it is dependent for marketing.
CinemaWorks' Wireless Internet Services Business Is Not Yet Active.
------------------------------------------------------------------
CinemaWorks has not yet identified or secured customers for its wireless
Internet services business. CinemaWorks may encounter stiff competition from
local companies who may price bandwidth below levels at which CinemaWorks can
profitably deliver its wireless services. In such cases, CinemaWorks may be
forced to de-install and remove its wireless equipment to other more financially
promising areas not competitively served with broadband Internet services.
CinemaWorks may have difficulty in managing the contract personnel in areas that
do not represent its core business.
18
<PAGE>
CinemaWorks Faces Competition from Some Larger Competitors with Greater
-----------------------------------------------------------------------
Experience and Capital Resources. There are no significant proprietary,
--------------------------------
financial or other barriers to entry that could keep potential competitors from
developing and providing competing services in CinemaWorks' current or future
markets. A number of CinemaWorks' competitors, who include XEROX Connect and
UNISYS, as well as numerous local companies, have longer operating histories,
greater name recognition, larger installed customer bases, and substantially
greater financial, technical and marketing resources than CinemaWorks. These
advantages apply to competition for hotel customers as well as competition for
the services of lead technicians. CinemaWorks' ability to compete successfully
to sign hotels to installation projects and to contract with or employ lead
technicians will depend in large part on how well the hospitality consortium
members can market their high speed Internet services solution. Through the
hospitality consortium, CinemaWorks has access to the name recognition and
growing market share of Sprint Canada and the other hospitality consortium
members.
CinemaWorks' Success Is Substantially Dependent on the Performance and
----------------------------------------------------------------------
Continued Employment of William Massey. CinemaWorks is particularly reliant
--------------------------------------
upon the experience and relationships that its Chief Executive Officer, William
Massey, has in the hospitality industry. CinemaWorks 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
adversely affect CinemaWorks' ability to expand its current level of business,
as most of CinemaWorks' business to date has resulted from Mr. Massey's network
of industry contacts.
Possible Uninsured Losses Could Occur. CinemaWorks' installation
-------------------------------------
activities expose CinemaWorks to potential liability, including for personal,
property and business interruption damages. Although CinemaWorks maintains
comprehensive liability and property insurance, there can be no assurance that
such insurance coverage will be sufficient to cover any claims made against
CinemaWorks or that insurance will be available to CinemaWorks in the future at
affordable rates or at all.
CinemaWorks Needs to Protect Its Intellectual Property. While CinemaWorks'
------------------------------------------------------
operations do not rely on significant proprietary intellectual property,
CinemaWorks 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
CinemaWorks' system will not infringe the patent or other rights of third
parties, which could require CinemaWorks to modify its system, pay a royalty to
one or more third parties or discontinue using the system.
Currency Fluctuations Could Adversely Impact Earnings. 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 CinemaWorks' reported earnings. At the present time, CinemaWorks 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.
CinemaWorks Has No Experience Working Outside of Canada and the U.S.
--------------------------------------------------------------------
CinemaWorks' planned expansion to countries outside of North America in 2001
will subject CinemaWorks to new risks inherent in doing business on an
international basis that CinemaWorks has not yet had to face, 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.
CinemaWorks Is Largely Owned by Insiders. CinemaWorks' executive officers
----------------------------------------
and directors own directly or indirectly approximately 39.14% of CinemaWorks'
common stock. Accordingly, CinemaWorks' executive officers and directors are
able to exert effective control over the election of CinemaWorks' Board of
Directors and all business decisions affecting CinemaWorks and its shareholders.
Investors could have a limited ability to direct the business decisions for
CinemaWorks to increase profitability, or it is possible that the insider
directors could take self-interested actions that the other investors do not
approve.
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CinemaWorks' Stock Prices Are Volatile. 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 CinemaWorks' quarterly operating
results; announcements of technological innovations or new services by
CinemaWorks 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.
There Is a Limited Market for CinemaWorks' 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. Broker-dealers dealing in penny stocks are required to
provide potential investors certain additional disclosures and 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.
CinemaWorks Has No Plans to Pay Dividends in the Foreseeable Future.
-------------------------------------------------------------------
CinemaWorks currently intends to apply net earnings, if any, to increasing its
capital base and funding the growth of its operations. There can be no
assurance that CinemaWorks will ever have sufficient earnings to declare and pay
dividends to the holders of CinemaWorks' common stock, and, in any event, a
decision to declare and pay dividends is at the sole discretion of CinemaWorks'
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
CinemaWorks' headquarters and also houses all of CinemaWorks' Canadian
operations, including administrative, marketing and project management.
CinemaWorks 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. CinemaWorks does not have a renewal
option for this space. CinemaWorks 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
CinemaWorks is not charged any rent. CinemaWorks 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 CinemaWorks' knowledge, CinemaWorks 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 CinemaWorks' common
stock by (i) each
20
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person known by CinemaWorks to own beneficially more than 10% of the common
stock outstanding as of such date and (ii) the directors and officers of
CinemaWorks as a group.
<TABLE>
<CAPTION>
Name and Address Number of Common Shares Percent
of Person or Group Beneficially Owned Beneficially 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 (8 persons) 1,263,346 (2) 39.14%
</TABLE>
__________________
(1) William Massey, CinemaWorks' President, Chief Executive Officer and
Chairman of CinemaWorks' Board of Directors, owns 100% of the capital stock
of North American Movie Network, Inc.
(2) Includes shares beneficially owned by William Massey through North American
Movie Network, Inc. Assumes exercise of all 119,000 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 CinemaWorks in the U.S.,
although CinemaWorks 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 CinemaWorks' common stock, of which approximately 39%
of the outstanding shares were held of record by 25 shareholders in the U.S.
CinemaWorks' 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 CinemaWorks' past two fiscal years are set forth
below:
Quarter Ended High ($CDN) Low ($CDN)
------------- ---- ---
July 31, 2000 $1.50 $0.76
April 30, 2000 $2.90 $0.32
January 31, 2000 $0.40 $0.20
October 31, 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) -- --
____________
(1) As a result of CinemaWorks' failure to file certain reports with the
Canadian Venture Exchange, trading in CinemaWorks' 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.
21
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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 CinemaWorks on the
right of a non-resident to hold or vote common shares of CinemaWorks, other than
as provided in the Investment Canada 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 Canada 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 Canada Act, unless after review, the minister
responsible for enforcing the Investment Canada Act 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
Canada 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 CinemaWorks is not
controlled by a World Trade Organization Investor, would be reviewable under the
Investment Canada 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 CinemaWorks' business falls under the
aforementioned broadcast media sub-category, the acquisition of control of
CinemaWorks, if CinemaWorks' 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 CinemaWorks for purposes of the
Investment Canada 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 CinemaWorks
unless it could be established that, on acquisition, CinemaWorks 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:
. an acquisition of common shares by a person in the ordinary course of
that person's business as a trader or dealer in securities;
22
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. an acquisition of control of CinemaWorks 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
. an acquisition of control of CinemaWorks by reason of an amalgamation,
merger, consolidation or corporate reorganization, following which the
ultimate direct or indirect control in fact of CinemaWorks, 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) and the Canada-
United States Income Tax Convention, 1980 and at all relevant times:
. is resident in the United States and not resident in Canada;
. holds CinemaWorks' shares as capital property;
. deals at arm's length with CinemaWorks; and
. does not use or hold and is not deemed to use or hold CinemaWorks' shares
in or in the course of carrying on business in Canada.
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 CinemaWorks' shares and no representation with respect to the
Canadian federal income tax consequences to any such prospective purchaser is
made. Accordingly, prospective purchasers of CinemaWorks' shares should consult
with their own tax advisors with respect to their individual circumstances.
Dividends
The Income Tax Act 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 Income Tax Act 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 Canada-United States Tax
Convention as amended by the Protocols thereto. The Canada-U.S. Tax Convention
may reduce the withholding tax rate on dividends as discussed below.
Article X of the Canada-U.S. Tax Convention as amended by the U.S.-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 CinemaWorks 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 CinemaWorks, a
withholding tax of 15% is imposed on the gross amount of the dividend or deemed
dividend paid. CinemaWorks 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 Canada-U.S. Tax
Convention, will not be available:
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(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 Canada-U.S. Tax Conversion 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.
Capital Gains
A non-resident holder is not subject to tax under the Income Tax Act
(Canada) 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 CinemaWorks 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
CinemaWorks at any time during the five-year period preceding the disposition.
In the case of a non-resident holder to whom shares of CinemaWorks 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.)
24
<PAGE>
The following discussion is based on the Internal Revenue Code of 1986, as
amended, Treasury Regulations, published Internal Revenue Service rulings,
published administrative positions of the Internal Revenue Service 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 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
U.S. court is able to exercise primary supervision over the administration of
the trust or one or more U.S. 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 CinemaWorks 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 CinemaWorks 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 CinemaWorks
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 CinemaWorks 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 CinemaWorks, they will be
treated first as a return of capital to the extent of the shareholder's basis in
the common shares of CinemaWorks and thereafter as gain from the sale or
exchange of the common shares of CinemaWorks. 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 CinemaWorks will not be
eligible for the dividends received deduction provided to corporations receiving
dividends from certain United States corporations.
25
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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 CinemaWorks is also entitled to a deemed paid
foreign tax credit in certain circumstances for the underlying foreign tax of
CinemaWorks related to dividends received or Subpart F income received from
CinemaWorks. (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 CinemaWorks 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 CinemaWorks may, under certain circumstances, be treated as ordinary
income, if CinemaWorks were determined to be a "collapsible corporation" within
the meaning of Internal Revenue 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:
the amount realized on the sale; and
his tax basis in the common shares of CinemaWorks.
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 that are corporations (other than corporations subject to
Subchapter S of the Internal Revenue Code), any unused capital losses may only
be carried back three and forward five years from the year in which such losses
are realized.
A "collapsible corporation" is a corporation that is formed or availed
principally to manufacture, construct, produce, or purchase certain types or
property that the corporation holds for less than three years and that generally
would produce ordinary income on its disposition, with a view to the
stockholders' selling or exchanging their stock and thus realizing gain before
the corporation realizes two thirds of the taxable income to be derived from the
property. Such property includes: stock in trade and inventory; property held
primarily for sale to customers in the ordinary course of business; unrealized
receivables or fees, consisting of rights to payment for noncapital assets
delivered or to be delivered, or services rendered or to be rendered to the
extent not previously included in income, but excluding receivables from selling
property that is not prescribed; and property gain on the sale of which is
subject to the capital gain/ordinary loss rule. Generally, a shareholder who
owns directly or indirectly 5 percent or less of the outstanding stock of the
corporation may treat gain on the sale of his shares as capital gain.
26
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Other Possible Considerations for U.S. Holders
If CinemaWorks were regarded as falling within any of the following
classifications, the above discussion may not describe the United States federal
income tax consequences resulting from the holding and disposition of
CinemaWorks' common stock. Those classifications, described below, are a
foreign personal holding company, a foreign investment company, a passive
foreign investment company or a controlled foreign corporation (each as defined
under the Internal Revenue Code). Because CinemaWorks is, and has been, engaged
in the active conduct of a business, its principal assets are related to such
business, and its stock is not anticipated to be concentrated among U.S. holders
to the extent required for any of such classifications, it does not appear to
fall within any such classification, nor is it likely to do so in the
foreseeable future.
Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the total combined
voting power or the total value of CinemaWorks' outstanding shares is owned,
actually or constructively, by five or fewer individuals who are citizens or
residents of the United States and 60% or more of CinemaWorks' gross income for
such year was derived from certain passive sources (e.g., from dividends
received from its subsidiaries), CinemaWorks would be treated as a foreign
personal holding company. In that event, U.S. holders that hold common shares
of CinemaWorks would be required to include in income for such year their
allocable portion of CinemaWorks' passive income which would have been treated
as a dividend had that passive income actually been distributed.
Foreign Investment Company
If 50% or more of the combined voting power or total value of CinemaWorks'
outstanding shares are held, actually or constructively, by citizens or
residents of the United States, United States domestic partnerships or
corporations, or estates or trusts other than foreign estates or trusts (as
defined by the Internal Revenue Code Section 7701(a)(31)), and CinemaWorks is
found to be engaged primarily in the business of investing, reinvesting, or
trading in securities, commodities, or any interest therein, it is possible that
CinemaWorks might be treated as a foreign investment company as defined in
Section 1246 of the Code, causing all or part of any gain realized by a U.S.
holder selling or exchanging common shares of CinemaWorks to be treated as
ordinary income rather than capital gains.
Passive Foreign Investment Company
A U.S. holder who holds stock in a foreign corporation during any year in
which such corporation qualifies as a passive foreign investment company is
subject to U.S. federal income taxation of that foreign corporation under one of
two alternative tax methods at the election of each such U.S. holder.
Section 1297 of the Internal Revenue Code defines a passive foreign
investment company as a corporation that is not formed in the United States and,
for any taxable year, either (i) 75% or more of its gross income is passive
income, which includes interest, dividends and certain rents and royalties or
(ii) the average percentage, by value (or, if the company is a controlled
foreign corporation or makes an election, adjusted tax basis), of its assets
that produce or are held for the production of passive income is 50% or more
(publicly traded corporations must apply this test on a fair market value basis
only).
Controlled Foreign Corporation Status
If more than 50% of the voting power of all classes of stock or the total
value of the stock of CinemaWorks is owned, directly or indirectly, by U.S.
holders, each of whom own after applying rules of attribution 10% or more of the
total combined voting power of all classes of stock of CinemaWorks, CinemaWorks
would be treated as a controlled foreign corporation under Subpart F of the
Internal Revenue Code. This classification would bring into effect many complex
results including the required inclusion by such 10% U.S. holders in income of
their pro rata shares of Subpart F income (as defined by the Internal
27
<PAGE>
Revenue Code) of CinemaWorks and CinemaWorks' earnings invested in "U.S.
property" (as defined by Section 956 of the Code). In addition, under Section
1248 of the Internal Revenue Code, if CinemaWorks is considered a controlled
foreign corporation at any time during the five year period ending with the sale
or exchange of its stock, gain from the sale or exchange of common shares of
CinemaWorks by such a 10% U.S. holder of CinemaWorks at any time during the five
year period ending with the sale or exchange is treated as ordinary dividend
income to the extent of earnings and profits of CinemaWorks attributable to the
stock sold or exchanged.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING THE COMMON SHARES OF
CINEMAWORKS.
ITEM 8. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are expressed in
U.S. dollars 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 CinemaWorks' 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
CinemaWorks' prior pay per view services business in the fiscal year ended July
31, 2000. All amounts below are expressed in U.S. dollars.
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------
1996 1997 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 (0.01) (0.01) 0.05 (0.16) (0.02)
Income (loss) from
continuing operations (0.02) (0.02) (0.03) (0.04) (0.04)
Dividend paid -- -- -- -- --
Balance Sheet Data
------------------
Working capital $(259,176) $(234,082) $ 7,658 $(487,161) $ 388,763
Total assets 266,234 449,149 390,621 417,885 488,351
Long term debt -- -- -- -- 57,870
Capital lease obligation -- -- -- 102,074 --
Shareholders' equity 647,317 114,817 279,139 (253,363) 356,182
</TABLE>
____________
(1) CinemaWorks changed its business from the provision of pay per view
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.
28
<PAGE>
CinemaWorks' Consolidated Financial Statements have been prepared in accordance
with Canadian GAAP. Except as disclosed in Note 13 of the Consolidated
Financial Statements, the Consolidated Financial Statements conform to all
material respects with U.S. GAAP. The table below reflects the information in
the table above reconciled under U.S. GAAP.
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<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) (126,677) (1,048,484)
Income (loss) from discontinued
operations (150,818) (75,483) (247,752 (409,257) 181,813
Net income (loss) (235,541) (150,174) 164,857 (535,934) (1,230,297)
Dividend paid - - - - -
Per share amounts
Net income (0.01) (0.01) 0.05 (0.04) (0.19)
Dividend paid - - - - -
Balance Sheet Data
------------------
Working capital $(259,176) $(234,082) $ 7,658 $(487,161) $ 198,763
Total assets 266,234 449,149 390,621 417,885 599,444
Long term debt - - - 102,074 57,870
Shareholders' equity 647,317 114,817 279,139 (253,363) 240,323
</TABLE>
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):
Fiscal Year Average High Low Year End
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
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, with CinemaWorks committing in 1998 to change its business focus from
its prior business of owning and operating pay per view services for the
hospitality industry to installing high-speed Internet networks and connections
for the hospitality industry. CinemaWorks first signed an agreement with Darwin
to act as a sales agent for
29
<PAGE>
Darwin's high-speed Internet services and data services for hotels in North
America. Second, in March 2000, CinemaWorks completed an offering to the public
of CinemaWorks' capital stock via the Canadian Venture Exchange that brought
CinemaWorks CDN$641,250. The third step in changing CinemaWorks' business focus
was completed in July 2000, when CinemaWorks finalized a transaction to sell its
pay per view assets, thus completing CinemaWorks' exit from the pay per view
services business. The fourth step for CinemaWorks' change in business began in
August 2000, when CinemaWorks signed the memorandum of understanding with Sprint
Canada for CinemaWorks to install high-speed Internet access equipment for
Sprint Canada and its customers in Canada. The fifth step occurred in August
2000, as well, when CinemaWorks signed the memorandum of understanding with
Sprint Canada, Wiredinn and TIV to form the hospitality consortium, for which
CinemaWorks is the "preferred installation partner" under the terms of the
memorandum of understanding. CinemaWorks signed an agreement with Wiredinn to
become its preferred installation company in North America in October 2000,
solidifying CinemaWorks' role as the preferred installer for the consortium
members.
CinemaWorks' high-speed Internet infrastructure installation operations in
Canada and the U.S. are conducted through independent contractor agreements with
supplier/operator companies such as Wiredinn, Elastic and Darwin, with whom
CinemaWorks has signed installation agreements. CinemaWorks is nearing
completion of an installation agreement with supplier/operator Sprint Canada.
To date, CinemaWorks has only completed installation projects for Darwin.
CinemaWorks plans to strengthen and develop its existing alliances and to pursue
other broadband Internet services installation opportunities.
Revenue Model For High-Speed Internet Access Equipment Installation
-------------------------------------------------------------------
Business
--------
CinemaWorks has several possible sources of revenue from typical high-speed
Internet access equipment installation projects:
. Installation Services (Includes Site Survey). CinemaWorks' hotel
customers pay a flat fee for CinemaWorks' installation services, in most
cases based on the number of rooms installed.
. Long Term Maintenance of System Equipment. Customers also pay
CinemaWorks for long term maintenance service on the installed equipment
throughout the term of the hotel customers' service agreements with
CinemaWorks. CinemaWorks provides replacement and repair pursuant to the
equipment manufacturers' warranties. After the warranties expire,
CinemaWorks will offer its hotel customers the option to purchase
additional warranty coverage for a monthly fee. CinemaWorks estimates
that its margin on this revenue is 40%.
. Lease or Rental Income from Equipment. The hotel customers pay
CinemaWorks monthly lease/rental payments for the equipment installed in
these hotels in cases where CinemaWorks owns the equipment or rents or
leases the equipment for the project. Generally, CinemaWorks will own
the high-speed Internet services equipment for projects with the
hospitality consortium. In projects CinemaWorks performs with Sprint
Canada outside of the hospitality consortium, CinemaWorks may or may not
own the equipment, and when CinemaWorks installs high-speed Internet
networks and equipment for Darwin and Elastic, CinemaWorks does not own
the equipment.
. Liquidation Value of Equipment CinemaWorks Owns. In some cases, hotel
customers desire to lease the high speed Internet access equipment from
CinemaWorks. CinemaWorks will either own the equipment or the
supplier/operator will own the equipment. Where CinemaWorks owns the
equipment, it anticipates that once the equipment is paid for through
customers' lease payments to CinemaWorks, the equipment will retain
value and upon termination of the contract with the hotel or the
installation of upgrade equipment, the equipment could be resold in a
likely
30
<PAGE>
international affirmation letter. CinemaWorks has no experience in any
such resale market at the present time and is not certain what value, if
any, will reside in these assets once paid for.
Results from Operations
Fiscal Year Ended July 31, 2000 Compared to Fiscal year Ended July 31, 1999
Revenues. CinemaWorks' 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, CinemaWorks' efforts were
focused on this change of business, including selling CinemaWorks' pay per view
assets and raising capital through the public offering of CinemaWorks' capital
stock. For the fiscal year ended July 31, 2000, CinemaWorks' revenues from its
new high-speed Internet networks and connections installation business were
generated in conjunction with CinemaWorks' sales agency agreement with Darwin.
Cost of Good Sold. CinemaWorks' 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 CinemaWorks' new high-speed Internet
infrastructure installation business are lower than the costs of providing pay
per view services to the hospitality industry, and consist primarily of salaries
for lead technicians, semi-skilled labor to assist the lead technicians,
installation equipment (for CinemaWorks' direct employees) and the low cost of
plentiful ethernet cable lines CinemaWorks installs for its customers. The
supplier/operator entities with whom CinemaWorks contracts for installations
provide the more costly networks and connections components to be installed.
The pay per view 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 pay per view 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. CinemaWorks had no bad debts to record
during the fiscal year ended July 31, 2000, and CinemaWorks had no amortization
expenses related to its installation assets to record in the fiscal year ended
July 31, 2000 (which consisted solely of office equipment and a company
vehicle). In addition, during the fiscal year ended July 31, 2000, CinemaWorks
reduced its rent expense, travel and promotion expenses and management fees due
in large part to the discontinuation of CinemaWorks' pay per view services
business. CinemaWorks' increase in selling, general and administrative expenses
in the fiscal year ended July 31, 2000 resulted in an increased loss for that
fiscal year compared to the fiscal year ended July 31, 1999, notwithstanding an
increase in operating revenues for the fiscal year ended July 31, 2000 versus
the fiscal year ended July 31, 1999. As anticipated revenues increase in 2001,
the general and administrative expenses as a percentage of revenues should be
reduced.
Net Loss. CinemaWorks 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 CinemaWorks' change of its business. Another reason
for the decrease in net loss connected to CinemaWorks' change of business in the
fiscal year ended July 31, 2000 was the income of $99,244 generated from
discontinued operations. This compares to a net loss from discontinued
operations of $409,257 in the fiscal year ended July 31, 1999. Revenues from
discontinued operations in the fiscal year ended July 31, 2000 were $113,068 as
compared to $510,198 for the fiscal year ended July 31, 1999, due to
CinemaWorks' contraction and cessation of this pay per view services business
and its change to the new high speed Internet infrastructure installation
business. However, CinemaWorks experienced higher operating costs for its
discontinued operations in the fiscal year ended July 31, 1999 because it was at
that time still engaged in the pay per view business. In addition, during the
fiscal year ended July 31, 1999, CinemaWorks had additional non-recurring
expenses from its failed efforts to acquire additional pay per view properties.
Net Loss Under United States GAAP. Note 13 of Cinemaworks' Consolidated
---------------------------------
Financial Statements explains and reconciles differences between Canadian and
U.S. GAAP. These differences did not result in any significant changes to Cinema
Works' results from operations for the fiscal years ended July 31, 1999 and
1998. However, for the fiscal year ended July 31, 2000, CinemaWorks' net loss
under U.S. GAAP was $1,230,297 as compared to its net loss under Canadian GAAP
of $114,849 for the fiscal year ended July 31, 2000, as the result of the
following adjustments.
. The granting of incentive stock options increased compensation expense
by $834,391 pursuant to SFAS No. 123; and
. The gain on disposal of discontinued operations, totaling $281,057 was
reversed and will not be recognized until it is actually realized,
pursuant to APB No. 30.
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 CinemaWorks and should not be considered indicative of the current or future
operations of CinemaWorks' new business.
Revenues. CinemaWorks' revenues for the year ended July 31, 1999 were
--------
generated entirely from its discontinued pay per view 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 CinemaWorks' pay per view business due to
the decrease in the number of hotel rooms CinemaWorks was able to service under
contract, resulting from the expiration of certain hotel pay per view service
agreements and CinemaWorks' inability to attract the necessary equipment lease
financing to
31
<PAGE>
replace CinemaWorks' aging pay per view technology or to expand its pay per view
operations. This difficulty rendered CinemaWorks increasingly unable to
effectively compete with other pay per view providers that could offer expanded
and enhanced pay per view services to hotels such as sophisticated video-on-
demand systems that were far superior to CinemaWorks' older scheduled pay movie
systems.
Cost of Good Sold. CinemaWorks' 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 CinemaWorks' pay per view
business and its increasing inability to compete in that industry. The costs
associated with owning and operating pay per view services included commissions
to hotels, maintenance of the sensitive pay movie and television equipment,
point of sale marketing supplies, the pay per view 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, CinemaWorks 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, CinemaWorks' 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 CinemaWorks' efforts during the
fiscal year ended July 31, 1999 to sell its aging pay per view assets while
simultaneously seeking strategic alliances and financing for CinemaWorks'
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. The gross profit decreased for the fiscal
year ended July 31, 1999 primarily due to non-recurring expenses related to
CinemaWorks' failed efforts to acquire additional pay per view properties.
Net Loss. CinemaWorks 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 CinemaWorks' increasing challenges in competing in the
pay per view services industry as a result of the aging of CinemaWorks' pay per
view technology. CinemaWorks' overall sales efforts in the pay per view
services industry in the fiscal year ended July 31, 1999 decreased compared to
the fiscal year ended July 31, 1998 as CinemaWorks explored alternative
businesses to the owning and operating of pay per view services.
Liquidity and Capital Resources
Traditionally, CinemaWorks 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 CinemaWorks 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,
CinemaWorks completed a public offering of its securities that generated net
proceeds of CDN$641,250, which were used by CinemaWorks to carry receivables
during the initial stages of growing its new high-speed Internet infrastructure
installation business with Darwin. CinemaWorks plans to dispose of the
Chequemate stock it received in the pay per view asset sale, which may provide
additional modest cash funds for CinemaWorks after the current fiscal year.
Because the stock is restricted, CinemaWorks cannot sell
32
<PAGE>
it immediately. CinemaWorks will be able to sell the 55,000 shares Chequemate
agreed to register, but only after CinemaWorks has held the stock for one year
(when all of the Chequemate shares may be sold) or after the effectiveness of
the registration statement Chequemate files, which is anticipated to occur by
the end of 2000.
At July 31, 2000, CinemaWorks 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 CinemaWorks' pay
per view assets in July 2000, the receipt of funds from CinemaWorks' public
offering of capital stock completed in March 2000, and the issuance of shares of
common stock in repayment of debt. CinemaWorks issued 3,416,290 shares of its
common stock to pay $460,975 of accounts payable. The accounts payable
CinemaWorks paid included consultants' fees, legal fees, sums owed for the
purchase of the North American Movie Network Inc. pay per view movie systems
(See Item 13 "Interest of Management in Certain Transactions"), and certain
loans from shareholders to CinemaWorks procured to pay the same expenses.
CinemaWorks 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, CinemaWorks 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. CinemaWorks anticipates, if necessary to support its increasing
operations, that it will seek to obtain a line of credit in 2001 from a
financial institution. CinemaWorks does not have any commitments from third
parties to provide debt or equity financing or a line of credit to CinemaWorks,
and there can be no assurance that any financing will be available to
CinemaWorks on attractive terms or at all. In the event CinemaWorks is unable to
obtain additional capital during its current fiscal year, its ability to expand
its operations will be materially and adversely affected. Moreover, should
CinemaWorks continue to incur operating losses and be unable to raise additional
capital, it could be forced to reduce the scope of or even discontinue its
current operations.
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.
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
CinemaWorks' directors are elected by CinemaWorks' shareholders and serve
until the next annual shareholders meeting or until their successors are
otherwise elected by the shareholders. CinemaWorks' executive officers are
appointed by CinemaWorks' Board of Directors and serve as officers until their
successors are appointed by the Board of Directors. The directors and executive
officers of CinemaWorks as of November 1, 2000 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
Robert Campbell Vice President, Business Development
John Boyce Vice President, Technology
Moez Manji Vice President, Sales and Marketing
33
<PAGE>
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 CinemaWorks since 1997.
Previously, he had served as President and a director of CinemaWorks 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 CinemaWorks in January 1999 as its Chief Financial Officer, he
has guided and advised CinemaWorks 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
CinemaWorks 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 CinemaWorks, where he served as
President and a director of CinemaWorks 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 CinemaWorks 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, Mr.
Bower was the site technical Manager for MAN B&W, Seattle, WA and Portland,
Oregon from 1999 to June 2000. From 1995 through 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 CinemaWorks since
January 1999, and has served as CinemaWorks' Office Manager since 1998. Prior
to joining CinemaWorks, 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.
Robert Campbell. Mr. Campbell has been CinemaWorks' Vice President of
Business Development since July 2000. Mr. Campbell has 20 years of senior
corporate management experience in the telecommunications, utility and banking
industries. From 1996 to 1999, Mr. Campbell served as the President and CEO of
Skylink Corporation (telecommunications). Between 1977 and 1996, Mr. Campbell
was the General Manager of Northwest Natural Gas Company. Mr. Campbell earned a
B.S. in Management in 1990 from Maryhurst University in Portland, Oregon and an
Associates of Applied Science degree in Banking and Finance from Clark College
in 1977.
John Boyce. Mr. Boyce has been CinemaWorks' Vice President of Technology
since April 3, 1999, when he took early retirement from USWest. Mr. Boyce
served in several senior technical positions with USWest between February, 1974
and April 1999. As a contract employee with USWest after retiring, Mr.
34
<PAGE>
Boyce managed the deployment of T-1 designed services for over 30 Seattle,
Washington hotels during the World Trade Organization event in late 1999. Mr.
Boyce also trained 150 USWest technicians for field deployment of Megabit
services featuring Cisco DSL technology.
Moez Manji. Mr. Manji has been Vice President of Sales and Marketing for
CinemaWorks since July 2000, and has been a sales consultant for CinemaWorks
since September 1999. Mr. Manji's prior consulting company, Reachout
Communications, specialized in sales development, Internet marketing and finance
between October 1998 and August 1999. From June 1997 to October 1998, Mr. Manji
served as a liaison between customers, installers and administration from
Canguard Security Systems (formerly part of the Rogers Cable Communications
Group). Mr. Manji's international business experience includes serving as a
business development officer for EUROMET Inc. from April 1995 to May 1997. Mr.
Manji received a degree in 1978 in cost management accounting from the
University of Derby in England.
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 CinemaWorks and its subsidiary
paid during the fiscal year ended July 31, 2000 to all officers as a group
(six individuals) for services in all capacities was approximately $220,916. No
amounts were paid or accrued by CinemaWorks 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
CinemaWorks' officers and directors:
<TABLE>
<CAPTION>
Name of Optionee Director / No. of Shares of Exercise Expiry Date
Officer common stock Price CDN $
<S> <C> <C> <C> <C>
(a) Bower, Thomas Director 33,000 $0.88 May 10, 02
20,000
(b) Boyce, John Executive Officer 33,000 $0.88 May 10, 02
(c) Campbell, Robert Executive Officer 33,000 $0.88 May 10, 02
(d) Hahn, Robert Officer 33,000 $0.25 Nov 01, 00
(e) Manji, Moez Executive Officer 33,000 $0.88 May 10, 02
(f) Massey, William Director and 324,723 $0.88 May 10, 02
Officer
(g) Menlove, Anna Officer 33,000 $0.88 May 10, 02
(h) Murphy, Alan Director 33,000 $0.88 May 10, 02
(i) All directors and 575,723
officers as a group
(eight individuals)
</TABLE>
In addition to the options held by CinemaWorks' officers and directors,
there are options outstanding to purchase a total of 198,000 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.
35
<PAGE>
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 CinemaWorks or T.E.N. Private Cable
Systems USA was or is to be a party within the last three fiscal years, in which
(i) any director or executive officer of CinemaWorks or the T.E.N. Private Cable
Systems USA, (ii) any entity that controls CinemaWorks, 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, CinemaWorks paid the
spouse of William Massey $53,000 and $46,278, respectively, for services
rendered to CinemaWorks in her capacity as an employee of CinemaWorks.
During the fiscal year ended July 31, 1998, CinemaWorks entered into an
agreement with North American Movie Network, which is 100% owned by William
Massey, for the sale to CinemaWorks by North American Movie Network of certain
"on-demand" pay per view 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. North American Movie Network sold the pay per view
assets to CinemaWorks for North American Movie Network's cost, plus the amount
of revenues received from continuing operations of these pay per view 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
pay per view assets was $276,927, which represented $205,120 of asset value and
$71,807 of revenues CinemaWorks collected and retained between July 31, 1998 and
March 15, 1999 under the terms of the asset sale agreement between the parties.
In order to improve its working capital position, CinemaWorks then sold the
equipment to CapitalPlus Equity, LLC, formerly known as Richlund Capital, Inc.,
in Utah for $126,176 on March 15, 1999, a price that reflected the fair market
value of the assets at the time. CapitalPlus Equity, LLC then leased the
equipment back to CinemaWorks 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 pay per view asset sale by CinemaWorks to Chequemate. See "CinemaWorks
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
CinemaWorks' 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 CinemaWorks' Articles of Incorporation or
Bylaws. The total number of shares of common stock authorized by CinemaWorks'
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 CinemaWorks'
Articles of Incorporation nor its Bylaws restrict the repurchase or redemption
of shares by CinemaWorks while there is an arrearage in payment of dividends.
CinemaWorks has never declared or paid cash dividends on its common stock.
CinemaWorks 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.
36
<PAGE>
PART II
ITEM 15 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not Applicable
ITEM 17 FINANCIAL STATEMENTS
CinemaWorks' 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
Earthramp Communications/CinemaWorks: Memo of Understanding
37
<PAGE>
Integra Leasing/T.E.N. Private Cable Systems, Inc.: Lease Agreement
Sprint Canada/CinemaWorks Memorandum of Understanding Letter
Wiredinn.com/CinemaWorks License and Services Agreement, October 31,
2000*
*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.
38
<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, F-4
2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years ended July 31, 2000, 1999 F-5
and 1998
Consolidated Statements of Shareholders' Equity for the Years ended July 31, F-6
2000, 1999 and 1998
Notes to Consolidated Financial Statements F-7
</TABLE>
[LETTERHEAD OF DAVISON & COMPANY]
F-1
<PAGE>
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 years then ended. 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 Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these 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 years then ended, expressed in U.S. dollars, in
accordance with Canadian 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
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)
On behalf of the Board:
Director Director
------------------------------ ------------------------------
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
=================================================================================================================================
Weighted average number of shares outstanding 5,624,437 3,363,667 3,438,667
=================================================================================================================================
</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 3,438,667 $ 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 3,438,667 3,628,702 (3,515,657) 166,094 279,139
Cancellation of escrow shares (150,000) - - - -
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 accounts payable 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.
Basis 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.
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...)
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, Canadian dollar denominated monetary items
are translated into U.S. dollars at the rate of exchange in effect at the
balance sheet date. Non-monetary items and amortization of capital assets
are translated at the exchange rate in effect on the date of the
transactions. Revenues and expenses are translated at the average exchange
rate for the year. Foreign currency transaction gains and losses are
included in determining net income (loss) for the year.
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 installation 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>
F-8
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
3. CAPITAL ASSETS (cont'd...)
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).
During the current year, the Company sold all of its hotel installation
equipment, including equipment under capital lease, to Chequemate
International Inc. (Note 9).
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>
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).
F-9
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
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 3,438,667 $3,628,702
Cancellation of escrow shares (150,000) -
--------- ----------
As at July 31, 1999 3,288,667 3,628,702
Settlement of accounts payable 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>
Capital stock has been restated to give retroactive recognition to a 5:1
reverse stock split which occurred on July 27, 1999.
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.
<PAGE>
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
8. OPTIONS AND WARRANTS (cont'd...)
Incentive stock options and share purchase warrants enabling the holders to
acquire the following number of shares, were outstanding at July 31, 2000:
===========================================================================
Number Exercise
of Shares Price Expiry Date
---------------------------------------------------------------------------
Options 20,000 Cdn $ November 27, 2000
0.25
753,723 Cdn $ April 15, 2002
0.88
Warrants 482,250 Cdn $ March 31, 2001
0.75
===========================================================================
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.
Ownership of 95,000 common shares of Chequemate will not enable the Company
to exert significant influence over the management of 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).
<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.
<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 ("GAAP") 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 consultants and
requires the recognition of compensation expense related to stock
compensation based on the fair value of the equity instrument granted or
repriced. Canadian GAAP does not require the reporting of any stock based
compensation expense in the Company's financial statements.
In calculating compensation expense, 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>
<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> <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
=========
Weighted average fair value of options repriced during 2000 $ 0.12
=================================================================================================================
</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.
<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...)
Income taxes (cont'd...)
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.
Foreign currency translation
The Company's policy on foreign currency translation is in compliance with
SFAS No. 52, "Foreign Currency Translation".
In previous years, the functional currency of the Company's Canadian hotel
pay-per-view operations was the Canadian dollar. Using the current rate
method, translation adjustments resulting from translating the Canadian
operation's financial statements into the reporting currency, the U.S.
dollar, were disclosed and accumulated in a separate component of equity.
During the current year, the Company disposed of both its U.S. and Canadian
hotel pay-per-view operations (Note 9). As such, the Company has included
the amount accumulated in the translation adjustment component of equity as
part of the gain on disposal of discontinued operations.
Also during the current year, the Company began operations of its new
business. Although the business is run out of its Canadian office, the
currency of the primary economic environment in which the Company operates
is the U.S. dollar. Therefore the U.S. dollar is the Company's functional
currency and also remains it's reporting currency. Gains and losses on
foreign currency transactions are included in determining net income (loss)
for the year.
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 of a material nature.
Disposal of discontinued operations
The treatment of a disposal of discontinued operations is essentially the
same under both Canadian and United States GAAP. However, the gain on the
sale of the Company's hotel pay-per-view business (Note 9) was recorded
despite the sale not closing until August 3, 2000. The reasons for this are
as follows:
a) The date of the letter agreement was only three days after the year
end. The terms of the agreement had been settled by July 31, 2000.
b) Shareholder approval had not been received. However, management
approved the plan, has received no shareholder complaints in response
to the announcement of its plan, and has never encountered significant
opposition at any meeting of shareholders.
F-15
<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...)
Disposal of discontinued operations (cont'd...)
c) Chequemate actually assumed responsibility for operating the hotel pay-
per-view business in March, 2000. Since that time all revenues from and
expenses incurred in operating the business have been Chequemate's.
The Canadian Venture Exchange did not object to this treatment. Under
United States GAAP however, a gain must not be recognized before the
disposal date. Therefore, the gain has been reversed for United States
reporting puposes.
Consolidated financial statement balances under United States GAAP
The impact of the above differences between Canadian and United States GAAP
on the consolidated balance sheets is as follows:
<TABLE>
<CAPTION>
================================================================================================
2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Consolidated balance sheets
Total assets, Canadian GAAP $ 488,351 $ 417,885
Receivable on disposal of assets (190,000) -
Net assets of discontinued operations 301,093 -
----------- -----------
Total assets, United States GAAP $ 599,444 $ 417,885
=========== ===========
Total liabilities, Canadian GAAP $ 132,169 $ 671,248
Net liabilities of discontinued operations 226,952 -
----------- -----------
Total liabilities, United States GAAP 359,121 671,248
----------- -----------
Capital stock, Canadian GAAP 4,518,294 3,628,702
Cumulative compensation expense on stock options 838,719 4,328
----------- -----------
Capital stock, United States GAAP 5,357,013 3,633,030
Cumulative translation adjustment of discontinued operations 165,198 165,198
Deficit, United States GAAP (5,281,888) (4,051,591)
----------- -----------
Shareholders' equity, United States GAAP 240,323 (253,363)
----------- -----------
Shareholders' equity and liabilities, United States GAAP $ 599,444 $ 417,885
================================================================================================
</TABLE>
F-16
<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...)
Consolidated financial statement balances under United States GAAP
(cont'd...)
The impact of the above differences between Canadian and United States GAAP
on the consolidated statements of operations and deficit and cash flows is
as follows:
<TABLE>
<CAPTION>
=======================================================================================================================
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated statements of operations and deficit
Income (loss) for the year as reported $ (114,849) $ (531,606) $ 164,857
Less: Compensation expense on stock options (834,391) (4,328) -
Gain on disposal of discontinued operations (281,057) - -
----------- ----------- -----------
Income (loss) for the year, in accordance with United States
GAAP (1,230,297) (535,934) 164,857
Deficit in accordance with United States GAAP,
beginning of year (4,051,591) (3,515,657) (3,680,514)
----------- ----------- -----------
Deficit in accordance with United States GAAP,
end of year $(5,281,888) $(4,051,591) $(3,515,657)
===============================================
Consolidated statements of cash flows
Cash flows provided by (used in) operating activities,
Canadian GAAP $ (234,191) $ 241,562 $ (100,440)
Increase in loss from continuing operations (834,391) (4,328) -
Item not affecting cash 834,391 4,328 -
----------- ----------- -----------
Cash flows provided by (used in) operating activities,
United States GAAP (234,191) 241,562 (100,440)
----------- ----------- -----------
Cash flows provided by (used in) financing activities,
United States GAAP 485,558 (8,023) (535)
----------- ----------- -----------
Cash flows used in investing activities,
United States GAAP (29,710) (145,067) (7,671)
----------- ----------- -----------
Cash flows provided by (used in) discontinued operations,
Canadian GAAP (114,638) (136,863) 140,047
----------- ----------- -----------
Change in cash during the year 107,019 (48,391) 31,401
Cash, beginning of year 7,766 56,157 24,756
----------- ----------- -----------
Cash, end of year $ 114,785 $ 7,766 $ 56,157
=======================================================================================================================
</TABLE>
F-17
<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 differences between Canadian and United States GAAP
on the consolidated 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 3,438,667 $3,628,702 $(3,515,657) $166,094 $ 279,139
Cumulative compensation expense
on stock options - - - - -
--------- ---------- ----------- -------- ----------
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)
Cumulative compensation expense
on 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
Cumulative compensation expense
on stock options - 838,719 (838,719) - -
Gain on disposal of discontinued
operations - - (281,057) 165,198 (115,859)
--------- ---------- ----------- -------- ---------
Stockholders' equity in accordance
with United States generally
accepted accounting principles at
July 31, 2000 7,960,207 $5,357,013 $(5,281,888) $165,198 $ 240,323
===========================================================================================================================
</TABLE>
F-18
<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...)
Earnings per share (EPS)
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share",
effective for financial statements issued for periods ending after December
15, 1997. SFAS No. 128 simplifies the computation of earnings per share by
replacing the presentation of primary earnings per share with a
presentation of basic earnings per share, as defined. The statement
requires dual presentation of basic and fully diluted earnings per share by
entities with complex capital structures. Basic earnings per share includes
no dilution and is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding for the
period. Fully diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of an entity similar to fully
diluted earnings per share.
Under Canadian GAAP, shares held in escrow are included in calculating the
weighted average number of shares outstanding for computing basic earnings
per share. Under United States GAAP, shares held in escrow are excluded
from this calculation.
The following loss per share information results under United States GAAP:
<TABLE>
<CAPTION>
===========================================================================================================================
2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) for the year under United States GAAP $(1,230,297) $ (535,934) $ 164,857
===========================================================================================================================
Weighted average number of shares outstanding
under United States GAAP 5,624,437 3,288,667 3,288,667
===========================================================================================================================
Earnings (loss) per share $ (0.22) $ (0.16) $ 0.05
===========================================================================================================================
</TABLE>
For the years ended July 31, 2000 and 1999, fully diluted EPS has not been
disclosed as the effect of the exercise of the Company's outstanding
options and warrants would be anti-dilutive. At July 31, 1998, there were
no outstanding stock options or warrants.
14. SUPPLEMENTAL DISCLOSURES WITH RESPECT TO CASH FLOWS
===============================================================================
-------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------
Cash paid during the year for interest $ - $ 6,361 $ -
==============================================================================
Cash paid during the year for income taxes $ - $ - $ -
==============================================================================
F-19
<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 accounts
payable 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-20
<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 Amendment to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
CINEMA INTERNET NETWORKS INC.
Date: 12/01/00 By: /s/ William E. Massey
--------- ---------------------------
William E. Massey, Chief Executive Officer
<PAGE>
EXHIBIT INDEX
--------------------------------------------------------------------------------
Exhibit Title
Number
--------------------------------------------------------------------------------
1 Articles of Incorporation and Bylaws of the Company
--------------------------------------------------------------------------------
1.1 Articles of Incorporation+
--------------------------------------------------------------------------------
1.2 Bylaws+
--------------------------------------------------------------------------------
1.3 Certificate of Existence/Authorization of TEN Private
Cable Systems (USA), Inc., dated January 5, 1999+
--------------------------------------------------------------------------------
3 Material Contracts
--------------------------------------------------------------------------------
3.1 Chequemate/CinemaWorks: CinemaWorks Asset Purchase
Agreement, May 25, 2000+
--------------------------------------------------------------------------------
3.2 Sprint Canada, Inc./ TIV Inc./ Wiredinn, Inc./ Cinema
Internet Networks Inc.: Memorandum of Understanding,
September 15, 2000+
--------------------------------------------------------------------------------
3.3 Darwin Networks, Inc./ CinemaWorks: Sales Representation
Agreement, August 17, 1999*+
--------------------------------------------------------------------------------
3.4 Elastic Networks, Inc./ CinemaWorks: Master Services
Agreement, August 23, 2000*+
--------------------------------------------------------------------------------
3.5 Gala Vu Entertainment, Inc./ CinemaWorks: High Speed
Internet Services Memo of Understanding, May 12, 2000*+
--------------------------------------------------------------------------------
3.6 North American Movie Network/ CinemaWorks: Asset Sale
Agreement, January 15, 1998 and Master Lease, March 15,
1999+
--------------------------------------------------------------------------------
3.7 Offer to Sublease, March 2, 2000+
--------------------------------------------------------------------------------
3.8 Earthramp Communications/ CinemaWorks: Memo of
Understanding, May 10, 2000*
--------------------------------------------------------------------------------
3.9 Integra Leasing/ T.E.N. Private Cable Systems, Inc.: Lease
Agreement, November 1998
--------------------------------------------------------------------------------
3.10 Spirit Canada/ CinemaWorks: Memorandum of Understanding
Letter, February 1, 2000*
--------------------------------------------------------------------------------
3.11 Wiredinn.com/ CinemaWorks: License and Service Agreement,
October 31, 2000*
--------------------------------------------------------------------------------
+ Filed herewith and previously filed with the SEC by paper with Form 20-F
* 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.
