FORM 20-F/A3
(Amendment No. 3)
[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 0-31547
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: 7,983,207 Common Shares were outstanding as of January
25, 2001.
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes __ No X
-
Indicate by check mark which financial statements item the registrant has
elected to follow:
[ITEM 17 [x] ITEM 18[]]
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 that is engaged in the high-speed
(broadband) Internet networks and connections installation business for hotels
and other commercial customers. CinemaWorks commenced this business in November
1999 and has generated approximately $266,032 in revenues through January 15,
2001 from these operations, which were its only revenues generated from its
currently continuing operations during that period. During its fiscal year
ending July 31, 2000, CinemaWorks discontinued its pay per view movie
programming services business, which it provided to the hospitality industry for
15 years in Canada and the U.S.
CinemaWorks incurred an operating loss of $214,093 in its fiscal year
ending July 31, 2000 ($1,230,297, as adjusted for U.S. generally accepted
accounting principles). Although CinemaWorks' discontinued pay per view business
generated revenues and operating income for the fiscal year ending July 31,
2000, this business had been incurring significant operating losses in recent
years. In order to fund its current operating losses and to expand its
operations, CinemaWorks will need to obtain additional financing in the near
term.
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.
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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. CinemaWorks evaluated the status of the pay per view industry and the
costs of acquiring and financing the assets that would be required for it to
become competitive as a provider of pay per view services. As a result of this
evaluation, CinemaWorks' management determined that a fundamentally new business
direction for CinemaWorks should be planned and implemented that both took
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. The price of Chequemate's
common stock as of January 8, 2001 was $0.3125 per share, with an average over
the three months prior to January 8, 2001 of $0.60 per share. 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. These rules 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.
Chequemate filed this registration statement in March 2001.
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. Both the shareholders of CinemaWorks and
the Canadian Venture Exchange have approved this sale arrangement.
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Pending the sale of the Canadian pay per view assets, CinemaWorks will be
responsible for certain lease payments relating to those assets, totaling
CDN$872 per month. Revenues generated by the Canadian pay per view business,
which have averaged CDN$3,777 per month during the seven-month period ended
December 2000, are available to satisfy those lease obligations. CinemaWorks
expects these revenues to be more than sufficient to satisfy these lease
obligations through September 2001. Any excess revenues are required to be
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 currently installs
high-speed Internet networks and connections, using wireline 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. While those services advertise similar data rates of 1
to 2 Mbs, they can only deliver these rates intermittently depending on whether
other customers are simultaneously online within the area.
CinemaWorks' primary market niche is the hospitality industry.
CinemaWorks believes the hospitality industry 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 believes that its prior experience and relationships in
providing 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.
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 provider and
distributor Sprint Canada Inc.
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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.
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. In order to
expand its current level of installations, however, CinemaWorks intends to both
hire on a contract basis or employ more trained lead technicians as may be
available. CinemaWorks also intends to implement an internal training program
during 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. If requested, CinemaWorks
will also install Internet connections in commercial buildings and other
multi-unit structures. CinemaWorks has not, to date, been requested to perform
any installation services in non-hospitality-related structures. CinemaWorks
enters into a contract with 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 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;
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. 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 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. The
supplier/operator, as the operating company for the installed network, is also
responsible for performing 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. The
supplier/operator may fulfill its maintenance responsibilities by providing
maintenance services itself or by contracting for those services, either with
CinemaWorks or with a third party maintenance provider. After the installation
is complete, in those cases in which the supplier/operator wishes to contract
with CinemaWoks for CinemaWorks to provide ongoing maintenance services,
CinemaWorks will supply these services 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. Time mismanagement of lead technicians can also 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 recently has established certain business relationships that
it expects to be integral to its future 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 infrastructure equipment. CinemaWorks
anticipates that these alliances will provide opportunities for CinemaWorks to
grow and generate potentially significant revenues in the foreseeable future. To
date, CinemaWorks has generated limited revenues from each of its strategic
relationships with Sprint Canada, Inc., Elastic Networks, Inc. and Darwin
Networks, Inc.
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
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conjunction with the newly formed hospitality consortium described below. Being
a Solutions Alliance Partner means that CinemaWorks is one of only approximately
30 selected businesses Sprint Canada uses for it outsourcing needs. Although
some other Solutions Alliance Partners provide installation services as part of
their businesses, CinemaWorks is currently the only Solutions Alliance Partner
that specializes solely in hospitality-related high-speed Internet installations
using xDSL solutions over existing telephone wires in hotels.
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. Through January 15, 2001 CinemaWorks has
received $2,785 in revenues resulting from this relationship. CinemaWorks' final
agreement with Sprint Canada will not guarantee CinemaWorks any particular level
of minimum revenues. The final agreement between Sprint Canada and CinemaWorks
also will not legally bind CinemaWorks to an exclusive agreement with Sprint
Canada, and therefore CinemaWorks will be free to provide installation services
for other companies in Canada.
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. No
formal agreement yet binds the parties as a hospitality consortium, and
CinemaWorks has not yet completed any installation projects with the hospitality
consortium or received any revenues relating to the hospitality consortium.
CinemaWorks is not guaranteed any minimum level of revenues under the memorandum
of understanding and does not expect to have any minimum revenue guarantees
under any definitive agreements among the hospitality consortium members.
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 will receive
payment up front for its installation services. Although it is the
supplier/operator's responsibility to provide ongoing maintenance services for
the high-speed Internet access lines CinemaWorks installs, often the
supplier/operator will contract with CinemaWorks for CinemaWorks to supply these
services. In such cases, CinemaWorks receives payment on an ongoing, monthly,
time and materials basis for its maintenance services. CinemaWorks also receives
payment on an ongoing, monthly basis for its 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, the
hospitality consortium members present projects to CinemaWorks that are beyond
CinemaWorks' capabilities or if other reasons exist for hospitality consortium
members to use another installer. 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
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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 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
--------------------------------------
In addition to CinemaWorks, the following companies are the current
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. TIV will also help the hospitality consortium's customer hotels
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
-----------------------------------------
Although CinemaWorks' current operations are limited to North America,
CinemaWorks anticipates that it may install high-speed Internet infrastructure
equipment internationally through relationships with additional hospitality
consortium members who may join the hospitality consortium. However, this
business is not expected to commence, if at all, until after the current fiscal
year.
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CinemaWorks does not currently have an agreement with any such
international companies. However, CinemaWorks is, at present, the only
hospitality consortium member offering high-speed Internet infrastructure
installation services. CinemaWorks therefore expects that potential future
hospitality consortium members would see CinemaWorks as a likely source of high
quality installation and maintenance services. Potential future 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 any future
international hospitality consortium members, 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.
3. Darwin Networks, Inc. In June 1999, CinemaWorks signed one of the
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first third-party agent agreements with Darwin Networks, Inc.. This agreement
allowed CinemaWorks, as Darwin's agent, to sell and install Darwin's high-speed
Internet network systems in hotels throughout Canada and the U.S. Installations
performed for Darwin in eight hotels (1,330 rooms) have generated $260,811 in
revenues for CinemaWorks as of January 15, 2001. These projects represent most
of CinemaWorks' completed installations and revenues received as of January 15,
2001 for its high-speed Internet networks and connections installation business
as a whole. However, Darwin recently filed for Chapter 11 protection relating to
its hospitality division, and is currently seeking to sell its hospitality
division assets. As a result, Darwin will no longer provide its network systems
to hospitality customers. Darwin will still offer its high-speed Internet
network systems for installation in multiple dwelling units in Canada and the
U.S. CinemaWorks believes, however, that it is unlikely that it will provide
installation services in multiple dwelling units for Darwin. Therefore,
CinemaWorks' relationship with Darwin will likely end after the Chapter 11
proceedings have been completed.
In addition to the likely loss of Darwin as a continuing source of
revenues, CinemaWorks is an unsecured creditor of approximately $40,000 owed to
it by Darwin for work already completed. CinemaWorks will probably receive only
partial payment of this amount.
4. Elastic Networks, Inc. In August 2000, CinemaWorks entered into a
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two-year, renewable, non-exclusive, independent contractor services agreement
with Elastic Networks, Inc. Under this agreement, 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 to
sell the equipment and services on its behalf. CinemaWorks currently installs
Elastic Networks equipment in hotels directly for Elastic Networks. To date,
CinemaWorks has not completed any installations of Elastic Networks properties,
but it has performed a preliminary site survey resulting in $2,436 in fees from
Elastic Networks. Elastic Networks pays CinemaWorks on either a time and
materials basis or on a per-line-installed basis.
5. GalaVu Entertainment, Inc. In addition to CinemaWorks' strategic
-------------------------
alliances with its principal customers, CinemaWorks has established a strategic
relationship with GalaVu Entertainment, Inc., a subsidiary of Chell Merchant
Capital Group (Nasdaq: CHEL) of Calgary, Alberta. CinemaWorks signed a
memorandum of understanding with GalaVu 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. Although CinemaWorks has not completed any
installations with GalaVu to date, the memorandum of understanding anticipates
that CinemaWorks will share its expertise to assist GalaVu to sell high-speed
Internet services to GalaVu-serviced hotels in Canada. CinemaWorks will install
the equipment on behalf of the supplier/operator chosen to supply the necessary
equipment in each case. Because of CinemaWorks' existing relationships with the
hospitality consortium members and Elastic Networks,
9
CinemaWorks anticipates that a number of GalaVu-serviced hotels will choose
these supplier/operators as their high-speed Internet providers. CinemaWorks and
GalaVu have not, to date, come to a final agreement on the choice of high-speed
Internet services providers.
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
relationship with Elastic Networks. Over the longer term, CinemaWorks intends to
expand this business internationally, relying primarily on expected new
relationships with other hospitality consortium members. This future expansion
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.
1. 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:
A. 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, including Sprint Canada, the other
members of the hospitality consortium, GalaVu and Elastic Networks.
B. 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.
C. 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. CinemaWorks expects to continue to utilize the
services of John Boyce, CinemaWorks' former Vice President of Technology, on a
contract basis. Mr. Boyce has extensive training experience from his 30 years in
the telecommunications business. Recruiting and training qualified individuals,
particularly lead technicians, is often difficult in the Internet infrastructure
installation industry. This is 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. CinemaWorks also expects to
implement during 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
10
ScienceLink program must be Canadian residents who have been unemployed and
actively seeking employment for six months. 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.
D. 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.
2. Expand High-Speed Internet Networks and Connections Installation
Business Internationally.
Substantial international opportunities may exist for CinemaWorks
outside North America. CinemaWorks believes that its membership in the
hospitality consortium may provide greater means for expansion of CinemaWorks'
future business 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. The addition of other international hospitality
consortium members in the future may also increase CinemaWorks' ability to
expand internationally, although it is not certain at this time whether
CinemaWorks will provide installation services for any future international
members of the hospitality consortium.
3. Expand into New Businesses
A. Wireless Internet Services
Two wireless products will likely form an important complementary
business to CinemaWorks' high-speed Internet installation services in the
future. These are CinemaWorks' planned provisioning of last mile line-of-sight
high-speed Internet wireless services and two-way broadband IP services via
satellite (to remote areas). CinemaWorks expects to provide wireless Internet
connections and services separately from the hospitality consortium. CinemaWorks
has not yet provided wireless services to any customers, although it currently
has the technical capability to do so. The wireless services being offered by
CinemaWorks are described below.
CinemaWorks expects to provide line-of-sight broadband wireless Internet
connections in the future 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
intends to use equipment from Cisco Systems, Inc. for its planned line-of-sight
broadband wireless Internet connections, and is currently trained on the
installation and use of this equipment.
Providing satellite data services is an alternative method for
delivering Internet connectivity to hotels. Currently, two-way broadband
Internet data delivered via copper landline connections either does not exist or
is very expensive in many areas of the world. In addition, satellite bandwidth
providers typically do not offer their services to the hospitality industry at
the present time. CinemaWorks anticipates being able to add value as a reseller
for satellite bandwidth providers by reselling the satellite bandwidth to
hospitality industry customers. CinemaWorks would procure the satellite
bandwidth by ordering a two-way satellite connection from a satellite bandwidth
provider on behalf of hospitality industry customers. No formal relationship
with a satellite bandwidth provider is necessary to place such an order. To
date, however, CinemaWorks has not placed any such orders for its hospitality
customers.
11
CinemaWorks plans to price its future 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' future wireless services will be
contracted with third parties. Maintenance services in potential future
international locations (e.g., Asia) will likely be contracted through the
hospitality consortium partners.
B. 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, a service
CinemaWorks does not currently offer. 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 in the future. 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 fiscal years
ended July 31, 1998, 1999, 2000 and the first quarter of the fiscal year ending
July 31, 2001:
Year Ended July 31,
------------------
1998 1999 2000 2001 (fiscal
---- ---- ---- ----
quarter ended
October 31,
2000 only)
Geographic Areas Discontinued Pay Per View
- ------------------------------------------
Business):
- ---------
Canada 27.62% 27.62% 29.6% 0.0%
United States 72.38% 72.38% 70.4% 0.0%
12
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 contract with the supplier/operator 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. Due to Darwin's filing for bankruptcy protection for its hospitality
division and the sale of its hospitality assets early in 2001, Darwin is not
expected to be a customer in the future. As of January 15, 2001, CinemaWorks'
supplier/operators have included Elastic Networks and Sprint Canada, with some
initial revenues from Darwin before it filed for bankruptcy.
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, 2000 and the first quarter of the fiscal
year ending July 31, 2001:
Year Ended July 31,
-------------------
1998 1999 2000 2001 (fiscal
---- ---- ---- ----
quarter ended
October 31,
2000 only)
Geographic Areas (Internet Infrastructure
- -----------------------------------------
Installation Business):
- ----------------------
Canada 0.0% 0.0% 81.0% 81.0%
United States 0.0% 0.0% 19.0% 19.0%
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, 2000
and the first quarter of the fiscal year ending July 31, 2001:
Year Ended July 31,
-------------------
1998 1999 2000 2001 (fiscal
---- ---- ---- ----
quarter ended
October 31,
2000 only)
Industry:
- --------
Pay Per View Business 100.0% 100.0% 33.3% 0.0%
Internet Infrastructure Installation Business 0.0% 0.0% 66.7% 100%
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 currently include Elastic
Networks and Sprint Canada. Darwin, formerly a major supplier to CinemaWorks, is
not expected to continue to be a supplier, due to its recent Chapter 11
bankruptcy protection filing for its hospitality division.
13
The supplier 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 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 has developed 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 has undergone testing and is now fully functional.
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) and Elastic Networks. Once the parties complete their
14
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 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 and a 15-year history of providing reliable, quality service in the
hospitality field of hotel pay per view operations. Moreover, as a member of the
hospitality consortium, CinemaWorks 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 in Sales,
one is in Administration and two are Executives. 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, with an additional $1500 having been expended during the
fiscal quarter ended October 31, 2000.
15
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. This may include difficulties
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
achieve or thereafter increase its operating profits in future periods. To
generate profits in the future, CinemaWorks will need to increase its revenues.
Increasing its revenues 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. Given CinemaWorks' limited experience
in this new industry, there can be no assurance that CinemaWorks will be able to
accomplish any of these goals.
CinemaWorks Has Limited Financial Resources and Will Need Additional
--------------------------------------------------------------------
Financing in the Near Future. CinemaWorks has only limited financial resources,
- ----------------------------
with working capital of $256,771 as of October 31, 2000. CinemaWorks anticipates
that it will require additional capital during its current fiscal year to fund
its recent operating losses and to finance the expected growth in its current
installation business (including growth that may be generated through the
hospitality consortium). 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. Longer term, CinemaWorks
may require additional capital to fund its planned entry into the wireless high
speed Internet services business and potential future entry into other
Internet-related content, software or hardware businesses. 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 Will Be Dependent on its Membership in a Newly Formed and
---------------------------------------------------------------------
Untested 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
16
defined in definitive agreements. The definitive agreements are expected to
permit Sprint Canada and the hospitality consortium members to utilize the
services of installers other than CinemaWorks under certain circumstances, and
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 an on-going written
arrangement with Elastic Networks only. This relationships is not exclusive.
CinemaWorks can only be as successful as its 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 That
--------------------------------------------------------------------
it may not Have the Ability to Hire, Thus Constraining CinemaWorks' Ability to
- ------------------------------------------------------------------------------
Compete and Grow. 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 May Not Be Able to Successfully Compete with 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.
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.
CinemaWorks Has No Experience Working Outside of Canada and the U.S.
--------------------------------------------------------------------
CinemaWorks' possible expansion to countries outside of North America would
subject CinemaWorks to new risks inherent in doing business on an international
basis that CinemaWorks has not yet had to face. These risks include meeting
regulatory requirements, legal uncertainty regarding liability, tariffs and
other trade barriers, difficulties in staffing and managing foreign operations
and potentially adverse tax consequences.
CinemaWorks Is Largely Owned by Insiders, Who Are in a Position to
------------------------------------------------------------------
Influence and Control Corporate Governance. CinemaWorks' executive officers and
- ------------------------------------------
directors own directly or indirectly approximately 37.80% 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.
The Limited Market for CinemaWorks' Common Stock Could Result in
----------------------------------------------------------------
Difficulty Selling the Stock and/or Continued Low Stock Prices. CinemaWorks
- --------------------------------------------------------------
anticipates that a trading market will develop for
17
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 January 15, 2001, certain
information with respect to the beneficial ownership of CinemaWorks' common
stock by (i) each 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.
Name and Address Number of Common Shares Percent
of Person or Group Beneficially Owned Beneficially Owned
North American Movie Network, Inc. (1) 1,852,320 23.20%
1822 Lakeland Drive
Dallas, TX 75218
Gene Yamagata Trust 799,380 10.01%
18
275 East Tropicana, Suite 200
Las Vegas, NV 89109
All Directors and Officers as a Group (7 persons) 3,017,666 (2) 37.80%
- ------------------
(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 March 16, 2001. 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 January 15, 2001, 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)
------------- ---- ---
October 31, 2000 $1.49 $0.75
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.
The average daily trading volume of CinemaWorks' stock on the Canadian
Venture Exchange over the past two years has been less than 1,000 shares per
day.
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".
19
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 under two circumstances. The first such circumstance would
be if acquisition of the CinemaWorks shares 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. The
second such circumstance would be 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 one of certain specified industry 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). These sectors 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). 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;
. 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
20
. 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:
(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.
21
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.)
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.
22
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.
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
23
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.
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.
24
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
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.
25
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, plus the fiscal
quarter ended October 31, 2000. The selected financial data are 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, plus unaudited financial statements from the first fiscal quarter of
the fiscal year ending July 31, 2001. 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.
Year Ended July 31,
-------------------
1996 1997 1998(1) 1999 (1) 2000 (1) 2001
---- ---- ---- ---- ---- ----
(fiscal
quarter
ended
October
31, 2000
only) (1)
Income Statement Data
- ---------------------
Revenues $ - $ - $ - $ - $ 222,980 $ 58,165
Gross profit -- -- -- -- 127,968 6,919
Income (loss) from (84,723) (74,691) (82,895) (122,349) (214,093) (132,929)
continuing operations
Income (loss) from (150,818) (75,483) 247,752 (409,257) 99,244 --
discontinued operations
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) (132,929)
Income (loss) from (0.02) (0.02) (0.03) (0.04) (0.04) (0.02)
continuing operations
Income (loss) from (0.04) (0.02) --
discontinued operations
Dividend paid -- -- -- -- -- --
Balance Sheet Data
- ------------------
Working capital $(259,176) $(234,082) $ 7,658 $(487,161) $ 388,763 $ 256,771
Total assets 266,234 449,149 390,621 417,885 488,351 326,257
Long term debt -- -- -- -- 57,870 56,408
Capital lease obligation -- -- -- 102,074 -- --
Shareholders' equity 647,317 114,817 279,139 (253,363) 356,182 224,759
____________
(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. There were no revenues from discontinued operations in
the first quarter of the fiscal year ended July 31, 2001.
26
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. The data set forth in the table below for the
fiscal years ended July 31, 2000, 1999, 1998, 1997 and 1996 reflect the
reconciliation to U.S. GAAP as set forth in Note 13 of the Consolidated
Financial Statements for the fiscal year ended July 31, 2000. The data set forth
in the table below for the fiscal quarter ended October 31, 2000 reflect the
reconciliation to U.S. GAAP as set forth in Note 1 of the Consolidated Financial
Statements (unaudited) for the fiscal quarter ended October 31, 2000.
Year Ended July 31,
-------------------
1996 1997 1998 1999 2000 2001 (fiscal
---- ---- ---- ---- ---- ----
quarter ended
October 31,
2000 only)
Income Statement Data
- ---------------------
Revenues $ - $ - $ - $ - $ 222,980 $ 58,165
Gross profit - - - - 127,968 6,919
Income (loss) from continuing operations (235,541) (150,174) 164,857 (535,934) (1,230,297) (132,929)
Income (loss) from discontinued operations - - - - - 281,057
Net income (loss) (235,541) (150,174) 164,857 (535,934) (1,230,297) 148,128
Dividend paid - - - - - -
Per share amounts
Net Income (0.03) (0.03) 0.05 (0.16) (0.22) (0.02)
Net Income from continuing operations (0.03) (0.03) 0.05 (0.16) (0.22) (0.02)
Net Income from discontinued operations - - - - - 0.04
Dividend paid - - - - - -
Balance Sheet Data
- ------------------
Working capital $(259,176) $(234,082) $ 7,658 $(487,161) $ 198,763 $ 256,771
Total assets 266,234 449,149 390,621 417,885 599,444 326,257
Long term debt - - - - 57,870 56,408
Shareholders equity 647,317 114,817 279,139 (253,363) 240,323 224,759
Capital Lease Obligation - - - 102,074 - -
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 January 15, 2001, 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, plus the first quarter of the fiscal year ending July
31, 2001, 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
2001 (first
fiscal 0.669570 0.679260 0.653110 0.65484
quarter only)
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
27
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 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 and Elastic, with whom
CinemaWorks has signed installation agreements. CinemaWorks is nearing
completion of an installation agreement with supplier/operator Sprint Canada. To
date, CinemaWorks has completed installation projects for Darwin and Sprint
Canada, and has completed a preliminary site survey for Elastic Networks.
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 customer
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
28
Internet networks and equipment for Darwin and Elastic, CinemaWorks
does not own the equipment.
Results from Operations
Fiscal Quarter Ended October 31, 2000 Compared to Fiscal Quarter Ended
October 31, 1999
Revenues. CinemaWorks' revenues for the fiscal quarter ended October 31,
--------
2000 from continuing operations were $58,165, all of which were generated from
its new high-speed Internet networks and connections installation business.
These revenues were generated entirely from CinemaWorks' sales agency agreement
with Darwin. During the fiscal quarter ended October 31, 1999, CinemaWorks was
not yet generating revenues from its planned high-speed Internet infrastructure
installation business, as it was still involved in the pay per view movie
programming business at that time.
Cost of Goods Sold. CinemaWorks' cost of goods sold (direct costs) for
------------------
its high-speed Internet networks and connections installation business as a
percentage of revenues was 88% of revenues, leaving 12% gross profit. As further
detailed below, the costs of goods sold associated with building CinemaWorks'
new high-speed Internet infrastructure installation business were lower than the
costs of goods sold for the pay per view programming business for the fiscal
quarter ended October 31, 1999, which were 98.7% of revenues, leaving only 1.3%
gross profit.
Selling, General and Administrative Expenses. Selling, general and
--------------------------------------------
administrative expenses for the fiscal quarter ended October 31, 2000 were
$139,848, amounting to 240.4% of revenues for the quarter. Because CinemaWorks
was just beginning actual operations in its new high-speed Internet
infrastructure installation business, the majority of the selling, general and
administrative expenses in the fiscal quarter ended October 31, 2000 were
management fees, travel and promotion expenses, professional fees and wages,
benefits and consulting fees.
Net Loss. CinemaWorks recorded a net loss from continuing operations of
--------
$132,929 for the fiscal quarter ended October 31, 2000. The increase in net loss
as compared with the fiscal quarter ended October 31, 1999 was primarily due to
CinemaWorks' change in business, which had been completed only at the end of the
fiscal year ended July 31, 2000 and the beginning of the fiscal quarter ended
October 31, 2000. General and administrative expenses, incurred as a result of
building and promoting CinemaWorks' new high-speed Internet infrastructure
installation business, were all incurred and recorded before most revenues
resulting from these efforts were realized. The net loss of $95,598 CinemaWorks
recorded for the fiscal quarter ended October 31, 1999 was entirely a result of
the contraction and cessation of CinemaWorks' pay per view business. In
addition, although CinemaWorks expended funds later during the fiscal year ended
July 31, 2000 to acquire additional pay per view properties, these expenses had
not been incurred during the fiscal quarter ended October 31, 1999.
Net Income Under United States GAAP. Note 1 of CinemaWorks' Consolidated
-----------------------------------
Interim Financial Statements explains and reconciles differences between
Canadian and U.S. GAAP. For the three-month period ended October 31, 2000,
CinemaWorks' net income under U.S. GAAP was $148,128 as compared to its net loss
under Canadian GAAP of $132,929 as the result of the following adjustment:
. The gain on disposal of discontinued operations, totalling
$281,057, recorded during the year ended July 31, 2000 under
Canadian GAAP, was recognized during the three-month period ended
October 31, 2000 under U.S. GAAP.
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
29
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 Goods 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. However, CinemaWorks' overall selling, general and administrative
expenses increased in the fiscal year ended July 31, 2000 because of expenses
connected with commencing the new business, including wages and consulting fees.
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 its 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
CinemaWorks' 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
30
. 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 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 due primarily 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.
31
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. In addition, CinemaWorks 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. 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 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 covering those shares. In March 2001,
Chequemate filed a registration statement covering the 55,000 shares.
At October 31, 2000, CinemaWorks had working capital of $256,771. This
compares with working capital of $388,763 at July 31, 2000 and negative working
capital of $487,161 at July 31, 1999. The increase in working capital at the end
of the fiscal year ended July 31, 2000 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 debt. The debt that was
repaid consisted of 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 that CinemaWorks procured to pay these same
expenses. None of these non-recurring events occurred in the first quarter of
the fiscal year ending July 31, 2001, resulting in less working capital at
October 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
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 hospitality
consortium's expansion and its current operations should these operations not be
profitable in the future. William Massey loaned CinemaWorks CDN$100,000 in
December 2000 (See Item 13: "Interest of Management in Certain Transactions") to
provide additional operating capital for the short term. 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.
32
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 January 15, 2001 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
Moez Manji Vice President, Sales and Marketing
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
33
(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.
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 (five
individuals) for services in all capacities was approximately $220,916, with
$59,000 paid for such services in the fiscal quarter ending October 31, 2000. No
amounts were paid or accrued by CinemaWorks during the last fiscal year or the
first quarter of the fiscal year ending July 31, 2001 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 December 31, 2000 held by
CinemaWorks' officers and directors:
Name of Optionee Director / No. of Shares of Exercise Expiry Date
Officer common stock Price CDN $
(a) Bower, Thomas Director 33,000 $0.88 May 10, 02
(b) Campbell, Robert Executive 33,000 $0.88 May 10, 02
Officer
(c) Hahn, Robert Officer 33,000 $0.25 May 10, 02
(d) Manji, Moez Executive 33,000 $0.88 May 10, 02
Officer
34
(e) Massey, William Director and 324,723 $0.88 May 10, 02
Officer
(f) Menlove, Anna Officer 33,000 $0.88 May 10, 02
(g) Murphy, Alan Director 33,000 $0.88 May 10, 02
(h) All directors and 522,723
officers as a group
(seven individuals)
In addition to the options held by CinemaWorks' officers and directors,
there are options outstanding to purchase a total of 231,000 shares of common
stock at an exercise price of CDN$0.88. Of these options, 33,000, held by a
former officer of CinemaWorks, expire on February 25, 2001 and the remaining
198,000 expire on May 10, 2002. There are warrants outstanding to purchase a
total of 479,250 shares of common stock at an exercise price of CDN$0.88 and an
expiration date of March 31, 2001.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Except as set forth below, CinemaWorks is not aware of any transactions
or proposed transactions in respect of which 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 the Human Resources Manager 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 lower 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."
During December 2000, William Massey loaned CinemaWorks CDN$100,000 for
operating expenses. The loan is for 13 months at 1% interest per month and is
not a demand note.
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
The securities to be registered pursuant to this Form 20-F/A2 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
35
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.
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. Also included
are unaudited consolidated statements of operations and deficit, cash flows and
shareholders' equity for the fiscal quarter ended October 31, 2000.
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
Consolidated Balance Sheets (unaudited) as of October 31, 2000 and
1999
Consolidated Statements of Operations and Deficit (unaudited) for
the Quarters Ended October 31, 2000 ended 1999
Consolidated Statements of Cash Flows (unaudited) for the Quarters
Ended October 31, 2000 and 1999
36
Consolidated Statements of Shareholders' Equity (unaudited) for the
Quarters Ended October 31, 2000 and 1999
(b) Exhibits
--------
1.1 Articles of Incorporation(1)
1.2 Bylaws(1)
1.3 Certificate of Existence/Authorization of TEN Private Cable
Systems (USA), Inc.(1)
3.1 Chequemate/CinemaWorks: CinemaWorks Asset Purchase Agreement(1)
3.2 Sprint Canada, Inc./TIV Inc./Wiredinn, Inc./Cinema Internet
Networks Inc: Memorandum of Understanding(1)
3.3 Darwin Networks, Inc./Cinema Internet Networks Inc.: Sales
Representation Agreement
3.4 Elastic Networks, Inc./Cinema Internet Networks Inc.: Master
Services Agreement*
3.5 GalaVu Entertainment, inc./Cinema Internet Networks Inc.:
High-Speed Internet Services Memo of Understanding
3.6 North American Movie Network/Cinema Internet Networks Inc.:
Asset Sale Agreement(1)
3.7 Offer to Sublease(1)
3.8 Earthramp Communications/CinemaWorks: Memo of Understanding*
3.9 Integra Leasing/T.E.N. Private Cable Systems, Inc.: Lease
Agreement(1)
3.10 Sprint Canada/CinemaWorks: Memorandum of Understanding Letter*
3.11 Wiredinn.com/CinemaWorks: License and Services Agreement*
(1) This exhibit was previously filed with the Securities and Exchange
Commission with CinemaWork's 20-F/A (Amendment No. 1).
*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.
37
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 Third Amendment to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
CINEMA INTERNET NETWORKS INC.
Date: 03/13/01 By: /s/ William E. Massey
-------- -------------------------------
William E. Massey, Chief Executive Officer
Index to Financial Statements
Title Page
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 F-4
Years ended July 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years ended July F-5
31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the Years F-6
ended July 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements F-7
Consolidated Balance Sheets (unaudited) as of October 31, 2000 F-24
and 1999
Consolidated Statements of Operations and Deficit (unaudited) F-25
for the Quarters ended October 31, 2000 and 1999
Consolidated Statements of Cash Flows (unaudited) for the F-26
Quarters ended October 31, 2000 and 1999
Consolidated Statements of Shareholders' Equity (unaudited) F-27
for the Quarters ended October 31, 2000 and 1999
Notes to October 31, 2000 Consolidated Financial Statements F-28
[LETTERHEAD OF DAVISON & COMPANY]
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
F-1
[LETTERHEAD OF DAVIDSON & COMPANY]
AUDITORS' REPORT
To the Shareholders of
Cinema Internet Networks Inc.
We have audited the consolidated balance sheets of Cinema Internet Networks Inc.
as at July 31, 2000 and 1999 and the consolidated statements of operations and
deficit, cash flows and shareholders' equity for the 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
A Member of SC INTERNATIONAL
============================
Suite 1200, Stock Exchange Tower, 609 Granville Street, P.O. Box
10372, Pacific Centre, Vancouver, BC, Canada, V7Y 1G6
Telephone (604) 687-0947 Fax (604) 687-6172
F-2
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
AS AT JULY 31
================================================================================
2000 1999
- --------------------------------------------------------------------------------
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
==============================================================================
Nature and continuance of operations (Note 1)
Subsequent events (Note 16)
On behalf of the Board:
"William Massey" Director "Al Murphy" Director
- ---------------------------- --------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in U.S. dollars)
YEAR ENDED JULY 31
===================================================================================================
2000 1999 1998
- ---------------------------------------------------------------------------------------------------
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
==================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
YEAR ENDED JULY 31
===============================================================================================================
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
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
==============================================================================================================
Supplemental disclosures with respect to cash flows (Note 14)
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in U.S. dollars)
==================================================================================================================
Cumulative
Number Translation
of Shares Amount Deficit Adjustment Total
- ------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-6
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
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
=======================================================================
Net Book Value
------------------
Accumulated
Cost Amortization 2000 1999
-----------------------------------------------------------------------
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
=======================================================================
F-8
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
===========================================================================================================================
Net Book Value
--------------
Accumulated
Cost Amortization 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Software and hardware rights $ - $ - $ - $ 12,038
===========================================================================================================================
5. LONG-TERM DEBT
===========================================================================================================================
2000 1999
---------------------------------------------------------------------------------------------------------------------------
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 $ -
===========================================================================================================================
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
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
7. CAPITAL STOCK
==========================================================================================================================
Number
of Shares Amount
--------------------------------------------------------------------------------------------------------------------------
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
==========================================================================================================================
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.
F-10
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 $ 0.25 November 27, 2000
753,723 Cdn $ 0.88 April 15, 2002
Warrants 482,250 Cdn $ 0.75 March 31, 2001
=======================================================================
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. The letter agreement states that the purchase price is
$251,000. However, at the date of the agreement, these shares have a
value of $190,000. Therefore, the purchase price, for purposes of these
financial statements, is considered to be $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.
F-11
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
9. DISCONTINUED OPERATIONS (cont'd...)
Income (loss) from discontinued operations is comprised of the
following:
===========================================================================================================================
2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
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
===========================================================================================================================
Sales revenue applicable to discontinued operations totalled $113,068
(1999 - $510,198; 1998 - $612,014).
Cash flows from discontinued operations are comprised of the following:
===========================================================================================================================
2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
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
===========================================================================================================================
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:
===========================================================================================================================
2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
Management fees-continuing operations $ 32,500 $ 32,500 $ 10,350
Management fees-discontinued operations 32,500 32,500 10,350
Wages, benefits and consulting fees 48,000 41,278 36,881
===========================================================================================================================
Management fees are paid for carrying out the duties of the office of
president of the Company. Consulting fees are paid for handling
administration and human resources duties.
F-12
CINEMA INTERNET NETWORKS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
JULY 31, 2000
================================================================================
10. RELATED PARTY TRANSACTIONS (cont'd...)
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.
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.
Under Canadian Venture Exchange policy, options can be repriced only if
at least six months have elapsed since the later of the date of
commencement of the option term, the date the Company's shares
commenced trading, or the date the option exercise price was last
amended, and if regulatory approvals is received.
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:
=======================================================================
2000 1999 1998
-----------------------------------------------------------------------
Risk free interest rate 6.58% 4.34% -
Expected life 2 years 2 years -
Expected volatility 270% 328% -
Expected dividends - - -
=======================================================================
F-13
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 following is a summary of the status of stock options outstanding
at July 31, 2000:
===================================================================================================================
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life (Years) Price Number Price
-------------------------------------------------------------------------------------------------------------------
$ 0.25 20,000 0.33 $ 0.25 20,000 $ 0.25
0.88 753,723 1.75 0.88 753,723 0.88
===================================================================================================================
Following is a summary of the stock based compensation plan during
2000, 1999 and 1998:
====================================================================================================================
Weighted
Average
Number Exercise
of Shares Price
- -----------------------------------------------------------------------------------------------------------------------------
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
======
- continued -
F-14
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...)
=============================================================================================================================
Weighted
Average
Number Exercise
of Shares Price
- -----------------------------------------------------------------------------------------------------------------------------
Continued...
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
===================================================================================================================
Income taxes
Under United States GAAP, income taxes are provided in accordance with
SFAS No. 109, "Accounting for Income Taxes". A deferred tax asset or
liability is recorded for all temporary differences between financial
and tax reporting and net operating loss carryforwards. Deferred tax
expenses (benefit) results from the net change during the year of
deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
For the years ended July 31, 2000, 1999 and 1998, no deferred tax
assets or liabilities would have resulted from the implementation of
SFAS No. 109.
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.
F-15
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...)
Foreign currency translation (cont'd...)
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 different
under Canadian and United States GAAP. Under Canadian GAAP, 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 agreement, has received no shareholder complaints in
response to the announcement of the agreement, and has never
encountered significant opposition at any meeting of shareholders.
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.
Under United States GAAP however, a gain must not be recognized before
the disposal date. As well, the measurement date, as defined in APB 30,
was not met because shareholder approval for management's plan was not
received by July 31, 2000. Therefore, the gain has been reversed for
United States reporting purposes.
F-16
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
The impact of the above differences between Canadian and United States
GAAP on the consolidated balance sheets is as follows:
==================================================================================================================
2000 1999
------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================
F-17
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:
=====================================================================================================================
2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
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 -
Reversal of disposal of discontinued operations (114,638) (136,863) 140,047
-------------- ------------- -------------
Cash flows provided by (used in) operating activities,
United States GAAP (348,829) 104,699 39,607
-------------- ------------- -------------
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
Reversal of disposal of discontinued operations 114,638 136,863 (140,047)
-------------- ------------- -------------
Cash flows provided by (used in) discontinued operations,
United States GAAP - - -
-------------- ------------- -------------
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
====================================================================================================================
F-18
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:
===================================================================================================================
Share Capital Cumulative
----------------------------
Number Translation
of Shares Amount Deficit Adjustment Total
-------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================
F-19
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:
===================================================================================================================
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================
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-20
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-21
Quarterly Report FORM 61
ISSUER DETAILS
For Quarter Ended: October 31, 2000
Date of Report: January 2, 2001
Name of Issuer: Cinema Internet Networks Inc.
Issuers Address: 320 - 1333 Johnston Street, Vancouver, BC, V6H 3R9
Issuers Fax Number: 604-602-1290
Issuers Phone Number: 604-602-1280
Contact Person: William Massey
Contact Position: Director
Contact Phone Number: 604-602-1280
CERTIFICATE
The One/Two schedules required to complete this Quarterly Report are attached
and the disclosure contained therein has been approved by the Board of
Directors. A copy of the Quarterly Report will be provided to any shareholder
who requests it.
Directors Name: "William Massey" Date Signed: January 2, 2001
Directors Name: "Al Murphy" Date Signed: January 2, 2001
F-22
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
OCTOBER 31, 2000
F-23
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
============================================================================================================================
October 31, October 31, July 31,
2000 1999 2000
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current
Cash $ 29,782 $ 4,714 $ 114,785
Accounts receivable 80,043 47,187 156,179
Receivable on disposal of assets 190,000 - 190,000
Prepaid expenses 2,036 2,717 2,098
------------ ------------ ------------
301,861 54,618 463,062
Capital assets 24,396 307,638 25,289
Intangible assets - 11,436 -
------------ ------------ ------------
$ 326,257 $ 373,692 $ 488,351
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 40,115 $ 598,893 $ 69,399
Current portion of long-term debt 4,975 - 4,900
Current portion of obligation under capital lease - 22,659 -
------------ ------------ ------------
45,090 621,552 74,299
Long-term debt 56,408 - 57,870
Obligation under capital lease - 102,074 -
------------ ------------ ------------
101,498 723,626 132,169
------------ ------------ ------------
Shareholders' equity
Capital stock 4,519,800 3,628,702 4,518,294
Deficit (4,295,041) (4,142,861) (4,162,112)
Cumulative translation adjustment - 164,225 -
------------ ------------ ------------
224,759 (349,934) 356,182
------------ ------------ ------------
$ 326,257 $ 373,692 $ 488,351
============================================================================================================================
On behalf of the Board:
/s/ "William Massey" Director /s/ "Al Murphy" Director
- -------------------------- -------------------------
The accompanying note is an integral part of these consolidated financial
statements.
F-24
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
THREE MONTH PERIOD ENDED OCTOBER 31
==============================================================================================================
2000 1999
- --------------------------------------------------------------------------------------------------------------
REVENUES $ 58,165 $ -
DIRECT COSTS (51,246) -
------------- -------------
GROSS PROFIT 6,919 -
------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES
Amortization 1,884 -
Foreign exchange loss 1,183 -
Interest on long-term debt 468 -
Listing fees and transfer agent 6,069 4,140
Management fees 15,000 5,000
Marketing 8,409 -
Office services and miscellaneous 5,540 3,151
Professional fees 10,135 1,565
Rent 6,053 6,531
Telephone and communications 3,282 983
Travel and promotion 17,150 5,348
Wages, benefits and consulting fees 64,675 17,719
------------- -------------
(139,848) (44,437)
------------- -------------
Loss from continuing operations (132,929) (44,437)
Loss from discontinued operations - (51,161)
------------- -------------
Loss for the period (132,929) (95,598)
Deficit, beginning of period (4,162,112) (4,047,263)
------------- -------------
Deficit, end of period $ (4,295,041) $ (4,142,861)
==============================================================================================================
Loss per share from continuing operations $ (0.02) $ (0.01)
Loss per share from discontinued operations - (0.02)
------------- -------------
Loss per share $ (0.02) $ (0.03)
==============================================================================================================
Weighted average number of shares outstanding 7,961,707 3,288,667
==============================================================================================================
The accompanying note is an integral part of these consolidated financial
statements.
F-25
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
THREE MONTH PERIOD ENDED OCTOBER 31
============================================================================================================================
2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss from continuing operations $ (132,929) $ (44,437)
Item not affecting cash
Amortization 1,884 -
Changes in non-cash working capital items
(Increase) decrease in accounts receivable 76,136 24,343
(Increase) decrease in prepaid expenses 62 -
Increase (decrease) in accounts payable and accrued liabilities (29,284) 52,378
------------- -------------
Net cash provided by (used in) continuing operating activities (84,131) 32,284
------------- -------------
INVESTING ACTIVITIES
Purchase of capital assets (991) -
------------- -------------
Net cash used in investing activities (991) -
------------- -------------
FINANCING ACTIVITIES
Issuance of capital stock 1,506 -
Long-term debt (1,387) -
Translation adjustment - (973)
------------- -------------
Net cash provided by (used in) financing activities 119 (973)
------------- -------------
Net cash provided by (used in) discontinued operations - (34,363)
------------- -------------
Change in cash position during the period (85,003) (3,052)
Cash position, beginning of period 114,785 7,766
------------- -------------
Cash position, end of period $ 29,782 $ 4,714
============================================================================================================================
The accompanying note is an integral part of these consolidated financial
statements.
F-26
CINEMA INTERNET NETWORKS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
=============================================================================================================================
Cumulative
Number Translation
of Shares Amount Deficit Adjustment Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1999 3,288,667 $ 3,628,702 $ (4,047,263) $ 165,198 $ (253,363)
Translation adjustment - - - (973) (973)
Loss for the period - - (95,598) - (95,598)
----------- ------------ ------------ ------------ -----------
Balance October 31, 1999 3,288,667 3,628,702 (4,142,861) 164,225 (349,934)
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 - - - (164,225) (164,225)
Loss for the period - - (19,251) - (19,251)
----------- ------------ ------------ ------------ -----------
Balance, July 31, 2000 7,960,207 4,518,294 (4,162,112) - 356,182
Shares issued for cash
Exercise of warrants 3,000 1,506 - - 1,506
Loss for the period - - (132,929) - (132,929)
----------- ------------ ------------ ------------ -----------
Balance, October 31, 2000 7,963,207 $ 4,519,800 $ (4,295,041) $ - $ 224,759
=============================================================================================================================
The accompanying note is an integral part of these consolidated financial
statements.
F-27
CINEMA INTERNET NETWORKS INC.
NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
OCTOBER 31, 2000
================================================================================
1. 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.
Under Canadian Venture Exchange policy, options can be repriced only if
at least six months have elapsed since the later of the date of
commencement of the option term, the date the Company's shares
commenced trading or the date the option exercise price was last
amended, and if regulatory approval is received.
In calculating compensation expense under United States GAAP the
Company utilizes the Black-Scholes model to estimate the fair value of
options granted or repriced. No options were granted or repriced during
the three month periods ended October 31, 2000 and 1999.
The following is a summary of the status of stock options outstanding
at October 31, 2000:
=======================================================================================================
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life (Years) Price Number Price
-------------------------------------------------------------------------------------------------------
$ 0.25 20,000 0.08 $ 0.25 20,000 $ 0.25
0.88 753,723 1.50 0.88 753,723 0.88
=======================================================================================================
Income taxes
Under United States GAAP, income taxes are provided in accordance with
SFAS No. 109, "Accounting for Income Taxes". A deferred tax asset or
liability is recorded for all temporary differences between financial
and tax reporting and net operating loss carryforwards. Deferred tax
expenses (benefit) results from the net change during the year of
deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
For the three month periods ended October 31, 2000 and 1999, no
deferred tax assets or liabilities would have resulted from the
implementation of SFAS No. 109.
F-28
CINEMA INTERNET NETWORKS INC.
NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
OCTOBER 31, 2000
================================================================================
1. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (cont'd...)
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 year ended July 31, 2000, the Company disposed of both its U.S.
and Canadian hotel pay-per-view operations. 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 year ended July 31, 2000, 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 period.
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 three month periods ended October 31, 2000 and 1999, there were no
other items of comprehensive income of a material nature.
Disposal of discontinued operations
The treatment of the disposal of discontinued operations is different under
Canadian and United States GAAP. Under Canadian GAAP, the gain on the sale
of the Company's hotel pay-per-view business was recorded during the year
ended July 31, 2000 despite the sale not closing until August 3, 2000. The
reasons for this were 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, had received no shareholder complaints in response
to the announcement of its plan, and had never encountered significant
opposition at any meeting of shareholders.
F-29
CINEMA INTERNET NETWORKS INC.
NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
OCTOBER 31, 2000
================================================================================
1. 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.
Under United States GAAP however, a gain must not be recognized before the
disposal date. As well, the measurement date, as defined in APB 30, was not
met during fiscal 2000 because shareholder approval for management's plan
was not received by July 31, 2000. Therefore, the gain recorded in the 2000
fiscal year was reversed for United States reporting purposes and was
recognized in the current period.
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:
===================================================================================================================
2000 1999
-------------------------------------------------------------------------------------------------------------------
Consolidated balance sheets
Total assets, United States GAAP $ 326,257 $ 373,692
==============================
Total liabilities, United States GAAP $ 101,498 $ 723,626
-------------- ------------
Capital stock, Canadian GAAP 4,519,800 3,628,702
Cumulative compensation expense on stock options 838,719 4,328
-------------- ------------
Capital stock, United States GAAP 5,358,519 3,633,030
Cumulative translation adjustment - 164,225
Deficit, United States GAAP (5,133,760) (4,147,189)
-------------- ------------
Shareholders' equity, United States GAAP 224,759 (349,934)
-------------- ------------
Shareholders' equity and liabilities, United States GAAP $ 326,257 $ 373,692
===================================================================================================================
F-30
CINEMA INTERNET NETWORKS INC.
NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
OCTOBER 31, 2000
================================================================================
1. 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:
=====================================================================================================================
2000 1999
---------------------------------------------------------------------------------------------------------------------
Consolidated statements of operations and deficit
Loss for the period as reported $ (132,929) $ (95,598)
Gain on disposal of discontinued operations 281,057 -
-------------- --------------
Income (loss) for the period, in accordance with United States
GAAP 148,128 (95,598)
Deficit in accordance with United States GAAP,
beginning of period (5,281,888) (4,051,591)
-------------- --------------
Deficit in accordance with United States GAAP,
end of period $ (5,133,760) $ (4,147,189)
Consolidated statements of cash flows
Cash flows provided by (used in) operating activities, Canadian GAAP $ (84,131) $ 32,284
Gain on disposal of discontinued operations (281,057) -
Item not affecting cash 281,057 -
-------------- --------------
Cash flows provided by (used in) operating activities, United States GAAP (84,131) 32,284
-------------- --------------
Cash flows provided by (used in) financing activities, United States GAAP 119 (973)
-------------- --------------
Cash flows used in investing activities, United States GAAP (991) -
-------------- --------------
Cash flows provided by (used in) discontinued operations, United States GAAP - (34,363)
-------------- --------------
Change in cash during the period (85,003) (3,052)
Cash, beginning of period 114,785 7,766
-------------- --------------
Cash, end of period $ 29,782 $ 4,714
=====================================================================================================================
F-31
CINEMA INTERNET NETWORKS INC.
NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
OCTOBER 31, 2000
================================================================================
1. 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:
==========================================================================================================================
Share Capital Cumulative
-------------------------
Number Translation
of Shares Amount Deficit Adjustment Total
--------------------------------------------------------------------------------------------------------------------------
Stockholders' equity as reported
October 31, 1999 3,288,667 $ 3,628,702 $ (4,142,861) $ 164,225 $ (349,934)
Cumulative compensation expense
on stock options - 4,328 (4,328) - -
--------- ------------- ------------- ------------- -------------
Stockholders' equity in accordance
with United States generally
accepted accounting principles at
October 31, 1999 3,288,667 $ 3,633,030 $ (4,147,189) $ 164,225 $ (349,934)
============================================================================
Stockholders' equity as reported
October 31, 2000 7,963,207 $ 4,519,800 $ (4,295,041) $ - $ 224,759
Cumulative compensation expense
on stock options - 838,719 (838,719) - -
--------- ------------- ------------- ------------- -------------
Stockholders' equity in accordance
with United States generally
accepted accounting principles at
October 31, 2000 7,963,207 $ 5,358,519 $ (5,133,760) $ - $ 224,759
==========================================================================================================================
Earnings per share (EPS)
SFAS No. 128, "Earnings Per Share", requires dual presentation of basic and
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. Diluted earnings per share takes into
consideration common shares outstanding (computed under basic earnings per
share) and potentially dilutive common shares.
F-32
CINEMA INTERNET NETWORKS INC.
NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
(Unaudited - Prepared by Management)
OCTOBER 31, 2000
================================================================================
1. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (cont'd...)
Earnings per share (EPS) (cont'd...)
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:
======================================================================================================================
2000 1999
----------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $ (132,929) $ (44,437)
Gain (loss) on disposal of discontinued operations 281,057 (51,161)
------------- -------------
Income (loss) for the period under United States GAAP 148,128 (95,598)
======================================================================================================================
Weighted average number of shares outstanding
under United States GAAP 7,961,707 3,288,667
======================================================================================================================
Loss per share form continuing operations $ (0.016) $ (0.014)
Earnings (loss) per share from discontinued operations 0.035 (0.016)
------------- -------------
Basic earnings (loss) per share $ 0.019 $ (0.03)
======================================================================================================================
For the three month period ended October 31, 1999, diluted EPS has not been
disclosed as the effect of the exercise of the Company's outstanding
options and warrants would be anti-dilutive.
F-33
EXHIBIT INDEX (1)
Exhibit
Number Title
- --------- ------------------------------------------------------------------------------------
1 Articles of Incorporation and Bylaws of the Company
1.1 Articles of Incorporation(1)
1.2 Bylaws(1)
1.3 Certificate of Existence/Authorization of TEN Private Cable Systems (USA), Inc.,
dated January 5, 1999(1)
3 Material Contracts
3.1 Chequemate/CinemaWorks; CinemaWorks Asset Purchase Agreement, May 25, 2000(1)
3.2 Sprint Canada, Inc./ TIV Inc./ Wiredinn, Inc./ Cinema Internet Networks Inc.:
Memorandum of Understanding, September 15, 2000(1)
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(1)
3.7 Offer to Sublease, March 2, 2000(1)
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(1)
3.10 Sprint Canada/CinemaWorks: Memorandum of Understanding Letter, February 1, 2000*
3.11 Wiredinn.com/CinemaWorks: License and Service Agreement, October 31, 2000*
(1) This exhibit was previously filed with the Securities and Exchange
Commission with CinemaWorks' 20-F/A (Amendment No. 1).
* 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.