1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
[X] Registration statement pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934
or
[ ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended_____________________
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]
For the transition period from___________________to__________________
Commission file number__________________
Videoflicks.com Inc.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Province of Ontario, Canada
___________________________
(Jurisdiction of incorporation or organization)
106 Orenda Road, Brampton, Ontario L6W 3W6
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (905) 459-5471
------------------------------
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
None
_________________________ _________________________________________
_________________________ _________________________________________
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
________________________________________________________________________________
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
________________________________________________________________________________
(Title of Class)
2
- 2 -
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common shares as of the close of the period covered by the annual
report - ____________ common shares outstanding.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes . No X .
Indicate by check mark which financial statement item the Registrant has elected
to follow. Item 17 X . Item 18 .
Unless otherwise indicated, all references herein are expressed in U.S. dollars.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Videoflicks.com Inc. ("Videoflicks.com" or the "Company") is engaged in the
business of selling videos and related products through its web site on the
Internet (www.videoflicks.com), utilizing software developed by the Company.
Videos may be searched for on the web site by title, category, or
actor/character. Reviews by professional critics as well as customer reviews are
provided to assist the customer. The web site also provides announcements of
forthcoming releases together with release dates. At the present time the
Company's web site has over 200,000 pages, listing more than 70,000 movies.
Sales to date include more than 23,000 different titles on videocassette and
digital video disc ("DVD") to over 60,000 customers in more than 30 countries.
The web site currently receives more than 1,000,000 visitors per month. The
database not only lists nearly all commercially available videos known to the
Company, but also those announced for forthcoming release, together with the
release date.
The Company offers search and browse features, e-mail services, personalized
shopping services, web- based credit card payment and direct shipping to
customers. The Company intends over time to expand its catalogue into other
information-based products, such as music and video games. The Company has
virtually unlimited "shelf space" and offers customers a vast selection through
a search and retrieval interface.
The Company strives to offer an online shopping experience that involves
discovery and fulfilment for its customers. The Company believes that the sale
of videos and other products and services over the web offers attractive
benefits to consumers, including, without limitation, enhanced selection,
convenience, ease-of-use, competitive pricing, depth of content and information
and personalization. Customers entering the Videoflicks.com web site can, in
addition to ordering videos and other products, purchase gift certificates,
conduct targeted
3
- 3 -
searches, browse highlighted selections, video best sellers and other features,
search for videos by subject category, stars, directors, and the like, read and
post reviews, register for personalized services, participate in promotions and
check order status. The key features of the web site include browsing, reviews
and content, online community, recommendations and personalization, and other
unique services, including the availability of multilingual videos.
The web site offers visitors a variety of highlighted subject areas and special
features arranged in a fashion intended to enhance video/movie search, selection
and discovery. In addition, the home page presents a variety of products and
information of topical or current-event interest. To enhance the shopping
experience and increase sales, the Company features a variety of videos on a
rotating basis throughout the site.
A significant feature of the web site is its interactive, searchable catalogue
of more than 70,000 titles, including most of the English language movies
commercially available on video, and a small number of CD's, videos, audiotapes
and other products. The Company provides a selection of search tools to find
videos and other products based on title, subject, star and director.
Utilizing proprietary software, the Company has designed a fully scalable
systems architecture for the Internet shopping marketplace (i.e. the web server
and connection utilized by the Company's web site can be expanded to accommodate
increased web site "traffic"). It has integrated all aspects of retail
transaction processing, including order placement, secure payment verification,
inventory control, order fulfilment and vendor invoicing in one seamless and
automated process. The system's credit card encryption uses state of the art 128
bit technology. The system being used now by the Company to sell videos and
DVD's can be used to sell any other products that the Company chooses to sell.
The employment of this specialized information system by the Company allows its
customers to access an automated marketplace of video movies from the
inventories of a large number of manufacturers and distributors and provides
detailed product descriptions, product availability, delivery times, delivery
status and back-order information. All sales and payments are processed
electronically 24 hours a day, with limited employee involvement.
The Company has established relationships with a number of manufacturers and
distributors who ship their products directly to the Company's customers in
response to orders received through the Company's web site and relayed to such
manufacturers and distributors, thereby reducing handling expense, delivery and
inventory maintenance. The Company also has a Supply Agreement with its
controlling shareholder, Videoflicks Canada Limited, pursuant to which
Videoflicks Canada Limited has agreed to supply videos to the Company at the
wholesale catalogue price charged by wholesalers on an arm's length basis on
videos, plus shipping charges and applicable taxes.
The Company can capture information from orders received through its web site to
develop individual and overall customer profiles with which to focus its
marketing efforts by, for example,
4
- 4 -
marketing specific movies or products or offering personalized services to
customers based on such profiles.
BUSINESS PLAN
The Company's business strategy for both its first year and for the long term is
to build strong brand recognition, strengthen customer loyalty and increase
customer traffic to the Videoflicks.com web site, enhance supplier
relationships, maximize repeat purchasers and develop incremental revenue
opportunities, while creating an economic model that is superior to that of the
capital and real estate intensive traditional retailing business. Achieving
increased profitability is dependent upon the Company's continued growth through
its ability to generate and sustain substantially increased revenue levels. The
objective of Company management is to achieve growth in both revenues and
profits in a fiscally responsible and sustainable manner.
To continue this growth, the Company must maintain and increase its customer
base, implement and successfully execute its business and marketing strategy,
continue to develop and upgrade its technology and transaction-processing
systems, improve its web site, provide superior customer service and order
fulfilment, respond to competitive developments and attract, retain and motivate
talented personnel and management experienced in large and fast-growing
organizations.
The Company believes that success will depend on its ability to extend its brand
position, to provide its customers with outstanding value and a superior
shopping experience and the ability to achieve sufficient sales volume to
realize economies of scale.
To date the business of the Company has operated with little or no advertising
support, relying upon word-of-mouth publicity. Notwithstanding the lack of
advertising support, sales generated by the Company's business for the nine
months ended May 31, 1999 increased 100% to $1,240,000 as compared to sales for
the nine months ended May 31, 1998. Repeat customers represent 20 to 25% of
orders. For each of the last 3 fiscal years approximately 75% of the Company's
sales were made to customers in the United States and of the remaining sales, no
more than 5% was concentrated in any one country.
Based on a pilot-program for advertising utilizing on-line media and print
conducted in fiscal 1998, management of the Company is confident that
expenditures for advertising will result in an increase in the number of
visitors to its web site and correspondingly an increase in sales volumes.
Accordingly, the Company intends to focus on marketing and promotion to increase
Videoflicks.com brand awareness. In this regard Management has committed
$600,000 to an initial advertising campaign commencing in August, 1999.
Web site development and operating infrastructure development will also be a
priority. Company management believes that the development of a high volume of
traffic on its web site will be a key element of its success. Therefore, the
satisfactory performance, reliability and availability of the web site,
transaction-processing systems and network infrastructure are critical to the
Company's reputation, and its ability to attract and retain customers and
maintain customer service levels.
5
- 5 -
In this regard, during fiscal 1999 the Company hired additional programmers to
develop its web site and additional staff to fulfill orders and ensure timely
product shipments. The Company's web site development group has increased the
efficiency of the data and systems management, thereby streamlining the
order-processing system. The Company plans to continue to implement technology-
driven enhancements to its web site to provide increasingly valuable personal
service programs, make the user-interface as intuitive, engaging and fast as
possible and continuously improve the efficiency of its order fulfillment
activities. To meet the demands of anticipated future growth in traffic on the
Company's web site the Company intends to expand and upgrade its network
infrastructure by adding another T1 transmission line or similar expansion which
will be required if the average number of users per day increases to 1,000,000
from the present rate of approximately 33,000. The web server and connection
used by the web site are fully-scalable and can be expanded as the number of
visitors to the Company's web site increases.
Incidental to the amalgamation which formed the Company on March 23, 1999, the
Company raised $1,200,000. As of the close of business on July 23, 1999, an
aggregate of 1,047,670 Series A Warrants had been exercised from which the
Company realized aggregate gross proceeds of $785,752.50 and an aggregate of
1,047,670 Series B Warrants were issued, of which 11 were exercised, yielding
aggregate gross proceeds of $12.65 to the Company. If all of the remaining
1,047,659 Series B Warrants are exercised, the Company will realize additional
gross proceeds of $1,204,807.80. The Series B Warrants expire on November 23,
1999. The Company also has outstanding and contingent stock options exercisable
to purchase up to 2,240,000 Company common shares at $0.50 per share. The
Company intends to allocate approximately 70%-75% of the funds obtained during
the current fiscal year from the amalgamation and through the exercise of its
Warrants and stock options principally for marketing to increase the Company's
sales and the remaining 25%-30% for hardware and software improvements to the
Company's web site and for general working capital purposes.
The Company views its producers and distributors as customers and seeks to
utilize the substantial structural advantages inherent in its business plan to
build strong relationships with them. In addition, the demographic and
purchasing data accumulated by the Company will enable it to help video studios
target customers for particular product offerings. Through targeted marketing
and virtually unlimited shelf space the Company intends to offer suppliers
enhanced promotional opportunities for new products, new video titles and second
and third tier titles.
The Company intends to leverage its brand, on-line commerce experience,
operating infrastructure and customer base to broaden its presence and develop
additional revenue opportunities. Management of the Company believes that it can
further its growth opportunities through strategic alliances with, for example,
international partners and on-line service providers. The Company will also
consider developing incremental revenue opportunities through affiliated or
related sites, related product areas and acquisition of complementary
businesses, products or technologies. The Company will also consider exploiting
opportunities presented by its customer demographic and substantial web site
traffic to sell advertising.
6
- 6 -
CORPORATE HISTORY
The Company was formed on March 23, 1999 by the amalgamation of Mantaur
Petroleum Corporation, 1318780 Ontario Limited and Videoflicks.com Limited, on a
reverse take-over basis, by Articles of Amalgamation issued under the Business
Corporations Act (Ontario). Immediately prior to amalgamation, the operating
assets of the business of the Company were owned by Videoflicks.com Limited, a
private company. 1318780 Ontario Limited, also a private company, had no active
business, no material liabilities and its only material asset was $1.2 million
in cash. Mantaur Petroleum Corporation, a public company having reporting issuer
status under the Securities Act (Ontario), had no active business and no
material assets or liabilities.
The business of the Company has been operating since 1995, initially as a
division of Videoflicks Canada Limited, a private company, which, in
contemplation of the amalgamation transaction, transferred the Internet
business, effective November, 1998, to its wholly-owned subsidiary,
Videoflicks.com Limited, one of the amalgamating companies.
COMPETITIVE ENVIRONMENT
The online commerce market, particularly over the World Wide Web, is new,
rapidly evolving and intensely competitive. In addition, the retail video/music
industry is intensely competitive. The company's current or potential
competitors include (i) various online video sellers and vendors of other
information-based products such as CDs and books, including entrants into narrow
specialty niches, (ii) a number of indirect competitors that specialize in
online commerce, through which retailers other than the Company may offer
products and (iii) publishers, distributors and retail vendors of videos, music
and books, including Amazon.com, Blockbuster Video, Reel.com and other large
specialty videosellers and integrated media corporations. See "Risk Factors
Affecting the Company" for further discussion of competition.
INTELLECTUAL PROPERTY
A trademark registration application was filed with the U.S. Patent and
Trademark Office in January 1999 for the mark "Videoflicks.com". All rights in
respect of the trademark application were acquired by the Company upon
amalgamation. The mark Videoflicks.com was first used in 1995, in connection
with the business of the Company, by Videoflicks Canada Limited from which all
rights in the mark were acquired by Videoflicks.com Limited and subsequently by
the Company upon amalgamation.
HUMAN RESOURCES
On August 10, 1999, the Company had 25 full-time employees and 2 part-time
employees. As the Company encourages share ownership, it has established an
option plan (see "Item 12. - Compensation - Stock Option Plan") to attract,
motivate and retain key employees and
7
- 7 -
consultants. The Company's employees are not governed by a collective bargaining
agreement. The Company believes that its employee relations are good.
RISK FACTORS AFFECTING THE COMPANY
The business of the Company entails significant risks, and an investment in the
securities of the Company should be considered highly speculative for a variety
of reasons. An investment in the securities of the Company should only be
undertaken by persons who have sufficient financial resources to enable them to
assume such risks. In addition to the usual risks associated with investment in
a business, the following is a general description of certain significant risk
factors, which should be considered.
COMPETITION
The market for video sales over the Internet is new, rapidly evolving and
intensely competitive, and the Company expects competition to intensify further
in the future. Barriers to entry are relatively low, and current and new
competitors can launch new sites at relatively low cost using commercially
available software. The Company currently or potentially competes with a number
of other companies. At present the Company competes with a number of established
online video sales services, many of which possess significant brand awareness,
sales volume and customer bases, including Amazon.com, Reel.com, Blockbuster
Video and a number of other small online video retailers, including those that
serve specialty markets. The Company also potentially faces competition from
other large online communities and services that have expertise in developing
online commerce and in facilitating online video sales interaction. Other large
companies with strong brand recognition and experience in online commerce, such
as large media companies may also seek to compete in the online video sales
market. Competitive pressures created by any one of these companies, or by the
Company's competitors collectively, could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company believes that the principal competitive factors in its market are
volume and selection of videos, population of buyers, customer service,
reliability of delivery, brand recognition, web site convenience and
accessibility, price, quality of search tools and system reliability. Many of
the Company's current and potential competitors have larger customer bases,
greater brand recognition and significantly greater financial, marketing,
technical and other resources than the Company. In addition, other online video
sales companies may be acquired by, receive investments from or enter into other
commercial relationships with larger, well-established and well- financed
companies as use of the Internet and other online services increases. Therefore,
certain of the Company's competitors with other revenue sources may be able to
devote greater resources to marketing and promotional campaigns, adopt more
aggressive pricing policies, obtain more favourable terms from manufacturers and
distributors and devote substantially more resources to web site and systems
development than the Company or may try to attract traffic by offering videos at
a lower price.
8
- 8 -
The Company expects that competition in the online commerce market will
intensify in the future. For example, as various market segments obtain large,
loyal customer bases, participants in those segments may seek to leverage their
market power to the detriment of participants in other market segments. In
addition, new technologies and the expansion of existing technologies may
increase the competitive pressures on online retailers, including the Company.
For example, "shopping agent" technologies will permit customers to quickly
compare the Company's prices with those of its competitors.
Increased competition may result in reduced operating margins, loss of market
share and diminished value in the Company's brand. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors. Further, as a strategic response to changes in the competitive
environment, the Company may, from time to time, make certain pricing, service
or marketing decisions or acquisitions that could have a material adverse effect
on its business, results of operations, prospects and financial condition. New
technologies and the expansion of existing technologies may increase the
competitive pressures on the Company by enabling the Company's competitors to
offer a lower-cost service. Certain web-based applications that direct Internet
traffic to certain web sites may channel users to trading services that compete
with the Company. In addition, companies that control access to transactions
through network access or web browsers could promote the Company's competitors
or charge the Company substantial fees for inclusion. Any and all of these
events could have a material adverse effect on the Company's business, results
of operations, prospects and financial condition.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
The Company believes that its historical growth has been largely attributable to
word-of-mouth advertising. Despite this historical organic growth, the Company
believes that continuing to strengthen its brand is critical to achieving
widespread acceptance of Videoflicks.com, particularly in light of the
competitive nature of the Company's market. Promoting and positioning its brand
will depend largely on the success of the Company's marketing efforts and the
ability of the Company to provide high quality services. In order to promote its
brand, the Company will need to increase its marketing budget and otherwise
increase its financial commitment to creating and maintaining brand loyalty
among users. There can be no assurance that brand promotion activities will
yield increased revenues or that any such revenues would offset the expenses
incurred by the Company in building its brand. Further, there can be no
assurance that any new users attracted to Videoflicks.com will conduct
transactions at Videoflicks.com on a regular basis. If the Company fails to
promote and maintain its brand or incurs substantial expenses in an attempt to
promote and maintain its brand or if the Company's existing or future strategic
relationships fail to promote the Company's brand or increase brand awareness,
the Company's business, results of operations and financial condition would be
materially adversely affected.
9
- 9 -
RAPID TECHNOLOGICAL CHANGE
The market in which the Company competes is characterized by rapidly changing
technology, evolving industry standards, frequent video additions and deletions,
introductions and enhancements and changing customer demands.
These market characteristics are exacerbated by the emerging nature of the web
and the apparent need of companies from a multitude of industries to offer
web-based products and services. Accordingly, the Company's future success will
depend on its ability to adapt to rapidly changing technologies, to adapt its
services to evolving industry standards and to continually improve the
performance, features and reliability of its service in response to competitive
service and product offerings and evolving demands of the marketplace. The
failure of the Company to adapt to such changes would have a material adverse
effect on the Company's business, results of operations, prospects and financial
condition. In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures by the Company to modify or adapt its services or
infrastructure, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company plans to expand its operations by developing and promoting new or
complementary services, products or transaction formats or expanding the breadth
and depth of services. There can be no assurance that the Company would be able
to expand its operations in a cost-effective or timely manner or that any such
efforts would maintain or increase overall market acceptance. Furthermore, any
new business or service launched by the Company that is not favourably received
by consumers or wholesalers could damage the Company's reputation and diminish
the value of its brand name. Expansion of the Company's operations in this
manner would also require significant additional expenses and development,
operations and other resources and would strain the Company's management,
financial and operational resources. The lack of market acceptance of such
services or the Company's inability to generate satisfactory revenues from such
expanded services to offset their cost could have a material adverse effect on
the Company's business, results of operations, prospects and financial
condition.
RISKS RELATED TO CONSUMER TRENDS
The Company derives substantially all of its revenues from selling video movies.
The Company's future revenues will depend upon continued demand for the types of
goods that are offered by the Company. These trends may also cause significant
fluctuations in the Company's operating results from one quarter to the next.
Any decline in demand for the goods offered through the Company's service as a
result of changes in consumer trends could have a material adverse effect on the
Company's business, results of operations and financial condition.
10
- 10 -
ONLINE COMMERCE SECURITY RISKS
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Currently, a
significant number of the Company's customers authorize direct billing of their
credit card accounts directly for all videos purchased. The Company relies on
encryption and authentication technology licensed from third parties to provide
the security and authentication technology to effect secure transmission of
confidential information, including customer credit card numbers. There can be
no assurance that advances in computer capabilities, new discoveries in the
field of cryptography, or other events or developments will not result in a
compromise or breach of the technology used by the Company to protect customer
transaction data. If any such compromise of the Company's security were to
occur, it could have a material adverse effect on the Company's reputation and,
therefore, on its business, results of operations, prospects and financial
condition. Furthermore, a party who is able to circumvent the Company's security
measures could misappropriate proprietary information or cause interruptions in
the Company's operations. The Company may be required to expend significant
capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. Concerns over the security of
transactions conducted on the Internet and other online services and the privacy
of users may also inhibit the growth of the Internet and other online services
generally, and the web in particular, especially as a means of conducting
commercial transactions. To the extent that activities of the Company involve
the storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage the Company's reputation and expose the
Company to a risk of loss or litigation and possible liability. The Company's
insurance policies carry low coverage limits, which may not be adequate to
reimburse the Company for losses caused by security breaches. There can be no
assurance that the Company's security measures will prevent security breaches or
that failure to prevent such security breaches will not have a material adverse
effect on the Company's business, results of operations and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS
If appropriate opportunities present themselves, the Company intends to acquire
businesses, technologies, services or products that the Company believes are
strategic. There can be no assurance that the Company will be able to identify,
negotiate or finance future acquisitions successfully, or to integrate such
acquisitions with its current business. The process of integrating an acquired
business, technology, service or product into the Company may result in
unforeseen operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for ongoing development
of the Company's business. Moreover, there can be no assurance that the
anticipated benefits of any acquisition, will be realized. Future acquisitions
could result in potentially dilutive issuances of equity securities, the
incurrence of debt, contingent liabilities and/or amortization expenses related
to goodwill and other intangible assets, which could materially adversely affect
the Company's business, results of operations, prospects and financial
condition. Any such future acquisitions of other businesses, technologies,
services or products might require the Company to obtain additional equity or
debt financing,
11
- 11 -
which might not be available on terms favourable to the Company, or at all, and
such financing, if available, might be dilutive.
DEPENDENCE ON THE WEB INFRASTRUCTURE
The success of the Company's service will depend in large part upon the
development and maintenance of the web infrastructure, such as a reliable
network backbone with the necessary speed, data capacity and security, or timely
development of complementary products such as high-speed modems, for providing
reliable web access and services. Because global commerce and the online
exchange of information is new and evolving, it is difficult to predict with any
assurance whether the web will prove to be a viable commercial marketplace in
the long term. The web has experienced, and is expected to continue to
experience, significant growth in the numbers of users and amount of traffic. To
the extent that the web continues to experience increased numbers of users,
frequency of use or increased bandwidth requirements of users, there can be no
assurance that the web infrastructure will continue to be able to support the
demands placed on it by this continued growth or that the performance or
reliability of the web will not be adversely affected.
Furthermore, the web has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure, and could face such outages
and delays in the future, including outages and delays resulting from the
inability of certain computers or software to distinguish dates in the 21st
century from dates in the 20th century. See "--Year 2000 Implications." These
outages and delays could adversely affect the level of web usage and also the
level of traffic and the processing of selling videos and related products of
the Company. In addition, the web could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of activity or due to increased governmental regulation. There can be no
assurance that the infrastructure or complementary products or services
necessary to make the web a viable commercial marketplace for the long term will
be developed or that if they are developed, that the web will become a viable
commercial marketplace for services such as those offered by the Company. If the
necessary infrastructure, standard or protocols or complementary products,
services or facilities are not developed, or if the web does not become a viable
commercial marketplace, the Company's business, results of operations, prospects
and financial condition will be materially and adversely affected. Even if the
infrastructure, standards or protocols or complementary products, services or
facilities are developed and the web becomes a viable commercial marketplace in
the long term, the Company might be required to incur substantial expenditures
in order to adapt its service to changing web technologies, which could have a
material adverse effect on the Company's business, results of operations,
prospects and financial condition.
12
- 12 -
RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH THE COMPANY'S
SERVICE
The law relating to the liability of online services companies for information
carried on or disseminated through their services is currently unsettled. It is
possible that claims could be made against online services companies under both
United States and foreign law for defamation, libel, invasion of privacy,
negligence, copyright or trademark infringement, or other theories based on the
nature and content of the materials disseminated through their services. Several
private lawsuits seeking to impose such liability upon other online services
companies are currently pending. Certain countries and jurisdictions limit or
prohibit the sales of certain videos and other products which the Company sells.
In addition, legislation has been proposed that imposes liability for or
prohibits the transmission over the Internet of certain types of information.
The Company's service features a Movie Review Publication section for each video
it sells, which includes information from users regarding their thoughts about
that movie. Although all such feedback is generated by users and not by the
Company, it is possible that a claim of defamation or other injury could be made
against the Company for content posted in the Movie Review Pages. The imposition
upon the Company and other online services providers of potential liability for
information carried on or disseminated through their services could require the
Company to implement measures to reduce its exposure to such liability, which
may require the Company to expend substantial resources and/or to discontinue
certain service offerings. In addition, the increased attention focussed upon
liability issues as a result of these lawsuits and legislative proposals could
impact the growth of Internet use. While the Company carries liability
insurance, it may not be adequate to fully compensate the Company in the event
the Company becomes liable for information carried on or disseminated through
its service. Any costs not covered by insurance incurred as a result of such
liability or asserted liability could have a material adverse effect on the
Company's business, results of operations and financial condition.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The Company believes that it is currently in material compliance with Canadian
and United States laws and regulations applicable to access to and commerce on
the Internet, including regulations applicable to businesses generally. However,
due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Although sections of the Communications Decency Act of
1996 (the "CDA") that, among other things, proposed to impose criminal penalties
on anyone distributing "indecent" material to minors over the Internet, were
held to be unconstitutional by the U.S. Supreme Court, there can be no assurance
that similar laws will not be proposed and adopted. Certain members of the U.S.
Congress have recently discussed proposing legislation that would regulate the
distribution of "indecent" material over the Internet in a manner that they
believe would withstand challenge on constitutional grounds. The nature of such
similar legislation and the manner in which it may be interpreted and enforced
cannot be fully determined and, therefore, legislation similar to the CDA could
subject
13
- 13 -
the Company and/or its customers to potential liability, which in turn could
have an adverse effect on the Company's business, results of operations,
prospects and financial condition. The adoption of any such laws or regulations
might also decrease the rate of growth of Internet use, which in turn could
decrease the demand for the Company's service or increase the cost of doing
business or in some other manner have a material adverse effect on the Company's
business, results of operations and financial condition. In addition,
applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain. The vast majority of such laws were
adopted prior to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the Internet and
related technologies. The Company does not believe that such regulations, which
were adopted prior to the advent of the Internet, govern the operations of the
Company's business nor have any claims been filed by any state implying that the
Company is subject to such legislation. There can be no assurance, however, that
a state, province or other jurisdiction will not attempt to impose these
regulations upon the Company in the future or that such imposition will not have
a material adverse effect on the Company's business, results of operations,
prospects and financial condition.
Several states and provinces have also proposed legislation that would limit the
uses of personal user information gathered online or require online services to
establish privacy policies. The United States Federal Trade Commission has also
initiated action against at least one online service regarding the manner in
which personal information is collected from users and provided to third
parties. Changes to existing laws or the passage of new laws intended to address
these issues, including some recently proposed changes, could create uncertainty
in the marketplace that could reduce demand for the services of the Company or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on the Company's business, results of operations, prospects and financial
condition. In addition, because the Company's services are accessible worldwide,
and the Company sells videos to users worldwide, other jurisdictions may claim
that the Company is required to qualify to do business as a foreign corporation
in a particular state or foreign country. The Company is qualified to do
business in Canada, and failure by the Company to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject the
Company to taxes and penalties for the failure to qualify and could result in
the inability of the Company to enforce contracts in such jurisdictions. Any
such new legislation or regulation, or the application of laws or regulations
from jurisdictions whose laws do not currently apply to the Company's business,
could have a material adverse effect on the Company's business, results of
operations, prospects and financial condition.
SALES AND OTHER TAXES
The Company does not collect sales or other similar taxes in respect of goods
sold. However, one or more states or provinces may seek to impose sales tax
collection obligations on out-of-state or foreign companies such as the Company
which engage in or facilitate online commerce, and a number of proposals have
been made at the state and local level that would impose additional
14
- 14 -
taxes on the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce, and could
adversely affect the Company's opportunity to derive financial benefit from such
activities. Moreover, a successful assertion by one or more states or provinces
or any foreign country that the Company should collect sales or other taxes on
the sale of videos on its system could have a material adverse effect on the
Company's business, results of operations, prospects and financial condition.
Legislation limiting the ability of the states and provinces to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. There can be
no assurance that this legislation will ultimately be enacted into law or that
the final version of this legislation will not contain a limited time period in
which such tax moratorium will apply. In the event that the tax moratorium is
imposed for a limited time period, there can be no assurance that the
legislation will be renewed at the end of such period. Failure to enact or renew
this legislation could allow various states or provinces to impose taxes on
Internet-based commerce and the imposition of such taxes could have a material
adverse affect on the Company's business, results of operations, prospects and
financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A component of the Company's strategy is to expand internationally.
Approximately 75% of the Company's current sales are made to residents of the
United States and Company management believes that the sales of its principal
competitors are also concentrated in the increasingly competitive U.S. market.
Expansion in the international markets will require management attention and
resources. The Company has limited experience in establishing its service in new
local markets, and the Company believes that many of its competitors are also
undertaking expansion into foreign markets. There can be no assurance that the
Company will be successful in expanding into international markets. In addition
to the uncertainty regarding the Company's ability to generate revenues from
foreign operations and expand its international presence, there are certain
risks inherent in doing business on an international basis, including, among
others, regulatory requirements, legal uncertainty regarding liability, tariffs,
and other trade barriers, difficulties in staffing and managing foreign
operations, potentially adverse tax consequences, all of which could adversely
affect the success of the Company's international operations. There can be no
assurance that one or more of the factors discussed above will not have a
material adverse effect on the Company's future international operations and,
consequently, on the Company's business, results of operations, prospects and
financial condition.
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
The Company regards the protection of its trademark copyright, service marks,
trade dress and trade secrets as critical to its future success and relies on a
combination of trademark registration and copyright, trademark, service mark and
trade secret laws and contractual restrictions to establish and protect its
proprietary rights in products and services. The Company has entered into
confidentiality and invention assignment agreements with its employees and
contractors, and
15
- 15 -
nondisclosure agreements with parties with which it conducts business in order
to limit access to and disclosure of its proprietary information. There can be
no assurance that the Company's reliance on trademark registration, contractual
arrangements or applicable laws will prove sufficient to prevent
misappropriation of the Company's technology or to deter independent third-party
development of similar technologies. The Company pursues the registration of its
trademarks and service marks in the U.S. and internationally. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which the Company's services are made available
online. The Company expects that it may license in the future certain of its
proprietary rights, such as trademarks or copyrighted material, to third
parties. While the Company attempts to ensure that the quality of the
Videoflicks.com brand is maintained by such licensees, there can be no assurance
that such licensees will not take actions that might materially adversely affect
the value of the Company's proprietary rights or reputation, which could have a
material adverse effect on the Company's business, results of operations,
prospects and financial condition. The Company also relies on certain
technologies that it has purchased from third parties under shrink-wrap licence
agreements, such as Microsoft and O'Rilieys Web Site, the suppliers of key
database technology, the operating system and specific hardware components from
which the systems for operating the Company's web site have been developed.
There can be no assurance that these third-party technologies will continue to
be available to the Company and on commercially reasonable terms. The loss of
such technologies could require the Company, in the course of upgrading or
changing their systems, to obtain substitute technologies of lower quality or
performance standards or at greater cost, which could materially adversely
affect the Company's business, results of operations, prospects and financial
condition.
To date, the Company has not been notified that its technologies infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by the Company with respect to past, current
or future technologies. The Company expects that participants in its markets
will be increasingly subject to infringement claims as the number of services
and competitors in the Company's industry segment grows. Any such claim, whether
meritorious or not, could be time-consuming, result in costly litigation, cause
service upgrade delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to the Company or at all. As a result, any such claim could have a
material adverse effect upon the Company's business, results of operations,
prospects and financial condition.
YEAR 2000 IMPLICATIONS
Many current installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000 and to comply
with the "Year 2000" requirements.
16
- 16 -
All of the Company's hardware and software systems used in connection with its
web site, data systems and order processing systems have been purchased during
the past three years and have all been certified by the manufacturers and
developers of same to be Year 2000 compliant. Testing by the Company of such
systems has confirmed that they are Year 2000 compliant. Consequently, the
Company does not believe that it presently has a material Year 2000 compliance
problem and accordingly does not presently anticipate having to incur any
material expenses in connection therewith.
The Company's business plan includes potential expansion through the acquisition
of businesses, technologies, products and services from other businesses. As the
Company continues to expand in this manner throughout calendar 1999, Year 2000
issues could result causing the Company to have to commit resources to address
same.
The Company also relies upon various vendors, utility companies,
telecommunications service companies, delivery service companies and other
service providers who are outside its control. There is no assurance that such
companies will not suffer a Year 2000 business disruption which could harm the
Company's business and financial condition. Furthermore, if third-party
equipment or software the Company uses in its business fails to operate properly
with regard to the Year 2000, it may need to incur significant unanticipated
expenses to remedy any such problems.
Management of the Company believes that if in fact it does encounter any Year
2000 problems, it will be able to quickly remedy same through the purchase
off-the-shelf systems or by switching to other Year 2000 compliant subscribers.
The Company's failure to resolve any Year 2000 issues which may arise with
respect to its products and services could damage its business and revenues and
result in liability on its part for such failure. The Company's business and its
prospects may be permanently affected by either the liability it incurs to third
parties or the negative impact on its business reputation.
LACK OF MARKET FOR COMPANY'S SHARES
Although the common shares of the Company trade on the over the counter market
in Toronto, Ontario (see "Item 5. Nature of Trading Market"), there is no
trading market at present in the United States for the common shares of the
Company and there is no assurance that a liquid market for the common shares of
the Company in the United States will be developed or be sustained. The lack of
a liquid market in the United States for the common shares of the Company could
have a negative impact on the ability of investors to buy and sell the common
shares of the Company and on the value of the shares.
17
- 17 -
POSSIBLE VOLATILITY OF SHARE PRICE
The trading price of the common shares is likely to be highly volatile and could
be subject to wide fluctuations in response to factors such as actual or
anticipated variations in the Company's quarterly operating results,
announcements of technological innovations, or new services by the Company or
its competitors, changes in financial estimates by securities analysts,
conditions or trends in the Internet and online commerce industries, changes in
the market valuations of other Internet or online service companies,
announcements by the Company or its competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments, additions or
departures of key personnel, sales of common shares or other securities of the
Company in the open market and other events or factors, many of which are beyond
the Company's control. Further, the stock markets in general, and the NASDAQ
National Market and the market for Internet-related and technology companies in
particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks are at or
near historical highs and reflect valuations substantially above historical
levels. There can be no assurance that these trading prices and valuations will
be sustained. These broad market and industry factors may materially and
adversely affect the market price of the common shares regardless of the
Company's operating performance. Market fluctuations, as well as general
political and economic conditions such as recession or interest rate or currency
rate fluctuations, may also adversely affect the market price of the common
shares. In the past, following periods of volatility in the market price of a
company's securities, securities class-action litigation has often been
instituted against such company. Such litigation, if instituted, could result in
substantial costs and a diversion of management's attention and resources, which
would have a material adverse effect on the Company's business, results of
operations, prospects and financial condition.
LIQUIDITY AND CAPITAL NEEDS
In order to fund planned expansion, the Company will likely need to raise
additional equity or debt financing. There can be no assurance that additional
funding will be available or, if available, that it will be available on
acceptable terms. The inability of the Company to obtain additional funding
could have a material adverse impact on the business, financial condition and
future prospects of the Company. There can be no assurance that the Company will
be able to raise additional capital if its capital resources are exhausted.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Some of the statements contained in or incorporated by reference in this
registration statement discuss the Company's plans and strategies for our
business or state other forward-looking statements, as this term is defined in
the U.S. Private Securities Litigation Reform Act of 1995. The words
"anticipate", "believe", "estimate", "expect", "plan", "intent", "should",
"seek", "will" and similar expressions are intended to identify these
forward-looking statements, but are not the
18
- 18 -
exclusive means of identifying them. These forward-looking statements reflect
the current views of Company management; however, various risks, uncertainties
and contingencies could cause the Company's actual results, performance or
achievements to differ materially from those expressed in, or implied by, these
statements, including the following:
- the success or failure of the Company's efforts to implement its
business strategy;
- the other factors discussed under the heading "Risk Factors" and
elsewhere in this memorandum.
The Company assumes no obligation to update any forward-looking statements
contained in this registration statement whether as a result of new information,
future events or otherwise. For a discussion of important risks of an investment
in the Company's securities, including factors that could cause actual results
to differ materially from results referred to in the forward-looking statements,
see "Risk Factors". You should carefully consider the information set forth
under the caption "Risk Factors". In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this registration statement
might not occur.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal facility, which is sub-leased from Videoflicks Canada
Limited, is located at 1654 Avenue Road, Toronto, Ontario. The sub-lease expires
on July 30, 2000. The sub-lease covers approximately 1,300 square feet and, if
required, can be expanded to 2,500 square feet at this location. The Company
pays a proportionate amount of the lease obligations of Videoflicks Canada
Limited based on the amount of space covered by the sub-lease relative to the
total floorspace leased by Videoflicks Canada Limited. Management believes that
they will outgrow this capacity in the near future and are looking at
alternative locations to meet the needs of anticipated future growth.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings of a material nature pending or known to be
contemplated against the Company by any party, including any governmental
authorities.
ITEM 4. CONTROL OF REGISTRANT
(a) At August 10, 1999, there were 17,808,954 shares outstanding with an
authorized capital of an unlimited number of shares. To the best of
Management's knowledge, the only person beneficially owning 10% or more of
the Company's outstanding shares as of August 10, 1999 was Videoflicks
Canada Limited which owned 8,000,000 common shares of the Company,
comprising approximately 44.9% of the outstanding common shares of
19
- 19 -
the Company. All of the shares of Videoflicks Canada Limited are beneficially
owned by Michael Kavanagh and his spouse, as to 50% each through their
respective holding companies. As a result, Mr. Kavanagh and his spouse, through
their ownership of Videoflicks Canada Limited, also have beneficial ownership of
the shares owned by Videoflicks Canada Limited and have effective voting control
with respect to all matters requiring shareholder approval except for those
matters which pursuant to the Business Corporations Act (Ontario) require
approval by special resolution of shareholders (i.e. a resolution passed by at
least two thirds of the votes cast at a special meeting of shareholders called
for the purpose of considering the resolution).
(b) The following table lists each person who as at August 10, 1999 is known to
the Registrant to be the owner of more than 10% of the Registrant's
outstanding common shares, the only class of voting securities of the
Registrant, and the total amount of common shares owned by the directors
and officers of the Registrant as a group:
Identity of
Person or Group Amount Owned Percent of Class
--------------- ------------ ----------------
Michael Kavanagh 8,800,000(1) 47.3%
106 Orenda Road
Brampton, Ontario L6W 3W6
Videoflicks Canada Limited 8,000,000 44.9%
106 Orenda Road
Brampton, Ontario L6W 3W6
All directors and others as a 8,800,000(2) 47.3%
group
(1) Consists of 8,000,000 common shares owned by Videoflicks Canada
Limited, of which Mr. Kavanagh and his spouse each own 50% of the
outstanding capital stock, and presently exercisable options to
purchase 800,000 common shares held by Mr. Kavanagh.
(2) Consists of 8,000,000 common shares owned by Videoflicks Canada
Limited, of which Mr. Kavanagh and his spouse each beneficially own
50% of the outstanding capital stock, and presently exercisable
options to purchase 800,000 common shares held by Mr. Kavanagh.
Options held by the other directors and officers are subject to
vesting requirements none of which are exercisable prior to March,
2000. See "Item 12. Options to Purchase Securities from Registrant or
Subsidiaries - Stock Option Plan".
20
- 20 -
At August 10, 1999, officers and directors, as a group, owned no
shares of the Company other than the 8,000,000 common shares of the
Company owned by Videoflicks Canada Inc., all of the shares of which
are beneficially owned by Michael Kavanagh and his spouse, as to 50%
each through their respective holding companies.
(c) There are no arrangements, known to the Company, the operation of
which may at a subsequent date result in a change in control of the
Company.
ITEM 5. NATURE OF TRADING MARKET
The Company's shares commenced trading over-the-counter on The Canadian Dealing
Network Inc., Toronto, Ontario on April 26, 1999. The following is a summary of
trading in the common shares of the Company on The Canadian Dealing Network Inc.
(stated in U.S. dollars):
High Low
---- ---
Third Quarter (1) $1.80 $0.90
Fourth Quarter(2) $0.95 $0.37
(1) For quarter ending May 31, 1999, from commencement of trading on April 26,
1999.
(2) For quarter ending August 31, 1999, for trades up to and including August
10, 1999.
The closing sales price of the shares as quoted on The Canadian Dealing Network
Inc. on August 10, 1999 was $0.48 per share.
Although the Company intends to apply to have its common shares quoted on the
NASD (National Association of Securities Dealers) Bulletin Board, there is no
trading market at present in the United States for the common shares of the
Company (see "Item 1, Business of the Company - Risk Factors Affecting the
Company - Lack of Market for Company's Shares").
At August 10, 1999, the Company had 2,961 shareholders of record. At August 10,
1999, there were 2,143 United States shareholders of record, holding 2,700,436
shares, which represented approximately 15.2% of the outstanding shares.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
(a) There are no laws or governmental decrees or regulations in Canada that
restrict the export or import of capital, or affect the remittance of
dividends, interest or other payments to holders of the Company's
securities who are not residents of Canada, other than withholding tax
requirements. Reference is made to "Item 7. Taxation".
21
- 21 -
(b) There are no limitations imposed by the laws of Canada, the laws of Ontario
or by the charter or other governing documents of the Company on the right
of a non-resident to hold or vote common shares of the Company, other than
as provided in the Investment Canada Act (the "Investment Act"). The
following summarizes the principal features of the Investment Act for a
non-resident who proposes to acquire common shares. The summary is of a
general nature only and is not intended to be nor is it, a substitute of
independent advice from an investor's own advisor. The summary does not
anticipate statutory or regulatory amendments:
The Investment Act generally prohibits implementation of a reviewable investment
by an individual, government or agency thereof, corporation, partnership, trust
or joint venture that is not a "Canadian" as defined in the Investment Act (a
"non-Canadian"), unless after review, the minister responsible for the
Investment Act (the "Minister") is satisfied that the investment is likely to be
of a net benefit to Canada. Under the Investment Act, a United States citizen
qualifies as a "World Trade Organization Investor." Subject to the restrictions
noted below, an investment in a Canadian business by a World Trade Organization
Investor would be reviewable under the Investment Act only if it is an
investment to acquire control of such Canadian business and the value of the
assets of the Canadian business as shown on its financial statements is not less
than a specified amount, which for 1999 is $184 million. An investment in the
shares of a Canadian business by a non-Canadian other than a "World Trade
Organization Investor" when the Company is not controlled by a World Trade
Organization Investor, would be reviewable under the Investment Act if it is an
investment to acquire control of the Canadian business and the value of the
assets of the Canadian business as shown on its financial statements is CDN$5
million or more, or if an order for review is made by the federal cabinet on the
grounds that the investment relates to Canada's cultural heritage or national
identity.
The acquisition by a World Trade Organization Investor of control of a Canadian
business in any of the following sectors is also subject to review if the value
of the assets of the Canadian business exceeds CDN$5 million (as shown on its
financial statements): uranium, financial services (except insurance),
transportation services and cultural businesses, which include broadcast media
(publication, distribution or sale of books, magazines, periodicals, newspapers,
music, film and video products and the exhibition of film and video products),
television and radio services. As the Company's business falls under the
aforementioned broadcast media sub-category, the acquisition of control of the
Company, in excess of the CDN$5million threshold, by a World Trade Organization
Investor would be subject to such review.
A non-Canadian would acquire control of the Company for purposes of the
Investment Act if the non- Canadian acquired a majority of the common shares.
The acquisition of less than a majority but one-third or more of the common
shares would be presumed to be an acquisition of control of the Company unless
it could be established that, on acquisition, the Company was not controlled in
fact by the acquirer through the ownership of common shares. Notwithstanding the
review provisions, any transaction involving the acquisition of control of a
Canadian business or the establishment of a new business in Canada by a
non-Canadian is a
22
- 22 -
notifiable transaction and must be reported to Industry Canada by the
non-Canadian making the investment either before or within thirty (30) days
after the investment.
Certain transactions relating to common shares are exempt from the Investment
Act, including:
(a) an acquisition of common shares by a person in the ordinary course of that
person's business as a trader or dealer in securities;
(b) an acquisition of control of the Company in connection with the realization
of security granted for a loan or other financial assistance and not for a
purpose related to the provisions of the Investment Act; and
(c) an acquisition of control of the Company by reason of an amalgamation,
merger, consolidation or corporate reorganization, following which the
ultimate direct or indirect control in fact of the Company, through the
ownership of common shares, remained unchanged.
COMPETITION ACT REVIEW
Investments giving rise to the acquisition or establishment, directly or
indirectly, by one or more persons of control over, or a significant interest in
the whole or part of a business of a competitor, supplier, customer or other
person are subject to substantive review by Canada's Competition Law Authority,
the Director of Investigation and Research (the "Director"). If or when the
Director concludes that a merger, whether by purchase or lease of shares or
assets, by amalgamation or by combination, or otherwise, prevents or lessens, or
is likely to prevent or lessen competition substantially, he may apply as may be
necessary to eliminate the substantial lessening or prevention of competition.
Such substantive merger review power applies to all mergers, whether or not they
meet limits for pre- notification under the Competition Act.
In addition to substantive merger review, the Competition Act provides for a
pre-notification regime respecting mergers of certain size. The regime applies
in respect of share acquisitions, asset acquisitions, amalgamations and
combinations, for ease of reference. This filing refers specifically to share
acquisition, although the pre-notification regime applies, with the appropriate
modification, to other types of acquisition of control as well.
In order for a share acquisition transaction to be pre-notifiable, the parties
to the transaction (being the person or persons who proposed to acquire shares,
and the Corporation the shares of which are to be acquired), together with their
affiliates (being all firms with a 50% or more voting shares linkage up and down
the chain) must have:
(i) aggregate gross assets in Canada that exceed $400,000,000 in value, as
shown on their audited financial statements for the most recently
completed fiscal year (which must be within the last fifteen (15)
months); or
23
- 23 -
(ii) aggregate gross revenue from sales in, from or into Canada that exceed
$400,000,000 for the most recently completed fiscal year shown on the
said financial statements; and
(iii) the party being acquired or corporations controlled by that party must
have gross assets in Canada, or gross revenues from sales in or from
Canada, exceeding $35,000,000 as shown on the said financial statements.
Acquisition of shares carrying up to 20% of the votes of a publicly
traded corporation, or 35% of the votes in a private corporation will
not be subject to pre-notification, regardless of the above thresholds.
However, exceeding the 20% or the 35% threshold, and again exceeding the
50% threshold, gives rise to an obligation of notification if the size
threshold is met.
If a transaction is pre-notifiable, a filing must be made with the Director
containing the prescribed information with respect to the parties, and a waiting
period, (either seven or twenty-one days, depending on whether a long or short
form filing is chosen) must expire prior to closing.
As an alternative to pre-notification, the Director may grant an Advance Ruling
Certificate which exempts the transaction from pre-notification. Advance Ruling
Certificates are granted where the Director concludes, based on the information
provided to him, that he would not have sufficient grounds on which to apply to
the Competition Tribunal to challenge the Merger.
ITEM 7. TAXATION
The following summary describes the principal Canadian federal income tax
considerations generally applicable to a holder of the Company's shares who, for
purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") and the
Canada-United States Income Tax Convention, 1980 (the "Convention") and at all
relevant times is resident in the United States and not resident in Canada,
deals at arm's length with the Company, holds the Company's shares as capital
property, and does not use or hold and is not deemed to use or hold the
Company's shares in or in the course of carrying on business in Canada (a
"United States Holder").
This following summary is based upon the current provisions of the Canadian Tax
Act, the regulations thereunder, all specific proposals to amend the Canadian
Tax Act and the regulations announced by the Minister of Finance (Canada) prior
to the date hereof and the Company's understanding of the published
administrative practices of Revenue Canada, Customs, Excise and Taxation. This
summary does not take into account or anticipate any other changes in the
governing law, whether by judicial, governmental or legislative decision or
action, nor does it take into account the tax legislation or considerations of
any province, territory or non-Canadian (including U.S.) jurisdiction, which
legislation or considerations may differ significantly from those described
herein.
This summary is of a general nature only and is not intended to be, and should
not be interpreted as, legal or tax advice to any prospective purchaser or
holder of the Company's shares and no
24
- 24 -
representation with respect to the Canadian federal income tax consequences to
any such prospective purchaser is made. Accordingly, prospective purchasers of
the Company's shares should consult with their own tax advisors with respect to
their individual circumstances.
DIVIDENDS ON THE COMPANY'S SHARES
Generally, dividends paid by Canadian corporations to non-resident shareholders
are subject to a withholding tax of 25% of the gross amount of such dividends.
However, pursuant to the Convention, the withholding tax rate on the gross
amount of dividends paid to residents of the United States is reduced to 15% or,
in the case of a U.S. corporation which owns at least 10% of the voting stock of
the Canadian corporation paying the dividends, to 5% of the gross amount of such
dividends.
Pursuant to the Convention, certain tax-exempt entities resident in the United
States may be exempt from Canadian withholding taxes, including any withholding
taxes levied in respect of dividends received on the Company's shares.
DISPOSITION OF THE COMPANY'S SHARES
In general, a United States shareholder will not be subject to Canadian income
tax on capital gains arising on the disposition of the Company's shares, unless
such shares are "taxable Canadian property" within the meaning of the Canadian
Tax Act and no relief is afforded under any applicable tax treaty. The shares of
the Company would be taxable Canadian property of a non-resident if at any time
during the five year period immediately preceding a disposition by the
non-resident of such shares, not less than 25% of the issued shares of any class
or series of all classes of shares of the Company belonged to the non-resident,
to persons with whom the non-resident did not deal at arm's length, or to the
non-resident and persons with whom the non-resident did not deal at arm's length
for purposes of the Canadian Tax Act. For this purpose, issued shares includes
options to acquire such shares (including conversion rights) held by such
persons. Under the Convention, a capital gain realized by a resident of the
United States will not be subject to Canadian tax unless the value of the shares
of the Company is derived principally from real estate (as defined in the
Convention) situated in Canada.
ITEM 8. SELECTED FINANCIAL DATA
The following selected financial data has been extracted from the financial
statements dated June 15, 1999 for the years ended August 31, 1998, 1997 and
1996 and for the periods ended May 31, 1999 and 1998. This financial data
reflects the carved-out operations of the Internet business of Videoflicks
Canada Limited on a continuity of interest basis.
25
- 25 -
VIDEOFLICKS.COM INC.
SELECTED FINANCIAL DATA
(EXPRESSED IN UNITED STATES DOLLARS)
MAY 31 MAY 31
1999 1998 AUGUST 31 AUGUST 31 AUGUST 31
9 MONTHS 9 MONTHS 1998 1997 1996
(UNAUDITED) (UNAUDITED) 12 MONTHS 12 MONTHS 12 MONTHS
----------- ----------- --------- --------- ---------
Net Operating Revenues $1,240,000 $ 621,000 $ 820,000 $ 431,000 $ 71,000
Operating Loss $ 356,000 $ 87,000 $ 113,000 $ 69,000 $ 45,000
Loss Per Share $ 0.021 $ 0.005 $ 0.007 $ 0.004 $ 0.003
Total Assets $1,478,000 $ 12,000 $ 12,000 $ 18,000 $ 27,000
Long Term Obligations $ 0 $ 0 $ 0 $ 0 $ 0
Redeemable Preferred $ 0 $ 0 $ 0 $ 0 $ 0
Stock
Cash Dividends Declared $ 0 $ 0 $ 0 $ 0 $ 0
Per Common Share
EXCHANGE RATES
(CDN$ TO US$)
Period End 0.6784 0.6866 0.6396 0.7203 0.7314
Average 0.6602 0.7042 0.6949 0.7310 0.7335
Low 0.6379 0.6809 0.6311 0.7130 0.7212
High 0.6922 0.7307 0.7307 0.7540 0.7535
EXCHANGE RATE @
JULY 21, 1999 - .6673
The above selected financial data has been prepared in accordance with generally
accepted accounting principles in Canada which conform in all material respects
with accounting principles generally accepted in the United States. In the
preparation of the above selected financial data there were no material issues
requiring reconciliation of Canadian with United States generally accepted
accounting principles.
26
- 26 -
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto included herein (see "Item 17. Financial
Statements"). The financial statements have been prepared in accordance with
generally accepted accounting principles in Canada which conform in all material
respects with accounting principles generally accepted in the United States. In
addition to historical information, the following discussion and analysis
includes forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ significantly from those expressed in the
forward-looking statements as a result of certain factors, including those
described in "Risk Factors" and elsewhere herein.
OVERVIEW
The Company sells movies on videotape and DVD formats through its Internet web
site at www.videoflicks.com. The Company is in its early stages as a public
company, having been formed as a public company by amalgamation in March, 1999.
Prior thereto the business of the Company was, since 1995, effectively operated
as a division of Videoflicks Canada Limited, a private company which, as its
principal business, owned , operated and franchised video retail outlets.
Management of Videoflicks Canada Limited, recognizing the potential of the
Internet as a retail medium, determined that it was essential to the success of
its Internet business that it have access to the public financial markets to
raise the necessary funds for advertising and web site development. Effective
November 30, 1998 Videoflicks Canada Limited completed a 'spin-out' of its
Internet business, transferring it to its wholly-owned subsidiary,
Videoflicks.com Limited which, in March, 1999 amalgamated with two other
companies to form the Company. Incidental to the amalgamation in March 1999, the
Company obtained $1,200,000 which had been raised by 1318780 Ontario Limited,
one of the amalgamating companies, in contemplation of the amalgamation.
The historical financial statements presented herein for the fiscal years ended
August 31, 1998, 1997, and 1996 reflect the carved-out operations of the
Internet business of Videoflicks Canada Limited on a continuity of interest
basis.
RESULTS OF OPERATIONS
The net loss for the period ended May 31, 1999 of $356,000 was comprised mostly
of the $221,000 charge for investor relations. The balance of $135,000 loss is
made up of increased costs of order processing, systems upgrades and preparing
for expansion in the near future.
Sales are recognized when products are shipped to customers and are net of any
allowances for returns. Sales figures include sale of product and shipping
revenue. For the periods 1995 through 1999 the average selling price of the
products has remained consistent. In 1999 a decision was made to reduce the
shipping charges to customers to a level that competitive companies were
27
- 27 -
charging. Sales increased 100% for the nine months ending May 31, 1999 in
comparison to the same period ending 1998. This sales growth has been achieved
without the aid of advertising and is achieved due to competitive product
pricing, high customer service and prompt delivery meeting customers' needs.
Repeat customers represent 20% to 25% of orders.
The Company includes in cost of sales all products purchased and shipped to
customers, discounts from credit card purchases and costs of shipping.
The decrease in the gross profit for the nine-month period ended May 31, 1999
was due to management's decision to reduce shipping charges to competitor's
rate, as mentioned above, and to the implementation of partial shipments which
increased the shipping costs with no increase in revenues. This change has
reduced the margin on the gross profit figures in 1999.
The Company made significant investments in assets of computer hardware and
software to upgrade the web site and increase capacity for the future. The
Company believes that the continued development of its software and systems to
allow the consumer to purchase product more easily, to increase their selection
of product and to make the shopping experience more personalized and enjoyable
will increase its sales and customer base over the coming periods.
The increased prepaid expenses account includes retainers paid to an advertising
company and to an investor relations company. These prepaid items will be
expensed prior to the end of calendar 1999.
Advertising expenses include all marketing and advertising expenses. The Company
incurred no significant advertising expenses for the periods covered by the
financial statements herein. The figures shown in 1998 reflect an initial
on-line media buy and print purchase to see if advertising has an effect on the
number of visitors to the Internet site and an increase in sales. The results
indicated there is an increase that has led management to commit $600,000 of the
funds raised in March of 1999 for an initial advertising campaign to begin in
August of 1999.
The investor relations expenses, incurred shortly after the Company's shares
became publicly traded, relate to advertising the Company to the investment
community to increase the awareness of the stock. Management believes these
costs should be expensed when they are incurred instead of amortizing them over
a period of time, as the residual factor of the value after the advertising
cannot be determined.
Inventory of product for sale increased as the Company purchased hard to find
and specialized products for inventory. The Company has entered into an
agreement with Videoflicks Canada Limited to purchase product for sale at prices
that are the same as those purchased from a third party vendor. This agreement
allows the Company to purchase product from a secure source without having to
set up terms with suppliers or maintain a sizeable inventory. The advances from
Videoflicks Canada Limited reflect the accounts payable owed to it for these
purchases.
28
- 28 -
Depreciation of capital assets has increased in 1999 over 1998 due to the
increase in asset purchases.
Site operating expenses include all costs associated with maintaining the
Internet web server. These costs include rental of the T1 transmission line,
hardware maintenance and software upgrade costs. The web server and connection
are fully scalable; they can be expanded if there is any increase in the number
of visitors to the Company's Internet web site. Future expansion of the web site
to the point where visitors increase from an average of approximately 33,000
users per day to 100,000 users per day will require the additional installation
of another T1 line or similar expansion.
Wages increased significantly between 1999 and 1998 as a result of increased
business activity. Due primarily to the increase in sales volumes, additional
staff were hired to fulfill orders and ship product in a timely manner. Since
this time, Company management has invested in streamlining the order processing
system by increasing efficiencies in data management and systems management. As
a result, management believes that future increases in sales will not lead to
corresponding increases in personnel to process orders and that the average
shipping costs per order will decrease. The increase in wages also reflects the
hiring of programmers in fiscal 1999 to enhance the web site and program better
tracking of customers products from ordering product through to the shipping
stages.
Increased administration costs, which include all office wages and general
expenses needed to run the Company, also reflect the increased business
activity; however these are not expected to significantly increase in the near
future.
The Company's operating premises currently comprise a total of 1,300 square
feet. If required, the Company can expand to 2,500 square feet at this location.
This includes no space for warehousing. Management believes that they will
outgrow this capacity in the near future and are looking at alternative
locations to meet the needs of anticipated future growth.
LIQUIDITY AND CAPITAL RESOURCES
Supplementary to the $1,200,000 raised in connection with the amalgamation, an
aggregate of 610,900 Series A Warrants of the Company were exercised up to May
31, 1999 from which the Company realized aggregate gross proceeds of $458,175
and subsequent to May 31, 1999 an additional 436,770 Series A Warrants of the
Company were exercised from which the Company realized aggregate gross proceeds
of $327,577.50; in total 1,047,670 Series A Warrants were exercised up to July
23, 1999, the date of expiry of the Series A Warrants, yielding aggregate gross
proceeds of $785,752.50. Pursuant to the exercise of the aforementioned Series A
Warrants an aggregate of 1,047,670 Series B Warrants were issued, of which 11
have been exercised, yielding aggregate gross proceeds of $12.65 to the Company.
Each Series B Warrant is exercisable to purchase one common share of the Company
at the price of $1.15 per share on or before November 23, 1999. If all of the
remaining 1,047,659 outstanding Series B Warrants are
29
- 29 -
exercised, the Company will realize additional gross proceeds of $1,204,807.80.
The Company also has outstanding and contingent stock options exercisable to
purchase up to 2,240,000 Company common shares at $0.50 per share. The Company
has no short term or long term debt. Management believes cash on hand together
with cash flow from operations will be sufficient to fund operations and planned
capital expenditures for the current fiscal year and for the next twelve months.
In order to fund planned expansion, the Company will likely need to raise
additional equity or debt financing. There can be no assurance that additional
funding will be available or, if available, that it will be available on
acceptable terms. The inability of the Company to obtain additional funding
could have an adverse impact on the business, financial condition and future
prospects of the Company.
YEAR 2000
All of the Company's hardware and software systems used in connection with its
web site, data systems and order processing systems have been purchased during
the past three years and have all been certified by the manufacturers and
developers of same to be Year 2000 compliant. Testing by the Company of such
systems has confirmed that they are Year 2000 compliant. Consequently, the
Company does not believe that it presently has a material Year 2000 compliance
problem and accordingly does not presently anticipate having to incur any
material expenses in connection therewith.
The Company's business plan includes potential expansion through the acquisition
of businesses, technologies, products and services from other businesses. As the
Company continues to expand in this manner throughout calendar 1999, Year 2000
issues could result causing the Company to have to commit resources to address
same.
The Company also relies upon various vendors, utility companies,
telecommunications service companies, delivery service companies and other
service providers who are outside its control. There is no assurance that such
companies will not suffer a Year 2000 business disruption which could harm the
Company's business and financial condition. Furthermore, if third-party
equipment or software the Company uses in its business fails to operate properly
with regard to the Year 2000, it may need to incur significant unanticipated
expenses to remedy any such problems.
Management of the Company believes that if it does encounter any Year 2000
problems, it will be able to quickly remedy same through the purchase
off-the-shelf systems or by switching to other Year 2000 compliant subscribers.
The Company's failure to resolve any Year 2000 issues which may arise with
respect to its products and services could damage its business and revenues and
result in liability on its part for such failure. The Company's business and its
prospects may be permanently affected by either the liability it incurs to third
parties or the negative impact on its business reputation.
30
- 30 -
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table outlines the names and municipalities of residence of each
of the directors and officers of the Company and their principal occupations.
All persons have served in these capacities since the inception of the Company.
Each director is expected to hold these positions until the next Annual General
Meeting of shareholders.
Name and Municipality
of Residence Office
--------------------- ------
Michael P. Kavanagh Director, President and
Toronto, Ontario Chief Executive Officer
John Waddell Director, Vice-President
Toronto, Ontario Information Technology
Robert Bray* Director, Secretary-Treasurer,
Toronto, Ontario Chief Financial Officer
Allen Karp* Director
Toronto, Ontario
[FN]
Notes:
1. * denotes a member of the Audit Committee of the Board of Directors.
2. The Company does not have an executive committee of the Board of Directors.
</FN>
DIRECTORS AND OFFICERS
Michael P. Kavanagh is the President and a director of Videoflicks Canada
Limited which he founded in 1981. Videoflicks Canada Limited presently has 35
video rental/sales stores of which 31 are franchised. Mr. Kavanagh is also Chief
Executive Officer of MSO Construction Co., a private company with 300 employees
and CDN$25 million in annual sales, and T.J. Pounder (Ontario) Ltd., a private
family manufacturing company.
John Waddell has been chief programmer in charge of information technology for
Videoflicks Canada Limited since 1983. Mr. Waddell has developed many
proprietary systems for tracking and processing sales and managing inventory and
is responsible for developing and maintaining the computerized data base and
hardware requirements for systems management. He functions as the chief
programmer for the Videoflicks.com web site. Mr. Waddell received his Masters of
Science degree from the University of Guelph, Ontario in 1973.
31
- 31 -
Robert Bray is the chief financial officer of Videoflicks Canada Limited since
1989, during the course of which he has designed and implemented accounting
systems and related corporate structures. Mr. Bray holds an MBA degree from the
University of Toronto, an Honours BA in Economics from York University, and is a
Certified General Accountant.
Allen Karp, Q.C. is Chairman and Chief Executive Officer of Cineplex Odeon
Corporation, the Canadian subsidiary of Loews Cineplex Entertainment Corporation
and a Director of Loews Cineplex Entertainment Corporation. For the past eight
years, Mr. Karp has served as President and Chief Executive Officer of Cineplex
Odeon. Mr. Karp practised corporate law, ultimately as a senior partner with the
law firm of Goodman and Carr, Toronto, from 1966 until 1986, the year in which
he also received his appointment as Queen's Counsel. During his career as a
business lawyer, he became a Director and senior legal advisor to many Canadian
and U.S. corporations, both private and public. Mr. Karp is also the author of a
variety of legal articles and papers and lectured extensively in the fields of
taxation, corporate and commercial law and, his primary specialty, the field of
franchising and licensing. In addition to the Board of Cineplex Odeon
Corporation, Mr. Karp sits on the Boards of Loews Cineplex Entertainment
Corporation, Speedy Muffler King Inc., Alliance/Atlantis Communications Inc.,
Teknion Corporation. He is also involved in various community activities
including the Boards of Canadian Film Centre, for which he is Chair of the "Fast
Forward" Capital Campaign, the Toronto International Film Festival/Cinematheque
Ontario, for which he is Chairman, the Motion Picture Pioneers and the Council
for Canadian Unity. As well, Mr. Karp is a member of the Canadian Civil
Liberties Association.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
EMPLOYMENT CONTRACTS
The Company is party to Employment Agreements with each of Michael Kavanagh,
Chief Executive Officer, President and a director, John Waddell, Vice-President,
Information Technology and a director, and Robert Bray, Secretary-Treasurer,
Chief Financial Officer and director, pursuant to which, respectively:
(a) Michael Kavanagh is entitled to an annual salary of $1.00 and an annual
bonus equal to 2% of annual revenues up to $10 million and 1% of annual
revenues in excess of $10 million. In the event of a change of control of
the Company he will receive a lump sum payment equal to three (3) times the
amount of the last annual bonus paid, or will have his employment is
extended for a further three (3) year period on the same terms and
conditions. If his employment is terminated without cause, at any time he
will receive a lump sum payment equal to two (2) times the most recent
annual bonus paid to him.
32
- 32 -
(b) John Waddell is entitled to an annual salary CDN$125,000 per annum and in
the event that his employment is terminated without cause prior to the end
of its one year term, or any renewal thereof, a lump sum payment equal to
two (2) years' annual salary.
(c) Robert Bray is entitled to an annual salary of CDN$75,000 per annum and in
the event that his employment is terminated without cause prior to the end
of its one year term, or any renewal thereof, a lump sum payment equal to
two (2) years' annual salary.
COMPENSATION OF DIRECTORS
No amount has been set aside or accrued by the Company for the current fiscal
year of the Company to provide pension, retirement or similar benefits for
directors and officers of the Company, pursuant to any existing plan provided or
contributed to by the Company.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
WARRANTS
Upon the amalgamation forming the Company on March 23, 1999, the Company issued
an aggregate of 4,180,200 Series A Warrants. Each Series A Warrant was
exercisable on or before July 23, 1999 at the exercise price of $0.75 to acquire
one (1) common share and one (1) Series B Warrant of the Company. As of the date
hereof, 1,047,670 Series A Warrants and 11 Series B Warrants have been
exercised. As of August 10, 1999 there were 1,047,659 Series B Warrants issued
and outstanding. Each Series B Warrant is exercisable on or before November 23,
1999 to acquire one (1) common share of the Company for $1.15 per share. None of
the Series A Warrants of the Company were, and none of the Series B Warrants
are, beneficially owned by directors or officers of the Company.
STOCK OPTION PLAN
The Company maintains a stock option plan pursuant to which the Board of
Directors of the Company may grant options exercisable to purchase up to a
maximum of 4,000,000 common shares of the Company to executive officers,
directors, employees and consultants of the Company in such numbers, for such
periods of time and at the exercise prices as the Board may approve and
according to the rules and regulations of any stock exchange or over-the-counter
market on which the common shares may be listed or quoted for trading from time
to time.
The following table sets out information relating to options to purchase common
shares granted by the Company under its stock option plan that are outstanding
as at the date hereof with the number of persons in each category shown in
parentheses:
33
- 33 -
Number of
Common Exercise
Shares Price Expiry
Optioned /Share Date
-------- ------ ----
Directors and 1,600,000 $0.50 March 23, 2004
Officers 300,000 $0.50 April 22, 2004
---------
1,900,000
All Other Option 140,000(1) $0.50 April 22, 2004
Holders
Total 2,040,000(1)(2)
[FN]
(1) Options to acquire an additional 200,000 common shares at $0.50 per share
on or before April 22, 2004 have been granted subject to compliance of such
grant with applicable securities legislation.
(2) All Options vest as to one third thereof on each of the first, second and
third anniversaries of their date of grant except for 800,000 Options
granted to Michael Kavanagh, Director, President and Chief Executive
Officer, all of which vest immediately.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
(a) Upon amalgamation, the Company succeeded to the following agreements:
1) A Supply Agreement which was made between Videoflicks Canada
Limited, a Company of which Michael Kavanagh and his spouse
together beneficially own 100% of equity shares, and its
wholly-owned subsidiary, Videoflicks.com Limited, under which
Videoflicks Canada Limited agreed to sell videos to
Videoflicks.com Limited at the wholesale catalogue price charged
by arm's length wholesalers of videos, plus shipping and
applicable taxes;
2) A Sub-Lease Agreement made between Videoflicks Canada Limited and
Videoflicks.com Limited pursuant to which the Company sub-leases
15% of the space leased by Videoflicks Canada Limited at 1654
Avenue Road, Toronto, Ontario; and
3) Employment Agreements made between Videoflicks.com Limited and
each of Michael Kavanagh, John Waddell and Robert Bray as
described in more detail under "Employment Contracts" under Item
11 hereof.
34
- 34 -
Subsequent to the amalgamation the Company entered into stock option agreements
with its directors and officers pursuant to which the Company granted options to
purchase up to 1,900,000 common shares of the Company at $0.50 per share, as
described under "Stock Option Plan" above.
(b) None of the officers or directors of the Company or any of their
associates are currently indebted to the Company or has been so
indebted at any time in the last three years.
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
The holders of the common shares ("Common Shares") of the Company shall be
entitled to vote at all meetings of shareholders except meetings at which only
holders of a specified class of shares are entitled to vote, and holders of
common shares shall be entitled to one vote for each Common Share held and,
subject to the rights, privileges, restrictions and conditions attaching to any
other class of shares of the Company, to receive the remaining property of the
Company upon the dissolution of the Company. Holders of the Common Shares shall
not have pre-emptive rights or any liability for further calls or assessments by
the Company. Holders of Common Shares have no right to receive dividends unless
same are declared by the board of directors to be payable in respect of the
Common Shares. The Common Shares are not redeemable by the Company.
ITEM 17. FINANCIAL STATEMENTS
Audited balance sheet as at August 31, 1998 and August 31, 1997 and the audited
statements of operations, deficit and cash flow for the years ended August 31,
1998, August 31, 1997 and August 31, 1996, which are reported on by BDO Dunwoody
LLP. Also included are unaudited balance sheet and statements of operations,
deficit and cash flow for period ended May 31, 1999 and May 31, 1998 which have
not been reported on by BDO Dunwoody LLP. The historical financial statements
for the years ended August 31, 1998, 1997 and 1996 reflects the carved-out
operations of the Internet business of Videoflicks Canada Limited on a
continuity of interest basis. The financial statements have been prepared by
management of the Company in accordance with generally accepted accounting
principles in Canada which are not materially different from generally accepted
accounting principles in the United States. In the preparation of the financial
statements there were no material issues requiring reconciliation of Canadian
with United States generally accepted accounting principles.
35
- 35 -
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
Audited balance sheet as at August 31, 1998 and August 31, 1997 and the audited
statements of operations, deficit and cash flow for the years ended August 31,
1998, August 31, 1997 and August 31, 1996, reported on by BDO Dunwoody LLP. Also
included are unaudited balance sheet and statements of operations, deficit and
cash flow for the periods ended May 31, 1999 and May 31, 1998 which have not
been reported on by BDO Dunwoody LLP. The historical financial statements for
the years ended August 31, 1998, 1997 and 1996 reflects the carved-out
operations of the Internet business of Videoflicks Canada Limited on a
continuity of interest basis. The financial statements have been prepared by
management of the Company in accordance with generally accepted accounting
principles in Canada which are not materially different from generally accepted
accounting principles in the United States. In the preparation of the financial
statements there were no material issues requiring reconciliation of Canadian
with United States generally accepted accounting principles.
(2) Exhibits
None of the following Exhibits have been previously filed with the
Securities and Exchange Commission
1. Articles of Amalgamation and By-laws
2. Material Agreements
2.1 Employment Agreement with Michael Kavanagh
2.2 Employment Agreement with Robert Bray
2.3 Employment Agreement with John Waddell
2.4 Supply Agreement with Videoflicks Canada Limited
2.5 Sub-lease Agreement with Videoflicks Canada Limited
2.6 Stock Option Agreement with Michael Kavanagh
2.7 Stock Option Agreement with Robert Bray
2.8 Stock Option Agreement with John Waddell
2.9 Stock Option Agreement with Alan Karp
36
- 36 -
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
VIDEOFLICKS.COM INC.
By: /s/ MICHAEL KAVANAGH
-------------------------------
Michael P. Kavanagh,
President and
Chief Executive Officer
August 20, 1999
37
VIDEOFLICKS.COM INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
AND FOR THE PERIODS ENDED MAY 31, 1999 AND 1998
[LOGO]
[BDO Dunwoody LLP]
38
VIDEOFLICKS.COM INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
AND FOR THE PERIODS ENDED MAY 31, 1999 AND 1998
CONTENTS
--------
AUDITOR'S REPORT 2
Financial Statements
Balance Sheet 3
Statement of Deficit 4
Statements of Operations 5
Statements of Cash Flows 6
Summary of Significant Accounting Policies 7 to 8
Notes to Financial Statements 9 to 14
39
[LOGO]
[BDO Dunwoody LLP]
AUDITOR'S REPORT
TO THE DIRECTORS OF
VIDEOFLICKS.COM INC.
We have audited the balance sheet of Videoflicks.com Inc. as at August 31, 1998
and August 31, 1997 and the statements of operations, deficit and cash flow for
the years ended August 31, 1998, August 31, 1997 and August 31, 1996. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at August 31, 1998 and August
31, 1997 and the results of its operations and its cash flows for the years
ended August 31, 1998, August 31, 1997 and August 31, 1996 in accordance with
Canadian generally accepted accounting principles.
BDO Dunwoody LLP
Chartered Accountants
Owen Sound, Ontario
June 15, 1999
40
VIDEOFLICKS.COM INC.
BALANCE SHEET
(EXPRESSED IN UNITED STATES DOLLARS)
MAY 31, AUGUST 31, August 31
1999 1998 1997
---- ---- ----
(UNAUDITED)
ASSETS
CURRENT
Cash $ 944,000 $ - $ -
Accounts receivable 35,000 - -
Inventory 33,000 - -
Prepaid expenses and deposits 354,000 - -
---------- ---------- -----------
1,366,000 - -
CAPITAL ASSETS (Note 4) 112,000 12,000 18,000
---------- ---------- -----------
$1,478,000 $ 12,000 $ 18,000
========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities $ 136,000 $ - $ 6,000
Due to related company (Note 5) 220,000 - -
---------- ---------- -----------
356,000 - 6,000
---------- ---------- -----------
SHAREHOLDERS' EQUITY
Share capital (Note 3) 1,471,000 - -
Net assets (deficit) (Page 4) (349,000) 12,000 12,000
---------- ---------- -----------
1,122,000 12,000 12,000
---------- ---------- -----------
$1,478,000 $ 12,000 $ 18,000
========== ========== ===========
Approved by:
/s/ Michael Kavanagh
- ----------------------------------------------Director
/s/ Robert Bray
- ----------------------------------------------Director
THE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES ARE AN
INTREGAL PART OF THESE FINANCIAL STATEMENTS.
3
41
VIDEOFLICKS.COM INC.
STATEMENT OF DEFICIT
(EXPRESSED IN UNITED STATES DOLLARS)
FOR THE NINE FOR THE YEAR For the year
MONTHS ENDED ENDED ended
MAY 31, AUGUST 31, August 31
1999 1998 1997
---- ---- ----
(UNAUDITED)
NET ASSETS, beginning of the period $ 12,000 $ 12,000 $ 12,000
NET LOSS FOR THE PERIOD (Page 5) (356,000) (113,000) (69,000)
CAPITAL CONTRIBUTION TO INTERNET OPERATIONS PRIOR TO
ACQUISITION (Note 7) 7,000 113,000 69,000
RECLASSIFICATION OF NET ASSETS ACQUIRED OF INTERNET
OPERATIONS TO SHARE CAPITAL (12,000) - -
----------- ----------- -----------
NET ASSETS (DEFICIT), end of the period $ (349,000) $ 12,000 $ 12,000
=========== =========== ===========
THE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES ARE AN
INTREGAL PART OF THESE FINANCIAL STATEMENTS.
4
42
VIDEOFLICKS.COM INC.
STATEMENT OF OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS)
MAY 1999 May 1998 AUGUST 1998 August 1997 August 1996
9 MONTHS 9 months 12 MONTHS 12 months 12 months
-------- -------- --------- --------- ---------
FOR THE PERIODS ENDED (UNAUDITED) (Unaudited)
REVENUE $ 1,240,000 $ 621,000 $ 820,000 $ 431,000 $ 71,000
COST OF SALES 893,000 419,000 553,000 290,000 54,000
------------- ----------- ----------- ----------- ----------
GROSS PROFIT 347,000 202,000 267,000 141,000 17,000
------------- ----------- ----------- ----------- ----------
EXPENSES
Advertising 4,000 23,000 23,000 - -
Site operating 51,000 71,000 88,000 26,000 15,000
Wages and benefits 231,000 86,000 124,000 89,000 10,000
Information Technology
Department wages 102,000 52,000 69,000 39,000 -
Rent 15,000 16,000 21,000 22,000 21,000
Administration 66,000 37,000 49,000 26,000 7,000
Amortization on capital
assets 13,000 4,000 6,000 8,000 9,000
Investor relations 221,000 - - - -
------------- ----------- ----------- ----------- ----------
703,000 289,000 380,000 210,000 62,000
------------- ----------- ----------- ----------- ----------
OPERATING LOSS FOR PERIOD $ (356,000) $ (87,000) $ (113,000) $ (69,000) $ (45,000)
============= =========== ========== =========== ==========
LOSS PER SHARE (NOTE 6) $ (0.021) $ (0.005) $ (0.007) $ (0.004) $ (0.003)
============= =========== ========== =========== ==========
THE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES ARE AN
INTREGAL PART OF THESE FINANCIAL STATEMENTS.
5
43
VIDEOFLICKS.COM INC.
STATEMENT OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
MAY 1999 May 1998 AUGUST 1998 August 1997 August 1996
9 MONTHS 9 months 12 MONTHS 12 months 12 months
-------- -------- --------- --------- ---------
FOR THE PERIODS ENDED (UNAUDITED) (Unaudited)
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period $ (356,000) $ (87,000) $ (113,000) $ (69,000) $ (45,000)
Amortization of capital
assets 13,000 4,000 6,000 8,000 9,000
Accounts receivable (35,000) - - - -
Inventory (33,000) - - - -
Prepaid expenses (354,000) - - - -
Accounts payable 136,000 (4,000) (6,000) (8,000) (9,000)
----------- ----------- ----------- ----------- -----------
(629,000) (87,000) (113,000) (69,000) (45,000)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of capital assets (113,000) - - - -
Cash acquired upon
amalgamation (note 2(b)) 1,200,000 - - - -
----------- ----------- ----------- ----------- -----------
1,087,000 - - - -
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Advances (to) from Videoflicks
Canada Limited 220,000 - - - -
Proceeds from Series A
warrants 458,000 - - - -
Capital contribution to
internet operations
prior to acquisition (Note 7) 7,000 87,000 113,000 69,000 45,000
Net issue costs (199,000) - - - -
----------- ----------- ----------- ----------- -----------
486,000 87,000 113,000 69,000 45,000
----------- ----------- ----------- ----------- -----------
INCREASE IN CASH
DURING THE PERIOD 944,000 - - - -
CASH, beginning of period - - - - -
----------- ----------- ----------- ----------- -----------
CASH, end of period $ 944,000 $ - $ - $ - $ -
=========== ========== ========= =========== ===========
THE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES ARE AN
INTREGAL PART OF THESE FINANCIAL STATEMENTS.
6
44
VIDEOFLICKS.COM INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
NATURE OF BUSINESS Videoflicks.com Inc. ("The Company") was
amalgamated under the laws of Ontario March
23, 1999. The company is engaged in the
business of selling pre-recorded video/movie
cassettes through an internet world wide site.
BASIS OF FINANCIAL STATEMENTS The financial statements are stated in United
States dollars "the reporting currency". The
transactions of the company have been recorded
during the period in Canadian dollars, "the
functional currency". The translation of
Canadian dollars into United States dollars
have been made at the period end exchange rate
for balance sheet items and the average
exchange rate for the period for revenues,
expenses, gains and losses. Translation
adjustments for the periods presented are not
material.
These financial statements have been prepared
by management in accordance with generally
accepted accounting principles in Canada,
which are not materially different from
generally accepted accounting principles in
the United States.
REVENUE RECOGNITION Revenue is recognized when the order is
shipped and payment has been confirmed.
ACCOUNTING ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from those
estimated.
INVENTORY Inventory is stated at the lower of cost and
net realizable value.
CAPITAL ASSETS Management reviews long-lived assets for
impairment whenever events or changes in
circumstances indicate that the carrying
amount of an asset may not be recoverable,
and, if deemed impaired, measurement and
recording of an impairment loss is based on
the fair value of the asset.
Capital assets are recorded at cost less
accumulated amortization. Office equipment is
being amortized over three years on a straight
line basis.
Furniture and fixtures - 20% declining balance
Computer equipment - 30% declining balance
Computer software - 30% declining balance
7
45
VIDEOFLICKS.COM INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
INCOME TAXES The company accounts for income taxes under
the assets and liability method. Under the
assets and liability method, deferred income
taxes are recognized for the tax consequences
of temporary differences by applying enacted
tax rates applicable to future years to
differences between the financial statement
carrying amounts and tax bases of existing
assets and liabilities.
FINANCIAL INSTRUMENTS The carrying amounts of financial instruments
of the company approximate their fair value
because of their short maturity.
8
46
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
1. UNAUDITED INFORMATION
The financial statements include the unaudited balance sheet as of May 31,
1999 and the related statements of operations, deficit and cash flows for
the nine months ended May 31, 1998 and 1999. This unaudited information has
been prepared by the Company on the same basis as the audited statements
and, in management's opinion, reflect all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the
financial information, in accordance with Canadian generally accepted
accounting principles, for the periods presented. Results for interim
periods are not necessarily indicative of the results to be expected for
the entire year.
2. BUSINESS COMBINATIONS AND BASIS OF ACCOUNTING
(a) INCORPORATION AND BUSINESS ACQUISITION
Videoflicks.com Limited was incorporated under the laws of Ontario on
July 4, 1997 and issued 100 common shares for $100.
Effective November 30, 1998, the Company acquired from Videoflicks
Canada Limited the business of selling pre-recorded video/movie
cassettes through an internet world wide web site (the "Business") in
exchange for 7,999,900 common shares. For purposes of the exchange the
Business acquired was valued at $5,148,000, however for accounting
purposes the assets acquired are valued at their carrying values and
goodwill of $5,136,000 is not recorded because the companies were
under common control.
The net assets acquired at carrying values as at November 30, 1998
were as follows:
Computer equipment $ 11,000
Software 1,000
----------
Total consideration attributed to shares of
Videoflicks.com Limited $ 12,000
----------
The historical financial statements for the years ended August 31,
1998, 1997 and 1996 reflect the carved-out operations of the internet
business of Videoflicks Canada Limited on a continuity of interest
basis.
(b) AMALGAMATION AND REVERSE TAKE OVER
Pursuant to an amalgamation agreement effective March 23, 1999, the
company was amalgamated with Mantaur Petroleum Corporation (Mantaur)
and 1318780 Ontario Limited (Ontco). The Amalgamated Company continues
under Videoflicks.com Inc.
Upon amalgamation all issued common shares of Mantaur and Ontco were
exchanged for units of Videoflicks.com Inc., each unit consisting of
one common share and one-half Series A Share Purchase Warrant. The
transaction results in the former shareholders of Videoflicks.com
Limited owning 47.7% of Amalgamated Videoflicks. If all of the Series
A Warrants referred to in Note 3(iii) are exercised the former
shareholders' holdings will be diluted to 38.2%. The former
shareholders of Videoflicks.com Limited will still own the controlling
block of shares and will have the majority representation on the Board
of Directors of Amalgamated Videoflicks therefore the amalgamation has
been treated for accounting purposes as an acquisition of Mantaur (the
acquirer for legal purposes) and Ontco by Videoflicks (the acquirer
for accounting purposes), referred to as a "reverse take-over".
Application of "reverse take-over" accounting results in the
following:
9
47
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
2. BUSINESS COMBINATIONS AND BASIS OF ACCOUNTING (CONTINUED)
(i) Videoflicks is deemed to be the acquirer for accounting purposes; its
assets and liabilities are included in the balance sheet at their
carrying values.
(ii) The acquisition of Mantaur and Ontco is accounted for under the
purchase method. The net assets acquired at fair value as at March 23,
1999 were as follows:
ONTCO MANTAUR
----- -------
Cash $1,200,000 $ -
Capital assets - 6,000
---------- ----------
1,200,000 6,000
---------- ----------
Less: Liabilities assumed
Accounts payable - 83,000
---------- ----------
Total consideration attributed to shares
of Amalgamated Videoflicks $1,200,000 $ (77,000)
========== ==========
The deficit of Mantaur was recorded as a cost of issue
3. SHARE CAPITAL
(i) AUTHORIZED
Unlimited number of common shares
(ii) ISSUED
Videoflicks.com Limited
Issued on incorporation 100 $ -
Shares issued upon purchase
of "Business" (Note 2(a)) 7,999,900 12,000
Mantaur Petroleum Corporation shareholders 5,960,462 -
1318780 Ontario shareholders 2,400,000 1,200,000
Advisory services fees 400,000 200,000
Cost of issue - (399,000)
---------- ----------
16,760,462 1,013,000
Series A Warrants exercised 610,900 458,000
---------- ----------
17,371,362 $1,471,000
========== ==========
10
48
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
3. SHARE CAPITAL (CONTINUED)
(iii) WARRANTS
Videoflicks.com Inc has the following warrants to issue common shares
outstanding:
SERIES A SERIES B
--------- --------
Warrants issued on amalgamation 4,180,200 -
Warrants exercised during the period (610,900) -
Warrants issued during the period - 610,900
--------- --------
Unexercised warrants at May 31, 1999 3,569,300 610,900
========= ========
Series A Warrants are exercisable at $0.75 per warrant until four (4)
months following the effective date of the amalgamation to purchase
one Class B Unit; each Class B Unit consists of one Videoflicks.com
Inc. common share and one Videoflicks.com Inc. Series B Warrant. Each
Series B Warrant will enable the holder to subscribe for one
Videoflicks.com Inc. common share at $1.15 until eight (8) months
following the effective date of the amalgamation.
Subsequent to May 31, 1999 an additional 436,770 Series A Warrants
were exercised. The remaining 3,132,530 Series A Warrants expired on
July 23, 1999. A total of 1,047,670 Series B Warrants were issued and
11 were exercised by July 23, 1999.
(iv) STOCK OPTION PLAN
Videoflicks.com Inc. has established a directors, officers, eligible
employees and consultants stock option plan (the "Plan"). The maximum
number of common shares that may be reserved for issuance under the
Plan is limited to 4,000,000 common shares.
Subsequent to the Amalgamation on March 23, 1999, options were
granted to purchase 2,040,000 common shares at an exercise price of
$0.50 per share expiring in March and April, 2004. All options vest
as to one third thereof on each of the first, second and third
anniversaries of their date of grant except for 800,000 options
granted to one director, all of which vest immediately. Options to
acquire an additional 200,000 common shares at $0.50 per share on or
before April 22, 2004 have been granted subject to compliance of such
grant with applicable securities legislation.
11
49
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
4. CAPITAL ASSETS
MAY 1999 AUGUST 1998
(UNAUDITED)
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
---- ------------ ---- ------------
Furniture and fixtures $ 18,000 $ 5,000 $ - $ -
Computer equipment 117,000 32,000 31,000 20,000
Computer software 17,000 3,000 2,000 1,000
---------- ---------- ---------- ----------
$ 152,000 $ 40,000 $ 33,000 $ 21,000
========== ========== ========== ==========
Net book value $ 112,000 $ 12,000
========== ==========
5. RELATED PARTY TRANSACTIONS
Amounts due to related parties are as follows:
MAY 1999 AUGUST 1998 August 1997
-------- ----------- -----------
(UNAUDITED)
Videoflicks Canada Limited $ 220,000 $ - $ -
The company has entered into the following transactions with a related
party, Videoflicks Canada Limited. Videoflicks Canada Limited owns the
controlling block of shares of the Company.
MAY 31, 1999
9 MONTHS
(UNAUDITED)
Purchases and freight $ 708,000
Wages and benefits 106,000
Information Technology
Department wages 40,000
Rent 11,000
Administration 28,000
----------
$ 893,000
==========
Cost of sales and operating expenses do not include any mark up from the
costs of Videoflicks Canada Limited.
Wages include a 15% mark-up on actual wages for payroll taxes and benefits.
Rent reflects the actual cost of the space maintained specifically for the
Internet Operations.
Administration expense is recorded at 15% of other operating expenses for
the period December 1, 1998 to March 23, 1999. This charge to Internet
Operations reflects an allocation of overhead costs including management,
administration, accounting services and office costs.
12
50
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
6. LOSS PER SHARE
Loss per share has been calculated based on the weighted average number of
shares outstanding for each period. For the years ended August 31, 1998,
1997 and 1996 and the period ending May 31, 1998, the weighted number is
16,760,462 and represents the shares outstanding after the recapitalization
of the operating company and the amalgamation (see note 2). For the period
ended May 31, 1999 the weighted average number of shares is 16,829,822.
The Company had losses for all the periods presented, therefore the
exercise of the warrants and employee stock options would have an
antidilutive effect on loss per share.
7. CAPITAL CONTRIBUTION TO INTERNET OPERATIONS PRIOR TO ACQUISITION
The statements of operations represent the results of operations of the
internet operations on a continuity of interest basis. All losses incurred
prior to the acquisition on November 30, 1998 are losses of Videoflicks
Canada Limited which operated the internet operations. The capital
contributions, net of the losses, are presented as the assets of the
internet division.
8. INCOME TAXES
The reconciliation of income taxes calculated at the effective rate of
44.5% to the total tax provision as follows:
FOR THE 9
MONTHS ENDED
MAY 31, 1999
(UNAUDITED)
-----------
Income taxes (recovery) at statutory rates $ 155,000
Adjustment to valuation adjustment (155,000)
------------
$ -
============
Tax losses avaiable to reduce taxable income of future years $ 155,000
Less: Deferred tax assets valuation allowance (155,000)
------------
Net tax assets $ -
============
The Company has net operation loss carry-forwards to reduce taxable income
of approximately $349,000 which expire during 2006.
13
51
VIDEOFLICKS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
AUGUST 31, 1998, 1997 AND 1996 AND MAY 31, 1999 AND 1998 (UNAUDITED)
9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000.
If the Year 2000 Issue is not addressed by the company and its major
customers, suppliers and other third party business associates, the impact
on the company's operations and financial reporting may range from minor
errors to significant systems failure which could affect the company's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the company,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
10. SEGMENTED INFORMATION
Approximately 75% of the Company's sales are to the United States with the
remaining 25% having no more than 5% concentrated in any one country. The
assets of the company are in Canada.
14