TM
The World’s First Audience-Financed Movies
BUSINESS PLAN
The CinemaShares.com Corporation
550 S. Barrington Ave. Suite 2129 Los Angeles, California 90049
Phone: (310) 476-3668 Fax: (310) 476-9520
For more information, please contact:
Gene Massey
E-mail: Gene@CinemaShares.com
Web site: www.CinemaShares.com
This is a business plan, not an offering to sell securities.
CONFIDENTIAL COPY NUMBER _____________
Table of Contents
Executive Summary - 3
Mission Statement - 5
The Company - 5
CS Unique Corporate Structure - 5
Corporate Structure Graphic Diagram - 6
Stock in a CS Licensee Company – 7
Marketing the Shares in Licensee Companies – 8
Size of Market - 10
Size of Market (Tables) - 11
Competitive Advantages – 12
Management Team – 14
Board of Advisors – 18
Capital Required and Use of Proceeds - 21
Investor Exit Strategy - 22
The Internet Industry Overview - 23
Motion Picture Industry Overview - 24
CinemaShares Business-Method - 26
Management's Projected Revenue Sources - 27
Theatrical Exhibition - 27
Home Video - 28
Licensing Revenue - 30
Advertising Revenue - 31
Product Placement Revenue - 31
Merchandising Revenue - 31
Game Revenue - 32
Sequel and Prequel Rights - 33
TV and Cable Rights - 33
Soundtrack Licensing - 34
Non-Theatrical Distribution - 34
Management's Revenue Projections - 35
Financial Plan - 35
Total Movie Distributor Revenues [Table: Historic, Table: Future] - 36
Major Assumptions and Methodology Used in Projections - 37
Projections Key - 38
Conservative Scenario Summary & Detail [Table] - 39
Moderate Scenario Summary & Detail [Table] - 40
Aggressive Scenario Summary & Detail [Table] - 41
Valuation - 42
Appendix A - Paul Kagan Reference on Movie Release Revenues
Appendix B – Info on U.S. and International Patent Filings
Appendix C – Related News Articles
Appendix D - Anatomy of Movie Funding - Hollywood Reporter Article
Appendix F – FUNGI - A Comedy About Pollution, CinemaShares' First Movie
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Executive Summary
Since its birth in the early 1900's, the motion picture industry has financed the production and
distribution of feature length films by loans from banks or movie studios that provided the
necessary "front money" to create them. These investments have generally required repayment
from revenues received from selling the film in various markets before any profits could be
realized. Over the years, certain films financed in this manner have generated extraordinary
profits. Even a film as expensive as "Titanic," with a cost of almost $200 million dollars to
produce, generated nearly ten times its production cost in revenues for Twentieth Century Fox and
Paramount, the two movie studios that shared production expenses. Numerous examples can be
given of other highly successful films such as Spiderman, Harry Potter, Lord of the Rings, Star
Wars, E.T., Jurassic Park, The Lion King, Men In Black, Forest Gump, and Home Alone, that
have generated enormous revenues, fully repaid the large loans necessary to make them, and even
to this day produce revenues for the studios that financed them.
And yet, every year a high percentage of films financed in this manner do not make back their
costs. According to a recent media and entertainment study published by Arthur Andersen, more
than 50% of the films made in the last three years have not been profitable. The study also
reported that despite significant increases in revenues, operating income for the 35 largest
media and entertainment companies actually decreased by 8% from 1998 to 1999. The
Arthur Andersen report concludes with the statement: "In this environment, there has never been a
greater need for content companies to have access to significant long-term and reasonably priced
capital."
The movie studios have long depended on the revenues from the highly successful films to make
up for the commercial failures. However, the high cost of producing and distributing featurelength movies continues to escalate each year, with a commensurate increase in risk for movie
investors. This great financial risk from the significant percentage of box office failures is due to
the inability of movie producers to accurately predict, prior to advancing the production funds of a
proposed film, the number of tickets that will eventually be sold. Since presently known methods
of surveying the audience cannot determine the number of tickets that will be eventually
purchased for a proposed movie, a method is needed for consistently assuring the financial success
of a movie, prior to advancing the funds needed for production and distribution.
As a solution to this long-standing problem, The CinemaShares.com Corporation has developed a
patent-applied-for business-method that allows the potential audience to invest in studio-quality
motion pictures, participate in the filmmaking process, and share in a film's profits. Our patentpending business-method eliminates the loan repayment from the process of financing a
motion picture. Furthermore, it allows an investor who purchases at least one share of stock in a
movie to receive a guaranteed "Agreed Fair Return" on their investment in the form of a free copy
of the movie.
For the first time in history, CinemaShares provides a method of funding a yet-to-be-produced
movie by presenting a "storyboard synopsis" on a production company’s Web site and allowing
potential viewers of the movie to purchase as little as one share of the company‘s stock prior to
production. The purchase of a minimum of one, fully-registered, publicly-traded, OTCBB share of
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stock in a CinemaShares Licensee Production Company holding rights to a proposed film will
entitle a Shareholder to receive the following benefits:

Trademarked as "Audience-Financed Motion Pictures," our Business Method allows for the
distribution to shareholders of a free VHS or DVD copy of the movie as a stock dividend.
(one free copy for every share held, upon completion of production) Described as an "Agreed
Fair Return," shareholders will receive their copies by mail within a certain window to avoid
competing with the theatrical release.

Our Business Method also allows for audience observation of, and participation in, the
creative process of making a movie. After purchasing at least one share of stock, a
Shareholder will be given the opportunity to participate as a "Cyber-Producer" during the
making of the movie, by casting advisory votes on the Web site for certain non-essential
elements of production. Some of the issues voted on will perhaps include casting, wardrobe,
locations, key story points, and other fun items during shooting as they occur. Shareholders
may also be able to download and read the script (with or without the ending), view
storyboards and production notes, and e-mail the production staff with their comments. They
will be entitled to discounts on Studio Store merchandise and will be entered in contests to
appear in the movie and receive free tickets to screenings. Through streaming video on the
Web site, they will be able to view some of the dailies, celebrity interviews, and even view
parts of the actual filming of the movie.

A shareholder will also receive a portion of the net profits generated from Worldwide
theatrical, television, cable and home video distribution of the movie. The films financed using
this method will generate revenues by distribution through traditional means, domestically and
internationally, to movie theatres and video rental stores through major and independent
studios, as well as through new and innovative methods on the Internet. However, unlike
traditional motion picture financing methods, with CinemaShares' method there is no loan
to be repaid to the financing entity, and all net profits received from a movie's
distribution will be paid out to Shareholders in the form of cash dividends.
These considerable benefits are offered to any Shareholder who purchases at least one share of
stock in a Licensee Company for $23 dollars ($20 dollars per share, plus a $3 online transaction
fee) or less than the current retail price of a typical DVD movie title. The purchase would take
place with a credit card on a CinemaShares Licensee Company's Web site.
An additional, but significant, ancillary source of revenue for CinemaShares will be from the
sale of our proprietary software, enabling publicly traded companies to deliver their
disclosure documents and sell their own stock directly to the public through their own Web
sites. Our software and databases would facilitate this capability and make it available to a wider
market and at a lower cost than can be done by many companies in-house.
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Mission
The Vision of CinemaShares is to become the world's pre-eminent source for financing,
publicizing, and marketing studio-quality motion pictures.
Our Mission is to use our Patent-Pending Internet-based financing concept, combined with
traditional offline film distribution methods, to contribute to the creation of highly entertaining,
commercially successful motion pictures that uplift the human spirit.
The Company
The CinemaShares.com Corporation (CinemaShares), a Nevada “C” Corporation, is a
development-stage parent holding company incorporated in April of 2000. CinemaShares utilizes
a new and innovative patent-applied-for Business Method that can minimize the risks associated
with financing a motion picture.
CinemaShares principal business is licensing our technology and software to our publicly traded
“Licensee Companies” enabling them to develop and finance studio-quality motion pictures
through their own Web sites. CinemaShares owns a Web site, www.CinemaShares.com, and
through access to our site we also provide our Licensee Companies with assistance in production,
advertising, and marketing their films to the public.
CinemaShares' Unique Corporate Structure
Each film that is financed utilizing the CinemaShares Proprietary Business Method will be
owned by a separate, publicly traded company and each company will own all rights to its
motion picture property. CinemaShares is currently a pre-IPO, parent holding company, and will
receive an interest in each of these publicly traded movie companies as compensation for: 1) the
use of our proprietary software system, 2) licensing the U.S. Patent for our Business Method, and
in some cases, 3) transferring our rights in a motion picture property. CinemaShares' holdings in a
Licensee Company will vary in each case according to terms negotiated with the original owners
of the motion picture property. Our holdings may range from a larger interest in a Licensee
Company owning all rights to a film developed in-house by CinemaShares, to a smaller interest in
a Licensee Company financing a film by merely licensing our Business method and purchasing
our software. CinemaShares will partner with a reputable online Broker/Dealer to facilitate
the sale of stock in each of our Licensee Companies.
For example, the first motion picture property planned for financing by CinemaShares will be the
family comedy, Fungi - A Comedy About Pollution. A complete description of this film project
can be seen in Appendix F of this document and at its Web site: www.Fungi-the-movie.com. The
Web site includes a storyboard synopsis, the budget, the shooting schedule, the cast description,
the screenplay, and biographies of key personnel. CinemaShares has acquired all rights to this
property and is transferring these rights and licensing its business-method to its first Licensee
Company, The Fungi, Inc., in exchange for 45 percent of the new company's stock. (See
Corporate Structure Graphic below and description of first film offering in Appendix F)
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6
Stock in a CinemaShares Licensee Company
Publicly traded stock in any CinemaShares Licensee Company could be classified as a
hybrid "Bank/Internet/Utility Stock." Motion pictures are typically financed by banks, which
receive interest on the loans necessary to finance them. Over the life of a movie loan this interest
can generate considerable revenues for the bank, with risk in the loans covered primarily by
completion bonds and insurance policies. The company producing the movie is usually the entity
at risk for the monies advanced for the production budget. Banks and financial companies
generally have a good revenue stream from movie companies requiring financing. It is
management's opinion that CinemaShares patent-pending method for financing movies will
replace traditional bank financing, so we might be compared with a bank stock.
Internet stocks are largely out of favor now because very few Internet-based companies are
showing any real earnings, let alone exponential earnings growth. A CinemaShares company
will use the Internet as a tool to sell its stock online, not to generate the majority of its
earnings. The earnings will come through traditional off-line methods for distribution, so we are
more of a traditional financing company that uses the Internet, than a typical Internet company.
Stock in a public utility is often purchased for the cash dividends paid out to shareholders. An
example of a utility stock paying dividends is a typical coal mining stock. With a coal mining
stock, the value of the stock actually goes down as the finite amount of coal is mined and sold and
the proceeds are paid out as cash dividends to the Shareholders. If all goes as planned, the cash
dividends paid out over time to the Shareholders eventually exceed the price they paid for the
stock, and hopefully with enough of a return to make the endeavor worthwhile.
CinemaShares' management expects the stock in each Licensee Company to pay cash dividends
very much like a coal mining stock. In each of these companies, the public will finance the
production of a film (as well as the cost of video and DVD copies distributed to Shareholders)
through the purchase of fully registered, publicly traded stock (OTCBB) on the company's Web
site. Upon completion of a film, CinemaShares' management expects the Licensee Company to
generate revenues from distributing the film through traditional means to theatres, home video,
and television in the U.S. and International markets. Without the usual loan repayment for a
movie's production costs, the net profits received from the distribution of a Licensee
Company's film can be expeditiously paid out as cash dividends. The typical CinemaShares
Licensee Company could thus be described as a hybrid Bank/Internet/Utility stock, because the
company replaces bank movie financing, it uses the Internet in its business model, and it pays out
all earnings as cash dividends like a utility stock.
CinemaShares expects to receive the bulk of its revenues from cash dividends paid out from
Licensee Companies. These cash dividends paid out to CinemaShares could be considerable, as
we will usually hold from 5% to 50% of the Licensee Company's stock. For example, let us
assume that CinemaShares holds 50% of the outstanding shares in a Licensee Company. If the
Licensee Company's film produces actual world-wide profits ranging from as little as $2 million to
as much as $100 million dollars, the cash dividends paid out to CinemaShares, the Parent
Company, will correspondingly range from $1 million to $50 million. These revenues would flow
through to CinemaShares, with very minimal deductions, as there would be no production loan to
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repay and the Licensee Company would have covered the major expenses. (See "Revenues"
section for greater detail.)
Even a highly successful film often receives the largest percentage of its revenues in the first few
years of distribution. After a certain period, it may not be worthwhile to a CinemaShares
Licensee Company to pay dividends to hundreds of thousands of individual Shareholders,
each holding a single share. At some point in the future, a film's anticipated future revenues
could be securitized and paid out in one lump sum to the Shareholders. Another option would be
the purchase of all outstanding shares by the CinemaShares parent company or by a major
studio that may want to add the Licensee Company's film to their library. (See Appendix C for
article on the Pullman Bond.)
Marketing the Shares in Licensee Companies
Obviously, the primary marketing challenge for each CinemaShares License Company is to
sell enough stock in an offering to be fully subscribed. The challenge is, of course, to generate
enough interest in each movie project and drive enough traffic to our Web site. This is no small
problem and the key to the success of our entire enterprise. The question is, can we sell a million
shares, and how will we do it?
The answer may be found in examining the history of subscriptions sold online. The Internet is
rapidly moving toward an online subscription model, and in essence, we have an online
subscription/product/investment hybrid. Some examples of successful Internet subscriptions are:
1) the Sony Game site has over 300,000 subscribers who pay $9.95 per month for access, 2)
Real.com has over 500,000 subscribers who pay $9.95 or more per month for RealPlayer Plus to
download music, and 3) NetFlix.com, the world's largest DVD rental company, has about 500,000
subscribers paying $20 a month to rent as many DVD’s as they want, with no late fees. (It is
adding about 15,000 new subscribers every month, according to the company.)
Successful studio movies routinely ship in excess of a million copies the first week of release
on home video, and occasionally their successes are monumental. Both Gladiator and X-Men
each earned in excess of $60 million in retail video sales and rental the first week of release.
Recently a number of studio and film-related Web sites have developed concepts based on
Audience observation of the movie-making process, (See Competitive Advantages Section, Page
12). Management believes we could almost make a good argument for selling subscriptions to this
creative process without an ownership in the project or the DVD dividend. In comparison to
successful Internet subscription-only offerings, it is fairly easy to see the additional value we offer
to our potential Shareholders for their $23 investment where they receive: a) the online
subscription, b) the DVD dividend, and c) potential revenues from the product’s
manufacturer. Our problem is largely one of making potential Shareholders aware of our
offerings without a $50 million ad campaign. Management expects to accomplish this in several
ways:

We expect to develop key strategic partnerships with movie-related Internet Web sites to drive
traffic to the CinemaShares site. Links and click-through banners will be purchased, bartered
and/or exchanged with movie-fan Web sites such as AOL MovieFone, HSX.com, Ifilm.com,
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


Atomfilms.com, Yahoo Movies, and Hollywood.com. We also expect to establish
relationships with companies specializing in the online sale and rental of movie copies such as
Reel.com, Amazon, Netflix, Yahoo, and America Online.
The success of e-mail marketing cannot be ignored. According to estimates from Christopher
Todd, an analyst at Jupiter Media Metrix, marketers spent $1 billion in 2001 for e-mail
marketing and will spend $5.3 billion in 2005. Our Licensee Companies will promote the
sale of their stock through custom-designed, flash-embedded, and/or streaming videoenabled e-mail marketing campaigns. We have researched our cost per acquisition (CPA)
and estimate a maximum cost of about $3 dollars for every share of stock marketed online and
offline. We will be sending out flash and streaming video enhanced e-mails that encourage
people to click through to our site and make a share purchase. We are also developing
innovative viral marketing programs that encourage anyone receiving e-mail from us to
forward it to others.
Like most Web sites, CinemaShares has incentive programs to develop our own internal email
list. We currently have contests for visitors who register on our site to receive a free DVD
copy of our movie and will continue to expand on this feature.
Another new method of marketing we intend to use is the distribution of pre-recorded CD's.
Custom-designed CD's are now being distributed to the public containing preview trailers of
upcoming movies with a link to the movie’s Web site. These CD's cost about 70 cents each, so
a million could be distributed for about $700,000 dollars, to help seed our prospective market.
In addition to the single shares marketed and sold to individuals through our Web sites, we also
expect to sell large blocks of the stock offered in each CinemaShares Licensee Company to
certain Strategic Investor Partners who would benefit from owning free video copies.
Although we have yet to develop a relationship with any of the major retailers, we will be working
to develop strategic alliances with national video retail chains like Blockbuster and Hollywood
Video, as well as other nationwide retail stores such as Wal-Mart, K-Mart, Target, and Best Buy.
For example, Blockbuster is currently self-financing movies for direct distribution to their
retail stores. If Blockbuster were to buy a portion of the stock offered in a CinemaShares
Licensee Company as an investment, they would receive a free movie copy for each share of stock
purchased. Blockbuster would thereby secure their investment with the free video dividends,
because they could then sell or rent these video copies at retail prices in their stores nationwide,
and still participate in the movie's earnings.
This same scenario could be played out with many other Strategic Partners in the retail video or
video distribution business such as Hollywood Entertainment, Wal-Mart, Warner Home
Video, Target, K-Mart, etc. Our formula will also work extremely well with major movie studios
and Internet retailers of movie copies such as Amazon.com, Reel.com, Bigstar.com, Buy.com, and
Yahoo.com. As investors purchasing stock in CinemaShares' films, the major movie studios and
Internet retailers would be motivated to offer promotional links to help drive traffic to our Web
site.
In the opinion of management, these campaigns would be more than sufficient to insure that each
offering will be fully subscribed.
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Size of Market
According to Paul Kagan Associates, the video rental industry is the largest single source of U.S.
revenue to U.S. movie distributors, representing about $7.6 billion, or 48.5%, of the $15.4 billion
of domestic movie revenue in 2000. International distribution produced an additional $14.5 billion
in revenues for U.S. movie producers with combined 2000 total movie revenues of over $32.1
billion.
A large part of the potential market for the stock in our licensee companies consists of anyone who
purchases copies of movies. In 2001, 1.0 billion VHS and DVD copies of movies were shipped to
U.S. retail outlets for purchase either by individuals as "sell through" copies or by the retail outlets
themselves for rental. Total worldwide combined DVD and VHS sales revenue is expected to
grow from $13.4 billion in 2000 to $32.7 billion by 2005. (Source: Adams Media Research).
Historically, new technologies have led to the creation of additional distribution channels for
movie studios resulting in additional revenues. It is the opinion of management that
CinemaShares' new business-method offers a major value-added alternative to the typical
purchaser of a home video or DVD. The value added by CinemaShares Business Method to
purchasers of movie copies is the opportunity to participate in the making of the movies they
purchase, as well as the right to own a share of the profits in each of these movies, paid out to
them as cash dividends. We must also consider the psychological benefit to the movie fan of the
pride of participation in, and partial ownership of, a studio-quality Hollywood movie.
In 2001, Blockbuster alone generated $5.1 billion in video sales and rentals worldwide (Source:
Blockbuster Annual Report). These video copies of movies were sold and rented to individuals
who purchased or rented them with no expectation other than viewing and/or owning the video
copy. Consider a Blockbuster video customer being offered the opportunity to participate in
the making of a Hollywood movie, and own a share of that movie's profits, for the same price
they previously paid for just the video. It is easy to see why we believe that one day the majority
of films could be financed using CinemaShares' Business Method.
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Worldwide film revenues grew to a staggering $32.1 billion in 2000, with the US box office
accounting for $7.8 billion of the total. Worldwide revenues are expected to grow over the
next five years by an average of 8.1%, with the overseas market continuing to gain in
importance. The charts below show Paul Kagan's calculations of the actual theatrical and
video Worldwide revenue from 1995 to 1999 and projected theatrical and video
Worldwide revenue from 2000 to 2005 (based on the 1999-growth rate of 8.1%), with
projected Worldwide revenue of $47.5 billion in 2005.
Total Movie Distributor Revenues (in $ millions)
2001
Projected
2003
2002
2004
2005
U.S. home video
8,640
9,339
10,096
10,914
11,798
Other U.S. revenue
9,163
9,906
10,708
11,575
12,513
Total U.S. revenue
17,803
19,245
20,804
22,489
24,310
5,238
5,662
6,121
6,617
7,153
Other international revenue
11,710
12,658
13,684
14,792
15,990
Total international revenue
16,948
18,321
19,805
21,409
23,143
Total worldwide revenue
34,751
37,566
40,609
43,898
47,454
International home video
Percentage increase (at 1999 rate)
Source: Paul Kagan Associates
8.1%
8.1%
8.1%
Total Movie Distributor Revenues (in $ millions)
Actual
1995
1996
1997
1998
8.1%
1999
8.1%
2000
U.S. home video
5,231
6,152
6,306
6,811
7,389
7,990
Other U.S. revenue
6,020
6,690
7,161
7,240
7,837
8,474
Total U.S. revenue
11,251
12,842
13,467
14,051
15,226
16,464
International home video
4,192
4,432
4,406
4,436
4,480
4,844
Other international revenue
6,052
7,439
8,049
8,999
10,015
10,829
Total international revenue
10,244
11,871
12,455
13,435
14,495
15,674
Total worldwide revenue
21,495
24,713
25,922
27,486
29,721
32,138
Percentage increase
Source: Paul Kagan Associates
15.0%
4.9%
6.0%
8.1%
8.1%
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Competitive Advantages
CinemaShares comes to market at a very opportune time. With the advent of the Internet and its
ability to reach millions of movie fans, coupled with the recent popularity of online stock trading,
it is no wonder a number of start-up companies now have plans to offer stock in movies to the
public. The Internet offers immediacy and so many options for interactivity that it is a perfect
medium for not only selling stock in a movie, but also allowing for Shareholder involvement in
the creation of the movie. A number of companies have announced plans to provide audience
involvement in the financing and/or production of movies. Among these are:
www.HollywoodInvestor.com - This is an expensive-looking, very creative, flash-enabled Web
site that announces an opportunity to invest in large Studio-quality Hollywood movies. The site's
creators would appear to be Hollywood insiders from the major movies they claim to have worked
on, but the principals are not identified, nor are their exact credits on those films listed. It difficult
to evaluate their business model, but they do have movie-related products for sale.
www.civilianpictures.com - The site for this company offers some promise, based on their
streaming video promotional film. They are a registered broker/dealer (NASD/SIPC) and they
plan to equity-finance movie production through underwriting the public sale of OTC BB listed
stock. They announced their new business at the Sundance Film Festival at the end of January
2001. According to their video, they point out the same problems that we do with the equity
financing of movies, such as enabling anyone to purchase shares, and enabling an affordable
minimum investment for the small investor. They have not, however, solved the problem of
money-losing films, do not have our free DVD dividend per share idea, and list no films ready for
financing or production. See Appendix C for USA TODAY news article.
www.HollywoodStockExchange.com (also www.HSX.com) - this is one of the most popular and
most trafficked sites with almost one million unique visitors a month. There is no legal stock
offered for sale on the site and it is not designed to finance movies. The site would, however, be a
good advertising partner to drive traffic to the CinemaShares sites, and could supply excellent
research statistics.
www.MovieShares.com - This is a Web site actually designed to finance movies by selling stock.
However, according to their disclosure, when it is offered, it will be sold only to qualified
investors. Furthermore, their investors will get nothing other than the stock and a possible invite to
some screenings and parties. There are several films now listed for production and they are
seeking investors.
www.AudienceFunding.com - This site is almost identical in concept to MovieShares.com in that
it has announced plans to sell stock in movies on its Web site. It does claim that it will sell not just
to qualified investors, but to all movie fans and their shareholders will also be invited to special
investor parties. They will not sell stock from their own Web site but will sell through
Broker/Dealers, thereby most likely eliminating the possibility of competing with our one
share/DVD dividend concept.
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www.MGM.com - This is a very appealing and well-designed site focusing primarily on MGM
Studios current and future film releases. Visitors to the site can see celebrity interviews,
production stills, and trailers from upcoming films. One feature we plan to also offer is the ability
to scroll down through a scene from the script as the same scene plays through a streaming video
clip alongside. The site supports our belief that movie audiences want to observe all aspects of the
filmmaking process, and viewers would jump at the chance to actually participate through online
voting for some aspects of production. Visitors to the MGM site can also purchase VHS and DVD
copies of MGM movies online.
www.projectgreenlight.com - This overwhelmingly popular site is not designed to finance movies
but is actually a contest for screenwriters who would like to submit a script for consideration by
Miramax. The winner of the first contest got his film “Stolen Summer” financed by Miramax and
received $1 million to direct his movie script. Miramax is producing, and HBO will document the
making of the film with a thirteen-week television series. This once again supports our
contention that audiences want to observe and participate in the filmmaking process.
The management of CinemaShares.com feels that we have very little competition for these
reasons:






Most of the companies listed above require "Qualified Investors" - An individual must meet
certain financial criteria to legally invest in the project.
All of the offerings require a minimum investment of several hundred to several thousand
dollars.
Movies are historically a very high-risk investment. Most individuals are aware of this and
would be reluctant to invest.
Most of the companies described above plan to offer stock that is illiquid and not fully listed,
making it difficult to trade.
None of the Internet businesses described above are attempting to fully finance movies with
our free-DVD-dividend-per-share concept, thereby offering an "agreed fair return" to the
investor.
We have filed for U.S. and International Patents on our business method concept, and based on
the opinion of our Intellectual Property Attorneys and their Prior Art research, we fully expect
it to be granted. If it is granted, it may be broad enough to include all movie financing on
the Internet.
We expect to see many more companies attempting to utilize the Internet to finance movies in the
near future. Most of the current movie investment Web sites offer stock only to "qualified
investors" and have minimum investment requirements ranging from $200 to $2,000 dollars. It is
management's opinion that without being fully listed as an OTC BB stock and without
CinemaShares' "agreed fair return" (a free video copy per share plus other benefits), the other
investment ideas will have difficulty succeeding.
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The Management Team:
Gene Massey - CinemaShares Founder and Chairman /CEO
Gene Massey began his film career in the early-1980's as a television commercial director, and
since that time has been president of a Los Angeles-based film and television production
company, Gene Massey Films, Inc. In recent years, the company has produced revenues primarily
from the production of short films and national television commercials. Gene's most recent film:
Hymns From the Vedas: Creation, is a ten-minute film designed to introduce these ancient
scriptures to modern audiences. This film was donated to the new Sathya Sai Baba Chaitanya Jyoti
Spiritual Museum at Puttaparthi, India.
In August of 1999, Gene trademarked the name CinemaShares.com, and filed U.S. and
International Patents for a new method of financing motion pictures on the Internet.
In 1998, he completed the screenplay for the feature film “Fungi - A Comedy about Pollution.”
This script has now been recognized in three national screenplay competitions and received
awards for Best Comedy Screenplay from both the Houston Film Festival and the Charleston
Film Festival, and Best Screenplay Finalist from the Arizona Film Society. Most recently the
screenplay also received the 2001 Film Advisory Board’s Award of Excellence for Family
Films.
Between 1990 and 1997, Gene worked personally with Ely Callaway, producing and directing
over four hundred television commercials for Callaway Golf, and introducing and selling the "Big
Bertha" line of golf clubs. Gene also often wrote or co-wrote many of the commercials, and his
company, Gene Massey Films, Inc., managed traffic for shipping the commercials, and paid the
Screen Actors Guild talent.
During the period of time Gene directed Callaway's commercials, their total sales increased
from $21 million in 1990 to $843 million in 1997. Gene's commercials for Callaway were
produced at an average cost of less than $15,000 each, while the industry average cost for a
national spot made during that period was over $200,000.
Gene has directed such well-known sports personalities as Johnny Miller, Sugar Ray Leonard, Chi
Chi Rodriguez, Annika Sorenstam, Colin Montgomerie, Greg Louganis, Paul Azinger, Patty
Sheehan, and Kenny Roberts. Also known for his comedy direction, Gene has also worked with
such stars as Jean Stapleton, Smokey Robinson, Alice Cooper, Tommy Smothers, Kenny G, Jane
Wyatt, Jimmy Walker, Eva Marie Saint, Vincent Price, and Henry Mancini.
In addition to the Callaway Golf commercials, he has directed short films and commercials for
clients such as Goodyear, Gucci, Chrysler, Pizza Hut, Toyota, Burger King, Epson Computers,
Gallo, Polaroid, RCA, Case Tractors, the American Cancer Society, and the U.S. Army. Gene's
other film and television work has received awards from Clio, Telly, the New York Festival,
the Houston Film Festival, the Art Director's Club of Los Angeles, and the Homburg Award.
Prior to his work as a director, Gene was an actor, appearing in a number of network television
shows and feature films, and most notably working with Steven Spielberg on Close Encounters of
the Third Kind. He studied film acting for nine years with Charles Conrad, and he also has a
background in film editing, beginning with a job as Jack Horger's assistant editor on a feature film
in 1974.
14
Some of the milestones in his career include directing the world’s first notebook computer
commercial (CLIO Recognition), and the first commercial on MTV.
Prior to moving to Los Angeles to begin his career in the film industry, Gene attended the
University of Georgia, majoring in Drama and Playwriting.
Richard Stocker - Chief Financial Officer
Mr. Stocker brings a wealth of international public accounting experience in the entertainment
business to CinemaShares. A California-licensed Certified Public Accountant, he started his career
with KPMG, a top five accounting firm. His major film studio experience includes a stint at
Warner Bros., where he oversaw the annual billion-dollar production budget that included
such well-known hits as Batman Forever, Arnold Swarzenegger’s Eraser and television’s ER
and Friends.
Mr. Stocker also has considerable experience in motion picture exhibition, having worked for
United Cinemas International, a worldwide chain of theaters and the largest theater group in
Europe. He has also consulted on many diverse entertainment projects, including the Emmy
nominated In Search of Doctor Seuss and the Film Advisory Board award winning Adventures of
Pumpkin Pete. Most recently, he has served as the Chief Financial Officer of Pumpkinhouse
Productions, a startup film production company specializing in children's programming, and
worked for Fox Cable Networks in a corporate financial planning and reporting capacity.
Mr. Stocker graduated summa cum laude from San Diego State University in 1988 with a
Business degree in Accounting. He has continued his studies with post-graduate work in business
entertainment at UCLA.
Jeromee Johnson, Chief Technology Officer
Jeromee Johnson is an experienced engineer and manager in the field of Financial Technology. As
an Internet programmer, he has done extensive development in both Java and Perl, and is uniquely
familiar with the technology of the Internet and the regulatory side of public finance, especially as
it relates to securities trading. Jeromee holds a number of NASD regulated securities licenses
(Series 4 Options Principal, 7 General Securities Rep, 24 General Securities Principal, 31
Managed Futures Rep, 53 Municipal Securities Principal, 55 Equity Trader/ Market Maker, 63
Uniform Securities Agent, and 65 Investment Advisor.)
After graduating with a BS in Computer Science from the American Institute for Computer
Sciences he has been employed as a Financial Advisor by Morgan Stanley Dean Witter, VP
Operations and Technology at Daylight Trading (also a partner in this successfully sold direct
access trading company), and Director of Engineering at GoInvest.com. Currently Jeromee is
employed as Director of Trading Technology Solutions at Javelin Technologies, the industry
leader in FIX technology. At Javelin, Jeromee acts as a project manager, taking ownership of
projects with the Pacific Stock Exchange, Bank of America Securities, and Robertson Stephens,
and as a development manager leading the FLIRT (Financial Language Internet Real Time
Trading) protocol, Cherubino, and Coquette engineering teams. Jeromee also handles Javelin’s
15
relationships with its technology clients and partners including Advent Software, TIBCO, Yahoo,
Quicken.com (Intuit), Compaq, and BEA Systems.
In addition to his full time position with Javelin Technologies, Jeromee acts a technology advisor
and occasionally a consulting engineer to several private and public companies including Taho
Commerce, GBI Capital, Feuerstein Capital Management, and JB Oxford.
Seth Hallen – VP, Business Development
Seth is a veteran entrepreneur and business development executive with an extensive background
in building and operating two successful marketing companies over the past twelve years. In 1990,
he co-founded Royal Windows, Inc., a Maryland-based company specializing in the direct
marketing of commercial and residential construction and remodeling. As Royal Window’s
President, he built the company’s annual revenues to over 4,000,000 dollars in just 3 years. In
1994, he sold his shares of the company to his partners to pursue opportunities in Los Angeles.
In 1995 Seth founded Home Security Corporation, a company best known for becoming one of the
most well known mass-marketer of security communications services. By the end of 1996, Home
Security had over 100 employees and was nationally recognized as an industry leader. In 1998,
Home Security began acquiring other service providers and by the end of 1999 he sold his
company for $2.1 million to pursue a career in the film and new media markets.
With the exciting things happening in the Internet world, in May of 2000, Seth combined his
experience with building and running companies with his love of the entertainment industry to
found the revolutionary new Internet/Media marketing conduit, Yowzer Media
(www.yowzermedia.com). Yowzer’s concept of audience and talent participation in the making
of movies as well as promoting them ties in extraordinarily well with CinemaShares’ concept of
Audience-Financed Motion Pictures.
While President & CEO of Yowzer Media, Seth has developed relationships with companies such
as Yahoo!, the Uproar Network and E! Online. These relationships will prove invaluable to
CinemaShares as we market our concept to Internet-connected movie fans worldwide.
Mr. Hallen graduated from the University of Maryland in 1990 with an Arts and Humanities
degree in Radio, Television and Film.
Angela Petillo, Chief Counsel
Ms. Petillo is an attorney in Business Affairs at the William Morris Agency, Beverly Hills,
California. Ms. Petillo negotiates development and production deals for the clients of one of the
world's largest entertainment agencies. Her daily activities put her in contact with some of
Hollywood's biggest movie studios, filmmakers and stars. She previously served in a similar
capacity for the Creative Artists Agency, ABC Television, and Dino DeLaurentiis Productions.
She is currently considering our offer to employ her as an officer in CinemaShares.
16
Ryan Pennington – Online Creative Director
Mr. Pennington has over 8 years experience in developing and designing Web sites for highprofile companies in the entertainment and financial industries. In 1999 Ryan designed the
Academy Awards Web site for Universal Studios. In addition to his entertainment experience, he
created Web sites for financial companies such as Javelin Technologies, JB Oxford & Company,
and Goinvest.com. Mr. Pennington holds a Bachelor of Science degree in Applied Art and Design
from California Polytechnic University-San Luis Obispo.
James Gladden, Web Developer
Mr. Gladden is one of the most successful freelance flash Web Developers in Los Angeles and has
expressed an interest in joining CinemaShares when we are fully funded. He has designed some of
Hollywood's most popular Web sites. His numerous clients have included Steven Spielberg's
DreamWorks Studios, Hollywood.com, Spike Radio, and Artist Direct. His sites for popular
television shows have included Melrose Place, and Beverly Hills 90210, and he has created sites
for such popular music groups as the Rolling Stones, the Backstreet Boys, and Aerosmith. He
would prove to be a valuable contributor to our endeavor.
17
CinemaShares’ Board of Advisors
Michael Byorick, Intellectual Property Law
Mr. Byorick is Patent Counsel resident in the Colorado Springs office of Hogan & Hartson, L.L.P.
His practice is primarily concerned with obtaining patents for corporate clients in the computer
and telecommunications industries. He has been extensively involved in counseling clients on a
broad range of intellectual property law matters.
Mr. Byorick was previously Patent Counsel for Microsoft Corporation, responsible for
handling intellectual property matters for their Internet Division. As Microsoft’s fourth
patent attorney, he had extensive experience in the area of protection of intellectual property,
including determining patent filing and acquisition strategies, working with engineering staff to
prioritize patentable ideas, and reviewing work of outside counsel. While working at Microsoft,
he was invited to participate in the Microsoft Distinguished Lecturer series.
Over fifteen years of engineering experience has provided Mr. Byorick with a diverse background
in the telecommunications, computer and electrical engineering areas. He developed one of the
first user-programmable ‘PC’s in 1977 and created the Bell Business Basic programming language
while at AT&T Bell Laboratories.
Mr. Byorick graduated from the Georgia Institute of Technology with a Bachelor of Science in
Information and Computer Science. He earned his J. D. from the University of Denver College of
Law. He is admitted to the Colorado Bar and is a registered patent attorney.
Please see appendix A for Mr. Byorick's comments on the CinemaShares patent applications.
John Gorman, Securities Counsel
Mr. Gorman is a partner in the firm of Luse, Lehman, Gorman, Pomerenk, & Schick, in
Washington, D.C. He is a former Special Counsel to the Chief Counsel, Corporation Finance
Division, Securities and Exchange Commission. His experience at the SEC included
responsibility for handling the regulation of securities offered by financial institution holding
companies. Since leaving the SEC in 1984, Mr. Gorman has specialized in counseling mutual to
stock conversions, mutual holding companies, mergers and acquisitions as well as providing
advice as to executive compensation. In addition, Mr. Gorman provides general corporate,
securities law and regulatory advice to financial institutions on an ongoing basis. A 1979 graduate
of Vanderbilt University School of Law, Mr. Gorman received a Bachelor of Science degree from
Brown University in 1976.
Inderjit Singh, MP, Government of Singapore
Mr. Singh is past President of United Test and Assembly Center, and a Member of Parliament of
the Government of Singapore. He is very active and well respected in the software industry in
Singapore and has incubated several Internet companies. His expertise in these industries and
investment contacts in Singapore will prove most valuable in his advisory role to CinemaShares.
18
Angela Petillo, Entertainment Attorney
Ms. Petillo is an attorney in Business Affairs at the William Morris Agency, Beverly Hills,
California. Ms. Petillo negotiates development and production deals for the clients of one of the
world's largest entertainment agencies. Her daily activities put her in contact with some of
Hollywood's biggest movie studios, filmmakers and stars. She previously served in a similar
capacity for the Creative Artists Agency, ABC Television, and Dino DeLaurentiis Productions.
She is currently considering our offer to employ her as an officer in CinemaShares.
Jeromee Johnson, Internet Securities Trading Software Engineer
Jeromee Johnson is an experienced engineer and manager in the field of Financial Technology. As
an Internet programmer, he has done extensive development in both Java and Perl, and is uniquely
familiar with the technology of the Internet and the regulatory side of public finance, especially as
it relates to securities trading. Jeromee holds a number of NASD regulated securities licenses
(Series 4 Options Principal, 7 General Securities Rep, 24 General Securities Principal, 31
Managed Futures Rep, 53 Municipal Securities Principal, 55 Equity Trader/ Market Maker, 63
Uniform Securities Agent, and 65 Investment Advisor.)
After graduating with a BS in Computer Science from the American Institute for Computer
Sciences he has been employed as a Financial Advisor by Morgan Stanley Dean Witter, VP
Operations and Technology at Daylight Trading (also a partner in this successfully sold direct
access trading company), and Director of Engineering at GoInvest.com. Currently Jeromee is
employed as Director of Trading Technology Solutions at Javelin Technologies, the industry
leader in FIX technology. At Javelin, Jeromee acts as a project manager, taking ownership of
projects with the Pacific Stock Exchange, Bank of America Securities, and Robertson Stephens,
and as a development manager leading the FLIRT (Financial Language Internet Real Time
Trading) protocol, Cherubino, and Coquette engineering teams. Jeromee also handles Javelin’s
relationships with its technology clients and partners including Advent Software, TIBCO, Yahoo,
Quicken.com (Intuit), Compaq, and BEA Systems.
In addition to his full time position with Javelin Technologies, Jeromee acts a technology advisor
and occasionally a consulting engineer to several private and public companies including Taho
Commerce, GBI Capital, Feuerstein Capital Management, and JB Oxford.
Jerrol LeBarron, Writer's Script Network
Mr. LeBarron owns the Writer's Script Network, an Internet-based screenplay marketing
company. His Web site, www.WritersScriptNetwork.com has first-look access to thousands of
new screenplays and story ideas. He will prove extremely valuable to CinemaShares in acquiring
new properties for production.
19
Assoc. Prof. (Dr.) Toh See Kiat; MP, Government of Singapore, IT and
Intellectual Property Attorney
Dr Toh is a Senior Partner in the Singapore law firm of M/s Peter Ng & Company and is Head
Specialist in the IT, Intellectual Property and Internet Practice Group. He is Chairman of
CommerceNet Singapore LTD and Commerce Trust Ltd; Associate Professor at the Nanyang
Technological University and author of a book, Paperless International Trade: Law of Telematic
Data Interchange (Butterworths Asia, 1992), which deals with eCommerce. Dr Toh advises
companies and governments on the legal issues of eCommerce and is assisting the Dubai Internet
City to draft eCommerce laws.
Dr. Toh is currently a Singapore Member of Parliament and sits on the Government Parliamentary
Committee on Communications and Information Technology; the National Internet Advisory
Council and the National Trust Council. Concurrently, he sits on several international committees
on eCommerce such as the ICC, AFACT and ISO Working Groups on eCommerce
William Knoke, Investment Banker
William Knoke is founder and President of the Harvard Capital Group specializing in financing
high-technology companies, and is considered an expert on society’s future. Mr. Knoke is author
of the international bestseller Bold New World: The Essential Road Map to the Twenty-First
Century, now in ten languages, and an internationally recognized keynote speaker. Mr. Knoke has
been featured in The Wall Street Journal, Newsweek, The Los Angeles Times, Newsday, Forbes,
Success, and other publications, and has appeared on over 50 television and radio interviews in the
United States, Canada and Western Europe. He is a graduate of Harvard Business School, (MBA)
and Stanford University (BA Economics, cum laude).
S. Bryan Hickox, Film and Television Executive Producer
Bryan Hickox is a film and television Executive Producer, Producer and Director who has
personally produced 70 network Movies of the Week, pilots and Mini-Series; 7 network television
series; 250 hours of syndicated television programming; and 10 theatrical feature films. Mr.
Hickox has also been Vice President of Production at a large, publicly traded, independent film
and television production company and most recently President of Production at Santa Monica
Picture. Television movies Mr. Hickox has produced have been the highest rated movies on their
respective networks in 1987, 1988, 1989 and 1990. His movies have also won seven Emmy
Awards, the George Foster Peabody Award, and have garnered over 200 other national and
international film festival and competition awards.
20
Capital Required And Use Of Proceeds
CinemaShares is seeking a total of $20 million dollars, structured as a loan of convertible
preferred debt, in what we anticipate to be our maximum need for investment capital. For this
loan we are offering an equity position in CinemaShares of 2 million shares of restricted stock or
20% of the 10 million outstanding shares in the corporation. All assets of the CinemaShares.com
Corporation would secure the loan. We expect to receive this investment in two stages:
A First Round Investment of $6 million is needed for the following:









Complete the securities offering for The Fungi, Inc., a Nevada Corporation and the first
CinemaShares Licensee Company. This entails filing the SB-2 documents with the SEC and
registering the offering in all 50 states.
Open an office in Los Angeles and hire office staff. Update the Web site to provide for the sale
of stock and allow audience participation in the movies we produce.
Hire key executives from the motion picture and Internet industries.
Build strategic partnerships to market our concept to the Internet audience.
Begin pre-production on the first Licensee Company's film project.
Make deposits to talent agencies to attach certain star name talent to the first Licensee
Company's film project.
Create promotional advertising and publicity campaigns to build brand awareness and market
the sale of stock in the first Licensee Company to the public.
Option and begin development of additional motion picture properties for future production by
CinemaShares.
Purchase Comprehensive D & O, E & O, and other insurance policies.
Use of First Round Proceeds
(thousands):
Legal, including all 50 states' securities compliance (1st Film Co.)
Staff and maintain Los Angeles office (1st yr)
Technical, launch and maintain state-of-the-art Web site
Marketing and Public Relations
Talent holding fees
Key personnel salaries (1st year)
Insurance
Development of future motion picture properties
Finder's fee (5%)
Initial financing required
$425
435
645
2,105
1,150
720
50
175
295
$6,000
21
Prior to offering stock for sale in our first film project to the public, a Second Round Investment
of $14 million is needed for the following:
 Avoid an escrow or impound required by the SEC and certain states on monies received from
the initial stock offering until the offering is fully subscribed. (The offering of one million
shares at $20 must be fully subscribed to finance the first film production.)
 Assure the first film project will proceed even if the offering is only partially subscribed. This
assurance is needed on the first project because our concept in new and untested, but we do
not anticipate needing such an "assurance bond" on future productions.
It is the opinion of CinemaShares' management that this second stage investment could come
from one or more of our Strategic Partners. Furthermore, in lieu of an actual cash investment,
CinemaShares could proceed with its first stock offering by receiving a guarantee from a strategic
partner such as Blockbuster or a major film studio that the planned film would proceed whether or
not the offering is fully subscribed.
Every year traditional movie studios and movie financiers make hundreds of investments in films
in the budget range of our first offering without the many added values that an investment in
CinemaShares would bring. (See Appendix C for an article on Blockbuster and Best Buy and
their recent expansion into movie financing)
Investor Exit Strategy
An Investor in CinemaShares, the Parent Company, will have multiple exits. These are
described as follows:
1- The $20 million dollar investment in CinemaShares to avoid an escrow on the first film
offering would be structured as a loan from CinemaShares to the first Licensee Company,
designed to be repaid from monies received from the first offering. We expect the offering in
the first film to be fully subscribed, and if so, the $20 million dollar loan from
CinemaShares would be immediately repaid from proceeds received from the offering.
CinemaShares would then immediately repay the $20 million to the original investor(s).
If the offering were only partially subscribed, the loan would be partially repaid to the extent
possible from any proceeds from the offering. With revenues in hand from the first film,
coupled with expected major distributor interest in our future films, CinemaShares'
Management does not anticipate needing such a loan for our second offering.
2- Even after repayment of the initial $20 million dollar loan, the investor(s) would retain their
original percentage ownership in CinemaShares, the pre-IPO holding company, allowing for a
second exit when CinemaShares goes forward with its planned IPO.
3- Unlike other Internet companies, CinemaShares' earnings do not come primarily from the
Internet. They come from traditional movie revenue sources such as theatrical, cable and home
video distribution. Again, as there is no traditional financing loan to be repaid, and upon
completion of the movie, any earnings received by a Licensee Company from the
distribution of its movie can be expeditiously paid out to the Shareholders, and thereby
CinemaShares, as cash dividends. CinemaShares' management could elect to pay out
earnings to corporate shareholders at any time.
22
An Investor purchasing publicly traded stock in a CinemaShares Licensee Company will
also receive certain benefits as outlined here:
1- CinemaShares management is claiming that Shareholders in a Licensee Company will receive
an initial "agreed fair return" for their individual share purchase ($23). This return on their
investment includes voting participation on the Web site as a "Cyber-Producer" in the making
of a Hollywood movie, and receiving a free VHS or DVD copy of the movie, when completed,
as a stock dividend. It is management's opinion that these benefits alone constitute an "agreed
fair return" to the individual investor purchasing a single share, because the typical price of a
DVD purchased retail generally exceeds our share price.
2- An individual Shareholder, having already received an "agreed fair return" for his one share
purchase, may consider the eventual cash dividend to be incidental, but an investor purchasing
multiple shares may not want multiple video copies and may be very concerned about the
profits he receives as cash dividends for each share purchased. Purchasers of multiple shares
will have the option of receiving, in lieu of a free video dividend, a one-time guaranteed
cash dividend payment of $3, paid at the same time of distribution of the free video
dividend.
3- Furthermore, any investor in a Licensee Company, regardless of the number of shares
purchased and held, will receive their portion of the net profits earned by world-wide
distribution of the Licensee Company's film, expeditiously paid out to them as cash dividends.
These cash dividends could range anywhere from $0 to $100 per share, as there is no method
to predict in advance of distribution the actual earnings they would receive from the sale of the
film.
4- At some point in the future, a film's anticipated future revenues could be securitized and paid
out in one lump sum to the Shareholders in a Licensee Company. Another option would be the
purchase of all outstanding shares by the CinemaShares parent company or by a major
studio that may want to add the Licensee Company's film to their library.
The Internet Industry Overview
The immediate future will see the Internet and the marvelous devices that connect us to it continue
to revolutionize our lives. The pace of this revolution will grow exponentially over the next few
years, as will the number of devices and the many ways they will enhance our productivity. There
is no need to detail here the Internet's expected growth rate. It is fairly common knowledge that in
the history of American business, there has never been a better time or a greater opportunity for a
well-placed investment in this medium.
Internet companies achieving the greatest success now are doing so because they are using the
Internet as it was intended to be used. Frank Biondi, the former President of Universal Studios and
now the head of Waterview Advisors, has said that the Internet is just a tool. As it is really only a
new means of communicating, we like to compare the Internet to the telephone. You cannot make
very much money on the telephone unless you are using it to implement your business plan. You
might find some advertiser willing to pay you a little something to mention his product while
you're talking on the phone, but you're never going to make any real money talking on the phone
unless you use it to actually sell the product, or in some way facilitate the sale of a product.
23
As detailed here in our business plan, CinemaShares will use the Internet as just such a tool. We
expect to generate the majority of our revenue offline. Furthermore, our business model could
succeed without the use of the Internet. The Internet will only accelerate our success and magnify
our possibilities. We are essentially creating a new type of equity bank for the financing of motion
pictures without the traditional loan.
Although VOD (Video on Demand) may some day be one of the main sources of revenue for film
producers, we do not expect to generate significant revenue in the immediate future from
streaming the movies we finance from our Web site. We expect to receive our principal revenue
from the distribution of studio-quality motion pictures through traditional means such as
home video and theatrical exhibition.
Motion Picture Industry Overview
The motion picture industry encompasses the production and theatrical exhibition of featurelength motion pictures and the subsequent distribution of these pictures in home video, television
and other ancillary markets. The industry is dominated by the "major studios," as defined by the
Motion Picture Association of America. The major studios include Universal Pictures, Warner
Brothers, (which includes New Line Cinema and Castle Rock Entertainment), Twentieth Century
Fox, Sony Pictures Entertainment, (which includes Columbia Pictures and TriStar Pictures),
Paramount Pictures, The Walt Disney Company, (which includes Buena Vista, Touchstone and
Miramax), and MGM, (which includes Metro Goldwyn Mayer Pictures, United Artists Pictures,
Orion Pictures and Goldwyn Entertainment Company).
These major studios historically have produced and distributed the majority of theatrical motion
pictures released annually in the United States. The major studios generally own their production
studios and have national and/or worldwide distribution organizations. In recent years, however,
"independent" producers, unaffiliated with the major studios, have played an important role in the
production of motion pictures for the worldwide feature film market. These independent producers
generally do not have their own distribution capabilities. Historically, independent distributors,
unaffiliated with the major studios, have distributed film for the independent producers. According
to Paul Kagan Associates Inc., a media and communications research firm in Carmel, California,
the independent distributors' box office share has increased from an average of 5.4% for the fiveyear period 1989 to1993 to 13.2% for the five-year period 1994 to 1998. In addition, the number
of domestic theatrical releases distributed by independent distributors has outnumbered those
distributed by major studios in recent years.
New Feature Distribution in the United States (Source: (MPAA).
MPAA
All Other
Year
Affiliates Distributors
2001............................................. 189
273
2000............................................. 191
270
1999............................................. 213
229
1998............................................. 221
269
1999............................................. 219
242
24
CinemaShares Licensee Companies will function as Independent Producers, who typically
create motion pictures at substantially lower average production costs than major studios.
Direct production costs consist of acquiring or developing the screenplay, film studio rental,
cinematography, post-production costs and the compensation of creative and other production
personnel. Distribution expenses, which consist primarily of the costs of advertising and releasing
prints, are generally not included in direct production costs. Major studios typically release films
with direct production costs ranging from $25 million to in excess of $100 million. From 1990 to
1998, the major studios' average production costs, including overhead and capitalized interest
(commonly referred to as "negative cost,"), have increased from $26.8 million to $52.7 million,
representing a compound annual growth rate of 8.8%.
CinemaShares Licensee Companies will distribute their films through the major studios.
Motion picture distribution encompasses the licensing of pictures for distribution or exploitation in
various markets both domestically and internationally, following a release pattern. These markets
include theatrical exhibition, home video, (rental and sell-through), television (which includes
pay-per-view), pay television, first-run broadcast television and syndication, licensing and
merchandising. The distributor typically acquires rights from a producer to distribute a motion
picture in one or more markets. For its distribution rights, the distributor typically agrees to
advance the producer a minimum royalty or guarantee, which is to be recouped by the distributor
out of revenues generated from the distribution of the motion picture and is generally
nonrefundable. Successful motion pictures often continue to play in theaters for up to six months
or longer following their initial release. Concurrent with their release in the United States, motion
pictures are generally released in Canada and may also be released in one or more other foreign
markets. After the initial theatrical release, distributors seek to maximize revenues by releasing
movies in sequential release date windows, which are generally exclusive against other nontheatrical distribution channels:
CinemaShares' movies will follow the typical distribution release timetables:
Movie Release Revenue Windows








Months After
Approximate
Approximate % of
Initial Release
Release Period
Total Revenues*
Theatrical........................……………………………………………………..……..…..12%
Home video........……………….................. 4-6 months ………1-3 months ………….25
Pay-per-view.........………………............... 6-9 months……….... 3 months …...……...1
Pay television……………...................….10-18 months…….12-21 months……………5
Network or basic cable……….............….30-36 months…….18-36 months……………6
Syndication.......................……………….48-70 months…..……3-15 years ……..…...1
Licensing and merchandising……….......…..Concurrent…….……Ongoing …….……2
All international releasing…………........…..Concurrent….…..…Ongoing………48% - 100%
Following the industry norm, CinemaShares Licensee Companies will generally receive the
majority of their revenues in the first three years after the initial release.
25
CinemaShares' Business-Method
Our innovative Business Method is possible due to recent SEC and Federal Reserve regulations
enabling single shares of stock to be sold economically from a Web site. These new rulings
provide for: 1) the delivery of disclosure documents through e-mail, eliminating the need for
mailing quarterly and annual reports, and 2) purchasing a company’s stock on a Web site with a
credit card. Without these two new rulings, our Business Method would not be possible. The
fully listed OTCBB stock our Licensee Companies sell is not marginable, and as such, is not
subject to regulations T and U of the Federal Reserve. Our companies can therefore offer stock
and even extend credit for their shares through their own Web sites.
Our patent-pending Business Method essentially guarantees the profitability of any movie
we choose to fully finance. It provides a unique method for funding the production of a movie by
presenting a "storyboard synopsis" (a realistically drawn, sequential series of drawings depicting
the action of the story, running concurrently with a narrative description) of the unproduced movie
on a licensee production company's Web site.
Accompanying the storyboard synopsis is an offer to participate in the making of the movie by
‘voting’ in an advisory capacity for certain options related to the movie’s production, as well as
the opportunity to view the production of the movie via live streaming video transmission over the
Internet. The participants in the offer, who, in part, comprise the ultimate audience, use the
storyboard synopsis to determine whether to make a purchase of the movie in advance of
production.
A potential viewer who decides to participate in the offer then purchases a minimum of one share
of stock in the Licensee Company that holds the rights to the movie. This purchase entitles the
Shareholder to receive, in addition to the above opportunities, a free copy of the movie
(when completed) as a dividend. The stock purchase is effected by an electronics fund transfer,
such as by the entering of a credit card number via the secure Web site. A surety bond, equaling
the entire offering amount and required by the SEC and "merit review" states to guarantee the film
is completed whether or not the offering is fully subscribed, is put in escrow. Production of the
movie may or may not be commenced until the number of "tickets" (i.e., shares of stock in the
production company) sold is sufficient to cover the cost of making the movie.
The financial success of the movie is therefore essentially guaranteed, because a section of the
ultimate movie audience assures that sufficient funding is available to produce the movie by
purchasing stock (and thereby, copies of the movie), prior to production. Upon completion of the
movie and delivery to Shareholders of the video copies, the costs of production and distribution to
Shareholders are completely paid for, and any future revenues received from screening the movie
in world-wide markets are then, essentially, gross profit. All net profits received from the sale and
distribution of each movie in world wide markets are paid out to Shareholders as cash dividends.
The participants who decide to purchase a share of stock, and thereby a copy of the movie,
become the end users of a product they themselves help create. Our Business Method exposes a
movie’s ultimate audience to its story line and may even adapt the story line according to input
received from them. In addition, it also allows the participants to help determine aspects of the
26
movie such as casting, wardrobe, selection of the filming locations and the shooting schedule. The
filmmakers now have valuable feedback from their eventual audience in making their creative
choices during the production of a movie.
The CinemaShares method also solves the problem of "creative meddling" by the typical studio
investor. A Licensee Production Company would not need to accept financing and the
accompanying creative choices from the studio. The public will finance each production fully,
and though provided with an advisory "vote" for certain creative choices, each Shareholder,
by accepting the agreement on the Web site, understands that his suggestion may or may not
be taken by the filmmakers. Thus, the CinemaShares method allows the filmmakers to be the
ultimate arbiter of which options are to be employed in the actual production of the movie.
Management's Projected Revenue Sources:
All revenues from the use of CinemaShares' Business Method will come directly or indirectly
from the marketing and sale of motion picture properties through traditional methods of
distribution for typical major motion pictures produced by studios and independents, as well as
from new and innovative means on the Internet.
A CinemaShares Licensee Company will own all rights to a movie property it fully finances.
These rights can generate considerable revenues from a variety of sources. As the U.S. market
represents only about 40 % of potential worldwide revenue, the foreign theatrical, home video,
cable, and television sales are very important in the revenue stream and have great value in any
distribution plan.
In the following categories we describe the various sources of revenue generated directly or
indirectly by the films financed using CinemaShares' Business Method:
Theatrical Exhibition
Theatrical distribution of a motion picture involves the manufacture and transportation of multiple
prints of the motion picture, the promotion of the picture through advertising and publicity
campaigns and the licensing of the motion picture to theatrical exhibitors. According to the
Motion Picture Association of America, the major studios had average combined prints and
advertising costs of $31.0 million per film in 2001. We believe that independents have prints and
advertising costs generally ranging from $5 to $15 million per film. The size and success of the
promotional advertising campaign can materially affect the revenues realized from the theatrical
release of a motion picture.
CinemaShares and its Licensee Companies at present have no plans to bear the cost of print
and advertising campaigns for theatrical exhibition and expect to contract with major and
independent motion picture distributors for the theatrical release of all of the films we
finance.
Release strategies depend on the particular genre of film and vary from wide releases, involving
more than 800 screens, to specialized releases, whereby the film is first screened only in selected
27
cities. Under the terms of a distribution contract, the distributor and theatrical exhibitor generally
enter into an arrangement providing for the exhibitor's payment to the distributor of a percentage
of the box office receipts for the exhibition period, and in some cases after deduction of the
theater's overhead or a flat negotiated weekly amount. The distributor's percentage of box office
receipts varies widely, ranging from an effective rate of 35% to over 90%, depending primarily
upon the success of the motion picture at the box office. Revenues are typically collected 90 to120
days after screening, although substantial delays in collection are not unusual.
According to Paul Kagan Associates, the trend on the part of major studios toward widerrelease blockbusters over the past ten years has led to a decline in profitability, while the
efficiency and quality of smaller production films have been on the rise. (Measured by Paul
Kagan Associates as the ratio of a film's estimated revenues against negative and releasing costs.)
CinemaShares was created to finance small to medium budget, studio-quality motion pictures with
a budget range of $10 to $50 million. For example, The FUNGI, Inc. the first company to license
our technology, has planned as its first movie; “FUNGI – A COMEDY ABOUT POLLUTION.”
This movie will be cast with star name talent, it will have a production budget of over $12 million,
and will receive considerable public relations and media attention from the FUNGI Web site
(much like “The Blair Witch Project”). We also anticipate receiving considerable free publicity
from the release of news on CinemaShares as an entity created to finance movies. These
considerable advantages, plus the fact that the FUNGI screenplay has already won awards from
three major screenplay competitions, could make this project considerably more appealing than
the typical project submitted to the major studios for distribution. The FUNGI, Inc., company
plans to seek a distribution agreement with a major studio prior to production. Please see the
revenue projections section of this document for projected earnings from "FUNGI" and Appendix
F for more information on the actual offering.
Home Video
Home video distribution involves the promotion and sale of videocassettes and DVD to video
retailers such as K-Mart, Wal-Mart, etc., and video specialty stores such as Blockbuster,
convenience stores, record stores and other outlets, which then rent or sell the videocassettes and
DVDs to consumers for private viewing. The distributors of the titles rather than the retailers
generally incur marketing and distribution costs for individual titles.
Of the many movies produced by major studios and released in the United States each year,
relatively few are profitable, based on box office revenues alone. In addition to purchasing box
office hits, video rental stores also purchase movies for resale on videocassette and DVD that are
not successful at the box office, thus providing the movie studios with a reliable source of revenue
for almost all of their movies.
Major feature films are usually scheduled for release in the home video market within four to six
months after theatrical release to capitalize on the theatrical advertising and publicity for the film.
Promotion of new releases is generally undertaken during the nine to twelve weeks before the
release date. Videocassettes of feature films are typically sold to domestic wholesalers at a high
price point referred to as rental pricing, that generally discourages purchase by individual
28
consumers, and consumers rent these videos for fees typically ranging from $1 to $5 per day.
Wholesalers who meet established sales and performance objectives may earn rebates, return
credits and cooperative advertising allowances. Selected titles, including some made-for-video
programs, family-oriented titles and some extremely large box-office successes may be initially
released at a price point that encourages direct purchase by consumers and are supported by
substantial consumer marketing campaigns. Direct sale to consumers is referred to as the "pricedfor-sale" or "sell-through" market. Profit margins to video retailers on sell-through products are
generally lower than on rental products. Generally, those films that initially are not released to the
sell-through market are released to the sell-through market at reduced sell-through pricing
approximately four months to one year after they have been released to the rental market.
Generally, owners of films have not shared in video rental income because, according to industry
custom, video distributors historically have sold videocassettes to video rental stores. However,
video distributors have begun to enter into revenue sharing agreements with major video retail
chains. Under these arrangements, videocassettes are leased to video rental stores at a lower upfront cost to the store, and a percentage of the video rental revenues are then shared with the
owners or licensors of the films. The implementation of revenue sharing dramatically affects a
retailer's cost of sales and the distributor's revenues by changing the business model from a
primarily fixed to primarily variable cost approach. Movies priced for sell- through are usually not
subject to revenue sharing arrangements. We believe the adoption of revenue sharing agreements
by leading retail chains and the advent of DVD present significant growth opportunities for the
home entertainment industry. Revenue sharing agreements provide retailers with the opportunity
to substantially increase the quantity and selection of newly released video titles they stock due to
the significantly lower up-front payments by the retailers to the distributors. DVD presents the
opportunity for distributors of home video product to increase revenues, as consumers replace
existing titles currently on the VHS format, and to earn higher margins on sales of new titles in
DVD relative to the VHS format. According to the Motion Picture Association of America, DVD
has become the fastest growing new format in history as shown on the following chart:
Length of Time to Reach One Million Units Shipped*
Technology
Years
DVD Player....................................……1.9
CD Player.....................................….….2.7
Big-Screen TV...................................….4.2
VCR............................................………4.6
Color TV......................................……...8.8
*Source: Motion Picture Association of America
According to the Motion Picture Association of America, the number of DVD software units
shipped to retailers increased to 364.4 million in 2001 from 10.8 million in 1997, while the
number of titles available on DVD increased to 13,000 in 2001 from 600 in 1997. Paul Kagan
Associates estimates that DVD and VHS sell-through revenues should reach parity in 2009, at
approximately $8 billion each, bringing the industry close to $16 billion in sales, as compared with
$9 billion in 1998.
29
According to Paul Kagan Associates, the U.S. videocassette and DVD rental and sales industry
will grow from $17.1 billion in revenue in 1998 to a projected $22.8 billion in 2005. However,
another movie research firm, Adams Media Research predicts that Total combined DVD and
VHS sales revenue is expected to grow from an estimated $13.4 billion in 2000 to $32.7
billion by 2005. Paul Kagan Associates estimates that in 1999, 85.9 million, or 85.9% of the 100
million total U.S. television households owned a VCR. The number of VCRs that were sold in the
United States in 1999 was estimated by Paul Kagan Associates to be 20.5 million, which
represents the largest number of VCRs sold in any single year. In addition, the Consumer
Electronics Manufacturers Association estimates that about 4.1 million DVD players were sold to
dealers in the United States during 1999. According to Paul Kagan Associates, the VCR and DVD
markets will continue to grow as the number of multi-VCR households is expected to increase
from 9.7 million in 1999 to 51.4 million by 2005 and the number of DVD households is projected
to reach 31.0 million in 2005.
See Appendix C for recent news article
Licensing Revenue:
Another important source of revenue for CinemaShares.com would be from fees received from
producers listing their projects on our Web site as a means to secure financing.
For example, CinemaShares, for a negotiated fee, would accept film projects seeking financing to
put up on our site. We would utilize our patent-applied-for Business Method to create a color
storyboard synopsis and production package describing the intended film and post it on the
CinemaShares.com Web site along with other film projects, similarly described. Our audience
would then vote on which project or projects to continue with into the financing stage. Film
projects selected by our Internet audience would insure an on-going supply of desirable films to
finance.
Receiving approval of our patent from the U.S. Patent Office would grant CinemaShares an
exclusive and very important source of revenue - licensing fees for our Business Method.
However, whether or not CinemaShares is granted exclusivity through U.S. and International
patents will not detract from the fact that our method of film financing is a very powerful tool and
highly desirable to film producers everywhere. The major film producers constantly complain
about the cost of production and are plagued by films that do not make back their costs.
Any company licensing our Business Method to finance a film could be guaranteed at least some
profitability on every production, because the company could choose to commence production on
a film only when enough shares of stock are sold to cover the cost to make the film and ship the
copies. This is the very essence of our patent – a cure for money losing films, and this is why we
believe we have the method by which all films in the future will be financed.
30
Advertising Revenue:
CinemaShares will not rely on Internet advertising as a principal source of income. Banner
advertising revenue is often the principal source of revenue for many well-capitalized Internet
companies. However, unlike many Web sites receiving the majority of their revenues from
advertising, our Licensee Companies' Web sites expect only additional income from specific
companies targeting our well-defined audience.
With the advent of streaming video, a number of sites now feature video commercials. It is the
opinion of management that this trend will greatly accelerate, and with the high level of streaming
content planned on our sites, any CinemaShares Licensee Company utilizing our Business Method
will be particularly well suited for this new method of delivering an advertising message.
Although we will still be able to accept traditional banner ad placements, we expect to receive
greater revenues from video spot ads.
Product Placement Revenue:
Another source of revenue not available to typical Web sites would be from a new type of product
placement – writing product mentions into the story line. We have done this with our first
Licensee Company's film, Fungi - A Comedy About Pollution, by actually writing into the story
line such companies as Federal Express, Blue Cross, American Express, and Callaway Golf. We
have done so with the intention of receiving payment for product mentions. Our Licensee
Companies will have complete control over each film's content and can therefore very easily
change the material to suit any advertisers who are willing to pay a fee.
Another type of product placement, Adynamic Ad Insertion, while still in its infancy, is poised
for exponential revenue growth. This technology allows a Web surfer to click on a particular item
in a scene and immediately be taken to a Web page where they are able to purchase that particular
product. This is believed by many to be a major potential source of revenue for all movie
companies.
Merchandising Revenue
The release of “Star Wars” in 1977 forever changed the movie industry. Not only was it a colossal
blockbuster at the box office, but it firmly established the financial firepower of merchandising.
Until the Jedi invaded toy stores everywhere, merchandising was not a major factor in the movie
revenue stream. Over $2 billion in Stars Wars merchandising revenues dramatically changed that.
The potential of merchandising revenues has been ably illustrated by other movies too, and
children’s movies are particularly well suited for exploiting this lucrative revenue stream. Teenage
Mutant Turtles, a movie targeting children, took in a staggering $1 billion in merchandising
revenues in one year alone.
The great revenue potential of merchandising is not confined to movies. Television shows such as
the Care Bears and more recently “Teletubbies” have produced the majority of their revenues from
merchandising. It is well known that the popular children’s show “Barney” on U.S. public
television is basically “given away’ to the Public Broadcasting System for very little financial
31
remuneration, with the hefty merchandising associated with Barney more than compensating for
the low licensing fees. This is a classic case of the ‘give them free razors and make large profits on
the razorblades” strategy being applied to the movie industry.
Of course, not all movies produce such huge merchandising returns. But the range of spin-off
products possible, such as PVC figurines, T-shirts, key chains, board games etc. means that there
are significant opportunities available to the movie producer, particularly in the family-kids genre
which CinemaShares plans to target. A good example would be the $4 million that Mattel paid in
1991 for the rights to manufacture characters in the movie “Hook." A more typical master
licensing agreement from a major toy company like Hasbro or Mattel would involve $250,000 to
$1,000,000 in up-front licensing fees and 5-6% royalties on all sales. T-shirt merchandising deals
can involve $100-150,000 in up-front licensing fees and 8% royalties on all sales. One only needs
a special promotional deal with McDonalds or Coca-Cola or any other company interested in
reaching the all-important children's market for this to produce a major return to the license
holder.
Our first Licensee Company's film, Fungi - A Comedy About Pollution, is positioned in the prime
merchandising family-kids movie genre, and like all of our licensee companies will be in the
enviable position of having some one million co-producers, all eager to purchase a memento
commemorating their involvement with this exciting project. What movie fan, owning a share
of a movie, watching their movie being made through streaming video on the Web site and taking
an active role in voting on the Web site for various production decisions, would not want to buy a
hat, or a T-shirt, etc. as a souvenir from their movie? Having only half of the subscribers purchase
a T-shirt and a cap would represent potential income of over $1,000,000, and the additional
income potential of having this motivated and financially ambitious army of Fungi fans
encouraging their friends and family to purchase merchandising items is enough to make any
accountant’s eyes light up.
While it is by no means guaranteed that Fungi would be as successful in merchandising as any of
the movies mentioned, management does feel that merchandising represents a tremendous
opportunity for revenue development and that Fungi is uniquely positioned to capitalize on this.
Game Revenue:
According to Arcadia Investment Corp. and VidTrac, the total domestic home video game
market generated about $6.0 billion in software sales and about $634 million in rental
revenue in 2001. Arcadia Investment Corp. projects that video game software sales will remain
relatively steady through 2001.
Based upon estimates of Gerard Klauer Mattison & Co., Inc., it is the opinion of management that
most of the recent growth in the home video game industry has been fueled by the success of Sony
PlayStation® and Nintendo 64® and their respective video games. Arcadia Investment Corp.
recently reported that as of the end of 1999, the installed base of Sony PlayStation within the
United States was about 21.0 million. Nintendo has stated that as of the end of 1999, the installed
base of Nintendo 64 within the United States was about 14.0 million units. We expect that the
home video game industry will continue to grow with the anticipated U.S. introduction of Sony
PlayStation 2™ in the fall of 2000.
32
With a movie-based game there is considered to be a pre-sold audience for the home video game,
giving the CinemaShares' licensee companies another excellent revenue source. Based on its
story line and wide appeal to kids and families, it is management's opinion that
CinemaShares' first movie, Fungi - A Comedy About Pollution, is especially well suited for
the creation of a Sony PlayStation or Nintendo game. Such a game distributed through
traditional channels could result in considerable revenue for our first Licensee Company and
thereby for CinemaShares.
Revenue from Sequel and Prequel Rights:
A public company utilizing CinemaShares Business Method would generally hold all rights in the
film it plans to produce. A successful film often breeds a sequel (a follow-on movie usually about
what could happen next in the story), and sometimes a prequel (a movie about what could have
happened in the story before the current one).
A CinemaShares company owning all rights to a movie would either license the rights to make a
sequel, or would form a new company to produce the sequel. In either case, considerable
additional revenue would be generated for the Shareholders in the company holding the original
rights in the property.
Revenue from Television and Cable Rights:
Television and cable series are often based on original movies. The CinemaShares Licensee
Company holding all rights to an original film would be the beneficiary of revenues generated
from the sale of rights to produce a television program. These rights can be considerable. A
successful television program can be extremely profitable, producing a revenue stream for many
years to come.
Pay-Per-View television allows cable and satellite television subscribers to purchase individual
programs, including recently released motion pictures on a "per use" basis. The subscriber fees are
typically divided among the program distributor, the pay-per-view operator and the cable system
operator. Pay Television Pay television allows subscribers to view premium channels, including
HBO/Cinemax, Showtime/The Movie Channel, and other pay television networks offered by cable
and satellite system operators for a monthly subscription fee.
The pay television networks acquire a substantial portion of their programming from motion
picture distributors. Films are licensed to pay networks for fees, which are usually based on the
film's box office revenues, and most major producers have long-term output deals with the major
pay networks. New markets may develop with the maturation of direct broadcast satellite systems,
and other digital television systems.
Broadcast and Basic Cable Television Broadcast television allows viewers to receive, without
charge, programming broadcast over the air by affiliates of the major networks including ABC,
CBS, NBC and Fox, recently formed networks including UPN and the WB Network and
independent television stations and cable and satellite networks including USA, F/X and the Sci-Fi
33
Channel. In some areas, viewers may receive the same programming via cable transmission for
which subscribers pay a basic cable television fee. Broadcasters or cable system operators pay fees
to distributors for the right to air programming a specified number of times. As with pay-per-view
and pay television, broadcast and basic cable networks typically acquire a substantial portion of
their programming through output agreements. Television networks, independent television
networks, television stations and cable system operators generally license television series, films
and film packages consisting of theatrically released feature films and made-for- television movies
pursuant to agreements with distributors or syndicators that allow a fixed number of telecasts over
a prescribed period of time for a specified cash license fee or for barter of advertising time.
Pay/cable television services usually license pictures for initial exhibition commencing
approximately 10 to 18 months after initial domestic theatrical release or six months after
domestic home video release. Licensing of these properties is generally accomplished pursuant to
agreements, which allow a fixed number of telecasts over a prescribed period of time for a
specified license fee.
In addition to their domestic distribution activities, some motion picture distributors generate
revenues from distribution, directly or indirectly through sub-licensees, of motion pictures in
foreign theaters, home video, television and other foreign markets. There has been a dramatic
increase in recent years in the Worldwide demand for filmed entertainment. This growth is largely
due to the privatization of television stations, introduction of direct broadcast satellite services and
increased home video and cable penetration.
Pre-sales of international distribution rights are often used by independent film companies to
finance all or a portion of the direct production costs of a motion picture. Pre-sales consist of
license fees paid by international distributors in return for the right to exploit the completed
motion picture in theaters or to distribute it in home video, television, international or other
ancillary markets.
Soundtrack Licensing
In some cases, Soundtrack Licensing has been the largest source of revenue for a filmed
entertainment project. Original songs created for a specific movie generate considerable revenues
in perpetuity and should not be overlooked in the business plan for any project. CinemaShares
management plans to maximize this potential source of income for our Shareholders. For example,
in our movie, FUNGI - A Comedy About Pollution, famed Music Composer Paul Williams has
tentatively agreed to collaborate with Barry Fasman to create original songs and the original score
for this family project.
Non - Theatrical Distribution
CinemaShares expects additional movie-based ancillary revenues from a variety of sources.
Licensing and Marketing Revenues also may be derived from the non-theatrical distribution of
motion pictures to airlines, schools, libraries, hospitals and the military. Soundtrack albums and
licensing of rights to perform musical works from film music can be a significant source of
ancillary income.
34
Management's Revenue Projections:
As described below under "Revenue Projections," we rely on and refer to information
regarding our industry from market research reports, including reports from the Motion Picture
Association of America, Paul Kagan Associates, Inc., Adams Media Research, and other
publicly available information. Although we believe this information to be reliable, we cannot
guarantee the accuracy and completeness of the information and have not independently
verified it.
CinemaShares offers the individual investors who purchase a single share of stock in a
CinemaShares company a guaranteed "agreed fair return" as described elsewhere in this
document, as well as the possibility of some additional earnings, paid out as cash dividends.
However, this unique method of financing movies is also well positioned to produce significant
financial returns for CinemaShares, the Parent Holding Company, as can be seen from these
Revenue Projections below.
It should be again noted that each individual movie would be owned by a separate legal entity that
will be responsible for its own operating costs. Accordingly, most of CinemaShares’ actual
corporate expenses will come from marketing its services, creating the publicly trading
Licensee Companies, and administering and collecting its licensing fees. With most of each
film's expenses held in the individual movie companies, CinemaShares produces an enviably high
rate of return.
The CinemaShares revenues shown below are based on the collective Net Revenues received by
its Licensee Companies from the distributors of their films and include deductions for all expenses
such as prints and advertising.
Financial Plan
The entertainment industry is, of course, a glamorous one. Yet a CinemaShares’ investor, though
excited by the prospect of active involvement in this attractive field, will nonetheless remain
interested in the financial return of his or her investment. CinemaShares is in the enviable position
of not only aiming to penetrate a glamorous market but also of offering potentially glamorous
returns. It is management’s opinion that CinemaShares offers an incredible opportunity to get in
on the ground floor of a potentially industry-changing business method.
Consider for instance that the worldwide box office grew to a staggering $20.2 billion in 2001,
with the US box office accounting for $8.4 billion of the total (see table on page______). It is
management’s opinion that CinemaShares’ Patent-Pending Business Method will allow it to
capture a significant portion of the worldwide theatrical and home video markets. Management’s
strategy is to initially focus on a few select projects to demonstrate the superior financing option
of using CinemaShares’ business method. This in turn will generate media ‘buzz’ and spark
investor interest, leading to a larger slate of movies being produced using this novel Business
Method. It is management’s belief that the benefits of using this unique system of movie financing
will lead to a significant portion of movie financing being raised through this or a similar method.
It should be again noted that CinemaShares is currently the only company offering such a
35
method of movie financing and that both U. S. and International Patents have been applied
for to protect our method of business.
Major Assumptions and Methodology Used in the Financial Projections
The average profit assumptions by movie type were obtained from a Paul Kagan and Associates
report, see Appendix A. The report details worldwide rental income from all sources, less
worldwide costs, giving the profitability by movie category. CinemaShares has adjusted the
numbers used to reflect the fact that the financing loan (i.e. negative cost) would not need to be
repaid to the investors up front but would rather be paid back through dividends on the shares
owned by each individual investor. CinemaShares’ income would therefore be based on
worldwide revenues less only the actual worldwide costs before deducting the negative cost.
For instance, if a movie were made in the $15-20 million comedy genre, according to Paul Kagan
and Associates it would produce average worldwide revenue of $45.4 million with worldwide
costs of $40.7 million. However, using CinemaShares’ unique financing method, the loan raised to
finance the movie of $17.5m (average of the cost range $15-20 million) is paid back to individual
shareholders through dividends and thus would not need to be repaid before CinemaShares’
licensing royalty. This would reduce the worldwide costs to $23.2 million, producing a profit of
$22.2 million for distribution to the movie’s shareholders. CinemaShares would then receive its 5
to 45% distribution on this amount, as previously agreed with each particular movie project.
As the number of movies financed by CinemaShares increases, the average percentage of revenues
generated as licensing fees will decrease. This is due to the assumption that CinemaShares will
license its patent-pending Business Method to other production companies and the major studios,
rather than producing all movies itself. CinemaShares anticipates that it will continue to receive
45% of revenues of those movies that it produces in-house, while accepting a smaller fee for those
movies that merely use CinemaShares' Business Method.
According to the Motion Picture Association of America’s (MPAA) 2001 Economic Review,
there were some 482 new features released in 2001, a slight increase from the 478 and 461 in 2000
and 1999, respectively. CinemaShares feels that its method of movie financing offers significant
financial and other advantages over the traditional methods of movie financing and that this will in
turn spur an even greater number of movies being made. However, while management feels that
this method of movie financing could eventually become the de-facto standard in the
entertainment industry, for our financial projections a relatively modest penetration rate of 6.6%
(32/482), 16.8% (81/482) and 22.4% (108/482) by year 5 has been assumed for the Conservative,
Moderate and Aggressive scenarios, respectively.
36
Financial Projections Key:
1.
2.
3.
The number of movies financed by CinemaShares, by genre.
Average profit by movie category, determined using Paul Kagan and Associates report,
as described below in “Major Assumptions”
CinemaShares’ percentage ownership of each movie, producing an average ownership
percentage. Total profit is then multiplied by CinemaShares’ average percentage to
produce CinemaShares’ total revenue.
Based upon this scenario, three financial outcomes are considered as follows, ranging from
Conservative to Moderate to Aggressive:
37
Conservative Scenario Summary:
Year 1
Number of movies financed
Cinemashares' percentage
Year 2
Year 3
Year 4
Year 5
1
45.0%
2
45.0%
7
20.7%
16
16.3%
32
13.1%
Revenue ( in $ millions)
27.00
38.91
56.51
175.57
301.41
Sales and Marketing
General and Administrative
(2.70)
(2.70)
(5.84)
(3.89)
(8.48)
(5.65)
(14.05)
(17.56)
(24.11)
(30.14)
Total operating expenses
(5.40)
(9.73)
(14.13)
(31.60)
(54.25)
Operating Income
21.60
29.18
42.38
143.97
247.16
Income taxes
(7.56)
(10.21)
(14.83)
(50.39)
(86.51)
Net Income
Net Income %
14.04
52%
18.97
49%
27.55
49%
93.58
53%
160.65
53%
Conservative Scenario Detail:
Year 2
Genre
Comedy
Science fiction
Other
Kids/Family
Year 3
Genre
Comedy
Science fiction
Other
Kids/Family
Year 4
Genre
Comedy
Science fiction
Other
Kids/Family
Year 5
Genre
Comedy
Science fiction
Other
Kids/Family
1
No. of
movies 0-10 10-15
1
0
0
1
2
0.0
0.0
0.0
0.0
18.2
0.0
0.0
0.0
No. of
movies 0-10 10-15
3
0
1
3
7
0.0
0.0
0.0
0.0
18.2
0.0
35.9
45.9
No. of
movies 0-10 10-15
5
1
4
6
16
0.0
0.0
0.0
9.4
18.2
39.1
71.8
45.9
No. of
movies 0-10 10-15
7
6
9
10
32
0.0
0.0
0.0
9.4
36.4
78.3
35.9
45.9
2
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50
50-60
0.0
0.0
0.0
68.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50
50-60
22.2
0.0
0.0
68.3
24.1
0.0
0.0
58.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50
50-60
44.5
0.0
50.9
68.3
24.1
0.0
0.0
58.3
47.0
0.0
121.2
137.0
0.0
0.0
0.0
344.8
0.0
0.0
0.0
0.0
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50
50-60
44.5
39.6
101.7
136.5
24.1
82.0
178.4
174.8
47.0
60.4
242.5
274.1
50.2
0.0
144.4
344.8
0.0
0.0
145.6
0.0
60+
0.0
0.0
0.0
0.0
60+
0.0
0.0
0.0
0.0
60+
0.0
0.0
0.0
0.0
60+
0.0
0.0
0.0
0.0
Total
Profit
18.2
0.0
0.0
68.3
86.5
Total
Profit
64.5
0.0
35.9
172.4
272.8
Total
Profit
133.7
39.1
243.9
663.7
1,080.4
Total
Profit
202.2
260.2
848.6
985.5
2,296.5
No. of
movies
2
0
0
0
2
No. of
movies
2
1
2
2
7
No. of
movies
3
2
4
7
16
No. of
movies
4
3
8
17
32
3
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
45.0%
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
20.7%
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
16.3%
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
13.1%
CS
Revenue
8.2
0.0
0.0
30.7
38.9
CS
Revenue
13.4
0.0
7.4
35.7
56.5
CS
Revenue
21.7
6.4
39.6
107.8
175.6
CS
Revenue
26.5
34.2
38
111.4
129.3
301.4
Moderate Scenario Summary:
Year 1
Number of movies financed
Cinemashares' percentage
Year 2
Year 3
Year 4
Year 5
1
45.0%
3
38.3%
13
20.4%
30
17.2%
81
11.2%
Revenue ( in $ millions)
27.00
50.73
113.43
325.71
730.68
Sales and Marketing
General and Administrative
(2.70)
(2.70)
(7.61)
(5.07)
(17.01)
(11.34)
(26.06)
(32.57)
(58.45)
(73.07)
Total operating expenses
(5.40)
(12.68)
(28.36)
(58.63)
(131.52)
Operating Income
21.60
38.05
85.07
267.08
599.16
Income taxes
(7.56)
(13.32)
(29.77)
(93.48)
(209.70)
Net Income
14.04
24.73
55.30
173.60
389.45
52%
49%
49%
53%
53%
Net Income %
Moderate Scenario Detail:
1
Year 2
Genre
Comedy
Science fiction
Other
Kids/Family
Year 3
Genre
Comedy
Science fiction
Other
Kids/Family
Year 4
Genre
Comedy
Science fiction
Other
Kids/Family
Year 5
Genre
2
No. of
movies 0-10 10-15
1
0
0
2
3
0.0
0.0
0.0
0.0
18.2
0.0
0.0
45.9
No. of
movies 0-10 10-15
5
0
2
6
13
0.0
0.0
0.0
9.4
36.4
0.0
35.9
91.8
No. of
movies 0-10 10-15
12
1
6
11
30
5.5
0.0
0.0
0.0
72.8
39.1
71.8
183.5
No. of
movies 0-10 10-15
3
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50
50-60
0.0
0.0
0.0
68.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50
50-60
44.5
0.0
50.9
68.3
24.1
0.0
0.0
58.3
0.0
0.0
0.0
137.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50
50-60
44.5
0.0
50.9
204.8
48.1
0.0
89.2
58.3
94.0
0.0
121.2
274.1
50.2
0.0
144.4
344.8
0.0
0.0
0.0
0.0
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50
50-60
60+
0.0
0.0
0.0
0.0
60+
0.0
0.0
0.0
0.0
60+
0.0
0.0
0.0
0.0
60+
Total
Profit
18.2
0.0
0.0
114.1
132.3
Total
Profit
104.9
0.0
86.8
364.7
556.4
Total
Profit
315.2
39.1
477.5
1,065.5
1,897.3
Total
Profit
No. of
movies
2
1
0
0
3
No. of
movies
3
3
4
3
13
No. of
movies
4
8
9
9
30
No. of
movies
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
38.3%
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
20.4%
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
17.2%
CS % by
Movie
CS
Revenue
7.0
0.0
0.0
43.8
50.7
CS
Revenue
21.4
0.0
17.7
74.3
113.4
CS
Revenue
54.1
6.7
82.0
182.9
325.7
CS
Revenue
39
Comedy
Science fiction
Other
Kids/Family
17 0.0
8 0.0
34 21.1
22 0.0
81
54.6
78.3
179.5
137.6
66.7
79.2
254.3
477.8
96.2
82.0
713.7
233.1
141.0
120.7
1,091.1
685.2
100.5
0.0
433.3
1,034.5
72.5
0.0
145.6
0.0
102.8
0.0
138.4
0.0
634.4
360.2
2,977.0
2,568.2
6,539.8
4
8
36
33
81
45.0%
25.0%
10.0%
5.0%
11.2%
70.9
40.2
332.6
286.9
730.7
Aggressive Scenario Summary:
Year 1
Number of movies financed
Cinemashares' percentage
Year 2
Year 3
Year 4
Year 5
1
45.0%
4
35.0%
18
17.2%
44
13.4%
108
10.2%
Revenue ( in $ millions)
27.00
62.38
178.44
476.48
938.48
Sales and Marketing
General and Administrative
(2.70)
(2.70)
(9.36)
(6.24)
(26.77)
(17.84)
(38.12)
(47.65)
(75.08)
(93.85)
Total operating expenses
(5.40)
(15.59)
(44.61)
(85.77)
(168.93)
Operating Income
21.60
46.78
133.83
390.72
769.55
Income taxes
(7.56)
(16.37)
(46.84)
(136.75)
(269.34)
Net Income
Net Income %
14.04
52%
30.41
49%
86.99
49%
253.97
53%
500.21
53%
Aggressive Scenario Detail:
Year 2
Genre
Comedy
Science fiction
Other
Kids/Family
Year 3
Genre
Comedy
Science fiction
Other
Kids/Family
Year 4
Genre
Comedy
Science fiction
Other
Kids/Family
Year 5
Genre
Comedy
Science fiction
Other
Kids/Family
1
No. of
movies 0-10 10-15
1
0
0
3
4
0.0
0.0
0.0
0.0
18.2
0.0
0.0
91.8
No. of
movies 0-10 10-15
8
0
2
8
18
5.5
0.0
0.0
9.4
36.4
0.0
35.9
91.8
No. of
movies 0-10 10-15
14 11.0
3 0.0
10 21.1
17 9.4
44
72.8
39.1
71.8
183.5
No. of
movies 0-10 10-15
23 11.0
16 0.0
41 21.1
28 18.8
108
36.4
78.3
251.3
275.3
2
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50 50-60
0.0
0.0
0.0
68.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50 50-60
44.5
0.0
50.9
68.3
48.1
0.0
0.0
116.5
47.0
0.0
0.0
137.0
0.0
0.0
0.0
344.8
0.0
0.0
0.0
0.0
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50 50-60
44.5
39.6
50.9
273.0
48.1
41.0
178.4
116.5
94.0
0.0
242.5
274.1
50.2 72.5
0.0
0.0
144.4
0.0
1,034.5 440.4
Total profit by movie category (in $m)
15-20 20-30
30-40
40-50 50-60
88.9
79.2
254.3
273.0
96.2
82.0
713.7
291.4
141.0
301.8
1,091.1
685.2
251.2 72.5
161.8
0.0
866.6 291.2
1,034.5 880.7
60+
0.0
0.0
0.0
0.0
60+
0.0
0.0
0.0
0.0
60+
0.0
0.0
0.0
0.0
60+
205.6
0.0
276.8
341.4
Total
Profit
18.2
0.0
0.0
160.0
178.2
Total
Profit
181.5
0.0
86.8
767.8
1,036.1
Total
Profit
393.2
119.7
709.1
2,331.4
3,553.4
Total
Profit
903.0
703.0
3,766.2
3,800.3
9,172.4
No. of
movies
2
2
0
0
4
No. of
movies
3
4
4
7
18
No. of
movies
4
8
10
22
44
No. of
movies
4
9
45
50
108
3
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
35.0%
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
17.2%
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
13.4%
CS % by
Movie
45.0%
25.0%
10.0%
5.0%
10.2%
CS
Revenue
6.4
0.0
0.0
56.0
62.4
CS
Revenue
31.3
0.0
14.9
132.2
178.4
CS
Revenue
52.7
16.1
95.1
312.6
476.5
CS
Revenue
92.4
71.9
385.3
388.8
938.5
The detail supporting the above financial summaries can be found in the Exhibit section, page_____
40
Valuation
There are many methods that can be used to attach a value to a business, but a start up business presents a
special challenge. There is no historical financial information that can be analyzed and projected forward.
Careful attention should therefore be placed on the projected financial statements, and on management’s
strategy for achieving them.
One of the most common approaches to new business valuation is the use of industry rules of thumb to
provide a large picture valuation of a particular company. Specifically, sales and profit multiples are a
widely used valuation benchmarks. The information needed is annual revenue and an appropriate industry
multiplier. The industry multiplier can be found in various financial publications and on the Internet, as
well as from analyzing sales of comparable businesses. This method is easy to understand and use and is
often viewed as the valuation benchmark
A useful method to investigate the potential worth of CinemaShares would therefore be to apply a
meaningful multiple to its revenue to produce a Price/Sales ratio. Assuming a CinemaShares IPO by year 5,
it would be appropriate to value the company based on the comparable multiples of other publicly traded
companies. Given that CinemaShares is a hybrid motion picture/financing/internet company a number of
examples have been chosen from these sectors and applied to the financial projections on pages 38-40.
Under the Conservative, Moderate and Aggressive scenarios, Year 5 revenue is projected to be $301, $731
and $938 million, respectively. Applying the selected companies’ Price/Sales ratios to these projections
produces the following CinemaShares valuations:
COMPANY
E Trade
Disney
AOL Time Warner
Amazon
MGM
Citigroup
Clear Channel
Charles Schwab
Cox Communications
Wells Fargo Bank
Yahoo
Ebay
Pixar
Financial Sector Average
Motion Picture Industry Av.
S&P 500
Price/
Sales
Ratio
Market
Cap
(1)
(1)
0.74
1.26
1.31
1.82
2.02
2.32
2.55
2.56
3.25
4.11
7.15
16.07
23.07
1,367
28,981
47,936
6,415
2,734
136,100
18,631
10,728
13,470
75,764
5,994
16,197
2,149
301
301
301
301
301
301
301
301
301
301
301
301
301
223
380
395
549
609
699
769
772
980
1,239
2,155
4,844
6,954
731
731
731
731
731
731
731
731
731
731
731
731
731
541
921
957
1,330
1,476
1,695
1,863
1,871
2,375
3,003
5,224
11,742
16,857
938
938
938
938
938
938
938
938
938
938
938
938
938
694
1,182
1,229
1,708
1,896
2,177
2,393
2,403
3,050
3,857
6,710
15,081
21,651
2.80
3.36
2.63
N/A
N/A
N/A
301
301
301
844
1,013
793
731
731
731
2,046
2,455
1,922
938
938
938
2,628
3,153
2,468
Conservative
CinemaShares
Revenue Valuation
(in $ millions)
Moderate
CinemaShares
Revenue Valuation
(in $ millions)
Aggressive
CinemaShares
Revenue Valuation
(in $ millions)
The above Price/Sales ratio analysis values CinemaShares anywhere from $223 million to $21.6 billion in
year 5, depending on the scenario adopted and multiple applied. A 20% share in CinemaShares could thus
be worth anywhere from $76.0 million to $4.3 billion. This clearly represents a significant return on an
initial investment of $20 million.
41