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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:
Web site:

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

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 feature-length 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 patent-pending business-method eliminates the loan repayment from the process of financing a motion picture. Furthermore, it allows an investor who purchasesat least one share of stockin 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 shareof the company‘s stock prior to production. The purchase of a minimum of one, fully-registered, publicly-traded, OTCBB share of 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 theatricalrelease.
  • 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 fromthe sale of our proprietary software, enablingpublicly 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.

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, 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: 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)


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 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: