SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: August 31, 2000
Commission file number: 001-15131
PEACE ARCH ENTERTAINMENT GROUP INC.
(Exact name of registrant as specified in the charter)
BRITISH COLUMBIA, CANADA
(Jurisdiction of Incorporation or Organization)
#302, 1132 HAMILTON STREET, VANCOUVER, BRITISH COLUMBIA, CANADA
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act
None
Securities to be registered pursuant to Section 12(g)
of the Act:
None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
Class B Subordinate Voting Shares
The number of outstanding shares of each class of stock of PEACE ARCH
ENTERTAINMENT GROUP INC. as of August 31, 2000 was:
1,387,791 Class A Multiple Voting Shares, without par value
2,434,953 Class B Subordinate Voting Shares, without par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark which financial statement item the registrant has elected
to follow. Item 17 X Item 18
--- ---
TABLE OF CONTENTS
Page
Exchange Rates........................................................................3
PART I
Item 1. Description of Business....................................................3
Introduction...............................................................3
Development................................................................5
Production.................................................................5
Library....................................................................8
Marketing and Distribution.................................................8
Key Relationships..........................................................8
History....................................................................9
Industry Overview.........................................................10
Employees.................................................................12
Regulatory Considerations.................................................12
Item 2. Description of Property...................................................15
Item 3. Legal Proceedings.........................................................16
Item 4. Control of Registrant.....................................................16
Item 5. Nature of Trading Market..................................................17
Item 6. Exchange Controls and Other Limitations Affecting Security Holders........18
Item 7. Taxation..................................................................20
Item 8. Selected Financial Data...................................................24
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................27
Item 9A. Quantitative and Qualitative Disclosures About Market Risk................33
Item 10. Directors and Officers of Registrant......................................34
Item 11. Compensation of Directors and Officers....................................36
Item 12. Options to Purchase Securities from Registrant or Subsidiaries............37
Item 13. Interest of Management in Certain Transactions............................39
PART II
Item 14. Description of Securities to be Registered................................41
PART III
Item 15. Defaults Upon Senior Securities...........................................42
Item 16. Changes in Securities and Changes in Security
for Registered Securities.................................................42
PART IV
Item 17. Financial Statements......................................................43
Item 18. Financial Statements......................................................43
Item 19. Financial Statements and Exhibits.........................................44
EXCHANGE RATES
Peace Arch Entertainment Group Inc. (hereinafter, together with its
subsidiaries, also referred to as "Peace Arch" or the "Company") publishes its
financial statements in Canadian dollars. In this Annual Report, references to
"dollars", "$" or "Cdn$" are to Canadian dollars, unless otherwise specified,
reference to "US$" refer to United States dollars. For the convenience of the
reader, this Annual Report contains translations of certain Canadian dollar
amounts into United States dollars at specified rates. These translations should
not be construed as representations that the Canadian dollar amounts actually
represent such United States dollar amounts or could be converted into United
States dollars at the rate indicated. Unless otherwise stated, the translations
of Canadian dollars ("Cdn$") into United States dollars ("US$") have been made
at Cdn$1.4722 to US$1.00, the noon buying rate in New York City for cable
transfers in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York (the "Noon Buying Rate") on August 31, 2000. The Noon
Buying Rate on January 31, 2001 was Cdn$1.500 per US$1.00.
The following table sets forth certain exchange rates based on the Noon Buying
Rate. Such rates are set forth as U.S. dollars per Cdn$1.00. On January 31,
2001, the inverse of the Noon Buying Rate was Cdn$1.00 per US$0.6667.
Period
- ------------------------
From To Average High Low
- ---------- ---------- ------- ------- ------
8/31/95 8/31/96 0.7336 0.7517 0.7219
8/31/96 8/31/97 0.7308 0.7525 0.7139
8/31/97 8/31/98 0.6957 0.7293 0.6330
8/31/98 8/31/99 0.6635 0.6891 0.6423
8/31/99 8/31/00 0.6796 0.6973 0.6631
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Peace Arch Entertainment Group Inc. is a vertically integrated company that
develops, produces and distributes high-quality, proprietary television
programming for markets worldwide. The Company also provides production services
for third parties on a contract basis. The head office of the Company is based
in Vancouver, British Columbia, Canada, the third largest film and television
production center in North America. As a British Columbia-based producer, the
Company enjoys a number of competitive advantages over producers outside of
Canada, including tax and other government incentives. The Company also enjoys a
competitive advantage over producers in other parts of Canada due to its
proximity to Los Angeles, its varied geography and its temperate climate.
The Company was incorporated as Vidatron Enterprises Ltd. under the laws of
British Columbia on October 22, 1986 by registration of its Memorandum and
Articles. Effective February 13, 1992, the Company consolidated its share
capital on a one new for five old basis, increased its authorized share capital
to 25,000,000 common shares without par value and 25,000,000 serial preference
shares without par value, and changed its name to The Vidatron Group Inc.
Effective February 5, 1997, the Company consolidated its share capital on a one
new for four old share basis, increased its authorized share capital to
25,000,000 common shares without par value and 25,000,000 preference shares
without par value and changed its name to Vidatron Entertainment Group Inc.
3
By resolution dated July 14, 1999 the Company's share capital was reorganized by
converting the Common Shares of the Company into Class A Multiple Voting Shares
and Class B Subordinate Voting Shares, by converting each 5 issued and
outstanding Common Shares into 1 Class A Multiple Voting Share and 1 Class B
Subordinate Voting Share. At the same time, the Company's name was changed to
"Peace Arch Entertainment Group Inc.". All references in this document to share
data refer to post consolidated shares.
The following table shows the breakdown of the Company's total revenues during
the Company's past three fiscal years by activity and by geographical market:
Year Ended August 31,
------------------------------------------------------
1998 1999 2000
------------------ ----------------- -----------------
(Canadian dollars in millions)
REVENUES BY ACTIVITY
Proprietary programming.................................... $28.0 $47.3 31.7
Production services........................................ 4.2 3.7 2.8
Other...................................................... 0.3 0.5 0.9
REVENUES BY GEOGRAPHIC MARKET
Canada..................................................... $5.9 $ 7.3 5.3
U.S. ...................................................... 10.8 16.1 8.1
Europe and other markets................................... 15.8 28.1 22.0
The Company has 4 material wholly-owned operating subsidiaries, each
incorporated in British Columbia, Canada, as follows:
COMPANY NAME DATE OF INCORPORATION
- --------------------------------------------------------------------------------- ----------------------------------
The Eyes Multimedia Productions Inc. 05/19/93
- --------------------------------------------------------------------------------- ----------------------------------
Soho Enterprises Ltd. 01/03/91
- --------------------------------------------------------------------------------- ----------------------------------
Peace Arch Productions Inc. (formerly Sugar Entertainment Ltd.) 03/15/96
- --------------------------------------------------------------------------------- ----------------------------------
Peace Arch Television Inc. 03/18/99
- --------------------------------------------------------------------------------- ----------------------------------
The Company's Class A Multiple Voting Shares and Class B Subordinate Voting
Shares trade on the Toronto Stock Exchange under the symbols "PAE.A" and
"PAE.B", respectively. The Class B Subordinate Voting Shares trade on the
American Stock Exchange under the symbol "PAE".
The Company's consolidated financial statements are stated in Canadian Dollars
(CDN$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP), the application of which, in the case of the
Company, conforms in all material respects for the periods presented with U.S.
GAAP except as explained in footnote 20 to the consolidated financial statements
included under Item 17 to this Form 20-F.
4
The Company's head office and production/distribution facility is located in the
Peace Arch Building, Third Floor, 1132 Hamilton Street, Vancouver, B.C. CANADA
V6B 2S2. The telephone number is (604) 681-9308 and the facsimile number is
(604) 681-3299. The contact person is Timothy Gamble, President and Director.
The information in this Annual Report is stated as of January 31, 2001, unless
otherwise indicated.
DEVELOPMENT
The first stage in the process of creating television programming is concept
development. The Company selects programming concepts that the Company believes
will have domestic and international market appeal. The Company develops
programming for television, including episodic series, movies and documentaries.
It often arranges for the involvement of industry recognized creative talent,
such as writers, producers, directors and actors, which will make the
programming more saleable and may increase the value of the Company's library.
In some cases, one or more of these people may already be involved when the
Company becomes involved.
The Company's development department receives and evaluates written concepts,
scripts, books or other literary properties from agents, writers and prospective
production partners in the U.S., Canada and Europe. Once the Company has
selected and acquired the necessary rights to a source material, it may involve
broadcasters or third party investors to participate in the further development
of the concept. These activities may include the preparation of a series
"bible," script writing or the production of a promotional reel that can be used
as a sales tool. For concepts that have sufficient Canadian content, government
and related funding agencies, such as Telefilm Canada and BC Film, may provide
funding for the development process as described below under "Regulatory
Considerations".
In some cases the Company gets involved at a later stage of development, when
creative materials may have already been prepared or when key creative people
are already attached. Involvement at this stage may shorten the Company's
development process, but involve less opportunity for it to influence the
financial structure of the programming.
Early involvement in the acquisition and development of projects generally
increases the Company's control over the exploitation of the finished program.
The Company believes that greater control enhances its ability to build targeted
brand identities for its programming that should increase revenues from
television distribution and potential long-term revenue from ancillary markets
such as clothing, toys, novelties, books, CDs, soundtracks and other audio
products, electronic and video games, Internet applications and other
merchandise. Increased ownership and control also will allow the Company to
capitalize on new ancillary markets that may arise in the future.
The Company has several new drama and documentary programs at an early stage of
development with various Canadian, U.S. and international producers,
broadcasters and distributors.
PRODUCTION
Most of the Company's business activity relates to proprietary programming. The
production of proprietary television programming involves the assembly of a team
of production personnel, including script writers, directors, cast and crew. In
the case of larger-budget productions such as "First Wave", "The Immortal" and
"Big Sound", this team can include over 150 people per production who are hired
either as employees or independent contractors. Typically, the Company forms a
wholly-owned production company for each production which retains the necessary
employees and contractors.
5
The production of a 22-episode season of a one-hour dramatic series such as
"First Wave" or "The Immortal" can span ten months. Each episode takes
approximately 11 weeks to complete, including one week of preparation, one week
of shooting and up to 9 weeks of post-production. At any given time there may be
one episode in preparation, one episode shooting and three or four episodes in
various stages of post-production. The production of a 22-episode season of a
half-hour comedy series, such as "Big Sound", spans approximately nine months.
Each episode takes approximately nine weeks to complete, including eight days of
preparation, four days of shooting and up to six weeks of post-production. At
any given time there may be three episodes in preparation, one episode shooting
and five or six episodes in various stages of post-production.
In addition to the Company's proprietary programming, the Company produces
creative works that are directed to training, education and the information
needs of third parties and it offers domestic and foreign language production
services for network television including entertainment segments, news segments
and electronic press kits, as well as sports, entertainment, documentary,
television commercial and music videos, all under various contract arrangements.
While these production services represent only a small portion of the Company's
current revenues, it plans to continue to pursue production service arrangements
because they provide a training ground for the Company's creative staff, foster
its relationships with key industry participants, provide an incubator for new
skills and industry practices, and keep the Company's facilities utilized during
hiatus production periods of its television series programming. These
productions have won numerous awards, including most recently, the Gold Camera
Award in 1998 at the U.S. International Film and Video Festival for the
Company's video production entitled "Millennium". The Company has also won Best
Video, Best Director, Best Cinematographer for "Hello Time Bomb", as well as
Best Cinematographer for "Load Me Up" by Matthew Good Band at the 2000 Canadian
Music Video Awards.
The Company's proprietary programming and production services offer high
production values and generally require extensive studio and on-location filming
or taping, special visual effects, music scoring, editing and post-production
finishing. Most of these activities are undertaken by the Company's crews using
facilities and equipment that the Company owns or rents. Some key activities,
such as sound mixing and post-production finishing are subcontracted to
companies that specialize in these areas.
Since inception, the Company has produced feature length films, documentaries
and various specialty programs for television. The Company has also produced 112
one-hour episodes and 59 half-hour episodes of television series programming.
During fiscal 2000, the Company delivered one documentary and 29 hours of
programming. Production is currently underway on an additional 43 one-hour
episodes and 22 half-hour episodes.
The Company's recent proprietary programming and other productions include:
FIRST WAVE. In December 2000, the Company completed principal photography of a
third 22-episode season of its science fiction thriller television series "First
Wave". "First Wave" is produced in association with Pearson Television
International Ltd., Francis Ford Coppola and Chris Brancato. Based in the United
Kingdom, Pearson Television International Ltd. is a large international producer
and distributor of television programming. Mr. Coppola is an Academy Award
winner and producer and director of "The Godfather" and co-screenwriter of
"Apocalypse Now" and Mr. Brancato is an accomplished screenwriter ("Species 2"
and "Hoodlum"). Peace Arch controls North American rights to this series, and
made a sale of 66 episodes (three seasons of production) to USA Networks' Sci-Fi
Channel. Pearson Television International Ltd. agreed to distribute the initial
66 episodes of "First Wave" outside of North America. CHUM Television ordered 66
episodes for broadcast in Canada. In
6
2000 "First Wave" won a Leo Award for best male performer. The Leos recognize
excellence in British Columbia film and television production.
THE IMMORTAL. In December 2000 the Company also completed principal photography
of a 22-episode, one-hour drama television series titled "The Immortal",
co-produced with Alta Productions Limited of the United Kingdom. THE IMMORTAL is
based on a short story "The Tao of the Immortal" by Messrs. Cary Solomon and
Chuck Konzelman. CHUM Television will premiere THE IMMORTAL nationally in Canada
on SPACE: The Imagination Station commencing in the spring of 2001. THE Immortal
is also in syndication in approximately 80% of the United States market and in
various countries around the world. The Company is actively pursuing agreements
to sell additional seasons of THE IMMORTAL.
BIG SOUND. In June 2000, the Company commenced production of 22 episodes of its
1/2 hour comedy series, "Big Sound", which is set in the music industry. BIG
SOUND is a Canadian/United Kingdom co-production and the first season of the
series has been produced in association with Global Television, a CanWest
company, in Canada.
ANIMAL MIRACLES. In October 2000 the Company commenced production of 13 one hour
episodes of Animal Miracles. Animal Miracles tells the stories of the close
relationships that humans develop with animals. The Company holds world-wide
rights to the series and presold the initial season to PAX in the United States
market, as well as The Life Network in Canada.
DOCUMENTARIES. In 1998 and 1999, the Company produced two one-hour documentaries
for CTV and The Knowledge Network; "Citizen Shame", about child poverty in
Canada, and "Harm's Way", about youth and violence. These programs were financed
through Canadian broadcast sales and government incentive programs. The Company
retains the rights to exploit these programs worldwide. These documentaries
combined the efforts of independent Canadian documentary filmmakers and the
Company's in-house production facilities and staff. Writers and producers for
the programs included Helen Slinger, a senior Canadian journalist and
documentary writer and David Massar, a writer, producer and director of many
programs for NBC, Lifetime Television, ESPN, The Learning Channel, History
Channel, Discovery Channel and A&E. In 2000, the Company produced three
documentaries. "Heroines" is a dark and thought provoking expose of the dark
world of heroine addiction among women, "Cake Night" is a special on substance
abuse and "It's a Mall World" is a one hour fun filled look at the North
American phenomenon of shopping malls which has aired on the Discovery Networks
TLC in the United States and Canada.
COMMERCIALS. The Company has produced commercials for an extensive list of
clients over the last ten years, including Disney, McDonald's, Molson Breweries,
Frisch's and the Canadian Banking Association. Commercials produced by the
Company have won the Canadian Television Commercial Award (the "Bessies") Gold
and Silver Awards category in 1997 and 1998.
FEATURE LENGTH FILMS. In addition to the Company's current activities, it has
participated in the production of numerous feature films and documentaries.
These include: "Cadence", a feature film starring Martin Sheen and Charlie
Sheen; "Island of Whales", a feature documentary narrated by Gregory Peck and
commissioned by the PBS Nova Series; and "Outside Chance of Maximillian Glick",
an award-winning Canadian feature film. During 2000, the Company participated in
the production of five feature length films, namely, "Now & Forever", a dramatic
contemporary love story starring Mia Kirshner and Adam Beach and directed by
award winning director, Bob Clark, "The Impossible Elephant", an endearing
family story, and three 90 minute made for television movies based on the
Catherine Marshall "Christy" stories. "Christy" tells the story of a courageous
teacher who leaves the city to teach at a mission school in the Appalatian
mountains in 1912.
7
The Company holds world wide distribution rights for "Now & Forever", United
States television rights for "The Impossible Elephant" and Canadian rights to
the "Christy" movies. All five movies will be delivered in fiscal 2001.
LIBRARY
The Company retains varying ownership interests in its proprietary productions
and believes that this strategy will provide it with significant future asset
value. During fiscal 2000, the Company added 29 hours of dramatic programming
and one documentary to its library. At August 31, 2000, the Company's library
contained approximately 150 hours of proprietary programming. The Company's
library will continue to expand as it produces more proprietary programming.
The Company's production group also has accumulated an extensive library of
stock footage on film and video that can be incorporated into future
programming. The Company may seek to add to its library through strategic
acquisitions.
MARKETING AND DISTRIBUTION
The Company markets and distributes its proprietary television programming under
arrangements with U.S., Canadian and international broadcasters and
distributors. The Company seeks to market and distribute titles in its library
to existing pay and free television, home video and other markets worldwide, as
well as through developing technologies. Historically, the Company has directly
distributed its programming in North America, where there are a limited number
of buyers and marketing costs are manageable. In the past, the Company typically
contracted with international distributors, such as Pearson Television
International Ltd. and MGM, to distribute its programs in markets outside North
America. This strategy provides the Company with two principal benefits. It
avoids the substantial costs and financial risks of distributing its programs to
markets throughout the world and, in certain circumstances, allows the Company
to secure distribution advances to provide cash flow for the production.
Increasingly, the Company is using smaller international sales agents and
handling certain distribution activities directly. This strategy may require
more up-front capital, but can result in reduced distribution fees and expenses
in the long run. It can also allow the Company more control over the
distribution process.
The Company's marketing efforts are focused on creating branded identities for
its proprietary programs. The Company believes that such branded identities will
lead to additional revenues from television and home video distribution and
ancillary markets such as clothing, toys, novelties, books, CDs, soundtracks and
other audio products, electronic and video games, Internet applications and
other merchandise.
KEY RELATIONSHIPS
The Company expects that its relationships with domestic and international
broadcasters, distributors, financing sources and creative talent will be
important to the successful expansion of its proprietary television business.
U.S. AND INTERNATIONAL BROADCASTERS AND DISTRIBUTORS. The Company has produced
its programming in association with a variety of U.S. and international
broadcasters and distributors including Buena Vista
8
Television, Pearson Television International Ltd., Hallmark Entertainment
Network, MGM and Showtime Networks.
CANADIAN DOMESTIC BROADCASTERS. The Company has long-standing relationships with
the Canadian broadcast community, including CHUM-City, CTV, Global, The
Knowledge Network and The Family Channel. During fiscal 2000, the Company sold
the initial 22 episode season of its 1/2 hour comedy series "Big Sound" to the
Global Television Network. During the past two years, the Company has sold its
series "The Immortal", "First Wave", Dead Man's Gun", and "Electric Playground"
to CHUM-City. The Company has also licensed two documentaries, "Harm's Way" and
"Citizen Shame", to CTV and The Knowledge Network, and licensed its television
movies, "The Prisoner of Zenda, Inc." and "Ronnie and Julie", to The Family
Channel.
Canadian broadcaster relationships are an integral part of producing in Canada,
not only for the sales revenues they represent, but also because their
involvement makes it possible to take advantage of various government
incentives. See the discussion under "Regulatory Considerations-Canadian Content
Requirements" for further details of these incentives.
PRODUCING AND WRITING TALENT. The Company has worked with Francis Ford Coppola
and screenwriter Chris Brancato ("Species 2" and "Hoodlum"), who is the creator
and lead writer on "First Wave". The Company's first dramatic television series,
"Dead Man's Gun", was created by Howard and Ed Spielman ("Kung Fu" and "Young
Riders") and produced in association with Henry Winkler ("Happy Days" and
"MacGyver").
The Company has also hired Canadian talent at all levels in the production of
its programs, including writers, directors, production designers, editors and
actors. In late 1999, David Steinberg joined the creative team developing the
Company's 1/2 hour sit-com "Big Sound". Mr. Steinberg's writing and directing
credits with the U.S. Network sit-coms include "Mad About You", "Friends" and
"Seinfeld". In April 2000 Mr. Steinberg entered into an agreement with the
Company to perform all writing, development and producing (including executive
producing services) exclusively for the Company, or its related productions, for
a period of two years.
Four customers, including Pearson Television International Ltd., USA Network and
CHUM City, each accounted for 7% or more of the Company's revenues in fiscal
2000. The loss of any of these customers could have a material adverse impact on
the Company's results of operations and financial condition.
HISTORY
Since the Company's incorporation in 1986, it has been involved in producing and
marketing a variety of products ranging from consumer based instructional
videos, to integrated corporate training programs, to individually contracted
corporate videos, feature films, television documentaries and television
commercials. Historically, the Company derived the bulk of its revenues from
production service arrangements whereby the Company was retained to produce a
video program, film or television commercial for a fee. The Company expanded its
service production capability through the acquisition of The Eyes Multimedia
Productions Inc. The Company acquired The Eyes Multimedia Productions Inc. in
August 1995 for purchase consideration of common shares valued at $60,000 and
periodic cash payments totaling $215,000.
In 1995, the Company expanded its operations into the areas of video and
software distribution through the acquisitions of Image Media Services Ltd. and
Pilot Software. The principal business of Image Media was the distribution of
video and software and multi-media titles to primary, secondary schools,
9
and the post-secondary educational institutions throughout British Columbia
and most regions of Canada. The Company acquired Image Media Ltd. in February
1995 for purchase consideration of common shares valued at $250,000 and
periodic cash payments totaling $710,413. Pilot Software became a
wholly-owned subsidiary of Image Media and carried out the bulk of Image
Media's distribution activities in Ontario and Eastern Canada. The Company
acquired Pilot Software in December 1995 for purchase consideration of common
shares valued at $81,250 and periodic cash payments totaling $133,725.
In 1996, the Company commenced a shift in its business toward the production of
proprietary television programming. The first steps in this process were the
production of the feature length family films "The Prisoner of Zenda, Inc." and
"Ronnie and Julie". The Company's shift into the business of proprietary
television production was accelerated through the acquisition of Sugar
Entertainment Ltd. effective September 1, 1996. The Company's principal
motivation for expanding this business was that it offered the Company greater
potential for growth than its prior businesses. The Company also believes that
the production of proprietary programming offers it the ability to create and
expand a library of produced programming which it believes will have a residual
asset value.
Effective September 1, 1996, the Company acquired Sugar Entertainment Ltd. for
purchase consideration of common shares of the Company. On September 22, 1999
Sugar Entertainment Ltd.'s name was changed to "Peace Arch Productions Inc.".
On August 31, 1997, the Company completed the sale of the assets and operations
of Image Media and Pilot Software and thereby exited the video and software
distribution business. The Company's decision to sell this business was based on
the fact that gross profit margins were declining as a result of competitive
pressures.
INDUSTRY OVERVIEW
THE TELEVISION PRODUCTION INDUSTRY
The North American television production and distribution industry serves the
largest broadcast market in the world, with a population of nearly 300 million
people. In the last decade the growth of broadcasting and cable television
markets outside North America through the privatization of broadcasting systems,
the proliferation of broadcast licenses and the introduction of new delivery
technologies, such as cable and satellite transmission systems, has led to a
higher proportion of revenues from international markets.
Generally, the right to broadcast a program is licensed by a production company
to a combination of the U.S., Canadian and international broadcasters, including
free television and cable networks or individual television stations in the
first-run syndication market. After the initial network, cable licensing or
first-run syndication period, the program is available for further commercial
exploitation on cable or in syndication.
NORTH AMERICAN MARKETS
In North America, programming is delivered to the end user by way of free
television networks, cable channels and networks, individual television stations
and satellite delivery services. Free television networks include NBC, CBS, ABC,
Fox, UPN, WB and PBS in the U.S. and CBC, CTV and the Global Television Network
in Canada. Each of the major free television networks in the U.S. and Canada
currently schedules approximately 22 hours of programming in prime time during
the hours from 8 p.m.
10
to 11 p.m. Monday through Saturday, and 7 p.m. to 11 p.m. on Sunday of each
week. Programming generally consists of a mix of movies-of-the-week,
mini-series, half-hour comedy and hour-length drama, factual and reality
based programming, or action/adventure series.
In recent years, alternatives to the free television networks in the U.S. have
expanded with the growth of other networks, cable channels and the development
of a first run syndication market leading to more available slots for television
programming. Cable channels include HBO, Showtime, USA Networks, Lifetime, The
Family Channel, TNT and TBS in the U.S. and TMN, Super Ecran, SuperChannel,
Channel D and Showcase in Canada.
INTERNATIONAL MARKETS
The worldwide television industry is experiencing growth as a result of the
development of new television broadcasting systems outside of North America.
These systems represent significant new sources of revenue for television
producers. Factors contributing to the growth of the worldwide television
industry include the introduction of direct broadcast satellite services and pay
television, as well as increased cable penetration and the growth of home video.
Some foreign broadcasters seek out both indigenous programming in order to
satisfy the local content regulations of their broadcast licenses, and
international programming, largely from North America, to appeal to a wide
audience. The Company is increasingly looking at structuring its productions as
international co-productions and thereby produce "international" programming
that qualifies as indigenous in more than one country.
CANADA'S ROLE IN THE TELEVISION AND FEATURE FILM INDUSTRY
The Canadian film and television industry in 1999 generated total production
activity of more than $3.7 billion. At the same time as the domestic industry
has matured, Canada has become a leading location for internationally originated
productions due to several factors. Canada's geographic proximity to the U.S.
and shared North American values and interests have led to the establishment of
close professional contacts between Canadian and U.S. studios, independent
producers, distributors and buyers. The current favorable exchange rate of the
Canadian dollar, government tax incentives and the availability of free location
assistance to television producers offered by many Canadian cities and several
provinces have also increased production activity in Canada. Canada has made an
effort to increase its pool of highly-trained and professional crews,
technicians and production personnel. Finally, with its wide ranging topography,
stretching 3,400 miles from coast to coast, Canada is ideally suited for
location shooting. Urban centers such as Toronto, Vancouver and Montreal have
been disguised as London, Paris, New York, Los Angeles and Chicago. U.S.
companies with a strong presence in Canada include major U.S. studios such as
Paramount, Disney, Universal Pictures and Columbia Pictures/Tri-Star Pictures;
U.S. television networks such as ABC, NBC, CBS, Fox, UPN, WB and PBS; and film
companies such as The Hearst Corporation, Kushner-Locke Company and New World
Entertainment, Inc., among many others. European and Asian film companies have
also found Canada to be an attractive location and have often been able to
access Canada's numerous international film and television co-production
treaties.
Of Canada's ten provinces, the provinces of British Columbia and Ontario are
most actively involved in the motion picture production industry, with 1999
production expenditures equaling approximately $1.07 billion and $934 million,
respectively. These figures represent significant increases over the previous
year, when annual production expenditures in British Columbia and Ontario
totaled approximately $808 million and $809 million, respectively.
11
COMPETITION
Television production and distribution are highly competitive businesses. The
Company faces competition from companies within the entertainment business, as
well as alternative forms of leisure entertainment such as travel, sporting
events, outdoor recreation and other cultural activities, among many others. The
Company competes with numerous suppliers of television programming and related
programming, including national television networks and independent television
production companies, many of which are significantly larger and have
substantially greater resources than the Company has. The Company considers its
main competitors in Canada to be Alliance Atlantis Communications Corporation,
Salter Street Films, Ltd. and Lions Gate Entertainment Corp. and in the U.S. to
be Spelling Entertainment Group Inc., Kushner-Locke Co. and Carsey-Werner. The
Company believes that it has a competitive advantage over U.S. competitors
through its eligibility for Canadian tax credits described below under
"-Regulatory Considerations-Industry Incentives". The Company also enjoys a
competitive advantage over producers in other parts of Canada due to its
proximity to Los Angeles, its varied geography and its temperate climate.
EMPLOYEES
As of January 31, 2001, the Company had 27 full-time permanent employees. The
Company also hires additional personnel on a project-by-project basis in
connection with the production of its television programming. The Company
believes that its employee and labor relations are good.
REGULATORY CONSIDERATIONS
The Company's status as a producer of "Canadian" programming, established and
operating in British Columbia, makes it currently eligible to receive Canadian
tax and business incentives.
The Company continues to qualify for these tax and business incentives if, among
other things, Canadians beneficially own or control a majority of the voting
rights of Peace Arch. Approximately 62% of the voting power of the Company's
outstanding shares are held of record by Canadians. However, the Company has no
way of confirming actual beneficial ownership of its shares. If Canadians fail
to beneficially own or control a majority of the Company's voting rights, the
Company could lose its eligibility for these tax and business incentives. These
tax and business incentive programs also may be amended or eliminated in the
future. The loss or elimination of these tax or business incentives would have a
material adverse effect on the Company's results of operations and financial
condition.
CANADIAN CONTENT REQUIREMENTS
Canadian conventional, specialty, pay and pay-per-view television services are
required to devote a certain amount of their programming schedules, including
prime time, to Canadian productions. Compliance with these requirements is
enforced by the Canadian Radio-Television and Telecommunications Commission
("CRTC") and failure to comply can result in fines or the loss of a license.
These requirements provide support to the market for Canadian programming, such
as those the Company produces, as long as they qualify as Canadian programming
for CRTC purposes.
In addition to scheduling requirements, Canadian conventional, specialty, pay
and pay-per-view television services are typically required to invest in, or
acquire, Canadian programming based on the nature of the particular service and
financial performance. The requirement for a broadcaster to spend a specific
amount on Canadian programming typically takes the form of policies or
conditions of license.
12
The nature of such spending ranges from expenditures on script and concept
development to expenditures on specific categories of Canadian production.
The CRTC determines the criteria for certification of a program as "Canadian".
According to CRTC regulations, a program will qualify if it is produced by an
individual Canadian producer with the involvement of individual Canadians in key
creative functions, and where a substantial portion of the remuneration paid to
individuals is for services provided by Canadians and processing and final
preparation costs are for services provided in Canada. A program may still
qualify as "Canadian" even though some of the producer functions are performed
by non-Canadian individuals, if the production company is a "Canadian production
company" and other requirements are met. A "Canadian production company"
includes a Canadian company which carries on business in Canada with a Canadian
business address, which is owned or controlled by Canadians and whose principal
business is the production of film, videotape or live programming for
distribution on television or in theatrical, industrial or educational markets.
The Company believes that it will continue to qualify as a "Canadian production
company" for this purpose, so long as Canadian citizens or permanent residents
beneficially own more than 50% of the combined voting power of the Company's
outstanding shares or if it is controlled by Canadians.
The CRTC also requires Canadian conventional broadcasters to adhere to the
Canadian Association of Broadcasters' "Broadcast Code for Advertising to
Children".
INTERNATIONAL CO-PRODUCTION
Canada is a party to co-production treaties with more than 50 countries
throughout the world, excluding the U.S. Canada's co-production treaties allow
for the reduction of the risks of production by permitting the pooling of
creative, technical and financial resources of Canadian producers with
non-Canadian producers under prescribed conditions. Canadian co-production
treaty partners include China, France, United Kingdom, Germany, Italy, Hungary,
Israel, Mexico, New Zealand and Australia. A production that qualifies as a
co-production for treaty purposes is considered to be a national product in each
of the participating countries and, as such, is entitled to many local
advantages in each country. More specifically, the co-production usually
satisfies criteria for national certification in regard to content broadcasting
regulations, government subsidies and tax benefits. The copyright in the
production is shared by the co-producers, while the domestic distribution rights
are generally owned by the respective co-producers. Sharing of foreign revenues
is based on the respective contribution of each co-producer, subject to
negotiation between the co-producers and approval by the appropriate government
authorities. Two of the Company's series, "Big Sound" and "The Immortal", were
produced under Canadian/United Kingdom co-production treaties whereby the
Company holds an 80% interest and our United Kingdom co-producer, Studio Eight
Productions, holds a 20% interest.
INDUSTRY INCENTIVES
Since 1995, a refundable tax credit has been available under the Income Tax Act
(Canada) for eligible film and television productions undertaken by qualified
Canadian corporations. The tax credit is equal to 25% of the lessor of qualified
labor expenditure and 48% of eligible costs of production of a given project.
Eligible cost of production are total production costs less any other government
assistance, including any provincial refundable tax credit. Since the Company's
labor expenditures for a production typically exceed this limitation, it is
generally eligible to receive a federal tax credit equal to 12% of the eligible
cost of production. The credit is calculated on the basis of each individual
production and is available only to taxable Canadian corporations which have
activities that are primarily those of a Canadian film or video production
business carried on through a permanent establishment in Canada and
13
which are Canadian-controlled as determined under the Investment Canada Act.
A corporation is controlled by Canadians for purposes of the Investment
Canada Act where, among other things, Canadians own and control a majority of
the voting interest. The Company currently qualifies for this tax credit, and
the reclassification of its common shares into Class A shares and Class B
shares and other proposed changes to its articles assisted the Company in
continuing compliance while allowing for non-Canadian investment. The Company
believes that so long as, among other things, it continues to be
Canadian-controlled as determined for the purposes of the Investment Canada
Act, it will continue to so qualify and it will use its best efforts to
ascertain that all its production projects will continue to be eligible for
the tax credit. Federal tax credits refundable to the Company pursuant to the
Income Tax Act (Canada) for television programming delivered in fiscal 2000
amounted to $4,482,819.
In October 1997, the Canadian Minister of Finance announced the creation of a
new program to support film and video productions in Canada. Effective November
1, 1997, the film and video production services tax credit replaced the
privately promoted tax shelters that were affirmatively terminated on October
31, 1997, with a tax credit for films that do not satisfy all the requirements
of a Canadian-certified film or video production described above. This program
currently provides eligible production corporations engaged in an accredited
production with a tax credit equal to 11% of their qualified Canadian labor
expenditures for a production incurred after October 1997. An eligible
production corporation is a corporation that carries on a film or video
production business through a permanent establishment in Canada, and that owns
the copyright on an accredited production throughout the period in which it is
produced in Canada or that has contracted directly with the owner of the
copyright to provide production services in Canada where the owner of the
copyright is not an eligible production corporation. An accredited production is
a film or video production with a production cost of not less than $1.0 million
incurred during the two-year period that begins with the principal filming or
taping of the production. A production that is part of a series of two or more
episodes, or that is a pilot program for such a series, also qualifies as an
accredited production if the production costs of each episode incurred during a
two-year period that begins with the principal filming or taping of the
production exceeds $100,000 for an episode with a running time of less than 30
minutes and $200,000 in any other case. Accredited productions do not include,
among other things, pornography, advertising and various productions developed
primarily for industrial, corporate or institutional purposes. British Columbia
has adopted a similar program.
Through Telefilm Canada, the Canadian government provides financial assistance
to the Canadian film and television industry in the form of recoupable advances
in script development, equity investment in production, loan guarantees,
recoupable advances of the cost of dubbing into English or French and grants of
up to 75% of advertising and promotion costs. Telefilm Canada's development fund
and the international component of their Marketing Assistance Program are no
longer available to publicly traded companies. Other than these programs, the
Company is eligible for Telefilm Canada funding. In fiscal 1997 and 1998, the
Company did not use Telefilm funding from the development fund or the
international component of the Marketing Assistance Program. In fiscal 1997, the
Company did not use Telefilm funding for which it is currently eligible. In
fiscal 1998, the Company received less than $23,000 of Telefilm funding for
which it is currently eligible and in fiscal 1999 and 2000, the Company did not
receive any funding from Telefilm. In November and December 2000 the Company
received an aggregate of $1,400,000 from Telefilm's Equity Investment Program
for production funding in respect of BIG SOUND. The Company may avail itself of
such funding in the future if management believes it is prudent to do so.
Under the terms of the current film and television provincial tax credit system
under the Income Tax Act (British Columbia), British Columbia offers refundable
tax credit incentives for British Columbia film productions. The incentives are
available at the following levels:
14
o Basic incentives equal to 20% of qualified British Columbia labor
expenditures.
o A regional incentive equal to 12.5% of qualified British Columbia labor
expenditures for productions where principal photography occurs outside of the
Vancouver area in British Columbia.
o A training incentive equal to the lesser of 3% of British Columbia labor
expenditures or 30% of qualified labor expenditures attributable to payments to
eligible industry trainees.
Eligible labor expenditures are limited to 48% of the total production costs,
net of government assistance. The credit is calculated on the basis of each
individual production and is available only to a qualified corporation having a
permanent establishment in British Columbia and carrying on an eligible film or
television production business through a permanent establishment in Canada. In
order to access the basic credit, the corporation must also be controlled by
persons domiciled in British Columbia. The Company will continue to be
controlled by persons domiciled in British Columbia so long as more than 50% of
the members of its board of directors are persons domiciled in British Columbia
and more than 50% of the combined voting power of its outstanding shares are
beneficially owned by persons domiciled in British Columbia. In addition, in
order to access the basic credit, the producer of the eligible production must
be a British Columbia resident for tax purposes. Since the British Columbia tax
credit system was not established until 1998, the Company received no tax
credits in fiscal 1998. The Company received tax credits under the British
Columbia program on account of television programming delivered in prior fiscal
years in the amount of approximately $5,607,065.
In addition to these governmental incentives, the Canadian Television Fund
("CTF") License Fee Program, a partnership composed of public and private
television industry participants, was created in 1996 to form a television
funding initiative equal to approximately $80.0 million per year to promote
high-quality Canadian television programming. The Company believes that it is a
production company eligible for funding under the CTF's License Fee Program that
could, for each project eligible under such program, represent contributions of
up to 18% of the total production budget. The maximum contribution varies with
the categories of programs. The maximum contribution provided under the program
is for big-budget one hour drama series and is limited to the lower of $3.48
million and 18% of production costs. During fiscal 1999, the Company received
$29,632 from the CTF's License Fee Program and in fiscal 2000 the Company
received $1,369,471 from the License Fee Program.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's head office is located in the top two floors of a building it
leases in the Yaletown area of Vancouver, British Columbia. The lease expires in
August 2004, although the Company and its landlord each have the option to
terminate the lease after August 2001. The landlord has provided the Company
with notice to terminate as at 31st August 2001 and the Company is currently
seeking new office space. Based on current market conditions, the Company
currently anticipates that it will be able to lease new space at a comparable
cost. The lease provides for annual rental payments of $200,700. The Company
originally acquired this building in 1994 and sold it in on August 31, 1999.
The Company's studio buildings, comprising approximately 78,000 square feet
of studio, production office and storage space, are located at 310 West 4th
Avenue and 150 West 1st Avenue, Vancouver, British Columbia, Canada. They
accommodate many of the Company's own productions and are available for
rental by visiting producers of feature films, television series and
movies-of-the-week. The studios house the Company's ten digital post-production
suites and two visual effects suites which handle off-line editing for all of
its productions.
15
The Company's studios are well-positioned to capitalize on the growing trend
within the entertainment industry to complete production work in Vancouver. Both
are located within walking distance of Vancouver's premier film transfer and
post-production facilities and ten minutes from major downtown hotels and
restaurants. In addition to the direct impact on the Company's operating
results, the studios are a key asset which can be used to enhance the Company's
participation in a variety of film and television projects by ensuring access to
facilities, increasing the Company's flexibility and reducing its costs. The
West 4th studio was fully booked until December 2000 with the production of the
Company's television series "First Wave".
Approximately half of the West 1st Studio is currently being utilized by the
Company for its productions. The balance is leased to third parties at local
market rates.
The following sets forth information concerning facilities that the Company
owns.
ADDRESS AREA PURPOSE
- --------------------------------------------------------------------------------------------------------------------
310 West 4th Avenue 23,000 square feet Studio and production offices
Vancouver, B.C.
150 West 1st Avenue 55,000 square feet Production offices and post-production services
Vancouver, B.C.
The Company believes that its facilities are adequate for its current needs but
that as the Company expands its productions, additional space must be leased or
otherwise acquired.
ITEM 3. LEGAL PROCEEDINGS
On July 19, 2000 a former employee of one of our production companies filed a
Statement of Claim in the British Columbia Supreme Court against the Company for
wrongful termination, seeking damages of $500,000 (US). It is the opinion of the
Company that the claim is without merit.
Other than as set out above, the Company is not currently subject to any legal
proceedings which, if determined adversely to it, would have a material adverse
effect on its business or results of operations. The Company may, from time to
time, become a party to various legal proceedings arising in the ordinary course
of business. The Company maintains insurance coverage for such matters in
amounts that it believes to be adequate.
ITEM 4. CONTROL OF REGISTRANT
The Company is not directly or indirectly owned or controlled by another
corporation or by any foreign government.
The following table sets forth information regarding the beneficial ownership of
the Company's Class A and Class B shares as of January 31, 2001 for (a) each
person known to the Company to own beneficially more than 10% of either Class A
shares or Class B shares and (b) all executive officers and directors as a
group. The information in the table does not reflect ownership of options or
warrants.
16
CLASS A PERCENT CLASS B PERCENT
NAME SHARES OF CLASS SHARES OF CLASS
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Working Opportunity Fund (EVCC) Ltd. 160,000* 11.5% 160,000* 6.6%
- ------------------------------------------------------------------------------------------------------------------
Officers and directors as a group (9 persons) 170,956* 12.3% 198,485* 8.2%
- ------------------------------------------------------------------------------------------------------------------
* These numbers do not include any common shares which are issuable upon the
exercise of options or warrants.
ITEM 5. NATURE OF TRADING MARKET
The Company's Class A Multiple Voting Shares and Class B Subordinate Voting
Shares trade on The Toronto Stock Exchange ("TSE") symbols PAE.A and PAE.B in
Toronto, Canada. The Company's Class B Subordinate Voting Shares also trade on
The American Stock Exchange, symbol PAE. The Company's shares commenced trading
on the TSE in November 1997 under the symbol "VE". Effective July 19, 1999, the
Company's Class A shares and Class B shares began trading on the TSE, at which
time the Company's common shares were delisted. The Company's shares began
trading on AMEX on July 28, 1999.
The following table lists the volume of trading and high and low sales prices on
the TSE for shares of the Company's Class A and Class B Shares for each of the
last nine fiscal quarters in the last two completed fiscal years.
TORONTO STOCK EXCHANGE STOCK TRADING ACTIVITY
STOCK TRADING ACTIVITY
AVERAGE
DAILY
TRADING CDN$ CDN$ US$ US$
VOLUME HIGH LOW HIGH LOW
----------- ------ ----- ---- -----
Fiscal year ended August 31, 1999:
First Quarter............................. 3,695 5.93 5.63 4.08 3.88
Second Quarter............................ 4,780 8.10 7.68 5.58 5.29
Third Quarter............................. 13,264 4.10 2.75 2.12 1.89
Fourth Quarter (including up to
July 18, 1999)....................... 20,537 4.30 3.45 2.96 2.38
Fourth Quarter - Class A Shares
(commencing July 19, 1999)........... 859 12.00 6.40 8.27 4.41
Fourth Quarter - Class B Shares
(commencing July 19, 1999)........... 702 11.50 6.50 7.92 4.48
Fiscal year ended August 31, 2000
First Quarter - Class A Shares............ 1,110 7.50 3.80 5.17 2.62
First Quarter - Class B Shares............ 602 7.90 3.75 5.44 2.58
Second Quarter - Class A Shares........... 3,530 9.00 4.00 6.11 2.72
Second Quarter - Class B Shares........... 2,071 9.05 4.25 6.15 2.89
Third Quarter - Class A Shares............ 1,969 8.00 4.05 5.43 2.75
Third Quarter - Class B Shares............ 890 7.75 4.20 5.26 2.85
Fourth Quarter - Class A Shares........... 729 5.00 3.90 3.40 2.65
Fourth Quarter - Class B Shares........... 407 4.80 2.90 3.26 1.97
Fiscal year ending August 31, 2001
17
First Quarter - Class A Shares............ 1,223 5.50 2.60 3.74 1.77
First Quarter - Class B Shares............ 1,177 5.25 3.90 3.57 2.65
The American Stock Exchange:
Fiscal year ended August 31, 1999:
Fourth Quarter - Class B Shares
(commencing July 28, 1999)........... 3,635 7.55 6.71 5.19 4.62
Fiscal year ended August 31, 2000:
First Quarter - Class B Shares............ 3,045 8.16 3.99 5.62 2.75
Second Quarter - Class B Shares........... 19,727 10.58 4.05 7.188 2.75
Third Quarter - Class B Shares............ 7,881 8.65 4.23 5.875 2.875
Fourth Quarter - Class B Shares........... 5,302 5.15 3.86 3.50 2.625
Fiscal Year ending August 31, 2001
First Quarter - Class B Shares 3,115 5.43 2.76 3.688 1.875
The Company's shares are issued in registered form and the following information
is from the Company's registrar and transfer agent, CIBC Mellon Trust Company,
located in Vancouver, British Columbia, Canada.
As at August 31, 2000, the shareholders' list for the Registrant's common stock
showed 181 Registered Class A shareholders and 188 registered Class B
shareholders and 1,387,791 Class A Shares and 2,434,953 Class B Shares
outstanding. Of these shareholders, 109 holders of Class A Shares and 116
holders of Class B shares were U.S. residents, owning 498,656 Class A Shares and
1,259,988 Class B Shares representing 35.93% of the Class A and 51.75% of the
Class B issued and outstanding shares.
The Company has researched the indirect holdings by depositories and other
financial institutions and believes it has in excess of 3,500 shareholders of
its common stock.
ITEM 6. EXCHANGE CONTROLS AND OTHER
LIMITATIONS AFFECTING SECURITY HOLDERS
There is no law or governmental decree or regulation in Canada that restricts
the export or import of capital, or affects the payment of dividends, interest
or other payments to non-resident holders of Class B shares, other than
withholding tax requirements. See "Taxation" for a discussion of these
withholding requirements.
There is no limitation imposed by Canadian law on the right of a non-resident to
hold or vote Class B shares, other than as provided by the Investment Canada Act
(the "Act") enacted on June 20, 1985, as amended, as further amended by the
North American Free Trade Agreement (NAFTA) Implementation Act (Canada) and the
World Trade Organization (WTO) Agreement Implementation Act, which requires the
prior notification and, in certain cases, advance review and approval by the
Government of Canada of the acquisition by a "non-Canadian" of "control" of a
"Canadian business", all as defined in the Act. For the purposes of the Act,
"control" can be acquired through the acquisition of all or substantially all of
the assets used in the Canadian business or the direct or indirect acquisition
of interests in an entity that carries on a Canadian business, or which controls
the entity which carries on the Canadian business. Under the Act, control of a
corporation is deemed to be acquired through the acquisition of a majority of
the voting shares of a corporation, and is presumed to be acquired where
one-third or more, but less than a majority, of the voting shares of a
corporation are acquired, unless it can be established that the corporation is
not controlled in fact through the ownership of voting shares. Other rules apply
with respect to the acquisition of non-corporate entities.
18
Investments requiring review and approval include direct acquisitions of
Canadian businesses with assets with a gross book value of $5.0 million or more;
indirect acquisitions of Canadian businesses with assets of $50.0 million or
more; and indirect acquisitions of Canadian businesses where the value of assets
of the entity or entities carrying on business in Canada, control of which is
indirectly being acquired, is greater than $5.0 million and represents greater
than 50% of the total value of the assets of all the entities, control of which
is being acquired. Generally speaking, the value of the business acquisition
threshold (the "Threshold") is increased from those levels outlined where the
acquisition is by a member of NAFTA or a WTO Investor or by a non-Canadian other
than a WTO Investor where the Canadian business that is the subject of the
investment is immediately before the investment controlled by a WTO Investor.
The Threshold is to be determined yearly in accordance with a formula set forth
in the Act.
Different provisions and considerations apply with respect to investment to
acquire control of a Canadian business that, as defined in the Act or
regulations:
- Engages in production of uranium and owns an interest in producing
uranium property in Canada;
- Provides financial services;
- Provides transportation services;
- Is a cultural business.
Peace Arch is considered to be a cultural business pursuant to the Act.
If an investment is reviewable, an application for review in the form prescribed
by regulation is normally required to be filed with the Ministry of Industry,
Director of Investment prior to the investment taking place and the investment
may not be consummated until the review has been completed and ministerial
approval obtained. Applications for review concerning indirect acquisitions may
be filed up to 30 days after the investment is consummated. Applications
concerning reviewable investments in culturally sensitive and other specified
activities referred to in the preceding paragraph are required upon receipt of a
notice for review. There is, moreover, provision for the Minister (a person
designated as such under the Act) to permit an investment to be consummated
prior to completion of review if he is satisfied that delay would cause undue
hardship to the acquirer or jeopardize the operation of the Canadian business
that is being acquired.
Upon review of an application for review, the Minister will then determine
whether the investment is likely to be of "net benefit to Canada," taking into
account the information provided and having regard to certain factors of
assessment prescribed under the Act. Among the factors to be considered are:
- the effect of the investment on the level and nature of economic
activity in Canada, including the effect on employment, on resource
processing, on the utilization of parts, components and services
produced in Canada, and on exports from Canada;
- the degree and significance of participation by Canadians in the
Canadian business and in any industry in Canada of which it forms a
part;
- the effect of the investment on productivity, industrial efficiency,
technological development, product innovation and product variety in
Canada;
19
- the effect of the investment on competition within any industry or
industries in Canada;
- the compatibility of the investment with national industrial, economic
and cultural objectives enunciated by the government or legislature of
any province likely to be significantly affected by the investment;
and
- the contribution of the investment to Canada's ability to compete in
world markets.
See "Business-Regulatory Considerations-Canadian Content Requirements" for a
description of other Canadian and British Columbia ownership requirements.
ITEM 7. TAXATION
The discussions summarize the material tax considerations relevant to an
investment in Class B shares by individuals and corporations who, for income tax
purposes, are resident in the U.S. for purposes of the Convention (as
hereinafter defined) and are not resident in Canada, who hold Class B shares as
a capital asset, and who do not use or hold the Class B shares in carrying on a
business through a permanent establishment in Canada or in connection with a
fixed base in Canada (collectively, "Unconnected U.S. Shareholders" or
"Holders"). The tax consequences of an investment in the Class B shares by
investors who are not Unconnected U.S. Shareholders may differ substantially
from the tax consequences discussed herein. The discussion of U.S. tax
considerations is addressed only to Unconnected U.S. Shareholders whose
"functional currency" within the meaning of section 985 of the Internal Revenue
Code of 1986, as amended (the "Code"), is the U.S. dollar, and to U.S. citizens
who are not residents in the U.S. for purposes of the Convention, but who
otherwise meet the definition of Unconnected U.S. Shareholders. Furthermore, the
discussion of U.S. tax considerations does not address the tax treatment of
Unconnected U.S. Shareholders that own, or are deemed for U.S. federal income
tax purposes to own, 10% or more of the total combined voting power of all
classes of voting stock of Peace Arch. The discussion of Canadian tax
considerations does not address the tax treatment of a trust, company,
organization or other arrangement that is a resident of the U.S. and that is
generally exempt from U.S. tax.
This discussion does not address all of the income tax consequences that may be
applicable to any particular Holder subject to special treatment under the U.S.
federal income tax law or to any particular Holder in light of such Holder's
particular facts and circumstances. Some Holders, including tax-exempt entities,
banks, insurance companies and persons who hold the Class B shares as part of a
synthetic security, conversion transaction or "straddle" or hedging transactions
may be subject to special and/or different rules not discussed below. Statements
of legal conclusion of U.S. tax considerations as to the material U.S. federal
income tax consequences of the acquisition, ownership and disposition of the
Class B shares by Unconnected U.S. Shareholders do not purport to be a complete
analysis or listing of all possible tax considerations. The discussion of U.S.
tax considerations is based upon the provisions of the Code, and of published
administrative practices of the Internal Revenue Service and judicial decisions,
all of which are subject to change possibly with retroactive effect. Statements
of legal conclusions of Canadian tax considerations as to the material Canadian
federal income tax consequences of the acquisition, ownership and disposition of
the Class B shares by Unconnected U.S. Shareholders do not purport to be a
complete analysis or listing of all possible tax consequences. The discussion of
Canadian tax considerations is based upon the provisions of the Income Tax Act
(Canada) (the "Tax Act"), the Convention between Canada and the U.S. of America
with Respect to Taxes on Income and on Capital, as amended from time to time
(the "Convention"), and the Company's understanding of published
20
administrative practices of Revenue Canada and judicial decisions, all of
which are subject to change. The discussion does not take into account the
tax laws of the various provinces or territories of Canada or the tax laws of
the various state and local jurisdictions in the U.S.
THIS DISCUSSION IS NOT INTENDED TO BE NOR SHOULD IT BE CONSTRUED AS LEGAL OR TAX
ADVICE TO ANY PARTICULAR INVESTOR. THEREFORE, PROSPECTIVE INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES OF AN
INVESTMENT IN THE CLASS B SHARES.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
Unconnected U.S. Shareholders generally will treat the gross amount of
distributions paid by the Company, including the amount of any Canadian tax
withheld, as foreign source dividend income for U.S. federal income tax purposes
to the extent of the Company's current or accumulated earnings and profits, as
computed for U.S. federal income tax purposes. Distributions in excess of that
amount will reduce an Unconnected U.S. Shareholder's tax basis in the Class B
shares, but not below zero, and the remainder, if any, will be treated as
taxable capital gain. In general, in computing its U.S. federal income tax
liability, an Unconnected U.S. Shareholder may elect for each taxable year
whether to claim a deduction or, subject to the limitations described below, a
credit for Canadian taxes withheld from dividends paid on its Class B shares. If
the Unconnected U.S. Shareholder elects to claim a credit for such Canadian
taxes, the election will be binding for all foreign taxes paid or accrued by the
Unconnected U.S. Shareholder for such taxable year. The Code applies various
limitations on the amount of the foreign tax credit that may be available to a
U.S. taxpayer based upon the segregation of foreign source income into separate
categories, or "baskets", of income. For purposes of applying the foreign tax
credit limitation, dividends are generally included in the passive income basket
or the financial services income basket if received by a financial services
entity. The amount of credit that may be claimed with respect to the basket of
income to which the dividend is allocated, and to which the foreign taxes are
attributable, generally may not exceed the same proportion of the U.S. tax on
worldwide taxable income, before applying the foreign tax credit as the U.S.
holder's foreign source taxable income allocable to such basket bears to such
U.S. holder's entire taxable income. The foreign tax credit is disallowed for
dividends on stock unless a minimum holding period requirement is satisfied and
additional limitations may restrict the ability of some individuals to claim the
foreign tax credit. Accordingly, investors should consult their own tax advisors
with respect to the potential consequences to them of the foreign tax credit
limitations. Dividends paid by the Company generally will constitute "portfolio
income" for purposes of the limitation on the use of passive activity losses by
investors and "investment income" for purposes of the limitation on investors'
investment interest expense. Dividends paid by the Company will not be eligible
for the "dividends received deduction" generally allowed with respect to
dividends paid by U.S. corporations under Section 243 of the Code, but may be
eligible for the dividends received deduction which may be claimed by 10%
corporate shareholders under Section 245 of the Code.
For U.S. federal income tax purposes, the amount of any distributions made on
Class B shares to an Unconnected U.S. Shareholder in Canadian dollars will equal
the U.S. dollar value of the Canadian dollars calculated by reference to the
appropriate exchange rate in effect on the date of receipt of the distribution,
regardless of whether the Canadian dollars are actually converted into U.S.
dollars upon receipt. Unconnected U.S. Shareholders should consult their own tax
advisors regarding the treatment of foreign currency gain or loss, if any, on
any Canadian dollars which are converted into U.S. dollars subsequent to receipt
by the Unconnected U.S. Shareholder.
The sale of Class B shares generally will result in the recognition of gain or
loss to the Holder in an amount equal to the difference between the amount
realized and the Holder's adjusted basis in the Class
21
B shares. Provided the Holder is not considered a "dealer" in the Class B
shares sold, gain or loss upon the sale of Class B shares will generally be
capital gain or loss.
Capital losses are deductible to the extent of capital gains. Individual
taxpayers may deduct excess capital losses up to $3,000 a year, $1,500 in the
case of a married individual filing separately, from ordinary income.
Non-corporate taxpayers may carry forward unused capital losses indefinitely.
Unused capital losses of a corporation may be carried back three years and
carried forward five years.
In the case of individuals, net capital gain from the disposition of property
held for investment is excluded from investment income for purposes of computing
the limitation on the deduction for investment interest applicable. An
individual may, however, elect to include such net capital gain in investment
income if such taxpayer reduces the amount of its net capital gain that is
otherwise eligible for preferential capital gains tax treatment by such amount.
In that event, such investment income would be taxable at ordinary income rates.
For any taxable year of Peace Arch, if at least 75% of the Company's gross
income is "passive income", as defined in the Code, or if at least 50% of the
Company's assets, by average fair market value, or, prior to fiscal year 1998,
possibly by adjusted tax basis, are assets that produce or are held for the
production of passive income, the Company will be a passive foreign investment
company ("PFIC"). If the Company is a PFIC for any taxable year during which an
Unconnected U.S. Shareholder owns any Class B shares, the Unconnected U.S.
Shareholder will be subject to special U.S. federal income tax rules, set forth
in Sections 1291 to 1298 of the Code, with respect to all of such Unconnected
U.S. Shareholder's Class B shares. If the Company was treated as a PFIC at any
time during an Unconnected U.S. Shareholder's holding period for Class B shares,
such Unconnected U.S. Shareholder generally would be subject to additional tax
as well as interest charges with respect to the deferral of tax for the period
during which such Class B shares were held. Any such additional tax and interest
charges would apply upon the disposition of the Class B shares or the receipt of
dividends. Additionally, any gain realized on the disposition of Class B shares
would be treated as ordinary income or taxable at ordinary income rates rather
than as capital gain or taxable at capital gains rates, and the tax basis of the
Class B shares held by an Unconnected U.S. Shareholder generally would not be
stepped up to fair market value at death. Under some circumstances, shareholders
of a PFIC may elect to be taxed currently on their pro rata shares of PFIC
income and capital gain or, in accordance with recently enacted legislation,
report income currently on a mark to market basis with respect to their shares
of stock in the PFIC.
The Company does not believe that it is likely to be a PFIC in the current or
future taxable years; however, because the PFIC determination is made annually
on the basis of facts and circumstances that may be beyond its control and
because the principles and methodology for determining the fair market values of
its assets are unclear, there can be no assurance that the Company will not be a
PFIC for such years. Special rules not described herein will also apply if the
Company becomes a "controlled foreign corporation" for U.S. federal income tax
purposes. The Company would be treated as a controlled foreign corporation if
"U.S. Shareholders" were to own, actually or constructively, more than 50% of
the total combined voting power or total value of the company. For this purpose,
the term "U.S. Shareholder" means a U.S. person who owns, actually or
constructively, ten percent or more of the total combined voting power of Peace
Arch. In light of the ownership requirements necessary for the Company's
productions to constitute "Canadian-content" productions and for the Company to
claim Canadian tax benefits, it is not anticipated that it will become a
controlled foreign corporation for U.S. federal income tax purposes.
22
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Under current regulations, the proceeds of a sale of Class B shares through a
U.S. or U.S. related broker will be subject to U.S. information reporting and
may be subject to the 31% U.S. backup withholding requirements. Unconnected U.S.
Shareholders generally can avoid the imposition of U.S. backup withholding by
reporting their taxpayer identification number on an Internal Revenue Service
Form W-9; non-U.S. shareholders generally can avoid the imposition of U.S.
backup withholding tax by providing to their broker or paying agent a duly
completed Internal Revenue Service Form W-8. Any amounts withheld under the
backup withholding rules will be allowed as a refund or a credit against the
shareholder's U.S. federal income tax, provided the required information is
furnished to the Internal Revenue Service.
In general, dividends paid on the Class B shares, if any, by a foreign paying
agent will not be subject to U.S. backup withholding tax based on currently
effective regulations. Under treasury regulations that are generally effective
with respect to payments made after December 31, 2000 (the "New Withholding
Regulations"), dividends paid in the U.S. on the Class B shares to Unconnected
U.S. Shareholders or to non-U.S. shareholders through a U.S. or U.S. related
person may be subject to the 31% U.S. backup withholding tax unless
certification requirements are satisfied.
The New Withholding Regulations consolidate and modify the current certification
requirements and means by which a holder may claim exemption from U.S. federal
income tax withholding and provide presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders should consult their tax
advisors regarding the application of the New Withholding Regulations.
CANADIAN TAX CONSIDERATIONS
Dividends paid or credited, or that the Company deems to pay or credit, on the
Class B shares to Unconnected U.S. Shareholders will be subject to Canadian
withholding tax. Under the Convention, the maximum rate of withholding tax on
dividends paid or credited on the Class B shares is 15% if the beneficial owner
of such dividends is an Unconnected U.S. Shareholder. However, that rate is
reduced to 5% under the Convention if the beneficial owner of such dividends is
an Unconnected U.S. Shareholder that is a corporation that owns at least 10% of
the voting stock of Peace Arch.
An Unconnected U.S. Shareholder will not be subject to tax in Canada on any
capital gain realized upon a disposition or deemed disposition of the Class B
shares, provided that the Class B shares do not constitute "taxable Canadian
property" of the Unconnected U.S. Shareholder within the meaning of the Tax Act.
The Class B shares will not generally constitute taxable Canadian property of
the Unconnected U.S. Shareholder unless, at any time in the five-year period
that ends at the time of the disposition, the Unconnected U.S. Shareholder,
either alone or together with persons with whom the Unconnected U.S. Shareholder
did not deal at arm's length, owned, had an interest in or the right to acquire
25% or more of the issued Class B shares or any series or class of the Company's
capital stock. Even if the Class B shares are taxable Canadian property, under
the Convention, gains derived by an Unconnected U.S. Shareholder would generally
not be taxable in Canada unless the value of the Class B shares is derived
principally from real property situated in Canada. The Company believes that the
value of its Class B shares is not currently principally derived, directly or
indirectly, from real property situated in Canada and does not expect this to
change in the foreseeable future.
Canada does not currently impose any estate taxes or succession duties.
23
ITEM 8. SELECTED FINANCIAL DATA
Selected Consolidated Financial and Operating Data
The consolidated statement of operations and deficit presented below for each of
the years in the three-year period ended August 31, 2000 and the consolidated
balance sheet data as of August 31, 1999 and 2000, are derived from the audited
consolidated financial statements included elsewhere herein. The consolidated
statement of operations and deficit for each of the years in the two-year period
ended August 31, 1997 and the consolidated balance sheet data as of each of
August 31, 1998, 1997 and 1996, are derived from the Company's audited financial
statements which are not included or incorporated by reference herein. Each of
the financial statements from which the selected consolidated financial data and
operating data is derived was prepared in accordance with Canadian GAAP. This
selected financial data should be read in conjunction with the audited
consolidated financial statements and accompanying notes contained in this
annual report.
The selected consolidated financial and operating data set forth below is
reported in Canadian dollars. However, for the convenience of the reader, the
Canadian dollar statement of operations and deficit data for the year ended
August 31, 2000 has been translated into U.S. dollars using the average exchange
rate in effect during the period, and the Canadian dollar balance sheet data has
been translated using the rate in effect as of August 31, 2000. These
translations are not necessarily representative of the amounts that would have
been reported if the Company had historically reported its financial statements
in U.S. dollars. In addition, the rates utilized are not necessarily indicative
of the rates in effect at any other time or that may be effective in the future.
24
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED AUGUST 31,
---------------------------------------------------------------------
CDN$ CDN$ CDN$ CDN$ CAN$ US$
1996 1997 1998 1999 2000 2000
--------- --------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
CANADIAN GAAP
Revenue............................ $5,723 $ 23,584 $ 32,457 $ 51,547 $35,438 $24,081
Expenses
Amortization of programming...... - 14,796 23,659 40,296 26,311 17,879
Other costs of production and
sales.......................... 3,767 4,261 3,577 2,905 2,157 1,466
Selling, general and administra-
tion expense................... 2,404 2,453 2,201 3,049 3,668 2,493
Other............................ 579 640 965 1,672 1,744 1,185
Total expenses..................... 6,750 22,150 30,402 47,922 33,880 23,023
Net earnings (loss) from operations. (1,027) 1,434 2,055 3,625 1,558 1,058
Gain (loss) on sale of capital
assets and other................. - (333) - 360 272 185
Provision (against) limited partner-
ship revenue interests........... (1,073) (2,313) - - - -
Income taxes....................... - - (297) (2,132) (1,018) (691)
--------- --------- --------- --------- --------- ---------
Net earnings (loss)................ $( 2,100) $ (1,212) $1,758 $1,853 $ 812 $ 552
======== ======== ====== ====== ===== =====
Earnings (loss) per common share:(1)
Basic............................ $(1.68) $ (0.65) $ 0.68 $0.60 $0.21 $0.14
Diluted.......................... - - $ 0.63 $0.58 $0.21 $0.14
Weighted average number of
common shares.................. 1,247 1,861 2,603 3,083 3,806 3,806
Diluted number of common
shares......................... - - 3,124 3,473 3,806 3,806
OTHER OPERATING DATA:
Cash flows provided by (used in):
Operating activities............. (515) 13,442 21,473 39,771 27,355 18,589
Investing activities............. (1,126) (16,939) (28,331) (44,130) (33,702) (22,902)
Financing activities............. 1,695 5,118 6,990 6,938 6,351 4,316
EBITDA(2).......................... (465) 2,074 3,020 5,297 3,302 2,243
U.S. GAAP(3)
Net earnings (loss) $(2,100) $(1,212) $534 $1,666 $999 $679
Earnings (loss) per common share:(1)
Basic............................ $(1.68) $ (0.80) $ 0.23 $0.56 $0.26 $0.18
Diluted.......................... $(1.68) $ (0.80) $ 0.23 $0.56 $ 0.26 $0.18
Weighted average number of
common shares.................. 1,247 1,511 2,304 2,935 3,795 3,795
Diluted number of common
shares......................... 1,247 1,511 2,304 2,954 3,808 3,808
25
AS OF AUGUST 31,
---------------------------------------------------------------------
CDN$ CDN$ CDN$ CDN$ CDN$ US$
1996 1997 1998 1999 2000 2000
--------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and marketable securities........ $ 123 $ 1,744 $ 1,876 $4,455 $ 4,459 $3,029
Accounts receivable................... 1,097 4,799 10,235 19,901 16,443 11,169
Production costs in progress.......... 64 3,862 11,906 3,446 15,637 10,622
Investments in television
programming, net.................... 462 2,057 5,632 10,227 15,550 10,562
Property and equipment, net........... 4,847 5,048 9,498 7,079 7,397 5,024
Goodwill.............................. 736 597 2,544 3,185 2,913 1,979
Total assets.......................... 7,710 18,510 42,187 48,863 64,330 43,696
Debt financing(4)..................... 4,706 4,152 10,367 11,172 17,049 11,581
Deferred revenue...................... 83 4,230 10,770 3,980 8,338 5,664
Total liabilities..................... 5,692 9,390 24,454 23,137 37,265 25,312
Shareholders' equity.................. 2,018 9,120 17,733 25,726 27,065 18,384
(1) Basic earnings per share shown above are based on the weighted average
number of shares outstanding during the period. Diluted per share information is
not presented under Canadian GAAP if it would disclose a smaller loss per share
than the basic earnings per share.
(2) EBITDA represents earnings before interest, taxes, provision against limited
partnership revenue interests, gain (loss) on capital assets, depreciation and
amortization. For purposes of EBITDA, amortization excludes amortization of
programming and excludes interest capitalized in production costs. The Company
has included EBITDA because it feels that some readers will find it useful for
evaluating the Company's business and this investment. However, EBITDA should
not be considered as an alternative to net earnings, as determined in accordance
with Canadian GAAP, as an indicator of the Company's operating performance. In
addition, it should not be considered as an alternative to cash flows from
operations, as determined in accordance with Canadian GAAP, or as an indicator
of the Company's liquidity or available cash. To the extent that EBITDA does
represent cash generated by operations, this cash may not be available for
management's discretionary use, due to debt service requirements, requirements
to invest in television programming, and uncertainties. EBITDA, as presented,
may not be comparable to similar computations presented by other companies.
(3) Differences to U.S. GAAP shown above reflect the transfer of 160,000
performance shares to three of the Company's officers and directors. Under
Canadian GAAP, the transfer is a capital transaction outside of Peace Arch and
is not accounted for as compensatory to any of the individuals who acquired the
shares. For U.S. GAAP purposes only, a compensation expense of Cdn$1.2 million
was recorded in the year ended August 31, 1998. Effective August 31, 1999 the
Company sold real estate and reported a partial gain under Canadian GAAP. Part
of the consideration was a note receivable. Under US GAAP this transaction would
have been accounted for using the finance method due to the existence of the
note receivable and the partial gain of $187,000 would not have been realized at
that time. In fiscal 2000, under US GAAP, the partial gain would have been
realized resulting in a $187,000 difference in current year earnings.
(4) Debt financing shown above includes both bank indebtedness and long-term
debt.
26
DIVIDEND POLICY
The Company has not declared any dividends since incorporation and does not
anticipate that it will do so in the foreseeable future. The present policy of
the Company is to retain future earnings for use in its operations and the
expansion of its business.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this annual report.
GENERAL
The Company develops, produces and distributes proprietary television
programming for worldwide markets. These activities have comprised the Company's
core business since 1996 and have accounted for its rapid growth and its
profitability. The Company continues to operate its other businesses, which
include production activities on a fee for service basis.
The Company's continued growth is dependent on its ability to identify, develop
and acquire rights to ideas, storylines and other creative concepts and to
successfully finance, produce and market its proprietary programming.
BASIS OF PRESENTATION
The Company operates through separate subsidiaries established for each
production or series. The costs of programming are financed through advances
obtained from customers, from borrowings under a bank credit facility, from
contributions from equity participants and from working capital. Typically, the
Company retains the rights to its proprietary programming for exploitation in
future periods or in additional markets and media.
Revenues and expenses for television programming are realized when the license
period has commenced and the program or episode has been shipped. Deferred
revenues represent payments received in advance of a program or episode being
shipped.
Generally, the costs incurred in producing a film or television program are
capitalized. These costs include direct production costs, certain exploitation
costs, production overhead and interest relating to financing the project. Until
the date a program is completed, these costs are capitalized into "Production
costs in progress" on the consolidated balance sheet. Costs related to completed
proprietary programming are included, net of tax credits and amortization, in
"Investments in television programming" on the consolidated balance sheet. Tax
credits are recorded when a program or episode is complete.
Investments in television programming are amortized against revenues in the
ratio that the current period's gross revenues from all sources for the program
bear to management's estimate of anticipated total gross revenues for such film
or program from all sources. Generally, the Company amortizes a minimum of 90%
of the production costs over a three-year period. In the event that management
should determine that the capitalized costs of a production exceed its
recoverable value, capitalized costs would be written down in the current
period, resulting in a corresponding decrease in earnings. To date, the
27
Company has taken no material write-downs due to reevaluations of its future
estimates of revenues for film or television programs.
Results of operations for any period depend on the number of television programs
that are delivered. Consequently, results may fluctuate materially from
period-to-period, and the results of any one period may not necessarily indicate
results for future periods. Cash flows also may fluctuate and may not closely
correspond with revenue recognition.
Revenues from U.S. and international sources generally are payable to the
Company in U.S. dollars while costs are denominated primarily in Canadian
dollars. Accordingly, results can be affected by fluctuations in the U.S. dollar
exchange rate. The results of these fluctuations may be material. To date, the
Company has not entered into any material currency hedging instruments. In
addition, it has not maintained significant amounts of U.S. dollar balances in
order to reduce the risk of exchange rate fluctuations.
Due to the timing of U.S. television seasons and the lead-time required to
produce and deliver programs, revenues for the third fiscal quarter have
historically been lower than in other fiscal quarters. Production services and
other, which represented 10% of fiscal 2000 revenues, 8% of 1999 revenues and
14% of 1998 revenues, are not subject to significant seasonal variations.
As consideration for the acquisition of Peace Arch Productions Inc. (formerly
Sugar Entertainment Ltd.) in 1996, the Company issued an aggregate of 372,500
Class A shares and Class B shares, giving retroactive effect to the share
reclassification and conversion, including 350,000 performance shares which were
issued and held in escrow as required by Canadian provincial securities policies
to which the Company is subject. The performance shares were subject to release
with consent of the British Columbia securities regulatory agencies, as
specified financial performance standards were met. At the time the shares were
released from escrow, the Company recorded increases to goodwill and share
capital based on the fair value of the shares at the date the performance was
determined. This additional goodwill was amortized over 20 years until fiscal
1999, after which the Company commenced amortizing the remaining balance over 10
years due to a change in the estimate. During fiscal 1998, 200,000 of the
performance shares were released from escrow, resulting in increases in both
goodwill and share capital of $2.0 million. During fiscal 1999, the remaining
150,000 performance shares were earned, resulting in additional goodwill and
share capital increases of approximately $0.8 million. The remaining shares were
released from escrow September 28, 1999.
In December 1997, beneficial ownership of an aggregate of 160,000 of the
performance shares was transferred to three of the Company's officers and
directors. The transfer was subject to all of the escrow conditions at the same
price per share as was recorded when the performance shares were issued. Under
Canadian GAAP, the transfer is a capital transaction not involving Peace Arch
and was not accounted for as compensatory to any of the individuals who acquired
the shares. However, under U.S. GAAP, a compensation expense of Cdn$1.2 million
was recorded in the year ended August 31, 1998 in connection with the release
from escrow of the transferred performance shares. See Note 20 to consolidated
financial statements for further discussion of this adjustment.
OPERATING RESULTS
Over the past five years, since the Company took ownership in its programming,
it has enjoyed compound annual revenue growth of 55%, while adding proprietary
programming to its library of rights.
28
Revenue for fiscal 2000 decreased by 31% from revenue in the prior comparable
year due to fewer hours of programming being delivered. Revenue for fiscal 1999
increased by 59% from 1998 revenue. As the Company continues to grow it is
anticipated that the fluctuation of revenue between reporting periods will
decrease.
Earnings before taxes decreased by 54% over the prior comparable year. The
reduction in program deliveries resulted in a 17% decrease in earnings before
taxes. The remaining decrease in earnings before taxes was due to an adjustment
of the Company's estimates for amortization of Investment in Television
Programming resulting in a 33% decrease and for amortization of goodwill
resulting in a further 4% decrease. Earnings before taxes for fiscal 1999
reflected a 94% increase over fiscal 1998.
REVENUE. During the year ended August 31, 2000 approximately 90% of revenue was
derived from the production and distribution of proprietary programming,
compared with 92% in 1999 and 86% in 1998. During the year, revenue from
proprietary programming declined by 33% from $35.4 million from $51.5 million
due primarily to fewer program deliveries in the first half of the year when the
company's deliveries were comprised mainly of its television series, "First
Wave". During the year ended August 31, 1999 revenues increased by 59% over the
comparable years from $32.4 million to $51.5 million, as the Company delivered
episodes of both "Dead Man's Gun" and an increased number of episodes of "First
Wave".
Proprietary programming revenue for the last quarter of fiscal 2000 of $15.8
million was equal to revenue for the first three quarters combined, as the
company more than doubled its production activity. The Company continued
production of "First Wave" for its third 22-episode season and commenced
production of its television series, "The Immortal", which contributed to the
increase in revenue towards the end of the year. The Company also commenced
production of its new television series "Big Sound" and three television movies,
which will commence delivery in the first half of fiscal 2001.
AMORTIZATION OF TELEVISION PROGRAMMING. During the year the Company earned a
gross margin on its proprietary programming of 17%, compared with 15% for 1999
and 13% for 1998. The increase in margin is due primarily to a change in the
product mix of programs delivered during the year. The Company periodically
reviews its estimates for future revenue from television programming and adjusts
its amortization accordingly. During the year the Company increased amortization
expense by $1.4 million due to a change in estimates.
SELLING GENERAL AND ADMINISTRATIVE EXPENSE. Although revenue for the year ended
August 31, 2000 decreased, selling, general and administrative expense increased
by 20%, due to increased administration expense associated with the Company's
expansion in the area of proprietary programming. This increase in activity that
occurred throughout the year resulted in the growth in production volume has
begun to be reflected in revenue for the last quarter of the year and will
continue into fiscal 2001.
The increase in selling, general and administrative expense in fiscal 1999 of
39% was also due to increased administration expense associated with the
Company's expansion in the area of proprietary programming.
INTEREST EXPENSE. Interest expense of $934,728 is comprised $417,000 of interest
on long-term debt and $517,728 of interest on bank indebtedness and other
balances. Bank indebtedness relates to the Company's credit facility. Interest
on long-term debt relates $256,233 to loans to acquire plant and equipment and
$160,767 to other long-term debt. During the last quarter of the year, the
Company
29
retired $600,000 of 10% debentures and issued $7.9 million of new debentures
that bear interest at 18% before accounting for the deemed debt discount
associated with warrants.
Interest expense decreased by 21% from the prior year due to decreases in
average balances throughout the year for both bank indebtedness and long-term
debt. For fiscal 1999 interest was comprised equally of interest on bank
indebtedness and interest on long-term debt.
Interest expense is expected to increase significantly over the next fiscal year
due to the Company utilizing its bank credit facility to a greater extent and to
the $7.9 million subordinate debt financing that was completed at the end of the
current year.
TAXES. At August 31, 2000 the Company had operating losses for tax purposes of
$4.9 million which are available for carry forward to future years. The full
benefit of these losses has been recognized as a reduction of the Company's
future income tax liability.
During the year ended August 31, 2000 the Company reported an effective tax rate
of 55.6% which is comprised of the corporate statutory income tax rate of 46%,
less a 12.1% benefit from the recognition of the Company's remaining tax losses
and a 22.1% increase due to non-deductible expenses. The Company's effective tax
rate for fiscal 1999 was 53.5% (1998 - 14.4%) comprised of the statutory income
tax rate of 46%, less a 5% benefit from the recognition of the Company's
available tax losses and a 12.9% increase due to non-deductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances the capital costs of its proprietary television programming
and other cash requirements principally through advances from customers,
borrowings under the Company's bank credit facility, contributions from equity
participants and working capital. In the past, the Company has also funded its
capital requirements through the issuance of shares, warrants and convertible
debentures. The Company uses real estate mortgages and leases to finance the
acquisition of its production facilities and equipment. Management believes that
it can earn sufficient cash flow from operations to meet interest commitments on
its debt.
During the year, the Company generated $27.4 million from operations and raised
a net $6.4 million through financing activities, due primarily to the issuance
of debt. The Company invested $33.7 million of which $31.6 million related to
its investment in television programming. During the prior year the Company
generated $39.8 million (1998 - $21.5 million) from operations, raised $7.0
million (1998 - $6.9 million) from financing activities relating primarily to
the issuance of common shares and invested $44.1 million (1998 - $28.3 million)
relating primarily to its investment in proprietary programming.
The Company intends to renew mortgages in the aggregate amount of $3.4 million
as they come due during the next fiscal year.
The Company's principal debt funding is through its $25 million bank credit
facility. This facility bears interest at a rate equal to the Canadian prime
rate plus 1% per annum, with monthly payment of interest only drawn from an
interest reserve held by the bank. The facility is secured by refundable tax
credits, distribution rights to certain film properties and a general security
interest on the assets of the Company. During the year the Company decreased
borrowings under its credit facility by $1.1 million, leaving an available
balance of $19.2 million at the end of the year.
30
During the year the Company issued $7.9 million 18-month debentures that bear
interest at 18% per annum, 14% which is payable quarterly and the 4% balance
which is deferred until maturity. The debenture holders were issued warrants to
acquire 210,000 Class A common shares and 27,000 Class B common shares at a
price of $5.00 per share, resulting in a deemed debt discount of $331,650. The
proceeds of the debentures will be used for working capital to fund production
of the Company's proprietary television programming. The debentures are
renewable for an additional 18-month term, subject to certain provisions.
Management believes that the Company has adequate resources to meet its current
cash requirements and its requirements well into fiscal 2001. If business
activities continue to grow at current rates, management anticipates it will
have to raise additional capital to meet its cash requirements.
RISKS AND UNCERTAINTIES
There are risks and uncertainties that could impact revenues and earnings from
operations. In addition to interest rate risk and credit risk, that are referred
to in the notes to the consolidated financial statements, there are several
other risks specific to the Company and its industry.
BUSINESS RISKS
The business of producing and distributing television programming is highly
competitive. The Company faces intense competition with other producers and
distributors, many of whom are substantially larger and have greater financial
resources. The Company competes with other companies for ideas and storylines
created by third parties, as well as for actors, directors and other personnel.
Results of operations for any period depend on the number of television programs
that are delivered. Consequently, results may vary from period to period, and
the results of any one period may not indicate results for future periods. Cash
flows may also fluctuate and may not directly respond with revenue recognition.
Actual production costs may exceed budget, perhaps significantly, due to factors
within or beyond the Company's control. These factors may delay or prevent
completion of a production. If there are significant cost overruns, the Company
may have to seek additional financing to complete the production. Financing on
terms acceptable to the Company may not be available. The Company may be unable
to recoup the additional costs, which could have a material adverse impact on
operating results and liquidity.
Revenues derived from the production and distribution of television programming
depend primarily upon acceptance by the public, which is difficult to predict.
Some or all of the proprietary television programs of the Company may not be
commercially successful, resulting in its failure to recoup its investment or
realize its anticipated profits.
British Columbia has benefited from a stable labour force. The film and
television industry in British Columbia operates under collective agreements
with several unions. In the event that one or more of these unions should take
strike action, the Company may be unable to hire the required personnel to
produce its programming. This could result in a delay or cancellation of
production, causing a reduction in revenues and operating profits.
Investments in television programming are amortized against revenues in the
ratio that current revenues bear to management's estimate of aggregate
anticipated gross revenues for each program. Generally the
31
Company amortizes a minimum of 90% of the costs over a three-year period.
Management periodically reviews its estimates and adjusts the amortization of
its programming accordingly. In the event that management should determine
that the capitalized costs for a program exceed its recoverable value,
capitalized costs would be written down in the current period, resulting in a
corresponding decrease in earnings. Although to date the Company has taken no
material write-down due to revaluation of its revenue estimates for
television programs, no assurance can be provided that a material write-down
will not occur.
Although the Company's revenues have decreased from $51.5 million for fiscal
1999 to $35.4 million for fiscal 2000, the Company has undergone rapid
production growth in the latter part of the year, which will continue at a
minimum for the fist half of fiscal 2001. This rapid growth has placed
increasing demands on the Company's financial resources, and will continue to do
so as the Company pursues its expansion strategy. There is no assurance that the
Company will have the liquidity and financial resources to continue at this rate
of expansion.
GOVERNMENT INCENTIVES
The BC Film industry has been experiencing a trend of rapid growth. This growth
could have a positive effect on the Company's revenues and income from
operations. Refundable tax credits and other government incentives are important
to the Company's business. If these tax credits and incentives were to be
discontinued, the Company may be unable to pursue its growth strategy.
CURRENCY RISK
The Company receives a portion of its revenues from U.S. and international
sources in U.S. dollars, while its costs are payable primarily in Canadian
dollars. Accordingly, operating results can be affected by fluctuations in the
US dollar exchange rate. The Company does not maintain US currency balances in
excess of its estimated US payables. In addition, costs may be payable in
currencies other than Canadian and US dollars. To date the Company has not
entered into agreements for any material hedging instruments.
INFLATION
Historically, inflation has not had a material impact of the Company's results
of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Note 20 to the Consolidated Financial Statements sets forth differences between
Canadian GAAP and U.S. GAAP. In addition to the U.S. GAAP issues taken into
account in the preparation of Note 20, there have been accounting standards
issued by the Financial Accounting Standards Board (the "FASB") or other bodies
in the U.S. that may become applicable to the Company's reported results, but
that it has not yet adopted because such standards are not effective for the
periods presented.
In June 1998, FAS 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. FAS 133 provides comprehensive standards for the
recognition and measurement of derivative and hedging activities. Generally, FAS
133 requires that all derivatives be recorded on the balance sheet at their fair
value and establishes new accounting requirements for different types of hedging
activities. FAS 133 is effective for fiscal years beginning after June 15, 2000.
Management does not believe that the adoption of FAS 133 will materially impact
the reported historical financial position or results of operations as set out
in the consolidated financial statements of the Company.
32
The Company accounts for its investment in proprietary programming in accordance
with US Financial Accounting Standard 53 "FAS 53". The AICPA has issued a
statement of position (SOP 00-2) providing guidance on applying GAAP as it
relates to accounting by producers and distributors of films for fiscal years
beginning after December 15, 2000. Under the new guidelines, there may be
changes to the method in which the Company amortizes its investment in
television programs. These changes could cause the Company to adjust the
carrying value of its investment in television programming, which could result
in a write down that may be material. Management is currently evaluating the
impact of SOP 00-2 and has not yet concluded whether or not an adjustment will
arise on adoption.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
The Company intends some statements in this report, including statements set
forth under the captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this report,
regarding, among other things, the Company's plans to grow, future financial
position, business strategies, budgets, projected costs and plans and objectives
of management for future operations, to be "forward-looking statements."
Forward-looking statements generally can be identified by the use of
forward-looking terminology, such as "may," "will," "expect," "intend,"
"estimate," "anticipate," or "believe," or the negative thereof, or variations
thereon or similar terminology. Prospective investors are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Forward-looking statements involve unknown and uncertain risks,
uncertainties and other factors which may cause the Company's actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Important factors that could cause actual
results to differ materially from the Company's expectations are disclosed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this report. Although Management
believes that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity,
performance or achievements. The Company undertakes no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof, or to reflect the occurrence of
unanticipated events.
ITEM 9A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is subject to two main market risks: Interest rate risk and foreign
currency exchange risk.
The interest rate risk arises through the Company's $25.0 million bank credit
facility. This facility bears interest at a rate equal to the Canadian prime
rate plus 1% per annum. As of August 31, 2000, the Company had borrowings of
$5.8 million outstanding under the credit facility. During the year ended August
31, 2000 the Company recorded interest on its credit facility of $450,251. A 1%
increase in the Canadian prime rate would raise the Company's annual interest
amount for fiscal 2000 to approximately $503,000.
The Company receives a portion of its revenues from U.S. and international
sources in U.S. dollars while costs are payable primarily in Canadian
dollars. Accordingly, operating results can be affected by fluctuations in
the U.S. dollar exchange rate. Currency exchange rates are determined by
market factors beyond the Company's control and may vary substantially during
the course of a production. If the Canadian dollar were to strengthen in
relation to the U.S. dollar, the Company's effective costs would rise in
relation to its revenues. The Company does not maintain U.S. currency
balances in excess of its
33
estimated U.S. payables. To date the Company has not entered into agreements
for any material hedging instruments.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table lists as of January 31, 2001 the names of the Directors
and/or Executive Officers of the Company. The Directors have served in their
respective capacities since their election and will serve until the next Annual
General Meeting or until a successor is duly elected, unless the office is
vacated in accordance with the Articles of the Company. The Executive Officers
are appointed by the Directors and serve until the earlier of their resignation
or removal with or without cause by the Directors. Except for Bud Yorkin, who is
an American citizen and resides in the United States, all of the Directors and
Executive Officers are residents and citizens of Canada.
NAME DIRECTOR SINCE OFFICE HELD AGE
- ------------------------------- ------------------------ ------------------------------------------------ ----------
STEPHEN CHEIKES January 20, 1998 Director and Compensation Committee Member 52
- ------------------------------- ------------------------ ------------------------------------------------ ----------
DONALD STEELE September 14, 2000 Director, Audit, Compensation and Corporate 53
Governance Committees Member
- ------------------------------- ------------------------ ------------------------------------------------ ----------
TIMOTHY GAMBLE October 22, 1986 Director and President of the Company 44
- ------------------------------- ------------------------ ------------------------------------------------ ----------
JOHN DEREK DOUGLAS September 14, 2000 Director and Audit Committee Member 59
- ------------------------------- ------------------------ ------------------------------------------------ ----------
JULIET JONES Not Applicable Chief Financial Officer of the Company since 35
February 1996 and Secretary since January 1997
- ------------------------------- ------------------------ ------------------------------------------------ ----------
VINCENT LUM November 19, 1998 Director, Audit, Compensation and Corporate 41
Governance Committees Member
- ------------------------------- ------------------------ ------------------------------------------------ ----------
W.D. CAMERON WHITE February 12, 1993 Director and Chief Executive Officer of the 44
Company. Also Corporate Governance Committee
Member
- ------------------------------- ------------------------ ------------------------------------------------ ----------
BUD YORKIN February 24, 2000 Director 74
- ------------------------------- ------------------------ ------------------------------------------------ ----------
TIMOTHY GAMBLE is the Company's founder and has served as President and as
director since its inception in 1986. Mr. Gamble takes principal responsibility
for business development, marketing and corporate finance matters. He has been
involved in the production of numerous feature length films, such as "Cadence,"
starring Martin Sheen and Charlie Sheen.
W.D. CAMERON WHITE is the Company's Chief Executive Officer, having joined
the Company on a full-time basis in 1994. Prior to joining the Company, Mr.
White was a corporate and securities lawyer specializing in mergers and
acquisitions and public and private financings for emerging growth companies
at White & Associates Barristers and Solicitors from 1992 to 1994 and at
Worrall Scott & Page, Barristers and Solicitors, from 1981 to 1992. Mr.
White is responsible for strategic planning, acquisitions and corporate
finance. Mr. White has been a director since February 1993.
JULIET JONES has been the Company's Chief Financial Officer since February 1996,
and has been with the Company since 1991. Ms. Jones is responsible for
overseeing all accounting and audit functions, operations management, financial
planning and cash flow analysis and controls. Ms. Jones is a member of the
Certified General Accountants Association of British Columbia and Canada.
34
STEPHEN CHEIKES has been a member of the Company's board of directors since
January 1998. He is the co-founder, Chief Executive Officer and a director of
Monarch Entertainment Corporation, a British Columbia film finance company.
Prior to founding Monarch in 1993, Mr. Cheikes was a principal and senior
executive of the Beacon Group of Companies, from 1987 to 1992. He also practiced
entertainment law in Los Angeles from 1977 to 1987.
JOHN DEREK DOUGLAS has been a member of the Company's board of directors since
September 2000. He is currently a Senior Vice President of Growthworks Capital
Ltd., a venture capital company, since September 1998. Prior to joining
Growthworks Capital Ltd., Mr. Douglas was a Senior Vice-President and Principal
of Ventures West. During that time he managed $120 million in Immigrant Investor
Funds. Mr. Douglas has been on the Board of Directors of over thirty companies
and has been involved in many of British Columbia's successful venture backed
companies. Mr. Douglas was nominated to the Company's board pursuant to the
agreement between Working Opportunity Fund (EVCC) Ltd. ("WOF") and the Company
that so long as WOF continues to hold a specified number of the Company's
shares, WOF will have the right to have a director-nominee nominated to the
board. Mr. Douglas is also a director of three companies whose shares trade on
the Toronto Stock Exchange.
VINCENT LUM has been a member of the Company's board of directors since November
1998. He has been a Managing Director of Royal Bank Capital Partners since 2000
and was the Investment Manager of Royal Bank Capital Corporation ("RBCC") since
1997. From 1993 until 1997, Mr. Lum was involved in early-stage investments in
technology companies for the B.C. Advanced Systems Institute. Mr. Lum was
nominated to the Company's board pursuant to the agreement between RBCC and the
Company which provides that so long as RBCC or any of its affiliates holds Peace
Arch shares, RBCC shall have the right to have a director-nominee nominated to
the board.
DONALD STEELE has been a member of the Company's board of directors since
September 2000 and President of Mercantile Bancorp Limited since January 1998.
Mr. Steele is has also been the President of B.C. Mercantile Corporation since
1994 (predecessor of and currently a 100% owned subsidiary of Mercantile
Bancorp). Prior to founding Mercantile, Mr. Steele was Senior Vice-President and
Managing Director of Capital Markets for Pemberton Securities Inc., following a
position as Senior Vice-President, Corporate Finance Western Canada at Merrill
Lynch Canada. Mr. Steele holds a BSc, Biochemistry, from the University of
British Columbia, and an MBA, Dean's Honours, from the University of Western
Ontario. Mr. Steele was nominated to the Company's board pursuant to a Loan
Agreement between BCMC Capital Limited Partnership and BCMC Capital II Limited
Partnership (Mercantile Bancorp Limited is the management company for both BCMC
Capital Limited Partnership and BCMC Capital II Limited Partnership) and the
Company which provides that so long as the Loan Agreement remains in effect,
Mercantile shall have the right to have a director nominee nominated to the
board. Mr. Steele is a director of one publicly traded company on the Canadian
Stock Exchange.
BUD YORKIN has been a member of the Company's board of directors since February
2000. Mr. Yorkin has been a film and television producer and director since
1952. He has served as a member of the Board of Governors of both the Directors
Guild of America and the Academy of Television Arts and Sciences. He was also a
member of the Board of Trustees of his alma mater, Carnegie-Mellon University.
He presently serves on the Board of Trustees of the American Film Institute and
the Dean's Advisory Council at UCLA. Mr. Yorkin is a member of the Directors
Guild of America and the Writers Guild of America.
The Company's directors are all elected annually at its shareholders meetings
for one-year terms and serve until their successors are elected and qualified or
they sooner resign. RBCC, WOF and Mercantile
35
Bancorp each have a right to nominate one of the directors. As a British
Columbia corporation, the Company is required by British Columbia corporate
laws to include on its board of directors at least one person ordinarily
resident in British Columbia and a majority of persons ordinarily resident in
Canada. This requirement may limit the persons eligible to serve on the
Company's board in the future. With the exception of Mr. Bud Yorkin, who is a
United States of America citizen and who resides in the United States, all of
the Directors and officers of the Company reside in the Province of British
Columbia and all are Canadians. The Board of Directors met six (6) times in
fiscal 2000.
There are no arrangements or understandings between any two or more Directors or
Executive Officers, pursuant to which he/she was selected as a Director or
Executive Officer.
There are no family relationships between any two or more Directors or Executive
Officers. There are no material arrangements or understandings between any two
or more Directors or Executive Officers.
ITEM 11. COMPENSATION TO DIRECTORS AND OFFICERS
During the most recently completed fiscal year, the non-employee Directors of
the Company were paid a yearly retainer of $5,000. As well, these Directors are
paid $500 for each Directors' or Committee Meeting attended in person and $300
for each Directors' or Committee Meeting attended by conference call.
Chairpersons of any Directors' or Committee Meeting were paid twice that of a
non-chair member. Incentive stock options were granted pursuant to the Company's
Stock Option Plan to non-employee Directors of the Company during the last
completed financial year to purchase up to 40,000 Class B Shares at a price of
$5.00 (U.S.) per share exercisable on or before 2nd February 2003, none of which
were exercised. No stock options were exercised by any non-employee Directors.
The aggregate cash compensation paid or payable to officers and directors, as a
group, of the Company and its subsidiaries for services rendered during the
fiscal year ended August 31, 2000 was $622,655.
The following table sets forth all annual and long term compensation for
services to the Company for the most recently completed financial year, as at
August 31, 2000 in respect of the Named Executive Officers. At the end of the
most recently completed financial year, the Company had three Named Executive
Officers, Cameron White, the Company's CEO, Timothy Gamble, the Company's
President and Juliet Jones, the Company's CFO (the "Named Executive Officers").
There were no other executive officers of the Company, or other individuals,
whose total compensation exceeded $100,000 during the financial year ended
August 31, 2000.
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------------- ----------------------------------
AWARDS PAYOUTS
----------- ---------- ----------------- -------------------- -------------
NAME AND PRINCIPAL OTHER ANNUAL SECURITIES UNDER LTIP PAYOUTS ALL OTHER
POSITION SALARY BONUS COMPENSATION OPTION GRANTED (#) ($) COMPENSATION
($) ($) ($) ($)
- ----------------------- ----------- ---------- ----------------- -------------------- ------------- -----------------
WD Cameron $200,000 Nil Nil 25,000 Class B Nil Nil
White, CEO
- ----------------------- ----------- ---------- ----------------- -------------------- ------------- -----------------
Timothy Gamble,
President $200,000 Nil Nil 25,000 Class B Nil Nil
- ----------------------- ----------- ---------- ----------------- -------------------- ------------- -----------------
Juliet Jones, Chief
Financial Officer $120,000 Nil Nil 25,000 Class B Nil Nil
- ----------------------- ----------- ---------- ----------------- -------------------- ------------- -----------------
36
LONG TERM INCENTIVE PLANS -
AWARDS IN MOST RECENTLY COMPLETED FINANCIAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER
NON-SECURITIES-PRICE-BASED PLANS
SECURITIES UNITS PERFORMANCE OR OTHER ---------------------------------------------
OR OTHER RIGHTS PERIOD UNIT THRESHHOLD TARGET MAXIMUM
NAME (#) MATURATION OR PAYOUT ($ OR #) ($ OR #) ($ OR #)
- ---------------------------- ------------------ ---------------------- --------------- --------------- -------------
W.D. Cameron White N/A August 31, 2000 N/A N/A N/A
- ---------------------------- ------------------ ---------------------- --------------- --------------- -------------
Timothy Gamble N/A August 31, 2000 N/A N/A N/A
- ---------------------------- ------------------ ---------------------- --------------- --------------- -------------
Juliet Jones N/A August 31, 2000 N/A N/A N/A
- ---------------------------- ------------------ ---------------------- --------------- --------------- -------------
The maximum Performance Bonus entitlement shall be equal to 50% of each of
Messrs. White, Gamble and Ms. Jones' (collectively, the "Employee") base salary
during the relevant fiscal year. For greater certainty, the Employees' base
salary during the fiscal year ended August 31, 2000 shall be deemed to be
$200,000 per annum in the case of Messrs. White and Gamble and $120,000 per
annum in the case of Ms. Jones.
The actual entitlement shall be based on the share price performance of the
Company's shares and shall be calculated as a percentage of the maximum
entitlement. The percentage increase or decrease of the Company's shares during
the year shall be compared to the share price performance of a peer group of
companies (the "Peer Group"). The composition of the Peer Group shall be
determined by the Compensation Committee of the Company and the Employee at the
beginning of each fiscal year.
If the price performance of the Company's shares ranks in the top quartile of
the Peer Group, the Employee will earn the maximum Performance Bonus. If the
price performance of the Company's shares ranks in the second quartile, the
Employee will earn 50% of the maximum Performance Bonus. If the price
performance of the Company's shares ranks in the lower half of the Peer Group,
the Employee will not be entitled to the Performance Bonus. Price performance
will be calculated based on a 10 day trading average taken during the last five
and the first five trading days of each fiscal year.
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
During the most recently completed financial year, an aggregate of 75,000 Class
B incentive stock options were granted to the Named Executive Officers of the
Company at an exercise price of $5.50 per share exercisable on or before 13th
January 2003. None of the options have been exercised.
Except for the Company's Stock Option Plan, there are no plans in effect
pursuant to which cash or non-cash compensation was paid or distributed to Named
Executive Officers during the most recently completed financial year or is
proposed to be paid or distributed in a subsequent year. The Company does not
have any pension plans or retirement benefit plans.
ITEM 12. OPTIONS TO PURCHASE SECURITIES
FROM REGISTRANT OR SUBSIDIARIES
CLASS B STOCK OPTIONS OUTSTANDING AS AT JANUARY 31, 2001
37
Name Title Expiry Date Price No. of B Options
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employee March 29/01 $14.00 375
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
T. Gamble President Mar 29/01 $14.00 12,250
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employees Mar 29/01 $14.00 875
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employee May 9/01 $19.40 500
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
WDC White CEO Oct 15/01 $13.50 12,025
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Juliet Jones CFO Oct 15/01 $13.50 5,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employees Oct 15/01 $13.50 6,250
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
WDC White CEO June 2/02 $13.00 4,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
J. Jones CFO June 2/02 $13.00 3,800
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
T. Gamble President June 2/02 $13.00 4,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employees June 2/02 $13.00 4,400
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
T. Gamble President Mar 23/03 $9.50 7,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
WDC White CEO Mar 23/03 $9.50 7,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
J. Jones CFO Mar 23/03 $9.50 5,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
S. Cheikes Director Mar 23/03 $9.50 10,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employees Mar 23/03 $9.50 19,500
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employees Nov 19/03 $7.50 3,600
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
V. Lum Director Feb 16/04 $9.50 5,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
S. Cheikes Director Feb 16/04 $9.50 5,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
C. White CEO Jan 13/03 $5.50 25,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
T. Gamble President Jan 13/03 $5.50 25,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
J. Jones CFO Jan 13/03 $5.50 25,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employees Jan 13/03 $5.50 49,320
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
V. Lum Director Feb. 2/03 $5.00 (US) 7,500
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
S. Cheikes Director Feb. 2/03 $5.00 (US) 7,500
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
B. Yorkin Director Feb. 2/03 $5.00 (US) 25,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employee Feb. 2/03 $5.00 (US) 27,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employee Feb. 2/03 $6.00 (US) 10,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employee Feb. 2/03 $7.00 (US) 10,000
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employee July 27/03 $5.00 50,500
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
Employee Dec. 21/03 $3.00 91,100
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
TOTAL 468,495
- ---------------------------- ------------------ ------------------------ ------------------ ------------------------
CLASS B WARRANTS OUTSTANDING AS AT JANUARY 31, 2001
DATE OF ISSUANCE OF THE NUMBER OF WARRANTS NUMBER OF WARRANTS EXERCISE EXPIRY DATE OF
WARRANTS ISSUED CURRENTLY OUTSTANDING PRICE WARRANTS
- ------------------------- ---------------------- ----------------------------- ------------- ----------------------
August 3, 1999 75,000 Class B 75,000 Class B $6.75(US) August 3, 2004
- ------------------------- ---------------------- ----------------------------- ------------- ----------------------
August 16, 2000 40,500[1] Class B 40,500[1] Class B $5.00 February 16, 2004
- ------------------------- ---------------------- ----------------------------- ------------- ----------------------
[1] 13,500 of these Warrants are not exercisable unless the term of the
Debentures, as same is described in Item 13, "Interest of Management in Certain
Transactions,", is extended past their maturity date. If the Debentures are
repaid on or before the date they are due, these Warrants will expire.
38
The total amount of securities called for by all such options to purchase Class
B Shares and warrants to purchase Class B Shares held by directors and officers
as a group is 195,075.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
As at January 21, 2001, there was no indebtedness of any director, executive
officer, senior officer or associate of them to or guaranteed or supported by
the Company or any of its subsidiaries either pursuant to an employee purchase
program or otherwise.
The Company's only material transactions since the beginning of the last fiscal
year in which any of its directors or executive officers, or any principal
shareholder, or any associate or affiliate of them, has or had a material
interest, direct or indirect, were as follows.
In May 1998, Working Opportunity Fund (EVCC) Ltd. ("WOF"), the Company and
Messrs. Sugar, White and Gamble entered into a shareholders agreement which
allows WOF to nominate a director, provides WOF with pre-emptive rights in
future securities offerings, registration rights and includes rights of first
refusal and other buy-sell and protective provisions to each of the parties in
the event of proposed transfer by the others. The agreement, other than WOF's
right to designate a director, terminates in various circumstances, including in
the event the Company completes a financing that raises more than $7.0 million
from parties other than WOF. In July 1998, the Company entered into an agreement
with Royal Bank Capital Corp. ("RBCC") which grants RBCC substantially the same
rights.
In August 2000, the Company completed a $7.9 million subordinated debenture
financing (the "Debentures"). The Debentures which are due in February 2002 and
bear interest at 18% per annum, 4% of which is deferred until the Debenture is
repaid. The Debentures are subordinate to the Company's senior indebtedness.
Purchasers of the Debentures received a 5% fee as well as three year warrants to
purchase Class "A" and/or Class "B" shares exercisable at $5.00 per share (the
"Warrants"). Certain directors, officers, insiders and associates thereof
acquired Debentures and Warrants as set out below:
AMOUNT OF WARRANTS
PURCHASER DEBENTURE ------------------------------------------------
CLASS A SHARES CLASS B SHARES
- ---------------------------------------------------- ---------------- ------------------------ -----------------------
Timothy Gamble[4] $200,000 6,000 3,000[5]
- ---------------------------------------------------- ---------------- ----------- ------------ ----------- -----------
W.D. Cameron White[4] $150,000 4,500 2,250[5]
- ---------------------------------------------------- ---------------- ----------- ------------ ----------- -----------
Working Opportunity Fund (EVCC) Ltd. [1] $1,800,000[2] 27,000 13,500[5] 27,000 13,500[5]
- ---------------------------------------------------- ---------------- ----------- ------------ ----------- -----------
BCMC Capital Limited Partnership[3] $2,586,000 77,580 38,790[5]
- ---------------------------------------------------- ---------------- ----------- ------------ ----------- -----------
BCMC Capital II Limited Partnership[3] $1,414,000 42,420 21,210[5]
- ---------------------------------------------------- ---------------- ----------- ------------ ----------- -----------
[1] Derek Douglas, a director of the Company, is an insider of Working
Opportunity Fund (EVCC) Ltd., which in turn is an insider of the
Company. The purchasers paid consideration equal to that paid by
unrelated parties.
[2] $600,000 of this amount was used to retire a debenture previously
held by Working Opportunity Fund (EVCC) Ltd. which was due 21st
October 2000.
[3] Donald Steele, a director of the Company, is President of Mercantile
Bancorp Limited. Mercantile Bancorp Limited is the management company
for BCMC Capital Limited Partnership and BCMC Capital II Limited
Partnership.
[4] Director and Senior Officer of the Company. The purchasers paid
consideration equal to that paid by unrelated parties.
39
[5] These Warrants are not exercisable unless the term of the Debentures
is extended past their maturity date. If the Debentures are repaid on
or before the date they are due, these Warrants will expire.
40
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
41
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
Not Applicable.
42
PART IV
ITEM 17. FINANCIAL STATEMENTS
The Company's financial statements are stated in Canadian Dollars (CDN$) and are
prepared in accordance with Generally Accepted Accounting Principles (GAAP) in
Canada, the application of which, in the case of the Company, conforms in all
material respects for the periods presented with United States GAAP, except as
described in Note 20 to the audited financial statements included herein.
ITEM 18. FINANCIAL STATEMENTS
The Registrant has elected to provide financial statements pursuant to Item #17.
43
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(A) The Company's financial statements are stated in Canadian Dollars (CDN$) and
are prepared in accordance with Canadian Generally Accepted Accounting
Principles (GAAP) in Canada, the application of which, in the case of the
Company, conforms in all material respects for the periods presented with United
States GAAP.
The financial statements as required under Item 17 are attached hereto and found
immediately following the text of this Annual Report. The report of KPMG LLP,
Chartered Accountants for fiscal 1999 and 2000 is included herein immediately
preceding the financial statements.
The following financial statements are filed as part of this Annual Report on
Form 20-F:
Audited Financial Statements for the years ended August 31, 1998, 1999 and 2000
44
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PEACE ARCH ENTERTAINMENT GROUP INC.
By: /s/ W.D. CAMERON WHITE
------------------------------------
W.D. Cameron White
Chief Executive Officer and
a Director
Date: February 22, 2001
45
AUDITORS' REPORT
We have audited the consolidated balance sheets of Peace Arch Entertainment
Group Inc. (formerly known as Vidatron Entertainment Group Inc.) as at August
31, 2000 and 1999 and the consolidated statements of operations, deficit and
cash flows for the each of the years in the three year period ended August 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at August 31, 2000
and 1999 and the results of its operations and its cash flows for the years in
the three year period ended August 31, 2000, in accordance with Canadian
generally accepted accounting principles. As required by the Company Act
(British Columbia) we report that , in our opinion, these principles have been
applied on a consistent basis.
Canadian general accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations for each of the years in the three
year period ended August 31, 2000 and shareholders' equity as at August 31, 2000
and 1999 to the extent summarized in Note 20 to the consolidated financial
statements.
/S/ KPMG LLP
Chartered Accountants
Vancouver, Canada
December 13, 2000
46
CONSOLIDATED BALANCE SHEETS
As at August 31, 1999 and 2000
(Expressed in thousands of Canadian dollars)
1999 2000
- ----------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 4,455 $ 4,459
Accounts receivable (note 3) 19,901 16,443
Productions in progress 3,446 15,637
Prepaid expenses and deposits 292 882
Investment in television programming (note 4) 10,227 15,550
Property and equipment (note 5) 7,079 7,397
Deferred costs 278 1,049
Goodwill and trademarks (note 6) 3,185 2,913
- ----------------------------------------------------------------------------------------------------------
$ 48,863 $ 64,330
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank indebtedness (note 7) $ 6,932 $ 5,797
Accounts payable and accrued liabilities 6,674 10,095
Deferred revenue 3,980 8,338
Deferred gain (note 8) 514 233
Deferred credit (note 9) - 1,090
Future income taxes (note 10) 797 460
Debt (note 11) 4,240 11,252
- ----------------------------------------------------------------------------------------------------------
23,137 37,265
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity:
Share capital (note 12) 32,182 32, 378
Authorized:
100,000,000 Class A Multiple Voting Shares
Issued - 1,387,791 (August 31, 1999 - 1,517,965)
100,000,000 Class B Subordinate Voting Shares
Issued - 2,434,953 (August 31, 1999 - 2,267,978)
25,000,000 Preference Shares, issuable in series;
Issued - nil
Other paid-up capital 136 467
Deficit (6,592) (5,780)
- ----------------------------------------------------------------------------------------------------------
25,726 27,065
- ----------------------------------------------------------------------------------------------------------
$ 48,863 $ 64,330
==========================================================================================================
Commitments (note 8 and 11)
The accompanying notes are an integral part of the consolidated financial
statements
47
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended August 31, 1998, 1999 and 2000
(Expressed in thousands of Canadian dollars except per share information)
1998 1999 2000
- --------------------------------------------------------------------------------------------------------------------
Revenue $ 32,457 $ 51,547 $ 35,438
Expenses:
Amortization of television programming 23,659 40,296 26,311
Other costs of production and sales 3,577 2,905 2,157
Depreciation and amortization 389 484 809
Selling, general and administrative 2,201 3,049 3,668
Interest (note 13) 576 1,188 935
- --------------------------------------------------------------------------------------------------------------------
30,402 47,922 33,880
- --------------------------------------------------------------------------------------------------------------------
Earnings from operations before undernoted 2,055 3,625 1,558
Gain on sale of assets (note 8) - 360 272
- --------------------------------------------------------------------------------------------------------------------
- 360 272
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 2,055 3,985 1,830
Income taxes (note 10) 297 2,132 1,018
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,758 $ 1,853 $ 812
====================================================================================================================
Basic net earnings per common share (note 14) $ 0.68 $ 0.60 $ 0.21
====================================================================================================================
Fully diluted earnings per common share (note 14) $ 0.63 $ 0.58 $ 0.21
====================================================================================================================
CONSOLIDATED STATEMENT OF DEFICIT
For the Years Ended August 31, 1998, 1999 and 2000
(Expressed in thousands of Canadian dollars)
1998 1999 2000
- --------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ (10,203) $ (8,445) $ (6,592)
Net earnings (loss) for the year 1,758 1,853 812
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (8,445) $ (6,592) $ (5,780)
====================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
48
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended August 31, 1998, 1999 and 2000
(Expressed in thousands of Canadian dollars)
1998 1999 2000
- --------------------------------------------------------------------------------------------------------------------
Operating activities:
Net earnings (loss) $ 1,758 $ 1,853 $ 812
Items not involving cash:
Depreciation and amortization 24,513 40,119 27,120
Interest on debt discount - 96 48
Future income taxes - 1,816 629
Loss (Gain) on sale of assets - (361) 290
Other 19 7 -
Changes in non-cash operating working capital (note 15) (4,817) (3,759) (1,544)
- --------------------------------------------------------------------------------------------------------------------
21,473 39,771 27,355
- --------------------------------------------------------------------------------------------------------------------
Investing activities:
Investment in television programming (27,698) (44,231) (31,599)
Increase in deferred costs - (243) (998)
Increase in goodwill and trademarks - (12) (39)
Property and equipment acquired (633) (270) (589)
Proceeds on sale of assets, net (note 8) - 626 -
Acquisition of assets (note 9) - - (477)
- --------------------------------------------------------------------------------------------------------------------
(28,331) (44,130) (33,702)
- --------------------------------------------------------------------------------------------------------------------
Financing activities:
Issue of common shares, net 4,875 4,177 191
Increase (repayments) in loans due to directors and
shareholders 378 (386) 350
Increase (decrease) in bank indebtedness 1,704 4,282 (1,135)
Increase in debt 1,737 1,200 7,817
Repayment of debt (1,704) (2,335) (872)
- --------------------------------------------------------------------------------------------------------------------
6,990 6,938 6,351
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 132 2,579 4
Cash and cash equivalents, beginning of year 1,744 1,876 4,455
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,876 $ 4,455 $ 4,459
- --------------------------------------------------------------------------------------------------------------------
Supplementary information:
Interest paid (net of amounts capitalized) $ 543 $ 1,142 $ 787
Income taxes paid - 12 505
Non-cash transactions:
Property acquired through increase in long-term debt 4,100 - -
Property sold through decrease in long term debt and
increase in accounts receivable (note 8) - 2,467 -
Value assigned to common shares issued:
For acquisition of Peace Arch Productions Inc. (note 6) 1,980 803 -
The accompanying notes are an integral part of the consolidated financial
statements
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in tables expressed in thousands of Canadian dollars, except
per share amounts)
1. OPERATIONS
Based in Vancouver, British Columbia, Canada, Peace Arch Entertainment Group
Inc., together with its subsidiaries, (collectively, the "Company") is a fully
integrated television production company that produces and distributes film,
television, video, webcast and interactive programming for world-wide markets.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements of the Company are prepared in
accordance with generally accepted accounting principles in Canada and,
except as explained and quantified in note 20, comply, in all material
respects, with generally accepted accounting principles in the United
States. In particular, the Company's accounting policies are in
accordance with industry guidance in the United States as set out in
Statement of Financial Accounting Standards No.53, "Financial Reporting
by Producers and Distributors of Motion Picture Films" ("SFAS 53").
These consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. All
material intercompany balances and transactions have been eliminated.
In accordance with the provisions of SFAS 53, the Company has elected
to present an unclassified balance sheet.
(b) Revenue Recognition
(i) Revenues from television programming are recognized
when the license period has commenced, the program
has been delivered and other conditions as specified
in the respective agreements have been met.
(ii) Revenues from production services for third parties
are recognized when the production is completed and
delivered. All associated production costs are
deferred and charged against earnings when the film
is delivered and the revenue recognized.
(iii) Cash received in advance of meeting the revenue
recognition criteria described above is recorded as
deferred revenue.
(c) Cash Equivalents
Cash equivalents include highly liquid investments with terms to
maturity of 90 days or less when purchased.
(d) Productions in Progress
Productions in progress represent the costs of incomplete programs and
are carried at the lower of cost and estimated net realizeable value.
(e) Investment in Television Programming
Investment in television programming represents the unamortized cost of
completed proprietary television programs (net of related tax credits
received or receivable) which have been produced by the Company or to
which the Company has acquired distribution rights.
The Company records amortization based on the ratio that current
revenues bear to expected total gross revenues for a program.
Investment in television programming is recorded at the lower of
unamortized cost and net realizable value, determined on an individual
program basis. The Company amortizes substantially all of its
production costs over a five-year period.
(f) Property and Equipment
Property and equipment are stated at cost and depreciated on the
following basis:
Buildings................................. 5%.declining balance
Computers, furniture and equipment........ 20%.declining balance
Production equipment...................... 20%.declining balance
Other..................................... 2.- 5 year straight line
Equipment under capital lease is amortized using the above rates.
50
(g) Deferred Costs
Deferred costs represent financing costs, which are recognized over the
term of the related financing, and development costs incurred on
projects prior to production. Upon commencement of production, the
development costs are reclassified to productions in progress.
Development costs are written off when it is determined that they will
not be recovered.
(h) Goodwill
Goodwill is recorded at cost and until August 31, 1999 was amortized on
a straight line basis over 20 years. Effective September 1, 1999 the
Company changed its estimate to record amortization on a straight-line
basis over a remaining life of 10 years. The effect of this change in
accounting estimate which has been applied prospectively, is a
reduction in net earnings for the current year of $141,130 or $0.04 per
common share. Management performs annual assessments to determine
whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows
of the acquired operation. When the future cash flows are less than the
carrying value, the excess is charged against income.
(i) Government Assistance
The Company has access to several government programs that are designed
to assist film and television production in Canada. Amounts received in
respect of government programs are recorded as revenue in accordance
with the Company's revenue recognition policy for completed film and
television programs. Refundable tax credits are recorded as described
in note 2(e).
(j) Income Taxes
Future income taxes are recorded for using the asset and liability
method. Under the asset and liability method, future tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future
tax assets and liabilities are measured using enacted or substantively
enacted tax rates expected to apply when the asset is realized or the
liability settled. The effect on future tax assets and liabilities of a
change in tax rates is recognized in income in the period that
substantive enactment or enactment occurs. To the extent that the
Company does not consider it to be more likely than not that a future
tax asset will be recovered, it provides a valuation allowance against
the excess.
(k) Foreign Currency Translation
The Company's functional currency is the Canadian dollar. Foreign
currency denominated monetary assets and liabilities are translated
into Canadian dollars at exchange rates in effect at the end of the
period. Revenues and expenses are translated at exchange rates in
effect at the time of the transaction. Translation gains and losses are
included in income except for unrealized gains and losses arising from
the translation of long-term monetary assets and liabilities, which are
deferred and amortized over the life of the asset or liability. For
each year presented, the Company has no long-term monetary assets or
liabilities denominated in a foreign currency.
(Dollar amounts in tables expressed in thousands of Canadian dollars, except
per share amounts)
(l) Comparative Figures
Certain comparative figures have been restated to conform to the basis
of presentation adopted for the current year.
(m) Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may
ultimately differ from those estimates. Investment in television
programming, productions in progress and goodwill are asset accounts
that require significant use of management estimates to determine
recoverability.
3. ACCOUNTS RECEIVABLE
1999 2000
- -------------------------------------------------------------------------------------
Trade receivables $ 4,284 $ 6,011
Tax credits receivable 14,724 10,207
Income taxes recoverable 76 225
Short-term note (note 8) 817 -
- -------------------------------------------------------------------------------------
$ 19,901 $ 16,443
=====================================================================================
Tax credits receivable are federal and provincial refundable tax
credits related to specific film productions in Canada. The credits are
recorded as a reduction to the related investment in television
programming in the period in which the related production is completed
and then amortized in accordance with note 2(e). During the year, tax
credits aggregating $7,814,639 were recorded (1999 - $10,830,223).
51
4. INVESTMENT IN TELEVISION PROGRAMMING
1999 2000
--------------------------------------------------------------------------------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
--------------------------------------------------------------------------------------------------------
Television Movies $ 6,065 $ 5,860 $ 6,895 $ 5,973
Television Series 83,056 73,034 113,864 99,236
--------------------------------------------------------------------------------------------------------
89,121 78,894 120,759 105,209
--------------------------------------------------------------------------------------------------------
Net book value $ 10,227 $ 15,550
========================================================================================================
5. PROPERTY AND EQUIPMENT
1999 2000
--------------------------------------------------------------------------------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
--------------------------------------------------------------------------------------------------------
Land $ 5,203 $ - $ 5,203 $ -
Buildings 1,532 409 1,286 182
Computers, furniture and 386 253 413 270
equipment
Production equipment 1,101 527 1,350 679
Equipment under capital 57 20 325 54
lease
Other 23 14 29 24
--------------------------------------------------------------------------------------------------------
8,302 1,223 8,606 1,209
--------------------------------------------------------------------------------------------------------
Net book value $ 7,079 $ 7,397
========================================================================================================
6. GOODWILL AND TRADEMARKS
Effective September 1, 1996, the Company acquired 100% of the shares of
Peace Arch Productions Inc. (formerly Sugar Entertainment Ltd.), for
consideration of 22,500 common shares at a deemed price of $10.00 per
common share and contingent consideration of 350,000 cancelable
performance shares at a deemed price of $0.10 per common share. The
shares were comprised of 50% Class A shares and 50% Class B shares. The
performance shares were releasable from escrow at a rate of one share
for every $10.00 of cash flow generated by Peace Arch Productions Inc.
Goodwill recorded at the time of acquisition was $318,232.
The Company records additional goodwill at the time the performance
shares are releasable from escrow. During the year ended August 31,
1998, 200,000 of the performance shares were released from escrow,
resulting in an increase in purchase goodwill and share capital of
$1,980,000. During the year ended August 31, 1999, the remaining
150,000 performance shares were earned and additional purchase goodwill
and share capital in the amount of $802,500 was recorded. On September
28, 1999, the remaining shares were released from escrow.
As at August 31, 2000, accumulated amortization of goodwill amounted to
$534,777 (August 31, 1999 - $224,020).
7. BANK INDEBTEDNESS
Bank indebtedness is drawn under a credit facility of up to $25 million
for production financing and is comprised of demand loans bearing
interest at prime plus 1% per annum with monthly payments of interest
only withdrawn from reserves held by the bank. As at August 31, 2000,
the prime rate was 7.5% (August 31, 1999 - 6.25%). The loans are
secured by the refundable tax credits and distribution rights of the
film properties to which the loans relate and a general security
agreement.
8. DEFERRED GAIN
In August 1999, the Company sold one of its three properties for gross
proceeds of $3,265,000. As consideration, the Company received cash in
the amount of $550,000 and a note in the amount of $817,295 bearing
interest at 12% per annum. The principal was due and repaid in the
current year. The Company continues to occupy the property through a
lease arrangement, with an option to terminate after two years. The
gain on the sale in excess of the present value of the minimum lease
payments, being $284,528, was realized in 1999. The remaining amount of
$513,493 was deferred and is being amortized over the two year minimum
lease term.
The Company is obligated under the lease arrangement to pay $287,460
rent and operating costs in 2001.
52
9. ACQUISITION OF MVP MOVIE VISTA PRODUCTIONS INC.
Effective August 31, 2000, the Company acquired 100% of the issued and
outstanding shares of MVP Movie Vista Productions Inc. for cash
consideration of $476,975. Assets acquired include film rights and
future income tax assets valued at $1,566,762. The excess of the value
assigned to the acquired assets over the consideration paid is recorded
as a deferred credit and will be amortized in proportion to the
realization of the tax benefit acquired.
10. FUTURE INCOME TAXES
Temporary differences give rise to the following future tax assets and
liabilities at August 31:
1999 2000
--------------------------------------------------------------------------------------------------------
FUTURE INCOME TAX ASSETS:
Property and Equipment $ 278 $ 64
Share issue costs 704 503
Deferred gain 175 80
Other 54 75
Losses available for future periods 580 2,227
--------------------------------------------------------------------------------------------------------
Gross future tax assets 1,791 2,949
Valuation allowance - -
--------------------------------------------------------------------------------------------------------
Net future income tax assets 1,791 2,949
FUTURE INCOME TAX LIABILITIES:
Property and equipment - (156)
Investment in television programming (2,539) (3,210)
Other (49) (43)
--------------------------------------------------------------------------------------------------------
$ (797) $ (460)
========================================================================================================
The Company's losses expire as follows:
2001 $ 30
2002 689
2003 265
2004 390
2005 919
2006 1,358
2007 1,233
-------------------------------------------
$ 4,884
===========================================
The differences between the effective tax rate reflected in the provision for
income taxes and the Canadian statutory income tax rate are as follows:
Years ended August 31,
1998 1999 2000
------------------------------------------------------------------------------------------------------
Corporate statutory income tax rate 45.6% 45.6% 45.6%
Add (deduct) the effect of:
Utilization of previously unrecognized tax losses (35.1) (5.0) (12.1)
Expenses not deductible for income tax purposes 3.9 12.9 22.1
------------------------------------------------------------------------------------------------------
Effective tax rate 14.4% 53.5% 55.6%
======================================================================================================
53
11. DEBT
1999 2000
--------------------------------------------------------------------------------------------------------
(i) Mortgage due May 1, 2001 bearing interest at 7.2% per annum with $ 927 $ 897
aggregate monthly payments of principal and interest of $9, secured
by a first mortgage on property
(ii) Mortgage due March 1, 2001 bearing interest at 6.95% per annum with 2,641 $ 2,519
aggregate monthly payments of principal and interest of $25, secured
by a first mortgage on property
(iii) Loans to purchase equipment, bearing interest at an average annual 90 14
rate of the bank rate plus 2.0% secured by the equipment acquired.
(iv) Debentures having a face value of $7,900 (recorded net of $322 deemed - 7,578
debt discount) bearing interest at 14% per annum, payable quarterly,
and 4% interest compounded quarterly, payable at maturity. The debt
is secured by a charge on the assets of the Company, and due Feb 16,
2002. With the consent of the Lender, up to 75% of the principal may
be extended for a further 18 months (note 12(c)).
(v) Debentures having a face value of $600 (recorded net of deemed debt 560 -
discount of $40) bearing interest at 10% per annum, payable
quarterly, secured by a charge on the assets of the Company, and due
October 21, 2000.
(vi) Capital leases to purchase equipment, bearing interest from 7.2 to 22 244
10.2% per annum, secured by the equipment acquired.
--------------------------------------------------------------------------------------------------------
$ 4,240 $ 11,252
========================================================================================================
Of the $7,900,000 debt issued (note 11(iv)), $350,000 was to related parties.
Included with the issuance were warrants to purchase 210,000 Class A and 27,000
Class B shares at an exercise price of $5.00 per share (note 12(c)). A value of
$331,650 has been attributed to the warrants issued and recorded as debt
discount and other paid-in capital. This debt discount is being amortized
against income as interest expense over the term of the debentures, and has a
current unamortized value of approximately $322,434.
Also in connection with the debt issue, the Company agreed to grant, in the
event of an extension at February 16, 2002, warrants to purchase 105,000 Class A
shares and 13,500 Class B shares at an exercise price of $5.00 per share.
Principal due in each of the next five fiscal years ending August 31 is
approximately as follows:
2001 $ 3,291
2002 7,881
2003 80
2004 -
2005 -
- -----------------------------------------
$ 11,252
=========================================
54
12. SHARE CAPITAL
(a) Issued
In 1999, every five common shares were consolidated and
reclassified into one Class A Multiple Voting share and one
Class B Subordinate Voting share. Class A shares are entitled to
ten votes per share and Class B shares are entitled to one vote
per share. Each Class A share is convertible at any time into one
Class B share at the option of the holder. The information in
these consolidated financial statements has been restated to
reflect the share consolidation and reclassification.
Class A Class B
Number of Amount Number of Amount Total
Shares Shares Amount
- --------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1997 1,251,648 $ 9,661 1,251,660 $ 9,662 $ 19,323
Change during the year:
Issued for cash 268,817 2,513 268,818 2,514 5,027
Performance shares returned to
treasury (7,500) - (7,500) - -
Performance shares released
from escrow (note 6) - 990 - 990 1,980
Less share issue costs - (76) - (76) (152)
- --------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1998 1,512,965 13,088 1,512,978 13,090 26,178
Change during the year:
Tax recovery, prior year share
issue costs - 168 - 168 336
Performance shares released
from escrow (note 6) - 390 - 413 803
Issued for cash 5,000 37 5,000 37 74
Issued for cash, pursuant to
public offering - - 750,000 5,601 5,601
Less share issue costs, net of
tax benefit - (1) - (809) (810)
- --------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1999 1,517,965 13,682 2,267,978 18,500 32,182
Change during the year:
Issued for cash - - 36,800 202 202
Converted (130,174) (1,173) 130,175 1,173 -
Less share issue costs, net of
tax benefit - 29 - (35) (6)
- --------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2000 1,387,791 $ 12,538 2,434,953 $ 19,840 $ 32,378
====================================================================================================================
Shares issued for non-cash consideration have been valued at their
estimated fair value at the date of issuance.
(b) Options
For each of the periods presented, the following stock options were
outstanding. For the years 1998 and 1999, the number of shares shown in
the following table represent 1/2 Class A shares and 1/2 Class B
shares.
55
Expiry Date Exercise Price 1998 1999 2000
Per Share Class A Class B
- ------------------------------------------------------------------------------------------------------------------------
January 24, 2001 $ 11.20 1,350 750 375 375
March 29, 2001 14.00 47,000 47,000 13,500 13,500
May 9, 2001 19.40 1,000 1,000 500 500
October 15, 2001 13.50 49,500 47,950 23,525 23,525
June 2, 2002 13.00 39,600 35,000 16,450 16,450
August 26, 2002 10.25 6,000 - - -
January 13, 2003 5.50 - - - 130,320
February 2, 2003 US 5.00 - - - 76,000
February 2, 2003 US 6.00 - - - 10,000
February 2, 2003 US 7.00 - - - 10,000
March 23, 2003 9.50 158,200 130,000 53,500 53,500
July 27, 2003 5.00 - - - 53,500
November 19, 2003 7.50 - 14,000 3,600 3,600
February 1, 2004 11.25 - 1,000 - -
February 16, 2004 9.50 - 40,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------------------
302,650 316,700 126,450 406,270
=====================================================================================================================
1998 1999 2000
Class A Class B
- ---------------------------------------------------------------------------------------------------------------------
Balance, beginning of year 184,675 302,650 158,350 158,350
Granted 152,200 65,000 - 346,570
Exercised (825) (11,000) - (36,800)
Expired or cancelled (33,400) (39,950) (31,900) (61,850)
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year 302,650 316,700 126,450 406,270
=====================================================================================================================
Stock options have exercise prices based on market prices at the date
of grant and vest over a period that does not exceed two and one-half
years.
(c) Warrants
In 1999, 750,000 Class B shares were issued by way of public offering.
In connection with the public offering, the Company granted as
compensation a warrant to purchase up to 75,000 Class B shares at an
exercise price of $US 6.75 per share. The warrant is exercisable for a
period of four years beginning one year after August 3, 1999, and may
not be transferred, assigned or hypothecated for a period of one year
except to officers of the underwriter and any successors to the
underwriter.
In connection with the debentures issued during the year (note
11(iv)), the Company issued share purchase warrants to purchase an
aggregate of 210,000 Class A shares and 27,000 Class B shares, all
at an exercise price of $5 per share, exercisable for a period of 42
months from August 16, 2000. The Company granted additional warrants
to purchase 105,000 Class A shares and 13,500 Class B shares at an
exercise price of $5 per share. These Warrants are not exercisable
unless the term of the Debentures is extended past their maturity
date. If the Debentures are repaid on or before the date they are
due, these Warrants will expire. In the event of an extension, the
warrants will expire February 16, 2004.
For each of the periods presented, warrants were outstanding to acquire
common shares as indicated in the table. For the years 1998 and 1999,
the number of shares shown in the following table represent 1/2 Class A
shares and 1/2 Class B shares:
Exercise 1998 1999 2000
Price Per
Expiry Date Share Class A Class B
-----------------------------------------------------------------------------------------------------
March 31, 1999 $ 6.25 267,000 - - -
October 21, 2000 6.25 - 100,000 50,000 50,000
February 16, 2004 5.00 - - 210,000[1] 27,000[1]
August 3, 2004 US 6.75 - - - 75,000
-----------------------------------------------------------------------------------------------------
267,000 100,000 260,000 152,000
=====================================================================================================
(1) In addition to the warrants disclosed in the table above, the
Company granted contingent warrants to purchase 105,000 Class A
shares and 13,500 Class B shares, at an exercise price of $5.00, in
the event of an extension to the related debentures (note 12(c)).
(d) Dividends
Covenants attached to the debentures limit the Company's ability to
pay dividends without the approval of the lenders.
56
13. INTEREST EXPENSE
Years ended August 31,
1998 1999 2000
-----------------------------------------------------------------------------------------------------
Interest expense:
Long-term debt $ 447 $ 727 $ 417
Other 129 461 518
Interest capitalized 32 240 82
-----------------------------------------------------------------------------------------------------
14. NET EARNINGS PER COMMON SHARE
Net earnings per common share has been calculated by dividing into
earnings the weighted average number of common shares outstanding,
including issued shares held in escrow, after giving retroactive effect
to the share consolidation and reclassification on July 20, 1999 (note
12(a)). The weighted average number of shares outstanding for each of
the years presented is as follows:
Years ended August 31,
1998 1999 2000
-----------------------------------------------------------------------------------------------------
Basic 2,602,742 3,083,121 3,806,292
Diluted 3,124,007 3,473,357 3,806,292
-----------------------------------------------------------------------------------------------------
15. CHANGES IN NON-CASH OPERATING WORKING CAPITAL
Years ended August 31,
1998 1999 2000
--------------------------------------------------------------------------------------------------------------
Accounts receivable $ (5,436) $ (8,848) $ 3,458
Productions in progress (8,044) 8,460 (12,191)
Prepaid expenses and deposits (186) 75 (590)
Accounts payable and accrued liabilities 2,309 3,343 3,421
Deferred revenue 6,540 (6,789) 4,358
--------------------------------------------------------------------------------------------------------------
$ (4,817) $ (3,759) $ (1,544)
==============================================================================================================
16. GOVERNMENT ASSISTANCE
Deferred revenue includes $1,369,471 in production assistance and
$100,000 in equity participation obtained from the government during
the year (1999 - nil). The production assistance is not repayable and
the equity participation is repayable from distribution revenues in
respect of which the financing was made. Refer to note 2(i).
17. RELATED PARTY TRANSACTIONS
During the year, the Company transferred certain real estate
development rights to officers of the Company in exchange for cash
consideration of $125,000. This transaction was recorded at the
exchange amount agreed to by the parties.
Related party transactions not disclosed elsewhere in these
consolidated financial statements are as follows:
Years ended August 31,
1998 1999 2000
--------------------------------------------------------------------------------------------------------------
Production fees paid to a director of the Company $ 1,285 $ 1,956 -
Consulting fees paid to companies owned by
officers and directors of the Company $ 120 $ 70 -
--------------------------------------------------------------------------------------------------------------
18. FINANCIAL INSTRUMENTS
(a) Fair Values
As at August 31, 2000, 1999 and 1998, the Company's financial
instruments included cash and cash equivalents, accounts
receivable, bank indebtedness, accounts payable and accrued
liabilities and amounts due to directors and shareholders. As
at these dates, the carrying value of these financial
instruments approximated their fair value due to their ability
for prompt liquidation or short term to maturity, with the
exception of tax credits and short-term notes included in
accounts receivable,
57
which are receivable over a period of up to two years. As at
August 31, 2000, the fair value of tax credits receivable is
estimated to be $9,638,185 (August 31, 1999 - $14,080,764).
Also included as a financial instrument is long-term debt
consisting of mortgages, demand loans and debentures. The fair
value of long-term debt has been estimated to approximate
carrying value based upon discounting future cash flows at the
rate currently offered for debt that is estimated by
management to be of similar maturity and credit quality.
(b) Concentration of Credit Risk
Although all of its revenue is generated from production in
Canada, the Company derived over 84% (1999 - 85%) of its
revenues from export sales to the U.S. and Europe. In the year
ended August 31, 2000, one customer represented 48%, a second
represented 21%, a third represented 13%, and a fourth
represented 7% of total revenues. In the year ended August 31,
1999, one customer represented 36%, two customers represented
14% each and a third customer represented 14% of total
revenues. In the year ended August 31, 1998, one of these
customers represented 32%, two customers represented
approximately 20% each and a fourth customer represented 11%
of total revenues.
On August 31, 2000, approximately 62% (1999 - 74%) of accounts
receivable was comprised of refundable federal and provincial
tax credits. These credits are subject to audit by the
appropriate regulatory authorities.
(c) Currency Risk
During the year ended August 31, 2000 the Company derived
approximately 41% (1999 - 74%) of its revenues in U.S. funds.
The Company estimates its obligations payable in $US funds and
converts all U.S. funds in excess of these obligations into
Canadian currency as they are received. The Company did not
use derivative instruments to reduce its exposure to foreign
currency risk.
(d) Interest Rate Risk
The Company's exposure to interest rate risk is limited to the
cash flow risk associated with variable rate debt as disclosed
in notes 7 and 11.
19. SEGMENTED INFORMATION
The Company manages its operations in two business segments: production
services for projects in which the Company does not hold a financial
interest in a film or video program, and proprietary programming which
is programming the Company owns or in which it holds a financial
interest. The Company operates only in Canada, although its programs
are distributed throughout the world (note 18(b)). Selected information
for the Company's operating segments, net of inter-company amounts, is
as follows:
Production Proprietary
Services Programming Other Total
1998
-------------------------------------------------------------------------------------------------------------
Revenue $ 4,178 $ 27,945 $ 334 $ 32,457
Gross profits 1,075 3,727 419 5,221
Total assets 1,203 37,791 3,193 42,187
-------------------------------------------------------------------------------------------------------------
1999
-------------------------------------------------------------------------------------------------------------
Revenue $ 3,765 $ 47,298 $ 484 $ 51,547
Gross profits 1,220 6,972 154 8,346
Total assets 1,597 45,628 1,638 48,863
-------------------------------------------------------------------------------------------------------------
2000
-------------------------------------------------------------------------------------------------------------
Revenue $ 2,853 $ 31,723 $ 862 $ 35,438
Gross profits 696 5,412 862 6,970
Total assets 1,553 62,668 109 64,330
-------------------------------------------------------------------------------------------------------------
Gross profits are comprised of revenue less amortization of television
programming and other costs of production and sales.
In 2000, revenues from other business include interest earned on short
term investments and tax credits. In 1998 and 1999 revenues from other
business were mainly attributable to the rental of production assets.
58
20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in Canada
("Canadian GAAP") which differ in certain respects with accounting
principles generally accepted in the United States ("US GAAP").
Material differences to these consolidated financial statements are as
follows:
(a) Earnings Per Share:
Under US GAAP, shares that are contingently returnable to
treasury are excluded from the weighted average number of
shares outstanding for purposes of the calculation of basic
earnings per share for all periods prior to the period in
which the contingency is resolved and the shares are released
from escrow. They would be included in diluted earnings per
share prior to release under certain limited circumstances
(see note 6).
In addition, under US GAAP the weighted average number of
shares used in the calculation of diluted earnings per share
would be calculated by the treasury stock method whereby it is
assumed that proceeds received by the Company from the
exercise of dilutive securities are used to repurchase
outstanding shares in the market.
The effect of these items would be to reduce the weighted
average number of shares outstanding to:
Years ended August 31,
1998 1999 2000
- --------------------------------------------------------------------------------------
Basic 2,303,988 2,935,202 3,794,714
Diluted 2,303,988 2,954,319 3,808,430
- --------------------------------------------------------------------------------------
(b) Application of US GAAP:
(i) As discussed in note 6, effective September 1,
1996, the Company issued 350,000 performance
shares on the acquisition of Peace Arch
Productions Inc. In the year ended August 31,
1998, and prior to the release of 200,000 shares
from escrow, the holder of the performance shares
transferred, within escrow, 160,000 performance
shares to three officers of the Company. The
160,000 shares were transferred subject to the
terms and conditions of the escrow agreement for
their initial value of $0.10 per share. In the
year ended August 31, 1999, the balance of the
performance shares was recorded as described in
note 6.
Upon transfer, for US GAAP purposes, the excess of
the market value over the transfer price is charged
against income as compensation expense.
(ii) As described in note 8, for Canadian accounting
purposes, the Company has recognized a partial gain
on the sale of real estate. For US GAAP purposes, no
gain is recognized in the current year due to the
existence of the note receivable. Under US GAAP, this
transaction would be accounted for using the finance
method.
The effect of these differences on net earnings
(loss) and earnings (loss) per share (calculated by
reference to the weighted average number of shares
outstanding) under US GAAP would be as follows:
Years ended August 31,
1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------
Net earnings (loss), Canadian GAAP $ 1,758 $ 1,853 $ 812
Compensatory value of transferred shares (1,224) - -
Gain on sale of asset, net of income tax - (187) 187
- -----------------------------------------------------------------------------------------------------------------
Net earnings (loss), US GAAP $ 534 $ 1,666 $ 999
=================================================================================================================
Net earnings (loss) per share, US GAAP:
Basic $ 0.23 $ 0.56 $ 0.26
Diluted $ 0.23 $ 0.56 $ 0.26
Under US GAAP, total assets and shareholders' equity would be:
Years ended August 31,
1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 42,187 $ 51,330 $ 64,330
Shareholders' equity 17,773 25,539 27,065
- -----------------------------------------------------------------------------------------------------------------
59
(c) Stock-Based Compensation
As described in Note 12(b), the Company has granted stock
options to certain directors and employees. These options are
granted for services provided to the Company. For US GAAP
purposes, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"),
requires that an enterprise recognize or, at its option,
disclose the impact of the fair value of stock options and
other forms of stock-based compensation in the determination
of income. The Company has elected under SFAS 123 to continue
to measure compensation cost on the intrinsic value basis set
out in APB Opinion No. 25. As options are granted at exercise
prices based on the market value of the Company's share at the
date of grant, no adjustment for compensation expense is
required.
Under SFAS 123, where a company chooses to continue to apply
APB Opinion No. 25 in its basic financial statements,
supplementary pro forma information as if the fair value
method was applied must be disclosed. This pro forma
information is set out below. The pro forma stock compensation
expense has been determined by reference to an option-pricing
model that takes into account the stock price of the grant
date, the exercise price, the expected life of the option, the
estimated volatility of the underlying stock, expected
dividends and the risk free interest rate over the term of the
option.
The calculations applied have assumed that the expected life
of all options granted equals 60% of the maximum term. Based
on actual experience, no dividends will be paid, and expected
average volatility and risk free interest rates are:
Years ended August 31,
1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------
Volatility % 22 43 57
Risk free interest rate % 5.11 4.86 6.38
- -----------------------------------------------------------------------------------------------------------------
Unaudited pro forma information with respect to impact of the fair
value of stock options at the date of grant on reported loss for the
periods presented is as follows:
Years ended August 31,
1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------
Earnings (loss), US GAAP $ 534 $ 1,666 $ 999
Stock compensation expense (490) (403) (753)
- -----------------------------------------------------------------------------------------------------------------
Pro forma earnings (loss), US GAAP $ 44 $ 1,263 $ 246
=================================================================================================================
Pro forma basic earnings (loss) per share, US GAAP $ 0.02 $ 0.43 $ 0.06
(d) Supplementary Information - Allowance for Doubtful Accounts:
Accounts receivable is disclosed net of allowance for doubtful
accounts. Changes in the allowance for each of the periods
presented are as follows:
Years ended August 31,
1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 169 $ 316 $ 304
Charges to expenses:
Expensed 147 37 25
Recovered/written-off - (49) (263)
- -----------------------------------------------------------------------------------------------------------------
Balance, end of period $ 316 $ 304 $ 66
- -----------------------------------------------------------------------------------------------------------------
(e) New Accounting Standards
In June 2000, the United States Financial Accounting Standards
Board issued Statement of Position 00-2, which provides
guidance on generally accepted accounting principles to all
producers or distributors that own or hold rights to
distribute or exploit films. The new standard is effective for
financial statements for fiscal years beginning after December
15, 2000. The Company has not yet determined the impact the
adoption of SOP-2 will have on its financial statements.
60