PEACE ARCH ENTERTAINMENT GROUP INC, F-1/A, 1999-07-26

PEACE ARCH ENTERTAINMENT GROUP INC
F-1/A, 1999-07-26
MOTION PICTURE & VIDEO TAPE DISTRIBUTION

Previous: EQUITY OFFICE PROPERTIES TRUST, 424B1, 1999-07-26

Next: AUTOMOTIVE ONE PARTS STORES INC, POS AM, 1999-07-26

<PAGE>

As filed with the Securities and Exchange Commission on July 26, 1999
Registration No. 333-10354
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------

AMENDMENT NO. 4
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PEACE ARCH ENTERTAINMENT GROUP INC.
(Formerly Vidatron Entertainment Group Inc.)
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
British Columbia, Canada 7812E Not Applicable
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>

Number 302, 1132 Hamilton Street
Vancouver, B.C. V6B 2S2
Canada
(604) 681-9308
(604) 681-3299 (facsimile)
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
National Registered Agents, Inc.
1090 Vermont Avenue, NW, Ste. 910
Washington, D.C. 20005
(202) 371-8090
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

Copies to:
<TABLE>
<S> <C>
Margaret G. Graf, Esq. Dale E. Short, Esq.
Brand Farrar & Buxbaum LLP Troy & Gould Professional Corporation
515 S. Flower Street, #3500 1801 Century Park East, 16th Floor
Los Angeles, California 90071 Los Angeles, CA 90067
(213) 426-6222 (facsimile) (310) 789-1159 (facsimile)
</TABLE>

---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to the home jurisdiction's shelf
prospectus offering procedures, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any jurisdiction where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JULY 26, 1999

1,000,000 Class B Shares

Peace Arch Entertainment Group Inc. is offering 1,000,000 Class B shares for
sale in the U.S.

Our Class B shares are currently listed on The Toronto Stock Exchange under
the symbol "PAE.B." Effective July 14, 1999, every five of our common shares
was reclassified and converted into one Class A share and one Class B share.
Except for voting rights, and other rights with respect to conversion,
dividends and issuer bids, the Class B shares and Class A shares are identical
in all material respects. The Class A shares are entitled to ten votes per
share and the Class B shares to one vote per share.

We have applied to list the Class B shares on the American Stock Exchange
under the symbol "PAE." There has been no trading market for the Class B shares
in the U.S. prior to this offering. Before this offering, we will determine the
initial public offering price of the Class B shares through consultation and
negotiation with the representatives of the underwriters. We currently estimate
that the initial public offering price of the Class B shares will range between
$4.00 and $6.00 per share.

Before investing in the Class B shares, you should carefully consider the
risks described in the "Risk Factors" section beginning on page 7.

<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price..........................
Underwriting discount..........................
Proceeds, before expenses, to Peace Arch.......
</TABLE>

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

We have granted the underwriters the right to purchase up to an additional
150,000 Class B shares at the initial public offering price, less the
underwriting discount, to cover over-allotments.

The Seidler Companies Incorporated Josephthal & Co. Inc.

The date of this prospectus is , 1999.
<PAGE>

DESCRIPTION OF PROSPECTUS INSIDE FRONT COVER

The inside front cover of the prospectus consists of a photo montage
(which covers approximately two-thirds of the page) of images from our
television programming (in some cases, accompanied by the names of the program).
Program materials include photos of talent and scenes from "First Wave", "So
Weird", "Dead Man's Gun", "Electric Playground" and six of our other past
productions.

<PAGE>

PROSPECTUS SUMMARY

This summary highlights important information about our business and this
offering. Because it is a summary, it does not contain all the information you
should consider before investing in the Class B shares. You should read the
entire prospectus carefully. All references in this prospectus to "$" or
"dollars" are to United States dollars unless otherwise indicated.

Peace Arch Entertainment Group Inc.

We develop, produce and distribute high-quality, proprietary television
programming for markets worldwide. We take ideas, storylines and other creative
concepts developed by us or acquired from independent sources and convert those
concepts into television programming. Our proprietary programming consists of a
variety of episodic series, movies and documentaries, including "First Wave," a
popular one-hour science fiction drama series produced in association with
Pearson Television International Ltd., Francis Ford Coppola and Chris Brancato.

Our revenues in fiscal 1996 were Cdn$5.7 million. Beginning in 1996, we began
shifting our focus to production and distribution of proprietary programming.
Our fiscal 1997 revenues were Cdn$23.6 million due to growth of this new
business, and in fiscal 1998 revenues increased to Cdn$32.5 million over fiscal
1997 as a result of a 60% increase in revenues from proprietary programming
over fiscal 1997. The production and distribution of proprietary programming
represented approximately 86% of our revenues during fiscal 1998 and is
anticipated to make the greatest contribution to our future growth. In fiscal
1998 we reported net earnings of Cdn$1.8 million, up from a net loss of Cdn$1.2
million for fiscal 1997. Our 1997 loss was made up of Cdn$1.4 of operating
income and Cdn$2.6 million of one-time charges.

Historically, we have distributed our programming outside North America
through distributors such as Walt Disney Company, directly and through its
Buena Vista Television subsidiary, Hallmark Entertainment Network, Metro-
Goldwyn-Mayer and Pearson Television International Ltd. In North America, we
sell our programming directly to major U.S. and Canadian broadcasters,
including USA Networks, Showtime Networks, CHUM-City, CTV, CanWest Global and
WIC Television.

The proceeds of this offering will be used primarily to accelerate the
expansion of our business through increased funding of the development,
production and distribution of additional proprietary programming. Our aim is
to create a brand image for each program or series we produce. Successful
branding will allow us to generate greater revenues from television
distribution and ancillary markets, such as clothing, toys, novelties, books,
CDs, soundtracks and other audio products, electronic games, Internet
applications and other merchandise. By retaining ownership rights to our
programming, we add to our program library, which we believe has the potential
to generate future revenues.

We are based in Vancouver, British Columbia, the third largest film and
television production center in North America after Los Angeles and New York.
As a British Columbia-based producer, we currently benefit from a number of
competitive advantages over producers outside of Canada, including favorable
Canadian tax and other business incentives. Following this offering, we believe
we will continue to qualify for these tax and business incentives.

We are a vertically integrated company, with the in-house capacity to handle
concept creation, script writing, production, post-production and almost all of
the other aspects of the production and distribution process. We own our
primary production and post-production facilities located in downtown
Vancouver, which helps ensure that necessary facilities are available during
periods of high demand such as Vancouver is currently experiencing.

1
<PAGE>

In addition to these proprietary activities, we provide production services
for third parties on a contract basis. This programming includes television
series, movies and commercials, music videos, training and industrial
presentations. Our production services business acts as a training ground for
our creative staff, fosters our relationships with key industry participants,
provides us with an incubator for new skills and industry practices and keeps
our facilities utilized during the hiatus periods in the production of our
television series programming.

Recent Highlights

First Wave. We recently made an advance sale to the USA Networks' SciFi
Channel of 66 episodes of "First Wave," representing three years of regular
programming. This will allow us to substantially increase our library and
reflects a significant business opportunity for us. "First Wave" is broadcast
in Canada on CHUM's Space: The Imagination Station, a Canadian cable network.
In December 1998, CHUM's Space: The Imagination Station announced that "First
Wave" was their highest rated series, ranking ahead of "The X-Files."

Projects in Development. We currently are in an early stage of development of
our proprietary one-hour drama, "Yaletown," and a half-hour situation comedy
entitled "Acme Agency." Also, we recently purchased an option for the rights to
the screenplay "Jetlag," on which Dave Thomas, known for his appearances in
"Grace Under Fire," "SCTV" and "Strange Brew," will be executive producer. The
project, a made-for-television movie, is designed as a pilot for a television
series.

So Weird. In April 1999, we began production services for the Disney Channel
on a further 26-episode season of the half-hour children's series "So Weird."
Henry Winkler ("Happy Days" and "MacGyver") serves as executive producer.

Name Change. Effective July 14, 1999, we changed our name from Vidatron
Entertainment Group Inc. to Peace Arch Entertainment Group Inc.

2
<PAGE>

The Offering

<TABLE>
<C> <S>
Shares outstanding .............. 1,517,971 Class A shares

1,517,971 Class B shares

Shares offered................... 1,000,000 Class B shares

Shares to be outstanding after
this offering .................. 1,517,971 Class A shares

2,517,971 Class B shares

4,035,942 total shares

Use of proceeds.................. We intend to use the net proceeds of this
offering primarily for working capital and
other general corporate purposes relating
to the expansion of our business, including
possible future acquisitions. A portion of
the proceeds will be used to repay
approximately Cdn$1.4 million of
indebtedness, including approximately
Cdn$0.2 million owed to our directors and
officers. For further discussion of how we
intend to use the proceeds of this
offering, see "Use of Proceeds."
</TABLE>

3
<PAGE>

Information Concerning Certain Financial Matters

We prepare our financial statements in accordance with Canadian generally
accepted accounting principles ("Canadian GAAP"). These principles conform in
all important respects with accounting principles generally accepted in the
U.S. ("U.S. GAAP"), except as described in Note 19 of the Notes to Consolidated
Financial Statements contained in this prospectus. We believe that our
accounting policies are in accord with U.S. industry practices as set out in
Financial Accounting Standards Board Statement No. 53.

Unless otherwise indicated, all information in this prospectus assumes that
the underwriters will not exercise their option to acquire up to 150,000 Class
B shares to cover over-allotments and that the representatives of underwriters
will not exercise their warrants to acquire 100,000 Class B shares. In
addition, unless otherwise indicated, all information in this prospectus
assumes no exercise of outstanding options or warrants. Giving effect to the
share reclassification, we had options outstanding, as of April 30, 1999, to
purchase 196,850 Class A shares and 196,850 Class B shares at a weighted
average exercise price of Cdn$10.10 per share, and warrants outstanding, as of
May 10, 1999, to purchase 50,000 Class A shares and 50,000 Class B shares at an
exercise price of Cdn$6.25 per share. Finally, all information in this
prospectus assumes no conversion of the Class A shares into Class B shares and
that no fractional shares resulted from the conversion of our common shares
into Class A shares and Class B shares.

The following table sets forth certain exchange rates based on 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"). Such rates are set forth as U.S. dollars per Cdn$1.00. On
July 23, 1999, the inverse of the Noon Buying Rate was Cdn$1.00 per US$0.6633.

<TABLE>
<CAPTION>
Period
-----------------------
From To Average High Low
------- ------- ------- ------ ------
<S> <C> <C> <C> <C>
8/31/93 8/31/94 0.7397 0.7740 0.7165
8/31/94 8/31/95 0.7270 0.7471 0.6993
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 2/28/99 0.6544 0.6728 0.6382
</TABLE>

4
<PAGE>

Summary Financial and Operating Data

The following table summarizes financial data concerning our business
prepared in accordance with Canadian GAAP. You should read the information
below together with all the consolidated financial statements and other
financial information in this prospectus.

The financial data set forth below is reported in Canadian dollars. However
for the convenience of the reader, the annual 1998 and the six-month 1999
statement of operations data also have been translated into U.S. dollars using
the average exchange rate in effect for such periods, and the balance sheet
data have been translated using the rates in effect as of August 31, 1998 and
February 28, 1999. These translations are not necessarily representative of the
amounts that would have been reported if we had historically reported our
financial statements in U.S. dollars. In addition, the rates utilized are not
necessarily indicative of the rates in effect at any other time.

Summary Consolidated Financial and Operating Data
(in thousands, except per share data)

<TABLE>
<CAPTION>
Six Months Ended
Year Ended August 31, February 28,
--------------------------------------------------- -------------------------
Cdn$ Cdn$ Cdn$ Cdn$ Cdn$ US$ Cdn$ Cdn$ US$
1994 1995 1996 1997 1998 1998 1998 1999 1999
------- ------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Canadian GAAP
Revenue................. $ 1,519 $4,012 $ 5,723 $23,584 $32,457 $22,580 $16,233 $30,252 $19,797
Expenses
Amortization of
programming........... -- -- -- 14,972 24,124 16,783 12,461 25,406 16,626
Other costs of
production and sales.. 1,003 2,851 3,767 4,261 3,577 2,488 1,866 1,508 987
Selling, general and
administration
expense............... 1,148 1,401 2,404 2,453 2,201 1,531 925 1,330 870
Other.................. 205 376 579 464 500 348 292 354 232
------- ------ ------- ------- ------- ------- ------- ------- -------
Total expenses.......... 2,356 4,628 6,750 22,150 30,402 21,150 15,544 28,598 18,715
------- ------ ------- ------- ------- ------- ------- ------- -------
Net earnings (loss) from
operations............. (837) (616) (1,027) 1,434 2,055 1,430 689 1,654 1,082
Gain (loss) on sale of
capital assets and
other.................. -- -- -- (333) -- -- -- -- --
Provision (against)
limited partnership
revenue interests...... (324) (297) (1,073) (2,313) -- -- -- -- --
Income taxes............ -- -- -- -- (297) (206) -- (645) (422)
------- ------ ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)..... $(1,161) $ (913) $(2,100) $(1,212) $ 1,758 $ 1,224 $ 689 $ 1,009 $ 660
======= ====== ======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
common share:(1)
Basic.................. $ (2.00) $(1.05) $ (1.68) $ (0.65) $ 0.68 $ 0.48 $ 0.28 $ 0.33 $ 0.23
Diluted................ -- -- -- -- $ 0.63 $ 0.43 $ 0.28 $ 0.33 $ 0.23
Weighted average number
of common shares...... 579 892 1,247 1,860 2,603 2,603 2,504 3,026 3,026
Diluted number of
common shares......... -- -- -- -- 3,124 3,124 2,661 3,406 3,406

Other Operating Data:
EBITDA(2)............... (560) (223) (465) 2,074 3,020 2,102 1,015 2,347 1,536
U.S. GAAP
Earnings (loss) per
common share:(1)
Basic.................. $ (2.00) $(1.05) $ (1.68) $ (0.80) $ 0.23 $ 0.16 $ (0.25) $ 0.35 $ 0.24
Diluted................ $ (2.00) $(1.05) $ (1.68) $ (0.80) $ 0.23 $ 0.16 $ (0.25) $ 0.35 $ 0.24
Weighted average number
of common shares...... 579 892 1,247 1,511 2,304 2,304 2,154 2,876 2,876
Diluted number of
common shares......... 579 892 1,247 1,511 2,304 2,304 2,154 2,882 2,882
</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
As of February 28, 1999
-----------------------------------------
Actual As Adjusted
-------------------- --------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... Cdn$ 445 US$ 296 Cdn$ 5,133 US$ 3,405
Tax credits receivable.............. 13,213 8,787 13,213 8,787
Production costs in progress........ 3,771 2,508 3,771 2,508
Investments in television
programming, net................... 9,534 6,340 9,534 6,340
Property and equipment, net......... 9,565 6,361 9,565 6,361
Goodwill............................ 2,479 1,649 2,479 1,649
Total assets........................ 43,561 28,968 48,249 32,077

Debt financing(3)................... 17,461 11,612 16,061 10,683
Deferred revenue.................... 2,947 1,960 2,947 1,960
Total liabilities................... 24,217 16,104 22,885 15,221
Shareholders' equity................ 19,344 12,864 25,364 16,857
</TABLE>
- --------
(1) Basic earnings per share are based on the weighted average number of
shares outstanding during the period. Diluted per share information is not
presented if it would disclose a smaller loss per share than the basic earnings
per share. All share and per share data has been restated to give retroactive
effect to the share reclassification and conversion.

(2) EBITDA represents earnings before interest, taxes, provision against
limited partnership revenue interests, depreciation and amortization. For
purposes of EBITDA, amortization excludes amortization of programming. We have
included EBITDA because we feel that some investors will find it useful for
evaluating our 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 our 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 our
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) Debt financing shown above includes both bank indebtedness and long-term
debt.

Included in operations for fiscal years ended after 1996 are the accounts of
Sugar Entertainment Ltd., which was acquired on September 1, 1996. Years
subsequent to fiscal 1996 may not be comparable with fiscal 1996 and prior
years. Sugar Entertainment made up approximately 73% of revenues in 1997 and
86% in 1998.

The adjusted balance sheet data shown above is adjusted to give effect to the
sale of the Class B shares in this offering and the application of the net
proceeds, using the Canada:U.S. dollar exchange rate at July 23, 1999, as if
this offering occurred on February 28, 1999.

About Us

We were incorporated on October 22, 1986, under the laws of British Columbia,
Canada, under the name Vidatron Enterprises Ltd. We changed our name to
Vidatron Entertainment Group Inc. on February 5, 1997 and to Peace Arch
Entertainment Group Inc. on July 14, 1999. Our head office is located at #302,
1132 Hamilton Street, Vancouver, B.C. V6B 2S2 Canada. Our telephone number is
(604) 681-9308, and our facsimile number is (604) 681-3299. We maintain a
website at www.vidatron.com. Information available on our website is not part
of this prospectus.

We intend to furnish to our shareholders annual reports containing financial
statements audited by an independent public accounting firm and quarterly
reports for the first three fiscal quarters of each fiscal year containing
unaudited interim financial information.

"Vidatron" is our trademark. In addition, we intend to register the "Peace
Arch" mark in the U.S. and Canada. All other trademarks or tradenames referred
to in this prospectus are the property of others. We do not own or have any
rights to these marks.

6
<PAGE>

RISK FACTORS

An investment in our Class B shares involves a high degree of risk. Please
carefully consider the following risk factors before deciding whether to invest
in the Class B shares. If one or more of these risks actually materialize, our
business and the trading price of our Class B shares would likely suffer and
you could lose all or part of the money you invested in the Class B shares.

Risks Relating To Our Company

Because We Have a Limited Operating History in Television Programming Our
Future Operating Results Are Difficult to Predict.

Our business has been focused on television programming only since September
1996, when we acquired Sugar Entertainment Ltd. This limited operating history
in proprietary television programming makes future operating results more
difficult to predict. For example, our 66-episode order for "First Wave" will
be complete in February 2001. There can be no assurance that this series will
be renewed beyond the current 66-episode order. Our immediate prospects for
future growth depend on our ability to identify, develop and acquire the rights
to ideas, storylines and other creative concepts suitable to be produced and
distributed as television programming. There can be no assurance that we will
be able to grow.

Because We Have Grown Rapidly, We May Not Be Successful in Managing Our Growth.

Since 1996, our revenues have grown from Cdn$5.7 million to Cdn$32.5 million.
This rapid growth has placed increasing demands on our managerial and financial
resources, and will continue to do so as we pursue our expansion strategy. As
we grow, we will need to hire additional creative and managerial personnel. We
cannot assure you that we will be able to attract and hire such personnel, or
that we will continue to manage our growth effectively or that we will be
successful in expanding our business.

If We No Longer Qualify For or Canada Eliminates or Amends Government Incentive
Programming, Our Results of Operations and Financial Condition Will Be
Adversely Affected.

We currently finance a significant portion of our production budgets through
Canadian government agencies and incentive programs, including federal and
provincial tax credits, as well as through similar international arrangements
in the case of our international co-productions. These tax credits combined
represent approximately 19% of our production budgets. We will continue to
qualify for these tax credits if, among other things, Canadians beneficially
own or control a majority of the voting rights of Peace Arch. Upon completion
of the offering, approximately 63% of the voting power of our outstanding
shares will be held of record by Canadians. However, because we have no way of
confirming the actual beneficial ownership of our shares, it is possible that
non-Canadians could acquire and beneficially own a majority of our voting
rights. If Canadians fail to beneficially own or control a majority of our
voting rights at any time, we could lose such tax incentives and the costs of
our productions would increase substantially.

Canadian law requires Canadian conventional, specialty, pay and pay-per-view
television services to devote a certain amount of their programming schedules,
including prime time, to Canadian productions. If we fail to qualify as a
Canadian producer, it would be more difficult to obtain time slots in Canada
for our programming, a "slot" being a broadcast time period for a program. We
believe we will continue to qualify as a Canadian producer for this purpose as
long as, among other things, Canadians beneficially own or control a majority
of our voting rights.

These incentive programs, including federal and provincial tax credit
programs, may be amended or eliminated in the future, which could result in a
material increase in the effective cost of our productions. The loss or
elimination of these tax and business incentives would have a material adverse
effect on our results of operations and financial condition. For a more
detailed description of Canadian federal and provincial incentive programs, see
"Business--Regulatory Considerations."

7
<PAGE>

Because We Depend on a Limited Number of Entities for Much of Our Product
Distribution, the Loss of Any One Customer Could Cause a Material Decrease in
Our Revenues.

In fiscal 1998, we derived 85% of our revenues from five customers, including
four customers, Showtime Networks, Pearson Television International Ltd., Buena
Vista Television and MGM Worldwide Television, who each accounted for 10% or
more of our revenues. We expect that a significant amount of our revenues will
continue to be derived from a relatively small number of customers. The loss of
any of these customers could have a material adverse impact on our results of
operations and financial condition.

If the Exchange Rate of U.S. Dollars For Canadian Dollars Decreases, Our
Results of Operations May Be Adversely Affected.

Our costs are generally paid in Canadian currency while our revenues are
customarily paid in U.S. currency. Therefore, our revenues and operating
results may be affected by fluctuations in the exchange rate of U.S. dollars.
Currency exchange rates are determined by market factors beyond our control and
may vary substantially during the course of a production period. If the
Canadian dollar were to strengthen in relation to the U.S. dollar, our
effective costs would rise in relation to our revenues, adversely affecting our
profitability.

Since We Have Changed Our Name, We May Lose Recognition in Our Industry and
Increase the Difficulty of Protecting Our Intellectual Property.

On July 14, 1999, we changed our name from Vidatron Entertainment Group Inc.
to Peace Arch Entertainment Group Inc. Our name change may impair our
recognition in the industry and may make it more difficult to protect our
intellectual property rights.

If We Lose Key Personnel We May Not Be Able to Successfully Operate Our
Business.

Our success depends to a significant degree upon the services of certain key
personnel, particularly Timothy Gamble, our President, W.D. Cameron White, our
Chief Executive Officer and Larry Sugar, President of our subsidiary, Sugar
Entertainment Ltd. Because we are a relatively small company, these members of
management are involved in many aspects of the production process and virtually
all significant decisions are made or significantly influenced by these
individuals. The loss of the services of any one or more of our key personnel
could have a material adverse effect on our business. Although we intend to
obtain and maintain "key man" life insurance coverage with respect to these
personnel, there is no assurance that the proceeds would be sufficient to
compensate fully for the loss of the services of any of these individuals if
they were to die.

Since Our Business is Seasonal, Our Quarterly Operating Results Are Likely to
Fluctuate Materially From Period-to-Period.

Our results of operations for any period depend on the number of television
programs we deliver in the period. Consequently, our operating 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 correspond closely with revenue recognition. As a result,
our quarterly results of operations in any particular period may not meet the
expectations of persons considering an investment in or seeking to sell our
shares, which could cause the price of the Class B shares to decline or
fluctuate materially.

Since Protection of Our Intellectual Property Is Limited, Unauthorized Parties
May Copy Our Productions Which Could Decrease Our Ability to Fully Exploit Our
Productions.

We attempt to retain and protect all proprietary and intellectual property
rights to our productions through international copyright laws and licensing
and distribution agreements with reputable international companies

8
<PAGE>

for specified territories and media channels for limited duration periods.
Despite these precautions, existing copyright laws afford only limited
practical protection in some jurisdictions and, in fact, our programming is
sold in some jurisdictions in which there is no system or assurance of
copyright protection. As a result, unauthorized parties may copy and distribute
our productions or portions or applications of our programming, inhibiting our
ability to fully exploit our programming. In addition, other companies may
independently develop and produce programming which is similar to, or imitates,
our programming but which legally circumvents our intellectual property rights.

If We or Third Parties With Which We Do Business Suffer Equipment Failure At
the Year 2000, Our Business Could Be Disrupted.

Many existing computer programs and other systems in use today were designed
and developed without considering the upcoming change in the century, which
could lead to the failure of computer applications or create erroneous results
by or at the Year 2000. The Year 2000 issue is a broad business issue, the
impact of which extends beyond traditional computer hardware and software, to
possible failure of other systems and instrumentation, including equipment used
by us and by third parties with which we do business. Either we or third
parties with which we do business may suffer a Year 2000 business disruption
that may adversely affect our business.

Risks Relating to Our Industry

If Some or All of Our Television Projects Are Not Accepted by the Public, We
May Not Recoup Our Costs or Realize the Profits We Anticipate.

The television industry involves inherent risks, since revenues derived from
the production and distribution of a television program depend primarily upon
acceptance by the public, which is difficult to predict. The audience of a
television program responds not only to the artistic components of the program,
but also to the reviews by critics, promotion by the distributor, the
availability of alternative forms of entertainment and leisure time activities,
general economic conditions, public tastes generally and other intangible
factors, all of which can change rapidly. Further, the audience ratings for a
television series is generally a key factor in generating revenues from other
distribution channels, such as syndication and from ancillary opportunities.
Therefore, some or all of our television projects may not be commercially
successful, resulting in costs not being recouped or anticipated profits not
being realized.

Because There Are a Limited Number of Prime Time Slots for Television
Programming, We May Not Be Able to Increase Our Penetration of the Prime Time
Television Market.

As one means of expanding our television production business, we intend to
increase our penetration of the prime time North American television market.
There are a limited number of prime time slots, even though the total number of
outlets for television programming has increased over the last decade. We
compete for time slots with national networks and a variety of independent
companies which produce television programming and cannot assure you that we
will be able to increase our penetration of the prime time television market.

If Budget Overruns and Other Production Risks Occur, We May Not Be Able to
Recoup the Additional Costs.

Actual production costs for our programming may exceed budget, sometimes
significantly. Risks, such as labor disputes, death or disability of a star
performer, technology changes relating to special effects or other aspects of
production, shortages of necessary equipment, damage to film negatives, master
tapes and recordings, or adverse weather conditions, may cause cost overruns or
delay or prevent completion of a production. If there are substantial budget
overruns, we may have to seek additional financing to complete production of a
television program. Financing, on terms acceptable to us, may not be available.
In addition, if there are substantial budget overruns, we may not recoup the
additional costs, which could have a material adverse impact on our results of
operations and financial condition.

9
<PAGE>

Because the Market in Which We Operate Is Highly Competitive, We May Not Be
Successful in Acquiring Storylines, Attracting Personnel Necessary to Expand
Our Business or Selling Our Programming.

We derive a large portion of our revenues from producing and distributing
television programming and intend to expand this part of our business. The
business of producing and distributing television programming is highly
competitive. We face intense competition with other producers and distributors,
many of whom are substantially larger and have greater financial resources than
we have. We compete with other television and motion picture production
companies for ideas and storylines created by third parties, as well as for
actors, directors and other personnel required for a production.

If Our Accounting Practices Result in a Change in the Rate of Amortization or
Write-Downs, Our Results of Operations Could Be Adversely Affected.

In accordance with generally accepted accounting principles and industry
practice, we amortize filmed entertainment and television programming costs
using the individual film forecast method. Under this method, costs for each
television program are amortized in the ratio that revenues earned in the
current period for such title bears to our estimate of the total revenues to be
realized from all media and markets for such title. We regularly review and,
when necessary, revise our total revenue estimates on a title-by-title and
contract-by-contract basis, which may result in a change in the rate of
amortization or a write-down of the programming asset to net realizable value.
Any changes or write-downs could adversely affect our results of operations.

Risks Relating to this Offering

Because We Have Significant Discretion in the Use of Funds from this Offering,
the Proceeds May Be Used For Projects Not Yet Identified and Which Might Not
Improve Our Results of Operations.

We intend to use the net proceeds of this offering primarily for working
capital and general corporate purposes relating to increased development,
acquisition, licensing and distribution of our television programming and our
exploitation of ancillary rights. In addition, we may use a portion of the net
proceeds to acquire businesses, libraries and other assets we believe are
complementary to our current businesses or that further our strategic goals. As
a result, a significant portion of the net proceeds will be available for
projects that are not yet identified, and our management will have broad
discretion with respect to the application of such proceeds. There can be no
assurance that the projects for which the net proceeds are used will be
successful or will improve our results of operations.

Because There Is a Limited Trading Market in Our Stock, You May Not Be Able to
Sell the Class B Shares or May Only Be Able to Sell Them For Less Than the
Initial Public Offering Price.

Prior to this offering, there will be no trading market for the Class B
shares in the U.S. Although we have applied to list the Class B shares on the
American Stock Exchange, there can be no assurance that an active trading
market will develop or be maintained in the U.S. or that the Class B shares
will trade in the public market after this offering at or above the initial
public offering price in this offering. Therefore, you may not be able to sell
the Class B shares or may only be able to sell them for less than the initial
public offering price. There also can be no assurance that an active trading
market for the Class B shares will develop or be maintained in Canada on The
Toronto Stock Exchange.

Since We Are a Canadian Corporation, It May Be Difficult to Sue Us or to
Enforce a Judgment Against Us.

We are a Canadian corporation with our principal place of business in
Vancouver, British Columbia. Substantially all of our directors and executive
officers and some of the experts named in this prospectus are not residents of
the U.S. and virtually all of the assets of these persons and substantially all
of our assets are located outside the U.S. As a result, it may not be possible
for you to serve summons and complaints within the

10
<PAGE>

U.S. upon these persons or upon us. Similarly, it may not be possible to
enforce in U.S. courts, against such persons or against us, judgments of U.S.
courts based upon civil liability provisions of the U.S. federal or state
securities laws. In addition, it may be difficult in Canadian courts for you,
in original suits or in suits for the enforcement of judgments of U.S. courts,
to enforce civil liabilities based upon U.S. federal or state securities laws
against us or our directors or executive officers, or our experts. We have
appointed National Registered Agents, Inc. of Washington, D.C., to act as agent
for service of process in any action in any U.S. federal or state court brought
against us under the securities laws of the U.S. arising out of this offering
or any purchase or sale of securities in connection with this offering.

Sales of Shares Following this Offering Could Adversely Affect the Market Price
of the Class B Shares

Upon completion of this offering, we will have outstanding approximately
1,517,971 Class A shares and 2,517,971 Class B shares. The 1,000,000 Class B
shares being offered under this prospectus will be freely tradeable.

The remaining outstanding shares have not been registered under the
Securities Act and therefore will be treated as "restricted securities" and may
be publicly sold into the U.S. only if registered or if the sale is made in
accordance with an exemption from registration, such as Rule 144 or Regulation
S promulgated under U.S. federal securities laws. Under these exemptions,
however, substantially all of the other 1,517,971 Class B shares held by
persons other than those held by "affiliates," as well as the 1,517,971 Class B
shares issuable to such persons upon conversion of Class A shares, generally
will be eligible for resale in the U.S. without registration. This may
adversely affect the market price of the Class B shares and could affect the
amount of trading of such shares on the American Stock Exchange, particularly
if the trading price on the American Stock Exchange were to be higher than the
trading price on The Toronto Stock Exchange at any particular time.

Our officers, directors and some of our shareholders are expected to agree
with the underwriters not to sell any of our securities for a period of six
months from the date of this prospectus. The number of shares to be subject to
this restriction is approximately 558,375 Class A shares and 558,375 Class B
shares.

As of April 30, 1999, and giving retroactive effect to the share
reclassification, options to purchase a total of 196,850 Class A shares and
196,850 Class B shares and warrants to purchase an aggregate of 50,000 Class A
shares and 50,000 Class B shares were outstanding.

Sales of a significant number of such shares, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Class B shares and could impair our future ability to raise capital through an
offering of equity securities, which in turn could adversely affect our
business or results of operations. For a more detailed description, see "Shares
Eligible for Future Sale."

Because the Holders of Class A Shares Will Have Disproportionate Voting Control
of Peace Arch, the Market Price of the Class B Shares May Be Adversely Affected
and Investors May Be Discouraged From Attempting to Acquire Us.

The Class B shares have the right to only one vote per share compared to ten
votes per share possessed by the Class A shares, placing disproportionate
voting control of Peace Arch in the hands of the holders of Class A shares. The
effect of the allocation of voting control may be to limit the price that
investors will pay in the future for Class B shares, or to prevent or delay a
merger, takeover or other change in control and thus discourage attempts to
acquire us. A merger, takeover or other change in control might be in the best
interests of shareholders since any of these might cause the market price of
our shares to rise or a substantial premium to be payable to shareholders. In
addition, if an acquiror domiciled outside of British Columbia or Canada sought
to acquire us, the potential acquiror could be deterred by the prospect that
the Canadian and British Columbia tax credits would be eliminated if, after the
transaction, we were no longer controlled by Canadians.

11
<PAGE>

If We Issue Preference Shares, Your Rights May Be Adversely Affected.

We are authorized to issue up to 25,000,000 preference shares. Our articles
authorize our board to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the shareholders. The
rights of the holders of any preference shares may adversely affect the rights
of holders of the Class B shares. Our ability to issue preference shares gives
us flexibility concerning possible acquisitions and financings, but it could
make it more difficult for a third party to acquire a majority of our
outstanding voting shares.

Our Stock Price May Be Volatile and You May Be Unable to Resell Your Shares at
or Above the Initial Public Offering Price.

In recent years and months, the U.S. stock market has experienced significant
price and volume fluctuations. These fluctuations, which are often unrelated to
the operating performances of specific companies, have had a substantial effect
on the market price of stocks, particularly stocks of companies such as ours in
the "small cap" category. It is also possible that our operating results will
not meet the expectations of our public market analysts, which could have an
adverse effect on the trading price of the Class B shares. Accordingly, the
market price for the Class B shares may fluctuate substantially. There also is
no assurance that the market price for the Class B shares will ever exceed the
initial public offering price.

If We Become Subject to Penny Stock Rules, the Market Liquidity for the Class B
Shares Could Be Adversely Affected.

The Securities and Exchange Commission's regulations define a "penny stock"
to be any equity security that has a market price less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. The penny stock restrictions will not apply to the Class B shares
if they are listed on the American Stock Exchange and we provide certain price
and volume information on a current and continuing basis, or meet required
minimum net tangible assets or average revenue criteria. We cannot assure you
that the Class B shares will qualify for exemption from these restrictions. If
the Class B shares were subject to the penny stock rules, the market liquidity
for the Class B shares could be adversely affected.

Special Note Regarding Forward Looking Statements

We intend some statements in this prospectus, including statements set forth
under the captions "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus, regarding, among other things, our
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
our 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 our expectations are
disclosed under "Risk Factors" and elsewhere in this prospectus. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We undertake 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.

Unless otherwise indicated, references to outstanding shares and per share
amounts throughout this prospectus reflect our previous share capital
consolidations and the share reclassification and conversion effective July 14,
1999.

12
<PAGE>

USE OF PROCEEDS

The net proceeds of the offering are estimated to be $4,038,000 (based upon
an assumed public offering price of $5.00 per share and after deducting the
estimated underwriting discount, non-accountable expense allowance and other
offering expenses). Based on the Noon Buying Rate on July 23, 1999 of Cdn$1.00
per US$0.6633, the net proceeds are estimated to be Cdn$6,088,000. If the
underwriters' over-allotment is exercised in full, the net proceeds of the
offering are estimated to be $4,730,000 (Cdn$7,131,000).

We have allocated approximately $3.1 million (Cdn$4.7 million) of the net
proceeds to working capital and other general corporate purposes to accelerate
the expansion of our business primarily by expanding our proprietary
programming. These uses include the following:

. Expanding our proprietary programming by optioning literary properties,
engaging writers, directors, cast and crew, carrying out production and
post-production and exploiting worldwide distribution rights. We have
currently allocated approximately $2.8 million of the net proceeds for
these uses.

. Opening and staffing an office in Los Angeles to source and market our
programming in the U.S., for which we have currently allocated $0.3
million per year for the first two years.

. Seeking acquisitions to add complementary assets, personnel and
distribution channels.

We also plan to use a portion of the net proceeds to repay approximately $0.9
million (Cdn$1.4 million) principal amount of indebtedness, of which $0.3
million (Cdn$0.5 million) relates to debentures originally convertible into
common shares at $12.60 (Cdn$19.00) per share and bearing interest at 12% per
annum. The original maturity date of the debentures was March 31, 1999, which
date has been extended by agreement with the holders to July 31, 1999. An
aggregate of Cdn$0.2 million (US$132,660) principal amount relates to the
debentures due to our officers. Cdn$0.6 million (US$397,980) relates to a
debenture, dated November 5, 1998 and maturing in November 2000, due to Working
Opportunity Fund (EVCC) Ltd. The balance of Cdn$0.3 million (US$0.2 million)
relates to a loan bearing interest at 12% per annum due March 1, 1999, which
has been extended to July 31, 1999. This loan is personally guaranteed by two
of our officers. The proceeds have been used for working capital expenditures
as needed.

Prior to the application of net proceeds, we will invest them in short-term,
investment grade securities.

Although we intend to use the proceeds of the offering as described above,
our actual use may differ. We presently have no agreements or commitments for
any acquisitions.

13
<PAGE>

DETERMINATION OF OFFERING PRICE

Although our Class A shares and Class B shares have been listed on The
Toronto Stock Exchange prior to this offering, trading in our shares has been
limited and sporadic. There has been no trading market for the Class B shares
in the U.S. prior to this offering.

We and the representatives of the underwriters believe that the limited
trading that has occurred in our Class A shares and Class B shares does not
represent an active market and that prices for our shares on The Toronto Stock
Exchange do not reflect the prices at which the shares would trade if an
established and active trading market existed. Accordingly, we will determine
the initial public offering price of the Class B shares in this offering
through consultation and negotiation with the representatives of the
underwriters. Among the factors to be considered in these negotiations are
prevailing market and economic conditions, our recent historical results of
operations, estimates of our future business prospects and earnings potential,
the present state of our business operations, an assessment of our management,
the number of Class B shares being offered and the total number of Class A
shares and Class B shares to be outstanding upon completion of this offering,
the price that purchasers might be expected to pay for the Class B shares given
the nature of Peace Arch and the general condition of the securities markets at
the time of the offering, the consideration of these factors in relation to the
market valuation of comparable companies in related businesses or whose
operations are similar to ours, and the current condition of the markets in
which we operate.

There can be no assurance that an active trading market will develop for the
Class B shares after this offering, or that the Class B shares will trade in
the public market subsequent to this offering at or above the initial public
offering price in this offering.

14
<PAGE>

DILUTION

Our net tangible book value as of February 28, 1999 was $11.2 million, or
$3.71 per share based on the inverse of the Noon Buying Rate of Cdn$1.00 per
US$0.6650 in effect on that date. Net tangible book value per share represents
the amount of our total tangible assets less total liabilities, divided by
3,025,942 shares, which is the number of shares outstanding on February 28,
1999 after giving effect to every five common shares having been reclassified
and converted into one Class A share and one Class B share. After giving effect
to the receipt of the net proceeds from the sale of Class B shares in this
offering, based upon an assumed public offering price of $5.00 per share and
after deducting the estimated underwriting discount, non-accountable expense
allowance and other offering expenses, and without taking into account any
change in assets or liabilities since February 28, 1999, our pro forma net
tangible book value as at February 28, 1999, would have been approximately
$15.3 million, or $3.79 per Class B share. This represents an immediate
increase in pro forma net tangible book value of $0.08 per share to existing
shareholders and an immediate dilution of $1.21 per share to new investors
purchasing Class B shares in this offering. The following table illustrates the
dilution for each Class B share:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $5.00
Net tangible book value per share as of February 28, 1999...... $3.71
Increase per share attributable to new investors............... $0.08
-----
Pro forma net tangible book value per share after offering....... $3.79
-----
Dilution per share to new investors.............................. $1.21
=====
</TABLE>

15
<PAGE>

CAPITALIZATION

The following table sets forth our consolidated capitalization as of February
28, 1999 on an actual and as adjusted basis. The as adjusted capitalization
gives effect to the sale of the Class B shares in this offering and our
application of the net proceeds (at an assumed initial public offering price of
$5.00 per share and after deducting the estimated underwriting discount, non-
accountable expense allowance and other offering expenses). This table should
be read in conjunction with the consolidated financial statements and notes
appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
February 28, 1999
--------------------
Actual As Adjusted
------- -----------
(Canadian dollars
in thousands)
<S> <C> <C>
Bank indebtedness....................................... $ 9,357 $ 9,357
Long-term debt, including current portion............... 8,104 6,704
------- -------
17,461 16,061
Shareholders' Equity:
Class B shares, 100,000,000 authorized, 1,512,971
outstanding, actual; 100,000,000 authorized,
2,512,971 outstanding, as adjusted................... 13,322 19,410
Class A shares, 100,000,000 authorized, 1,512,971
outstanding, actual and as adjusted.................. 13,322 13,322
Preference shares, 25,000,000 authorized, none
outstanding.......................................... -- --
Other paid-in capital................................. 136 136
Deficit............................................... (7,436) (7,504)(1)
------- -------
Total shareholders' equity.......................... 19,344 25,364
------- -------
Total capitalization................................ $36,805 $41,425
======= =======
</TABLE>
- --------
(1) Includes Cdn$68,000 adjustment resulting from the use of proceeds of the
offering to repay debentures.

The table assumes no exercise of options, outstanding as of April 30, 1999,
to purchase 196,850 Class A shares and 196,850 Class B shares at a weighted
average exercise price of Cdn$10.10 per share.

The table also assumes no exercise of warrants, outstanding, as of May 10,
1999, to purchase 50,000 Class A shares and 50,000 Class B shares at an
exercise price of Cdn$6.25 per share.

The table also excludes the possible issuance of 150,000 Class B shares
pursuant to the underwriters' over-allotment option and 100,000 Class B shares
upon exercise of the representatives' warrants.

16
<PAGE>

PRICE RANGE AND TRADING VOLUME OF COMMON SHARES

The following table sets out the market price range and trading volume of our
common shares which traded on the Vancouver Stock Exchange and The Toronto
Stock Exchange (the "TSE") for the periods indicated. Until July 19, 1999, our
common shares traded on the TSE under the symbol "VE." Effective July 19, 1999,
our Class A shares and Class B shares began trading on the TSE under the
symbols "PAE.A" and "PAE.B", respectively, at which time our common shares were
delisted.

The information contained in this table has been restated to reflect our
previous share capital consolidations and the share conversion consummated
prior to the completion of this offering. The information has not been adjusted
to reflect the reclassification of our common shares into Class B shares and
Class A shares under the assumption that these classes of shares would trade in
substantially the same manner as our common shares. We have applied to list the
Class B shares on the American Stock Exchange under the symbol "PAE." There
will be no trading market for the Class B shares in the U.S. prior to this
offering. For the convenience of the reader, the share prices in the table
below have been translated into U.S. dollars where indicated, at the inverse of
the noon buying rate in effect on May 7, 1999 of Cdn$1.00 per US$0.6856.

<TABLE>
<CAPTION>
Average
Daily Trading Cdn$ Cdn$ US$ US$
Volume High Low High Low
------------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Vancouver Stock Exchange:
Fiscal year ended August 31, 1997:
First Quarter................... 2,710 $15.00 $14.00 $10.28 $9.60
Second Quarter.................. 5,026 18.40 16.80 12.62 11.52
Third Quarter................... 2,894 14.05 13.45 9.63 9.22
Fourth Quarter.................. 1,858 12.45 11.85 8.54 8.12
Fiscal year ended August 31, 1998:
First Quarter................... 5,664 8.60 8.13 5.90 5.57

The Toronto Stock Exchange:
Fiscal year ended August 31, 1998:
Second Quarter.................. 3,466 8.05 7.83 5.52 5.37
Third Quarter................... 7,330 10.38 9.95 7.12 6.82
Fourth Quarter.................. 3,982 9.40 8.93 6.44 6.12
Fiscal year ending August 31,
1999:
First Quarter................... 3,695 5.93 5.63 4.07 3.86
Second Quarter.................. 4,780 8.10 7.68 5.55 5.27
Third Quarter (includes up to
May 10, 1999).................. 3,300 8.38 8.05 5.75 5.52
</TABLE>

On June 23, 1999, the last reported sale price of our common shares was
Cdn$10.57, or US$7.17, based on the inverse of the Noon Buying Rate at June 23,
1999 of Cdn$1.00 per US$0.6793.

On July 23, 1999, the last reported sale price of our Class B shares was
Cdn$8.75, or US$5.80, based on the inverse of the Noon Buying Rate at July 23,
1999 of Cdn$1.00 per US$0.6633.

On May 26, 1999 we had 235 registered shareholders and 3,025,942 shares
outstanding. Of these shareholders, 150 were U.S. residents, owning 999,696
shares representing approximately 33% of the outstanding shares.

DIVIDEND POLICY

Since our incorporation, we have not paid any dividends on our shares. We do
not currently plan to pay dividends, but intend instead to reinvest any
earnings to the expansion of our business. Under the terms of outstanding
debenture held by Working Opportunity Fund (EVCC) Ltd. ("WOF"), we may not
declare or pay any dividend or purchase, redeem or acquire any shares, options
or warrants, or issue any bonuses to our shareholders without the prior
approval of WOF. This debenture will be repaid from the net proceeds of this
offering.

17
<PAGE>

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, 1998 and the
consolidated balance sheet data as of August 31, 1997 and 1998, are derived
from the audited consolidated financial statements included elsewhere in this
prospectus. The consolidated statement of operations and deficit for each of
the years in the two-year period ended August 31, 1995 and the consolidated
balance sheet data as of August 31, 1996, are derived from our audited
financial statements which are not included or incorporated by reference
herein. The consolidated financial data as of and for the six-month periods
ended February 28, 1998 and 1999 are derived from our unaudited consolidated
financial statements included elsewhere in this prospectus and, in the opinion
of management, reflect all adjustments, consisting solely of normal, recurring
adjustments, necessary for a fair presentation of such data. The results for
the six-month period ended February 28, 1999 are not necessarily indicative of
the results to be expected for the full 1999 fiscal year. This information
should be read together with the consolidated financial statements, including
the notes thereto, included elsewhere in this prospectus. Each of the financial
statements from which the selected consolidated financial data and operating
data is derived was prepared in accordance with Canadian GAAP.

The selected consolidated financial and operating data set forth below is
reported in Canadian dollars. However, for the convenience of the reader, the
annual 1998 and the six-month 1999 Canadian dollar statement of operations and
deficit have been translated into U.S. dollars using the average exchange rate
in effect for such periods, and the Canadian dollar balance sheet data have
been translated using the rates in effect as of August 31, 1998 and February
28, 1999. These translations are not necessarily representative of the amounts
that would have been reported if we had historically reported our financial
statements in U.S. dollars. In addition, the rates utilized are not necessarily
indicative of the rates in effect at any other time.

18
<PAGE>

Selected Consolidated Financial and Operating Data
(in thousands, except per share data)

19
<PAGE>

<TABLE>
<CAPTION>
As of
As of August 31, February 28,
-------------------------------------------- ---------------
Cdn$ Cdn$ Cdn$ Cdn$ Cdn$ US$ Cdn$ US$
1994 1995 1996 1997 1998 1998 1999 1999
------ ------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and marketable
securities............. $ 42 $ 70 $ 123 $ 1,744 $ 1,876 $ 1,207 $ 445 $ 296
Tax credits receivable.. -- -- 2,370 7,730 4,975 13,213 8,787
Production costs in
progress............... 144 112 64 3,862 11,906 7,663 3,771 2,508
Investments in
television programming,
net.................... 21 77 462 2,057 5,632 3,625 9,534 6,340
Property and equipment,
net.................... 2,368 2,787 4,847 5,048 9,498 6,113 9,565 6,631
Goodwill................ 63 560 736 597 2,544 1,770 2,479 1,649
Total assets............ 3,083 5,370 7,710 18,510 42,187 27,153 43,561 28,968

Debt financing(4)....... 1,958 2,730 4,706 4,152 10,367 6,672 17,461 11,612
Deferred revenue........ 147 77 83 4,230 10,770 6,932 2,947 1,960
Total liabilities....... 2,640 3,818 5,692 9,390 24,454 15,759 24,217 16,104
Shareholders' equity.... 443 1,552 2,018 9,120 17,733 11,414 19,344 12,864
</TABLE>
- --------
(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 if it would disclose a smaller loss per share than the basic
earnings per share. All share and per share data has been restated to give
retroactive effect to the share reclassification and conversion.

(2) EBITDA represents earnings before interest, taxes, provision against
limited partnership revenue interests, depreciation and amortization. For
purposes of EBITDA, amortization excludes amortization of programming.We have
included EBITDA because we feel that some investors will find it useful for
evaluating our 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 our 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 our
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 our 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.

(4) Debt financing shown above includes both bank indebtedness and long-term
debt.

20
<PAGE>

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 prospectus.

General

In 1996, we began shifting our principal business focus to the production and
distribution of proprietary television programming for worldwide markets. While
we have continued to provide production services for third parties on a
contract basis, the most significant portion of our revenues now comes from
proprietary programming. We have achieved our significant growth in this
business through internal expansion and our acquisition of Sugar Entertainment
Ltd., which was effective in September 1996. Since then we have produced and
distributed two dramatic television series, "First Wave" and "Dead Man's Gun,"
and approximately 20 hours of other proprietary programming. Our immediate
prospects for future growth depend on our ability to identify, develop and
acquire the rights to ideas, storylines and other creative concepts suitable to
be produced and distributed as television programming.

During the year ended August 31, 1997, approximately 73% of our revenues were
derived from the distribution of our proprietary programming. In fiscal 1998,
the production and distribution of proprietary programming represented
approximately 86% of our total revenues, reflecting 60% revenue growth over the
prior year. Our overall revenue growth in fiscal 1998 was 38%.

The following table shows the breakdown of our total revenues during our past
three fiscal years by activity and by geographical market:

<TABLE>
<CAPTION>
Year Ended August Six Months
31, Ended
----------------- February 28,
1996 1997 1998 1999
----- ----- ----- ------------
(Canadian dollars in millions)
<S> <C> <C> <C> <C>
Revenues by Activity
Proprietary programming.......................... $ -- $17.5 $28.0 $28.4
Production services.............................. 2.2 3.0 4.2 1.8
Software and video distribution.................. 3.2 3.0 -- --
Other............................................ 0.3 0.1 0.3 0.1

Revenues by Geographic Market
Canada........................................... $ 5.7 $ 6.1 $ 5.9 $ 3.6
U.S.............................................. -- 9.6 10.8 7.8
Europe and other markets......................... -- 7.9 15.8 18.9
</TABLE>

We realize revenues and expenses for television programming 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.

We operate through separate subsidiaries established for each production or
series. We finance the budgeted production costs of programming through
advances obtained from customers, borrowings under our bank credit facility and
from working capital. Typically, we retain the rights to our proprietary
programming for exploitation in future periods or in additional markets and
media.

We generally capitalize the costs we incur in producing a film or television
program net of tax credits. 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, we capitalize
these costs into "Production costs in progress" on our consolidated balance
sheet. Costs related to completed proprietary programming are

21
<PAGE>

included, net of amortization, in "Investments in television programming" on
our consolidated balance sheet. Tax credits are recorded when a program or
episode is complete.

Our 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, we amortize substantially all
of our production costs over a three-year period. In the event that management
reduces its estimates of the future gross revenues associated with a particular
program, a write-down, with a corresponding decrease in our earnings in the
period the write-down is taken, could occur. To date, we have taken no material
write-downs due to reevaluations of our future estimates of revenues for film
or television programs.

Our results of operations for any period depend on the number of television
programs we deliver. Consequently, our 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.

Our revenues from U.S. and international sources generally are payable to us
in U.S. dollars while our costs are denominated primarily in Canadian dollars.
Accordingly, our results can be affected by fluctuations in the U.S. dollar
exchange rate. The results of these fluctuations may be material. To date, we
have not entered into any material currency hedging instruments. In addition,
we have not maintained significant amounts of U.S. dollar balances in order to
reduce the risk of exchange rate fluctuations.

Because of the timing of U.S. television seasons and the lead time to produce
and deliver programs, we historically have had lower revenues in our third
fiscal quarter than in our other quarters. Production services have represented
13% of our revenues in the last two completed fiscal years and are not subject
to significant seasonal variation.

As consideration for the acquisition of Sugar Entertainment Ltd. in 1996, we
issued an aggregate of 372,500 Class A shares and Class B shares, giving
retroactive effect to our 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 we are subject. The
performance shares are subject to release with the consent of the British
Columbia securities regulatory agencies, as specified financial performance
standards are met. At the time the shares are released from escrow, we record
increases to goodwill and share capital based on the fair value of the shares
at the date the performance can be determined. This additional goodwill is
amortized over 20 years. During fiscal 1998, 200,000 of the performance shares
were released from escrow, resulting in increases in both goodwill and share
capital of Cdn$2.0 million. The remaining 150,000 performance shares are
expected to be released during calendar 1999 and to result in additional
goodwill and share capital increases of approximately Cdn$1.5 million.

In December 1997, beneficial ownership of an aggregate of 160,000 of the
performance shares was transferred to three of our 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 91,428 of the transferred performance shares. See Note 19 to
consolidated financial statements for further discussion of this adjustment. A
further compensation expense is expected to be recorded in calendar 1999 when
the remaining 68,572 of those transferred performance shares still held in
escrow are released with the amount to be determined at that date.

22
<PAGE>

Results of Operations

Six Months Ended February 28, 1999 and 1998 Compared

Revenues. During the six months ended February 28, 1999, revenues increased
by 86% over the comparable six-month period from Cdn$16.2 million to Cdn$30.2
million due primarily to a significant increase in our proprietary programming.
We derived 93% of our revenues from the production and distribution of
proprietary television programming compared with 83% during the comparable
period. Revenues from this programming increased from Cdn$13.4 million to
Cdn$28.4 million, representing a 111% growth rate, primarily due to the
addition of "First Wave" as our second television series. The increase in
revenues from proprietary programming was partially offset by a Cdn$0.6 million
decline in our production services revenues.

Amortization of Programming. Amortization of our programming increased to
Cdn$25.4 million for the six months ended February 28, 1999 from Cdn$12.5
million in the comparable six-month period, primarily due to the increase in
the proprietary programming revenues.

Other Production Costs. Other production costs declined by 19% from the prior
period primarily because of the decrease in the production service business as
we accelerated our proprietary programming activities.

Selling, General and Administration Expense. Selling, general and
administration expense increased to Cdn$1.3 million from Cdn$0.9 million in the
comparable period. Increased staff accounted for 63% of the increase and higher
marketing costs accounted for 26% of the increase.

Interest Expense. Interest expense of Cdn$0.5 million increased by 141% over
the prior comparable six-month period. Of the increase, 46% was due to the
increase in our bank credit facility and 44% was due to the addition of a
mortgage to acquire real property.

Foreign Exchange. During the six months ended February 28, 1999, we realized
a foreign exchange gain of Cdn$0.3 million compared with a gain of
Cdn$0.03 million of the prior comparable six months. Foreign exchange gains and
losses arise from fluctuations in the market rates of Canadian dollars relative
to U.S. dollars and as such are most often dependent on economic factors
outside our control. As a result, foreign exchange gains and losses may vary
from period-to-period.

Taxes. Income tax expense of Cdn$0.6 million for the six-month period ended
February 28, 1999 is recorded net of the effect of available loss carry
forwards of Cdn$0.2 million. We have utilized substantially all of our
available loss carryforwards. We expect future income to be fully taxed.

1998 Compared to 1997

Revenues. During 1998, revenues increased by 38% from Cdn$23.6 million in
1997 to Cdn$32.4 million in 1998. We derived 86% of our revenues from the
production and distribution of proprietary programming, compared to 73% in the
prior year. Revenues from proprietary programming grew by approximately
Cdn$10.5 million from Cdn$17.5 million to Cdn$28.0 million over the prior year,
representing a growth rate of 60%. This growth was primarily due to the
delivery of the first episodes of the "First Wave" series. The increase in
proprietary programming revenues was partially offset by the loss of revenues
of Cdn$3 million from our software and educational video distribution business
which we sold effective August 31, 1997.

Amortization of Programming. Amortization of programming for 1998 increased
to Cdn$24.1 million as compared to Cdn$15.0 million for the prior year, due to
the increase in proprietary programming revenues. Amortization represented 86%
of proprietary programming revenues for both 1998 and 1997.

Selling, General and Administration Expense. Our selling, general and
administration expense decreased from Cdn$2.5 million in 1997 to Cdn$2.2
million in 1998, representing a 10% reduction. The overall decrease was the net
effect of an approximately Cdn$0.9 million reduction in expense resulting from
the sale of our educational video and software business and a Cdn$0.6 million
increase in expense resulting 64% from

23
<PAGE>

salaries, 17% from advertising and 19% from other expenses related to the
growth of our proprietary programming activities.

Interest Expense. Interest expense of Cdn$0.6 million for fiscal 1998
increased from Cdn$0.4 million in 1997 representing an increase of 50%. Of this
increase, 50% was due to the addition of a mortgage used to acquire real
property and the balance is due to other increases in debt.

Foreign Exchange. During the year ended August 31, 1998, we realized a
foreign exchange gain of Cdn$0.5 million compared with a gain of Cdn$0.2
million of the prior comparable year. Foreign exchange gains and losses arise
from fluctuations in the market rates of Canadian dollars relative to U.S.
dollars and as such are most often dependent on economic factors outside our
control. As a result foreign exchange gains and losses may vary from period-to-
period. In fiscal 1998 approximately 82% of our revenues were receivable in
U.S. funds compared to 74% in 1997.

Taxes. At August 31, 1998, we had accumulated loss carryforwards for income
tax purposes of approximately Cdn$2.4 million. For 1998, Cdn$1.5 million of
these losses were applied to reduce our income tax expense by approximately
Cdn$0.7 million.

1997 Compared to 1996

Revenues. During 1997, revenues increased to Cdn$23.6 million from Cdn$5.7
million in 1996, representing a 312% increase resulting from our shift in focus
to proprietary programming, which had not been a material part of our business
in earlier periods. In 1997, we delivered two television movies and the first
ten episodes of "Dead Man's Gun."

Amortization of Programming. Amortization for 1997 was Cdn$15.0 million, or
86% of program revenues, reflecting the impact of our shift of focus to
proprietary programming during 1997. There was no amortization expense recorded
during fiscal 1996.

Selling, General and Administration Expense. Despite the significant increase
in revenues, selling, general and administration expense increased only
slightly from Cdn$2.4 million in fiscal 1996 to Cdn$2.5 million in fiscal 1997.
This was principally because we began our shift to proprietary programming in
1997 for which the comparable selling, general and administration expense had
not yet increased.

Interest Expense. Interest expense of Cdn$0.4 million for fiscal 1997
increased from Cdn$0.3 million in 1996 representing an increase of 19%. This
increase was primarily due to an increase in our bank indebtedness.

Foreign Exchange. During 1997, we realized a foreign exchange gain of Cdn$0.2
million compared with a loss of Cdn$0.02 million of the prior comparable year.
Prior to 1997 substantially all of our revenues and expenses were payable in
Canadian dollars. Commencing at the beginning of fiscal 1997, our business
changed with the acquisition of Sugar Entertainment Ltd. In 1997 approximately
74% of our revenues were receivable in U.S. funds.

Taxes. There was no tax expense for 1997, after giving effect to the tax
benefit of available loss carryforwards. In 1996, we reported a loss from
operations and incurred no income tax expense.

Other Expenses. Effective August 31, 1997, we sold the business and assets of
Image Media Ltd., our educational video and software distribution subsidiary,
and recorded a net loss of Cdn$0.3 million. Prior to 1997, we periodically
entered into marketing agreements with limited partnerships to market our
programming and services in exchange for an interest in future revenues that we
capitalized and amortized over ten years. We subsequently acquired the revenue
interests in exchange for common shares and recorded a provision of
Cdn$2.3 million in 1997 and Cdn$1.1 million in 1996.

24
<PAGE>

Liquidity and Capital Resources

We currently finance the capital costs of our proprietary television
programming and other cash requirements principally through advances obtained
from customers, borrowings under our bank credit facility and from working
capital. In prior periods, we have also funded our capital requirements through
the issuance of shares, warrants and convertible debentures. Net cash proceeds
from the issuance of share capital in 1998 and 1997 were Cdn$4.9 million and
Cdn$5.8 million. We have used real estate mortgages to fund the acquisition of
our production facilities. We have no material capital expenditure commitments.
We earn sufficient cash flow from operations to meet interest commitments on
our debt.

During fiscal 1998 cash flow from operating activities provided Cdn$21.5
million compared with Cdn$13.4 million in fiscal 1997. This increase was
primarily due to an increase in programming revenues.

Cash used for investing activities was Cdn$28.3 million compared with
Cdn$16.9 million for fiscal 1997 due to the increase in production activity
over the prior year. The increased capital cost of programming was due to our
focus on larger-budget, episodic programming. We delivered 40 hours of
programming in fiscal 1998 compared with 14 hours in 1997.

Cash flows from financing activities contributed Cdn$7.0 million in 1998
compared with Cdn$5.1 million in 1997. In 1998, we raised Cdn$4.9 million from
the issuance of common shares compared with Cdn$5.8 million in 1997. We
increased bank indebtedness and long-term debt in the amount of Cdn$3.4 million
compared with Cdn$0.5 million in 1997 and repaid bank indebtedness in the
amount of Cdn$1.7 million compared with Cdn$0.9 million in 1997.

We expect this trend of increased cash used for investing activities to
continue in fiscal 1999 and fiscal 2000 as we employ the net proceeds of this
offering. An increase in investments in television programming is required in
order to maintain sales growth. We expect cash provided by financing activities
will also increase in fiscal 1999 due to the net proceeds of this offering.

In fiscal 1996, cash used by operating activities was Cdn$0.5 million and
from investing activities was Cdn$1.1 million. Cash flows subsequent to fiscal
1996 are not comparable with 1996 due to the acquisition of Sugar Entertainment
that took place at the beginning of fiscal 1997. Financing activities provided
cash flows of Cdn$1.7 million of which Cdn$1.2 million was from the issuance of
common shares.

At February 28, 1999, we had total liabilities of Cdn$24.2 million, which
included Cdn$9.4 million in drawings outstanding under our bank credit facility
and Cdn$8.1 million in other debt, including Cdn$5.5 million in real estate
loans, Cdn$1.6 million in debentures, of which Cdn$0.2 million is due to
officers and directors, and approximately Cdn$1.0 million in other obligations.
Since February 28, 1999, Cdn$0.6 million of the principal amount of the
debentures has been repaid. The maturity date on the balance of the debentures
was originally March 31, 1999, but has been extended by agreement with the
holders of the debentures to July 31, 1999.

Our principal debt funding is through our Cdn$14.0 million bank credit
facility. This facility bears interest at a rate equal to the Canadian prime
rate plus 1.5% per annum, with monthly payments of interest only withdrawn from
an interest reserve held by the bank. The facility is secured by the refundable
tax credits, distribution rights of the film properties to which the loan
relates and a general security interest on substantially all of our assets. At
February 28, 1999, Cdn$9.4 million was outstanding on this facility. We will
apply a portion of the net proceeds to repay Cdn$1.4 million principal amount
of our remaining outstanding debentures, including Cdn$0.2 million due some of
our officers and directors. See "Interest of Management in Certain
Transactions" for the details of these payments.

We have mortgages that come due on February 1, 2000 in the amount of Cdn$1.9
million and on March 1, 2001 in the amount of Cdn$2.7 million. Our mortgages
are held by wholly owned subsidiaries and are secured by their assets. We
intend to renew these mortgages as they come due. On May 1, 1999 a mortgage in
the amount of Cdn$0.9 million came due and was extended for a two-year term at
the rate of 7.2% per annum.

25
<PAGE>

Based on our current business expectations, we believe that the anticipated
net proceeds from this offering, our cash on hand, operating revenues and
available credit under our bank credit facility will be adequate to fund our
current needs and to support our planned acceleration in our proprietary
programming activities for at least twelve months from completion of this
offering. The funds also should provide capital needed to pursue complementary
acquisitions, as the opportunity arises. Borrowings under our credit facility
are due on demand. If these loans were called, we may not have sufficient
liquidity to repay them. Our ability to repay them would be dependent on our
collection of the refundable tax credits. If we are unable to renew our bank
credit facility or expand the facility as our business grows, we may need to
seek additional financing to fund our business. We currently have no other
agreements or commitments for financing.

There are trends and uncertainties that could impact our revenues or income
from operations. The BC Film industry has been experiencing a trend of rapid
growth. This growth could have a positive effect on our revenues and income
from operations. Refundable tax credits are important to our business. If these
tax credits were to be removed our income from operations and revenues may not
continue to increase or may decline causing a decrease in our liquidity.

Year 2000

Many computer programs and other systems currently used in our business
activities were designed and developed without considering the upcoming change
in the century, which could lead to the failure of computer applications or
create erroneous results by or at the Year 2000. The Year 2000 issue is a broad
business issue, the impact of which extends beyond traditional computer
hardware and software to possible failure of other systems and instrumentation.

To address the Year 2000 issue, we have implemented a five-stage remediation
plan, including analysis, planning, implementation, testing and contingency
planning. The analysis stage involved manual tests of hardware and software,
researching information available from hardware and software providers, and
developing a list of third party suppliers of critical systems. The planning
phase was a process based on the results of our research and analysis. For
example, in some cases decisions were made to upgrade software and hardware, in
some cases software "patches" were available and in some cases decisions were
made to replace hardware and use entirely new software systems. The
implementation stage involved implementing our plans. This involved purchasing
or upgrading equipment and migrating files and records to the new system. The
testing stage is much the same as the analysis stage, but performing it with
the new hardware and software. Finally, the contingency planning stage involves
maintaining computer backup files and paper copies of all critical files and
information. We are nearing completion of the implementation stage and have
completed approximately 75% of the overall remediation plan. We have expended
approximately Cdn$60,000 to date due to Year 2000 related upgrades and
replacements. Our standard for Year 2000 compliance requires that a system or
piece of equipment be designed to be used prior to, on and after January 1,
2000. Such systems and equipment must operate without error in dates and date-
related data, including calculating, comparing, indexing and sequencing prior
to, on and after January 1, 2000. Our total estimated cost of the system
enhancements is estimated to be less than Cdn$100,000, which cost is being
expensed as incurred.

The impact of the Year 2000 issue on us will also be affected by the Year
2000 readiness of our business partners, customers, suppliers and vendors and
providers of facilities, equipment and services. Failure by these third parties
to be Year 2000 compliant may adversely affect, among other things, our
production, revenues and the timing of cash receipts. We have made written
inquiries of all material third-party suppliers advising them that we required
a written response confirming that they were Year 2000 compliant. We are
exploring alternative suppliers to use in the event that our principal
suppliers are not compliant. To date, however, we have received only
preliminary feedback from such third parties, and we have not independently
confirmed any information received from such third parties with respect to Year
2000 issues. As such, we cannot be certain that such third parties will
adequately address the Year 2000 issue and complete their Year 2000 conversion
and remediation efforts in a timely fashion or avoid business disruptions that
could adversely affect our business. Because of these uncertainties, we cannot
predict the costs to us if such third parties are not Year 2000 compliant.

26
<PAGE>

In the worst-case scenario, we may miss delivery dates for our programs due
to our inability to procure supplies, such as film, and services, such as
special effects work and sound, and to deliver the final program due to
transportation problems. Postponing delivery could cause payments to be
postponed and may cause us to postpone realizing revenues and related costs. In
addition, once our programs are delivered our customers may be unable to
process payments. Contingency planning is the last stage of our remediation
plan, scheduled for completion by August 31, 1999. We will identify alternate
suppliers and ensure we have provided adequate liquidity to meet a possible
delay in cash receipts.

Inflation

Historically, inflation has not had a material impact on our results of
operations.

Recent Accounting Pronouncements

Note 19 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 19, 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 our reported results but
that we have 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. We do not believe that the adoption of FAS 133 will materially impact
our reported historical financial position or results of operations as set out
in the consolidated financial statements.

In October 1998, the FASB released an exposure draft of the proposed
statement on recission of FAS 53. If adopted, companies previously subject to
the requirements of FAS 53 would follow the guidance of a proposed Statement of
Position ("SOP"), "Accounting by Producers and Distributors of Films." This
proposed SOP would be effective for fiscal years beginning after December 15,
1999. We have not concluded what, if any, impact these proposals will have on
our reported historical financial position or results of operations due to the
preliminary stages of the proposed SOP.

In March 1999, the FASB released an exposure draft which deals with a variety
of proposed technical amendments to the accounting for stock option plans and
employee stock compensation. One proposal would no longer allow an entity to
account for stock options issued to non-employee directors by the intrinsic
value method currently used in the measurement of net earnings (loss) under
U.S. GAAP. Instead, under the proposal the fair value of such options would be
recognized as a compensation cost. This proposal, together with others included
in the exposure draft, would apply prospectively to events occurring after
December 15, 1998. In February 1999, we granted options to purchase an
aggregate of 40,000 Class A shares and Class B shares to non-employee
directors, which numbers give effect to our share reclassification.

27
<PAGE>

BUSINESS

We are a vertically integrated company that develops, produces and
distributes high-quality, proprietary television programming for markets
worldwide. We also provide production services for third parties on a contract
basis. We are based in Vancouver, British Columbia, the third largest film and
television production center in North America. As a British Columbia-based
producer, we enjoy a number of competitive advantages over producers outside of
Canada, including tax and other government incentives. We also enjoy a
competitive advantage over producers in other parts of Canada due to our
proximity to Los Angeles, our varied geography and our temperate climate.

Development

The first stage in the process of creating television programming is concept
development. We select programming concepts that we believe will have domestic
and international market appeal. We develop programming for television,
including episodic series, movies and documentaries. We often arrange 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 our library. In some cases, one or more of these people
may already be involved when we become involved.

Our 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 we have selected and
acquired the necessary rights to a source material, we 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 we get 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 our development
process, but involve less opportunity for us to influence the financial
structure of the programming.

Early involvement in the acquisition and development of projects generally
increases our control over the exploitation of the finished program. We believe
that greater control enhances our ability to build targeted brand identities
for our 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 us to capitalize on new ancillary markets that may
arise in the future.

Projects in Development. We have several new programs at an early stage of
development with various Canadian, U.S. and international producers,
broadcasters and distributors. We are negotiating with broadcasters interested
in financing and airing our proprietary one-hour drama called "Yaletown" and
our half-hour sit-com with the working title "Acme Agency." Also, we recently
purchased an option for the rights to the screenplay "Jetlag" on which Dave
Thomas, known for his appearances in "Grace Under Fire," "SCTV" and "Strange
Brew," will be the executive producer. The project, a made-for-television
movie, is designed as a pilot for a television series and has been presented
for consideration to Pearson Television International Ltd. and WIC Television
in Canada.

Production

Most of our 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" and "Dead
Man's Gun," this team

28
<PAGE>

can include over 150 people who are hired either as employees or independent
contractors. Typically, we form a wholly-owned production company for each
production which retains the necessary employees and contractors.

One of these contractors hired by the production company is the producer that
we have designated to oversee the production process on our behalf. The
producer carries out a myriad of activities including development and approval
of scripts, casting, selecting directors and supervising the daily shooting
schedule. The producer is also responsible for supervising all post-production
activities, including editing, the insertion of music and special effects, and
ensuring that the finished product, usually in the form of a betacam tape,
meets the delivery specifications of the buyers.

The production of a 22-episode season of a one-hour dramatic series such as
"First Wave" can span 10 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.

In addition to our proprietary programming, we produce creative works that
are directed to training, education and the information needs of third parties
and we offer 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. As the demand for
interactive programming has increased, we have increased our involvement in the
production of CD-ROMs, on-line presentations and other digital programming.
While these production services represent only a small portion of our current
revenues, we plan to continue to pursue production service arrangements because
they provide a training ground for our creative staff, foster our relationships
with key industry participants, provide an incubator for new skills and
industry practices, and keep our facilities utilized during hiatus production
periods of our 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 our video production entitled
"Millennium." Our music video entitled "Apparitions" and featuring the Matthew
Good Band also received a Best Directed Music Video Award at the 1998 Canadian
Music Video Awards.

Our 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 our crews using
facilities and equipment that we own or rent. Some key activities, such as
computer-generated imaging, sound mixing and post-production finishing are
subcontracted to companies that specialize in these areas.

Since inception, we have produced five feature length films, three
documentaries and various specialty programs for television. We have also
produced 66 one-hour episodes and 39 half-hour episodes of television series
programming. During fiscal 1998, we delivered one documentary, 26 one-hour
episodes and 27 half-hour episodes. Production is currently underway on an
additional 22 one-hour episodes and 39 half-hour episodes.

Our recent proprietary programming and other productions include:

First Wave. In April 1999, we commenced production of a second 22-episode
season of our 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"). We
control North American rights to this series, and recently made an advance sale
of 66 episodes (three seasons of production) to USA Networks' Sci-Fi Channel.
Pearson Television International Ltd. has agreed to distribute the initial
66 episodes of "First Wave" outside of North America. To date, CHUM Television
has ordered 44 episodes for broadcast in Canada. "First Wave" recently was
nominated for a Leo Award for best dramatic

29
<PAGE>

series. The Leos recognize excellence in British Columbia film and television
production. In December 1998, CHUM's Space: The Imagination Station announced
that it has five of the top ten dramatic series on specialty television and
that "First Wave" is their highest rated series, ahead of "The X-Files."

Dead Man's Gun. In 1997, we commenced delivery of a 22-episode, one-hour
western-themed television series titled "Dead Man's Gun," produced in
association with Showtime Networks and Buena Vista Television and with Henry
Winkler as executive producer. This anthology series was nominated for three
Cable Ace Awards in 1997, including best dramatic series, and won the Western
Heritage Award for Best Western Dramatic Script for the last two years. "Dead
Man's Gun" was renewed for a second 22-episode season by Showtime and MGM
Worldwide Television that commenced production in spring 1998 and was completed
in early 1999. It currently airs on Showtime in the United States and has been
syndicated through most of Canada by CHUM Television. "Dead Man's Gun" has not
been renewed for a third season, but we are actively seeking new U.S. and
international partners in order to continue production.

Contemporary Classics. Since 1996, we also produced two installments of our
ongoing "Contemporary Classics" youth movie series made in association with
Showtime and Hallmark Entertainment Network--"The Prisoner of Zenda, Inc." and
"Ronnie and Julie." Prior pictures in the series include "AnnieO," "The
Halfback of Notre Dame" and "Robin of Locksley." We jointly fund the production
of the Contemporary Classics in association with Showtime and Hallmark and own
all Canadian rights to the movies.

The Electric Playground. In 1997, we began production on "The Electric
Playground," a series of 13 half-hour programming which review and promote
video-games and computer technology for the specialty cable market. The series
was renewed for the 1998-99 television season in Canada and is being shown on
CHUM's Space: The Imagination Station. "The Electric Playground" is also being
syndicated throughout Canada and in selected U.S. markets. Discussions are
underway with a national television syndicator and a number of potential
sponsors with a view to completing a third season which would begin airing in
the fall of 1999. A substantial amount of footage has already been shot for the
third season.

Documentaries. In 1998, we 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. We retain the
rights to exploit these programs worldwide. These documentaries combined the
efforts of independent Canadian documentary filmmakers and our 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.

So Weird. In 1998 we provided non-proprietary production services for the
initial 13 episodes of the children's television series "So Weird" for the
Disney Channel. Production has recently commenced on a further 26 episodes.
Henry Winkler is the executive producer of "So Weird."

Commercials. We have 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 us have
won the Canadian Television Commercial Award (the "Bessies") Gold and Silver
Awards category in 1997 and 1998.

In addition to our current activities, we have participated in the production
of numerous feature films and documentaries, which are now included in our
library. 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.

Industry Recognition. We have earned recognition for both our entertainment
and commercial productions. "Dead Man's Gun" has won the Western Heritage Award
for Best Western Dramatic Script for

30
<PAGE>

the last two years, and earned Cable Ace Award nominations for Best Actor and
Best Dramatic Series in 1997. Certain commercials of ours have won the Canadian
Television Commercial (the "Bessie") Gold and Silver Awards in 1998 and 1997.
We have also won numerous awards for our service productions, including the
Gold Camera Award in 1998 at the U.S. International Film and Video Festival for
our production of "Millennium," a promotional video.

Library

We retain varying ownership interests in our proprietary productions and
believe that this strategy will provide us significant future asset value.
During fiscal 1998, we added 26 hours of dramatic programming, one documentary
and 26 half-hour episodes of magazine-style programming to our library. At
August 31, 1998, our library contained approximately 60 hours of proprietary
programming. We expect to produce an additional 30 hours of dramatic television
programming and two one-hour documentaries in fiscal 1999. Although currently
limited, our library will continue to expand as we produce more proprietary
programming.

Our production group also has accumulated an extensive library of stock
footage on film and video that can be incorporated into future programming. We
also may seek to add to our library through strategic acquisitions.

Marketing and Distribution

We market and distribute our proprietary television programming under
arrangements with U.S., Canadian and international broadcasters and
distributors. We seek to market and distribute titles in our library to
existing pay and free television, home video and other markets worldwide, as
well as through developing technologies. Historically, we have directly
distributed our programming in North America, where there are a limited number
of buyers and the costs of marketing to this group are manageable. We currently
contract with other parties, such as Pearson Television International Ltd., to
distribute our programs in markets outside North America. This provides us with
two principal benefits. We secure distribution advances to provide cash flow
for the production, and we avoid the substantial costs and financial risks of
distributing our programs to markets throughout the world.

Our marketing efforts are focused on creating branded identities for our
proprietary programs. We believe 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

We expect that our relationships with domestic and international
broadcasters, distributors, financing sources and creative talent will be
important to the successful expansion of our proprietary television business.

U.S. and International Broadcasters and Distributors. We have produced our
programming in association with a variety of U.S. and international
broadcasters and distributors including Buena Vista Television, Pearson
Television International Ltd., Hallmark Entertainment Network, MGM and Showtime
Networks. The recent sale of 66 episodes of our television series "First Wave"
to USA Networks' Sci-Fi Channel represents an important new relationship for
us.

Canadian Domestic Broadcasters. We have long-standing relationships with the
Canadian broadcast community, including CHUM-City, CTV, CanWest Global, Western
International Communications, The Knowledge Network and The Family Channel.
During the past two years, we have sold our series "First Wave," "Dead Man's
Gun," and "Electric Playground" to CHUM-City. We have also licensed two
documentaries, "Harm's Way" and "Citizen Shame," to CTV and The Knowledge
Network, and licensed our television movies, "The Prisoner of Zenda, Inc." and
"Ronnie and Julie," to The Family Channel.

31
<PAGE>

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. We are currently working with Francis Ford
Coppola and screenwriter Chris Brancato ("Species 2" and "Hoodlum"), who is the
creator and lead writer on "First Wave." Our 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"). Henry Winkler is also the executive producer of "So Weird." We
have also hired Canadian talent at all levels in the production of our
programs, including writers, directors, production designers, editors and
actors.

Four customers, Showtime Networks, Pearson Television International Ltd.,
Buena Vista Television and MGM Worldwide Television, each accounted for 10% or
more of our revenues in fiscal 1998.

Business Strategies

Our primary objective is to accelerate the expansion of our business by
focusing principally on increased development and production of proprietary
programming. Our strategies for achieving this objective are:

. Quality Productions. We will use a portion of the proceeds of the
offering to expand our in-house development staff, enter into new
development agreements with independent writers, producers and other key
industry participants in the U.S., Canada and selected international
markets in order to gain broader access to programming concepts.

. North American Operations. We plan to increase our sales of television
programming to existing North American broadcast customers and actively
market new programming concepts to broadcasters, distributors and co-
production partners in North America. As part of these efforts, we intend
to establish an office in Los Angeles to facilitate interaction with
these sources and to accommodate our increasing marketing requirements.

. International Operations. We plan to increase our presence and production
profile outside of Canada and the U.S. by co-producing programming with
international partners and by entering into distribution agreements with
international broadcasters and distributors. We believe that effective
use of concepts in programs that have local and international appeal will
allow us to increase our visibility in markets outside North America and
open up new markets for our programming.

. Branded Identities. We plan to focus on creating a highly recognizable
name (a "brand" or a "branded identity") for each of our programs. By
increasing the name recognition of our programs and the demand for
related products, we believe that successful branding will allow us to
generate greater revenues from television distribution and ancillary
markets, such as clothing, toys, novelties, books, CDs, soundtracks and
other audio products, electronic games, Internet applications and other
merchandise. By retaining ownership rights to our programming, we add to
our program library, which we believe has the potential to generate
future revenues.

. Complementary Acquisitions. We expect to seek acquisitions that will
provide us with complementary assets, personnel and distribution
channels. We may also utilize acquisitions to provide a platform for new
endeavors or allow us to accelerate entry into a new market or region. We
currently have no agreements or commitments with respect to any
acquisitions.

History

Since our incorporation in 1986, we have 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, we derived the bulk of our revenues from production
service arrangements whereby we were retained to

32
<PAGE>

produce a video program, film or television commercial for a fee. We expanded
our service production capability through the acquisition of The Eyes
Multimedia Productions Inc. in August 1995. We acquired The Eyes Multimedia
Productions Inc. in August 1995 for purchase consideration of common shares
valued at Cdn$60,000 and periodic cash payments totaling Cdn$215,000.

In 1995, we expanded our 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, and the
post-secondary educational institutions throughout British Columbia and most
regions of Canada. We acquired Image Media Ltd. in February 1995 for purchase
consideration of common shares valued at Cdn$250,000 and periodic cash payments
totaling Cdn$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. We acquired Pilot Software in December 1995 for
purchase consideration of common shares valued at Cdn$81,250 and periodic cash
payments totaling Cdn$105,000.

In 1996, we commenced a shift in our 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," both of which are discussed above. Our shift into the
business of proprietary television production was accelerated through the
acquisition of Sugar Entertainment Ltd. effective September 1, 1996. Our
principal motivation for expanding this business was that it offered us greater
potential for growth than our prior businesses. We also believe that the
production of proprietary programming offers us the ability to create and
expand a library of produced programming which we believe will have a residual
asset value.

Effective September 1, 1996, we acquired Sugar Entertainment Ltd. for
purchase consideration of common shares valued at Cdn$260,000.

On August 31, 1997, we completed the sale of the assets and operations of
Image Media and Pilot Software and thereby exited the video and software
distribution business. Our decision to sell this business was based on the fact
that gross profit margins were declining as a result of competitive pressures.
We sold the assets and operations of Image Media Services Ltd. and Pilot
Software effective August 31, 1997 for cash proceeds of Cdn$575,000 and the
assumption by the buyer of long-term debt of Cdn$30,000. We realized a loss on
this sale of Cdn$333,325.

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

33
<PAGE>

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. 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 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, Chanel 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.

Canada's Role in the Television and Feature Film Industry

The Canadian film and television industry in 1998 generated annual production
expenditures of nearly Cdn$3.0 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 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 1998
production expenditures equaling approximately Cdn$808 million and Cdn$743
million. These figures represent significant increases over the previous year,
when annual production expenditures in British Columbia and Ontario totaled
approximately Cdn$630 million and Cdn$635 million.

Competition

Television production and distribution are highly competitive businesses. We
face 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. We compete
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

34
<PAGE>

greater resources than we have. We consider our main competitors in Canada to
be Alliance Atlantis Communications Corporation, Salter Street Films, Ltd.,
Lions Gate Entertainment Corp., Telescene Film Group Inc. and in the U.S. to be
Spelling Entertainment Group Inc., Kushner-Locke Co. and Carsey-Werner. We
believe that we have a competitive advantage over U.S. competitors through our
eligibility for Canadian tax credits described below under "--Regulatory
Considerations--Industry Incentives." We also enjoy a competitive advantage
over producers in other parts of Canada due to our proximity to Los Angeles,
our varied geography and our temperate climate.

Employees

As of February 28, 1999, we had 25 full-time permanent employees. We also
hire additional personnel on a project-by-project basis in connection with the
production of our television programming. We believe that our employee and
labor relations are good.

Regulatory Considerations

Our status as a producer of "Canadian" programming, established and operating
in British Columbia, makes us currently eligible to receive Canadian tax and
business incentives. See Note 3 of Notes to Consolidated Financial Statements
for further description of these incentives.

We will continue 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. Upon completion of the offering, approximately 63% of the
voting power of our outstanding shares will be held of record by Canadians.
However, we have no way of confirming actual beneficial ownership of our
shares. If Canadians fail to beneficially own or control a majority of our
voting rights, we could lose our 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 our 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 we produce, 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. 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

35
<PAGE>

and whose principal business is the production of film, videotape or live
programming for distribution on television or in theatrical, industrial or
educational markets. We believe that we 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 our
outstanding shares.

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 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.

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 our labor expenditures for a production typically exceed this limitation,
we are 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
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. We currently qualify for this tax credit, and the
reclassification of our common shares into Class A shares and Class B shares
and other proposed changes to our articles should assist us in continuing
compliance while allowing for non-Canadian investment. We believe that so long
as, among other things, we continue to be Canadian-controlled as determined for
the purposes of the Investment Canada Act, we will continue to so qualify and
we will use our best efforts to ascertain that all our production projects will
continue to be eligible for the tax credit.
Federal tax credits refundable to us pursuant to the Income Tax Act (Canada)
for television programming delivered in fiscal 1998 amounted to Cdn$5.7
million.

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

36
<PAGE>

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 Cdn$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 Cdn$100,000 for an episode with a
running time of less than 30 minutes and Cdn$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. "So Weird," which we produce for the Disney Channel, qualifies under
this 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 recently
announced that their development fund and the international component of their
Marketing Assistance Program would no longer be available to publicly traded
companies. Other than these programs, we are eligible for Telefilm Canada
funding. In fiscal 1997 and 1998, we did not use Telefilm funding from the
development fund or the international component of the Marketing Assistance
Program. In fiscal 1997, we did not use Telefilm funding for which we are
currently eligible. In fiscal 1998, we received less than Cdn$23,000 of
Telefilm funding for which we are currently eligible. We may avail ourselves 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:

. Basic incentives equal to 20% of qualified British Columbia labor
expenditures.

. 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.

. 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. We will continue to be controlled by
persons domiciled in British Columbia so long as more than 50% of the members
of our board of directors are persons domiciled in British Columbia and more
than 50% of the combined voting power of our 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, we received no tax credits in
fiscal 1998. We expect to receive tax credits under the British Columbia
program on account of television programming delivered in fiscal 1999.

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 Cdn$80.0 million per year to promote
high-quality Canadian television programming. We believe that we are 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 20% 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 drama series and is limited to the
lower of Cdn$4.4 million and 20% of production costs. We have not utilized this
funding, but may do so in the future if management believes it is prudent.

37
<PAGE>

DESCRIPTION OF PROPERTY

Our 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
our own productions and are available for rental by visiting producers of
feature films, television series and movies-of-the-week. The studios house our
eight digital post-production suites which handle off-line editing for all of
our productions.

We believe our 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 our operating results, we
believe that the studios will be a key asset which can be used to enhance our
participation in a variety of film and television projects by ensuring access
to facilities, increasing our flexibility and reducing our costs. The West 4th
studio is presently fully booked until January 2000 with the production of our
television series "First Wave."

Approximately half of the West 1st Studio is currently being utilized by us
for our productions. The balance has been leased to third parties at local
market rates.

The following sets forth information concerning facilities that we own.

<TABLE>
<CAPTION>
Address Area Purpose
---------------------------- ------------------ -----------------------------
<S> <C> <C>
1132 Hamilton Street........ 24,000 square feet Corporate offices
Vancouver, B.C.
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
Vancouver, B.C. post-production services
</TABLE>

We have entered into an agreement to sell our property at 1132 Hamilton
Street to an independent third party. The agreement to sell is subject to a
number of customary purchaser contingencies, including financing and due
diligence, and there is no assurance that the sale will be completed. In the
event the sale is consummated, we anticipate relocating our corporate offices
to another location. We believe we would be able to find adequate facilities to
relocate.

We believe that our facilities are adequate for our current needs but that as
we expand our productions, additional space must be leased or otherwise
acquired. We are currently considering renting office space in Los Angeles to
facilitate marketing our programming in the U.S.

LEGAL PROCEEDINGS

We are not currently subject to any legal proceedings which, if determined
adversely to us, would have a material adverse effect on our business or
results of operations. We may from time to time become a party to various legal
proceedings arising in the ordinary course of business. We maintain insurance
coverage for such matters in amounts that we believe to be adequate.

38
<PAGE>

MANAGEMENT

The names, offices and ages as of June 20, 1999 of our corporate directors
and executive officers and other principal officers of our production
subsidiaries are as follows:

<TABLE>
<CAPTION>
Name Age Position
------------------------ --- ------------------------------------------------
<C> <C> <S>
Timothy Gamble.......... 43 President and Director

Chief Executive Officer, Director and Nominating
W.D. Cameron White...... 42 Committee Member

Juliet Jones............ 34 Chief Financial Officer and Secretary

President of Sugar Entertainment Ltd., our
Larry Sugar............. 53 wholly-owned subsidiary

Blair Reekie............ 39 President of The Eyes MultiMedia Productions
Inc., our wholly-owned subsidiary

Stephen Cheikes......... 50 Director and Compensation Committee Member

Director and Member of Compensation and Audit
Darrell Elliott......... 52 Committees

Yad Garcha.............. 40 Director and Member of Audit, Nominating and
Compensation Committees

Director and Member of Nominating and Audit
Vincent Lum............. 39 Committees
</TABLE>

Timothy Gamble is our founder and has served as President and as director
since our 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 films, such as "Cadence,"
starring Martin Sheen and Charlie Sheen.

W.D. Cameron White is our Chief Executive Officer, having joined us on a
full-time basis in 1994. Prior to joining us, 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 1992-1994 and at Worrall Scott & Page Barristers
and Solicitors from 1981-1992. Mr. White is responsible for strategic planning,
acquisitions and corporate finance. Mr. White has been a director since
February 1993.

Juliet Jones has been our Chief Financial Officer since February 1996, and
has been with us 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. Ms. Jones is a director
of Voyager Film Capital Corporation, a publicly traded company listed on the
Alberta Stock Exchange.

Larry Sugar is the President of Sugar Entertainment Ltd., our wholly owned
subsidiary which we acquired from him in 1996, and has served in that capacity
since Sugar Entertainment Ltd. was incorporated in March 1996. Sugar
Entertainment Ltd. produces most of our proprietary television programming. Mr.
Sugar has over 25 years of experience in the feature film and television
industry. Mr. Sugar has held a number of senior industry positions, including
President of International Distribution for Republic Pictures from 1989 to
1991, President of Distribution for CBS Television from 1985 to 1986, President
of International Distribution for Weintraub Entertainment Group from 1987 to
1989 and President of Lorimar International from 1981 to 1985. In addition to
heading up our creative team, Mr. Sugar assists with the development and
financing of television projects, as well as the expansion of our international
distribution presence.

Blair Reekie has been the President of The Eyes MultiMedia Productions Inc.,
our wholly owned subsidiary, and its predecessor company since November 1,
1994. In this capacity, he is responsible for our video and multimedia
production. Prior to joining us, Mr. Reekie was the General Manager/Regional
Manager of Sales and Service in British Columbia and Alberta for Air Canada
Touram.

Stephen Cheikes has been a member of our 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

39
<PAGE>

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.

Darrell Elliott has been a member of our board of directors since August
1998. He has been president of Isuma Strategies Inc., a private strategic
advisory company, since 1998. Mr. Elliott worked for approximately nine years
until August 1998 with Royal Bank Capital Corporation as Regional Vice
President. Mr. Elliott has 27 years of merchant banking, venture capital and
analogous operating experience in Africa, Europe and Canada and has served on
numerous boards of directors. Mr. Elliott is currently a director of Nortran
Pharmaceuticals Inc., a publicly traded company listed on the Vancouver Stock
Exchange and traded on the OTC Bulletin Board. He is also currently a director
of Develcon Electronics Ltd., a publicly traded company on The Toronto Stock
Exchange, and Vianet Technologies Inc., a publicly traded company on the OTC
Bulletin Board.

Yad Garcha has been a member of our board of directors since 1998. He has
been Vice President of Growthworks Capital Ltd., a venture capital company,
since 1998. Prior to joining Growthworks Capital Ltd., Mr. Garcha was Vice-
President of Investment of the Working Opportunity Fund (EVCC) ("WOF"), a
venture capital company, from 1994 to 1998. Mr. Garcha initially worked in
commercial banking with the Bank of Montreal from 1986 to 1988 before becoming
an Investment Manager with the Federal Business Development Bank from 1988 to
1994. Mr. Garcha has an aggregate of more than 12 years experience in banking
and finance and, in addition to serving on our board, currently serves on the
board of several bio-technology companies. Mr. Garcha has been a director since
July 1998. Mr. Garcha was nominated to our board pursuant to the agreement
between WOF and us that so long as WOF continues to hold a specified number of
our shares, WOF will have the right to have a director-nominee nominated to the
board. Mr. Garcha is a director of Angiotech Pharmaceutical Inc., a publicly
traded company on The Toronto Stock Exchange, and is a director of Stressgen
Biotechnologies Corp., a publicly traded company on both The Toronto Stock
Exchange and the Vancouver Stock Exchange.

Vincent Lum has been a member of our board of directors since November 1998.
He has been an 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 our board pursuant to the agreement between RBCC and
us which provides that so long as RBCC or any of its affiliates holds our
shares, RBCC shall have the right to have a director-nominee nominated to the
board.

Our directors are all elected annually at our shareholders meetings for one-
year terms and serve until their successors are elected and qualified or they
sooner resign. RBCC and WOF each have a right to nominate one of the directors.
As a British Columbia corporation, we are required by British Columbia
corporate laws to include on our 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
our board in the future.

At our Annual General Meeting of shareholders held in February 1999, the
shareholders set the number of directors for the current year at six. Our
articles provide that the number of directors can be increased by the board of
directors by up to one-third without shareholder approval. A director may
designate a representative to act on the director's behalf, including in
connection with matters in which the director may have an interest.

Director Compensation

In fiscal 1999, our directors will be paid Cdn$5,000 per year and Cdn$500 per
meeting attended in person and Cdn$300 per telephone meeting or committee
meeting. The chairman of the board and each subcommittee chair will receive
double the compensation described in this paragraph. Pursuant to our share
reclassification and the adjustments under our stock option plan, each director
will be granted options to purchase 10,000 Class B shares when they join the
board of directors and 6,000 Class B shares each year thereafter.

40
<PAGE>

Committees of the Board

Our board of directors has three subcommittees, the Compensation Committee,
the Audit Committee and the Nominating Committee. The Compensation Committee
reviews executive salaries and administers our stock option plan. In addition,
the Compensation Committee consults with management regarding compensation
policies and practices. The Audit Committee reviews the professional services
provided by independent auditors, the independence of such auditors from our
management, our annual financial statements, and our system of internal
accounting controls. The Audit Committee also reviews such other matters with
respect to our accounting, auditing and financial reporting practices and
procedures as it may find appropriate or as may be brought to its attention.
The Nominating Committee recommends individuals to be nominated for director.

41
<PAGE>

CONTROL OF REGISTRANT

The following table sets forth information regarding the beneficial ownership
of our Class A and Class B shares as of April 30, 1999, as adjusted to reflect
the sale of 1,000,000 Class B shares in this offering for (a) each person known
to us 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 gives retroactive effect to the share reclassification and
conversion and does not reflect ownership of options or warrants.

<TABLE>
<CAPTION>
Prior to Offering After Offering
------------------------------------- -------------------------------------
Number of Number of Number of Number of
Class A Percent Class B Percent Class A Percent Class B Percent
Name Shares of Class Shares of Class Shares of Class Shares of Class
- ---------------------------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working Opportunity Fund
(EVCC) Ltd. ............... 160,000 10.6% 160,000 10.6% 160,000 10.6% 160,000 6.4%
Officers and directors
as a group (9 persons)(1).. 276,557 18.3% 276,557 18.3% 276,557 18.3% 276,557 11.0%
</TABLE>
- --------
(1) Includes 150,000 performance shares held by four persons which are
currently held in escrow. The shares are expected to be released from
escrow in calendar 1999. See "Interest of Management in Certain
Transactions" for a description of the performance shares and escrow.

42
<PAGE>

COMPENSATION OF DIRECTORS AND OFFICERS

Compensation of Officers and Directors

The aggregate cash compensation paid or payable to our officers and directors
as a group for services rendered during the fiscal year ended August 31, 1998
was Cdn$1,778,776.

The following table sets forth all compensation awarded to, earned by or paid
for services rendered in all capacities during fiscal 1998 by our chief
executive officer and each other executive officer who earned at least
Cdn$100,000 in fiscal 1998 ("Named Executive Officers").

Summary Compensation Table

<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Awards(4)
---------------------------
Annual Compensation Class A Class B Payouts
------------------------------- Shares Shares Restricted -------
Other Annual Under Under Shares or All Other
Name and Salary Compensation Option Option Restricted LTIP Compensation
Principal Position Year in Cdn$ Bonus in Cdn$ Granted Granted Share Units Payouts in Cdn$
------------------ ---- ------- ----- ------------ ------- ------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Timothy Gamble.......... 1998 $90,000 -- $60,000(1) 7,000 7,000 -- -- --
President 1997 60,000 -- -- 4,000 4,000 -- -- --
1996 60,000 -- -- 12,250 12,250 -- -- --
W.D. Cameron White...... 1998 $90,000 -- $60,000(2) 7,000 7,000 -- -- --
Chief Executive 1997 60,000 -- 14,000(2) 16,025 16,025 -- -- --
Officer 1996 60,000 -- 8,000(2) -- -- -- -- --
Larry Sugar............. 1998 -- -- -- 5,000 5,000 -- -- $1,284,777(3)
President, Sugar 1997 -- -- -- -- -- -- -- 725,391(3)
Entertainment Ltd. 1996 -- -- -- 10,000 10,000 -- -- --
</TABLE>
- --------
(1) The amount shown was paid to a company controlled by Mr. Gamble for
consulting services. See "Interest of Management in Certain Transactions"
for further explanation of these fees.

(2) The amount shown was paid to a company controlled by Mr. White for legal
and other services. See "Interest of Management in Certain Transactions"
for further explanation of these fees.

(3) The amount shown was paid to Mr. Sugar as production fees. See "Interest of
Management in Certain Transactions" for further explanation of these fees.

(4) All share data gives effect to the share reclassification.

Mr. Gamble has an employment agreement dated September 1, 1997, which was
amended effective April 1, 1999. Under the amended employment agreement, Mr.
Gamble is entitled to be paid a salary of Cdn$200,000 per annum, plus a
performance bonus of up to 50% of his salary.

Mr. White has an employment agreement dated September 1, 1997, which was
amended effective April 1, 1999. Under the amended employment agreement, Mr.
White is entitled to be paid a salary of Cdn$200,000 per annum, plus a
performance bonus of up to 50% of his salary.

Juliet Jones, our Chief Financial Officer, has an employment agreement dated
September 1, 1997, which was amended effective April 1, 1999. Under the amended
employment agreement, Ms. Jones is entitled to be paid a salary of Cdn$120,000
per annum, plus a performance bonus of up to 50% of her salary.

Under their agreements, Messrs. Gamble and White and Ms. Jones' performance
bonuses are calculated by the same formula based on the trading prices of our
shares. The formula compares the percentage increase or decrease during the
fiscal year of the trading price of our shares against the percentage of a peer
group of companies, determined by the Compensation Committee. If the price
performance of our shares exceeds

43
<PAGE>

specified levels compared to the peer group, the employee is eligible for an
increased percentage of the bonus. All of these employment agreements expire on
August 31, 2002 and provide that if they are terminated by us before
expiration, we will be obligated to pay the annual salaries and bonuses that
would be due for the remaining term of the agreement.

Mr. Sugar entered into an agreement with Sugar Entertainment Ltd., our
subsidiary, dated September 1, 1996 whereby Mr. Sugar is paid Cdn$1.00 per
annum plus producer's fees, writer's fees and director's fees on a case-by-case
basis for projects which he produces, writes or directs. Mr. Sugar's employment
agreement will expire September 1, 1999.

All of the employment agreements described above provide the individuals with
the usual employee benefits provided to our other full-time employees and
executives.

During fiscal 1998, each of our non-employee directors was granted options
under our stock option plan to purchase up to an aggregate 4,000 Class A shares
and 4,000 Class B shares at a price of Cdn$9.50 per share on or before
March 23, 2003, after giving effect to our share reclassification. No stock
options were exercised by any non-employee directors.

Option Grants During the Most Recently Completed Financial Year

Our officers and directors are eligible to receive grants of stock options
under our stock option plan. During fiscal 1998 we granted our officers and
directors options to purchase a total of 42,000 Class A shares and 42,000 Class
B shares at an exercise price of Cdn$9.50 per share, after giving effect to our
share reclassification.

The following tables set forth information concerning the option grants
during fiscal 1998 to the Named Executive Officers, after giving effect to our
share reclassification.

Option Grants During the Most Recently Completed Fiscal Year

<TABLE>
<CAPTION>
% of Total
Class A Shares Class B Shares Options Granted Exercise or
Name of Named Under Options Under Options to Employees Base Price Expiration
Executive Officer Granted(1)(#) Granted(1)(#) in Fiscal Year (Cdn$/Share) Date
- ------------------------ -------------- -------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Timothy Gamble.......... 7,000 7,000 17% $9.50 March 23, 2003
W.D. Cameron White...... 7,000 7,000 17% $9.50 March 23, 2003
Larry Sugar............. 5,000 5,000 12% $9.50 March 23, 2003
</TABLE>
- --------
(1) Granted pursuant to the terms of our stock option plan. The options are
subject to vesting over various periods up to two and one-half years after
the date of the original grant.

Aggregated Option Exercises During the Most Recently Completed Fiscal Year
and Fiscal Year End Option Values

<TABLE>
<CAPTION>
Value of Unexercised
Unexercised Options in the Money Options
at Fiscal Year End at Fiscal Year End
Name of Named Securities Acquired Aggregate Value Exercisable/ Exercisable/
Executive Officer on Exercise (#) Realized (Cdn$) Unexercisable(1)(#) Unexercisable (Cdn$)
- ------------------------ ------------------- --------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Timothy Gamble.......... -- -- 37,500/9,000 --/--
W.D. Cameron White...... -- -- 37,050/9,000 --/--
Larry Sugar............. -- -- 25,000/4,800 --/--
</TABLE>
- --------
(1) The number of shares shown above consists of one-half Class A shares and
one-half Class B shares.

44
<PAGE>

Stock Option Plan

Our stock option plan is for eligible directors, senior officers and
employees of Peace Arch and our subsidiaries, and other key persons engaged by
us to assist us in the conduct and growth of our business.

Giving effect to the share reclassification, the plan provides that the
aggregate number of shares issuable upon the exercise of options under the plan
will not exceed 250,000 Class A shares and 250,000 Class B shares. The maximum
number of shares reserved for issuance to any one person under the plan and any
other of our share compensation arrangements is 5% of the total number of
shares outstanding immediately prior to such issuance.

Under the plan, the exercise price is determined by the board of directors at
the time the option is granted, but the price may not be less than the higher
of the average of the daily high and low board lot trading prices of the shares
over the 10-day period immediately preceding the date of the grant and the
closing price of the shares on The Toronto Stock Exchange on the last trading
day preceding the date on which the grant of the option is approved by the
board of directors.

The plan provides that:

(1) the number of shares issuable to our insiders pursuant to options
granted under the plan, together with common shares issuable to insiders
under any other share compensation arrangement of Peace Arch, shall not:

(a) exceed 10% of the number of shares outstanding immediately prior
to the grant of any such option; or

(b) result in the issuance to insiders, within a one-year period, of
in excess of 10% of the number of shares outstanding immediately prior
to the grant of any such option;

(2) the number of shares issuable to any insider and the insider's
associates pursuant to options granted under the plan, together with shares
issuable to the insider or the insider's associates under any other share
compensation arrangement of Peace Arch shall not, within a one-year period,
exceed 5% of the number of shares outstanding immediately prior to the
grant of any option.

"Insiders" are defined under the plan as directors, officers and 10%
shareholders. The plan further provides that, if there is any change in the
shares similar to changes which, for example, occurred on the share
reclassification, the number of shares available for option, the shares subject
to option and the option price will be adjusted appropriately by the board of
directors in its sole discretion. The board of directors has determined that
any options outstanding at the time of the share reclassification will be
exercisable into Class A shares and Class B shares and any options granted in
the future will be exercisable into Class B shares only. This determination was
approved by our shareholders on July 14, 1999 and will be effective upon, and
subject to approval by, The Toronto Stock Exchange.

Under the plan, an option must be exercised within a period of ten years from
the date of grant and within 60 days of a holder's termination of his
relationship with us or within six months of such holder's death. Within those
limits, our board of directors has discretion to determine the exercise periods
for individual grants. The plan also includes provision for the option holder
to elect not to exercise all options such holder is entitled to exercise and to
receive instead that number of shares, when multiplied by the fair value per
share of such shares, as is equal to the number of shares originally subject to
option times the difference between the fair value and the exercise price per
share of such shares originally subject to option. Under our current plan we do
not provide financial assistance to holders of stock options to facilitate
their purchasing shares under the plan.

On July 14, 1999, our shareholders approved amendments to the plan which
restructures it to take advantage of United States incentive stock option tax
treatment for U.S. employees, including employee-directors, of Peace Arch and
its subsidiaries and to increase the aggregate number of shares issuable upon
the

45
<PAGE>

exercise of options. In order to take advantage of such United States incentive
stock option tax treatment, the administration of the plan is to be changed
from our board of directors to a committee appointed by the board. Furthermore,
our shareholders have approved an amendment to the plan to provide that the
number of Class B shares issuable upon exercise of options be immediately
increased from 250,000 to 400,000 Class B shares and to 800,000 Class B shares
upon completion of this offering. In accordance with the terms of the plan, the
proposed amendments to the plan are subject to the approval of The Toronto
Stock Exchange or of other regulatory bodies having jurisdiction over our
securities.

We have not instituted any pension plans or retirement benefit plans and none
are proposed at this time.

INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

As at February 28, 1999, there was no indebtedness of any director, executive
officer, senior officer or associate of them to or guaranteed or supported by
us or any of our subsidiaries either pursuant to an employee purchase program
or otherwise.

Our only material transactions during the past three fiscal years in which
any of our 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 March 1996, we issued three-year 12% convertible debentures in the
aggregate principal amount of Cdn$500,000. The debentures are convertible into
13,158 Class A shares and 13,158 Class B shares, after giving effect to the
share reclassification. The debentures originally matured on March 31, 1999.
The maturity date has been extended to July 31, 1999. Messrs. Gamble and White,
two of our directors and officers, each purchased Cdn$100,000 principal amount
of the debentures. We intend to repay such debentures in full with the proceeds
of this offering.

In October 1997, Mr. Cheikes, a director, loaned us Cdn$200,000 toward the
purchase of our property on West 1st Avenue in Vancouver. In February 1998,
Messrs. Gamble and White each loaned us Cdn$100,000 toward the purchase. The
loans bore interest at 12% per annum and were unsecured, with no specific terms
of repayment. These loans were repaid in full in February 1999.

In accordance with his employment agreement, Larry Sugar, the President of
Sugar Entertainment Ltd., our wholly-owned subsidiary, receives an annual
salary of Cdn$1.00 per year and we pay him producer's, writer's and director's
fees. We paid aggregate fees to Mr. Sugar of Cdn$725,000 and Cdn$1,285,000 in
1997 and 1998. For the first six months of fiscal 1999, we paid Cdn$1,196,000
to Mr. Sugar. At February 28, 1999, additional fees payable to Mr. Sugar under
the agreement were Cdn$583,000.

In fiscal 1998, we paid consulting fees to Plantation Capital Corp., a
British Columbia corporation owned and controlled by Mr. Gamble, of Cdn$60,000,
and for the six months ended February 28, 1999, we paid Cdn$30,000 to
Plantation Capital Corp. All of these fees were for consulting services
rendered to us. The arrangement was terminated effective March 31, 1999.

We paid fees to W.D. Cameron White Law Corporation, a British Columbia
corporation owned and controlled by Mr. White, of Cdn$14,000 and Cdn$60,000 in
fiscal 1997 and 1998, and of Cdn$30,000 for the six months ended February 28,
1999 for legal and other services provided to us. The arrangement was
terminated effective March 31, 1999.

In May 1998, WOF, Peace Arch 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

46
<PAGE>

WOF's right to designate a director, terminates in various circumstances,
including in the event we complete a financing that raises more than Cdn$7.0
million from parties other than WOF. In July 1998, we entered into an agreement
with RBCC which grants RBCC substantially the same rights. As a result, except
for the provisions concerning the designation of a director, these agreements
will terminate on the completion of this offering.

By agreement dated September 1, 1996, we acquired all of the issued and
outstanding common shares of Sugar Entertainment Ltd. In consideration for the
acquisition, we issued an aggregate of 22,500 Class A shares and Class B
shares, which are referred to as "trading shares", at a deemed price of
Cdn$10.00 per share and an aggregate of 350,000 Class A shares and Class B
shares, which are referred to as "performance shares", at a deemed price of
Cdn$0.10 per share, giving effect to the share reclassification and conversion.
The trading shares and performance shares were subject to resale restrictions
whereby they could not be traded for a period of one year from the date of
issuance. The performance shares are held in escrow and may only be released at
a rate of one performance share for each Cdn$10.00 of cash flow generated by
Sugar Entertainment Ltd. Additionally, the performance shares may only be
released if we meet our current financial obligations in the ordinary course of
business, remain in good standing under local securities laws and receive the
consent of the British Columbia Securities Commission. All performance shares
not released within five years of the escrow agreement must be returned to us
for cancellation. During the term of the escrow, Mr. Sugar is not entitled to
voting, dividend or any dissolution rights on any of the performance shares not
released. During the year ended August 31, 1998, 200,000 of the 350,000
performance shares were released from escrow. We believe that the remaining
150,000 performance shares will be released during calendar 1999 to be
allocated equally between Class A shares and Class B shares.

In December 1997, 160,000 of the 350,000 performance shares were transferred,
subject to the escrow, to Mr. Gamble and Mr. White, who each received 70,000
shares, and to Ms. Jones, who received 20,000 shares. 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. These amounts are also allocated
equally between Class A shares and Class B shares.

Of the net proceeds of this offering, Cdn$0.3 million (US$0.2 million) will
be used to repay a loan bearing interest at 12% per annum due March 1, 1999,
which has been extended to July 31, 1999. This loan is personally guaranteed by
Messrs. Gamble and White.

47
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General

We were incorporated on October 22, 1986 under the name Vidatron Enterprises
Ltd. Effective February 13, 1992, we changed our name to The Vidatron Group
Inc., consolidated our share capital on a 1-for-5 basis and increased our
authorized capital to 50,000,000 shares without par value, of which 25,000,000
were designated as common shares and 25,000,000 were designated as preference
shares.

Effective February 5, 1997, we further consolidated our common shares on a 1-
for-4 basis, but maintained our total authorized common share capital at
25,000,000 common shares without par value and changed our name to Vidatron
Entertainment Group Inc.

Until July 14, 1999, our authorized share capital consisted of 50,000,000
shares without par value divided into 25,000,000 common shares and 25,000,000
preference shares.

On February 16, 1999, our shareholders approved a change in our capital
structure, which was made effective July 14, 1999, to increase our authorized
capital to 225,000,000 shares without par value divided into 100,000,000 Class
A Multiple Voting Shares referred to as the "Class A shares", 100,000,000 Class
B Subordinate Voting Shares referred to as the "Class B shares" and 25,000,000
preference shares and to reclassify and convert each of our outstanding common
shares into one-half of a Class A share and one-half of a Class B share. To
facilitate this offering, on July 14, 1999, our shareholders approved a
consolidation of the conversion ratio to 2-for-5, with the combined effect
that, effective July 14, 1999, every five outstanding common shares have been
converted into one Class A share and one Class B share and all previously
authorized but unissued common shares were cancelled. No fractional shares will
be issued and any fractional shares resulting from such conversion will be
combined and issued as one Class B share. Accordingly, we are unable at this
time to determine the exact number of our outstanding shares that will result
from the conversion and all references to our outstanding shares are subject to
the number resulting from such fractional shares.

Except as described below with respect to voting rights, dividends,
conversion and issuer bids, the Class B shares and Class A shares are identical
in all material respects. The Class A shares are entitled to ten votes per
share and the Class B shares to one vote per share. Upon completion of this
offering, the outstanding Class B shares will represent approximately 19% of
the combined voting power of our outstanding shares. The purpose of the share
reclassification and consolidation of the conversion ratio was to facilitate
this offering while helping to assure that we continue to qualify for favorable
Canadian tax and business incentives available to Canadian companies. Upon
completion of this offering, based on our stock transfer records, we believe
approximately 60% of the combined voting power of our outstanding shares will
be held by Canadians.

At the meeting held on July 14, 1999, our shareholders also approved the
change of our name from Vidatron Entertainment Group Inc. to Peace Arch
Entertainment Group Inc.

The changes to our capital structure and our name became effective upon
completion of statutory filings required in British Columbia on July 14, 1999.

Class A Shares and Class B Shares

Except for voting and conversion rights and rights with respect to dividends
and issuer bids, the Class A shares and the Class B shares have the same rights
in all respects.

Voting Rights

The holders of Class A shares and Class B shares are entitled to receive
notice of, to attend, and to vote at, all meetings of shareholders as a single
class, except for meetings when only the holders of shares of one class or a
particular series are entitled to vote separately pursuant to the Company Act
(British Columbia) or our articles. The holders of Class A shares are entitled
to ten votes per share held and the holders of Class B shares are entitled to
one vote per share held.

48
<PAGE>

Dividends

Subject to the prior rights of holders of preference shares, if any, the
Class B shares and Class A shares will share ratably in any dividend declared,
paid or set aside for payment on the Class A shares. However, the board of
directors will have the right to declare dividends on the Class B shares
without declaring dividends on the Class A shares or while declaring a dividend
in a lesser amount. Since inception, we have not paid any dividends. We do not
currently plan to pay dividends, but intend instead to reinvest any earnings.

Subdivision and Consolidation

No subdivision or consolidation of either the Class A shares or Class B
shares can be carried out unless, at the same time, the other of such shares is
subdivided or consolidated in the same manner.

Liquidation or Dissolution

In the event of liquidation or dissolution, the holders of Class A shares and
Class B shares will be entitled to share ratably in the remaining assets of
Peace Arch, subject to the prior rights of holders of preference shares, if
any.

Conversion Privilege of Class B Shares

In the event that an offer is made to purchase Class A shares and the offer
is one which must, pursuant to applicable securities legislation or the rules
of a stock exchange on which the Class A shares are then listed, be made to all
or substantially all the holders of Class A shares in a province of Canada to
which the requirement applies, each Class B share will become convertible at
the option of the holder, at any time while the offer is in effect, into one
Class A share. The conversion right may only be exercised for the purpose of
depositing the resulting Class A shares on behalf of the shareholder.

If Class A shares resulting from the conversion and deposited pursuant to the
offer are withdrawn by the shareholder or are not taken up by the offeror; or
the offer is abandoned or withdrawn by the offeror, the Class A shares will be
re-converted into Class B shares and a share certificate representing the Class
B shares will be sent to the shareholder by the transfer agent.

In the event that the offeror takes up and pays for the Class A shares
resulting from conversion, our transfer agent shall deliver to the holders
thereof the consideration paid for such shares by the offeror.

There will be no right to convert the Class B shares into Class A shares in
the following cases:

. the offer to purchase Class A shares is not required under applicable
securities legislation or the rules of a stock exchange on which the
Class A shares are then listed to be made to all, or substantially all,
holders of Class A shares who are in a province of Canada to which the
legislation applies, that is, the offer is an "exempt take-over bid"
within the meaning of the applicable securities legislation; or

. an offer to purchase Class B shares is made concurrently with the offer
to purchase Class A shares and the two offers are identical in respect of
price per share, percentage of outstanding shares for which the offer is
made, and in all other material respects. The offer to purchase Class B
shares must be unconditional, subject to the exception that the offer for
the Class B shares may contain a condition to the effect that the offeror
not be required to take up and pay for Class B shares tendered in
response to the offer if no shares are purchased pursuant to the
contemporaneous offer for the Class A shares; or

. holders of Class A shares representing, in the aggregate, more than 50%
of the then outstanding Class A shares, excluding shares owned
immediately prior to the offer by the offeror and any person acting
jointly or in concert with the offeror, as defined in the relevant
securities legislation certify to the transfer agent and to the secretary
of Peace Arch that they will not tender any shares in response to the
offer for the Class A shares.

49
<PAGE>

Conversion of Class A Shares into Class B Shares

Each Class A share is convertible, at any time, at the option of its holder,
into one Class B share.

Normal Course Issuer Bid and Issuer Bid

In each case of a "normal course issuer bid" on the Class A shares, we are
required to extend the normal course issuer bid on an equal percentage of the
Class B shares. However, we may initiate a normal course issuer bid on the
Class B shares without being required to extend the normal course issuer bid to
the Class A shares. Under applicable Canadian securities legislation and
exchange provisions, a normal course issuer bid is generally one which allows
an issuer to acquire, on a recognized stock exchange, up to 5% of a class of
its securities in any twelve month period without complying with the detailed
rules usually applicable to takeover type transactions.

Similarly, subject to applicable securities legislation, in each case of an
issuer bid on the Class A shares (which is not a normal course issuer bid), we
are required to extend the issuer bid on an equal percentage of the Class B
shares, at the same price and upon the same terms and conditions. However, we
may initiate an issuer bid on the Class B shares without being required to
extend the issuer bid to the Class A shares.

Canadian Ownership Restrictions

We rely on our status as a Canadian corporation for our eligibility for
business incentives, tax credits and other financial assistance available only
to Canadian corporations. To further attempt to ensure that we will continue to
be eligible for such benefits, at a meeting of our shareholders held July 14,
1999, our shareholders approved an amendment to our articles to permit us to
prohibit the issuance or transfer of any of our shares to any person who is not
"Canadian", within the meaning of any applicable statute, regulation, guideline
or policy, if the issuance or transfer would cause us to cease to be eligible
for business incentives, tax credits or other financial assistance. The
amendment to our articles, effective July 14, 1999, provides that, before an
issue or transfer of shares is recorded in our register of members, the
purchaser or transferee may be required to submit to us or our agent a
declaration as to its beneficial ownership of our shares, its citizenship and
such other matters as our board of directors may deem relevant in order to
determine whether the registration of the purchaser or transferee should be
prohibited. Such a declaration may also be required at any time when proxies
are being solicited from shareholders, before or at any meeting of shareholders
or at any time when, in the opinion of our directors, the holding of voting
rights attached to shares by any non-Canadian person should be prohibited.
Shareholders may, therefore, be restricted from selling their shares to non-
Canadians to the extent that the resulting holdings would result in a breach of
these restrictions.

Preference Shares

The preference shares are issuable from time to time in one or more series as
may be determined by the board of directors. The directors are authorized to
create and attach special rights and restrictions to each series of preference
shares. No series of preference shares have been created. In the event of
liquidation, dissolution or winding up, the holders of preference shares are
entitled, unless otherwise provided in the special rights and restrictions
attached to such shares, after the payment of declared but unpaid dividends
thereon, to be paid pari passu the amount of capital paid up per share in
priority of the holders of Class A shares and Class B shares. Each series of
preference shares ranks equally within the class as to dividends and return of
capital on winding up, liquidation or otherwise. The holders of preference
shares are not entitled to vote at any general meeting of shareholders unless
voting is expressly provided as a special right, subject to the provisions of
the Company Act (British Columbia). The creation of a series of preference
shares having rights superior to those of the Class A or Class B shares may
give rise to shareholder approval procedures under the policies of Canadian
securities regulatory authorities having jurisdiction at the time.

50
<PAGE>

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 "Tax Considerations" 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.

Investments requiring review and approval include direct acquisitions of
Canadian businesses with assets with a gross book value of Cdn$5.0 million or
more; indirect acquisitions of Canadian businesses with assets of Cdn$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 Cdn$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.

51
<PAGE>

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;

. 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" and
"Description of Capital Stock--Canadian Ownership Restrictions" for a
description of other Canadian and British Columbia ownership requirements.

Transfer Agent and Registrar

The transfer agent and registrar for our Class B shares in the U.S. is
ChaseMellon Shareholder Services, L.L.C., New Jersey.

In order to comply with applicable requirements of Canadian provincial
securities commissions, we have instructed our transfer agent not to register
any transfer of our shares to any resident of Ontario, Canada, for a period of
90 days from the date of the first closing of the offering.

TAX CONSIDERATIONS

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 reflect the
opinion of Brand Farrar &

52
<PAGE>

Buxbaum LLP 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 and 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 counsel's understanding 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 reflect the
opinion of Thorsteinssons, our Canadian tax lawyers, 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 and 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 counsel's understanding of published
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 us, including the amount of any Canadian tax withheld, as
foreign source dividend income for U.S. federal income tax purposes to the
extent of our 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 us 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 us 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

53
<PAGE>

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 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 our gross income is
"passive income", as defined in the Code, or if at least 50% of our 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, we will be a passive foreign investment company ("PFIC"). If we are 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
we were 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.

We do not believe that we are 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 our control and because the
principles and methodology for determining the fair market values of our assets
are unclear, there can be no assurance that we will not be a PFIC for such
years. Special rules not described herein will also apply if we become a
"controlled foreign corporation" for U.S. federal income tax purposes. We 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 our productions to constitute
"Canadian-content" productions and for us to claim Canadian tax benefits, it is
not anticipated that we will become a controlled foreign corporation for U.S.
federal income tax purposes.

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

54
<PAGE>

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 we are deemed 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 our 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. We believe that the value of our Class B shares is not currently
principally derived, directly or indirectly, from real property situated in
Canada and do not expect this to change in the foreseeable future.

Canada does not currently impose any estate taxes or succession duties.

55
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, for whom The Seidler Companies Incorporated and
Josephthal & Co. Inc. are acting as representatives, have agreed to purchase,
and we have agreed to sell to the underwriters, the number of Class B shares
stated opposite each underwriter's name below.

<TABLE>
<CAPTION>
Number of
Class B
Underwriters Shares
------------ ---------
<S> <C>
The Seidler Companies Incorporated.................................
Josephthal & Co. Inc...............................................
---------
Total............................................................ 1,000,000
=========
</TABLE>

The underwriters' obligations are subject to conditions, including the
receipt of opinions and letters from our counsel and independent public
accountants. The underwriters must purchase and pay for all the Class B shares
if any of them are purchased.

We have been advised by the representatives that the underwriters propose to
offer the Class B shares directly to the public at the public offering price
stated on the cover page of this prospectus and to securities dealers at that
price less a concession not in excess of per share. The underwriters may
allow, and the selected dealers may reallow, a discount not in excess of per
share to brokers and dealers. After the public offering of the Class B shares,
the representatives may change the public offering price and other selling
terms, but no change will affect the amount of proceeds to be received by us as
stated on the cover page of this prospectus.

We have granted the underwriters an option, exercisable for a period of 45
days after the date of this prospectus, to purchase up to an additional 150,000
Class B shares at the public offering price, less the underwriting discount and
commissions, set forth on the cover page of this prospectus. The underwriters
may exercise this option solely to cover over-allotments, if any. To the extent
they do so, the underwriters will be committed, subject to conditions, to
purchase such additional Class B shares in approximately the same proportions
as set forth in the above table.

Our directors, officers and some of our shareholders, who own an aggregate of
approximately 558,375 Class A shares and an equal number of Class B shares, are
expected to agree that they will not, without the prior written consent of the
representatives, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, sell short, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or otherwise transfer or
dispose of, directly or indirectly, any Class A shares or Class B shares or any
securities convertible into or exercisable or exchangeable for Class A shares
or Class B shares, or enter into any swap or similar agreement that transfers,
in whole or in part, any of the economic consequences of ownership of Class A
shares or Class B shares, for a period of six months after the completion of
this offering. The representatives, on behalf of the underwriters, may, in
their sole discretion and at any time without notice, release all or any
portion of the shares subject to these lock-up agreements. In addition, we have
agreed that, for a period of six months after the date of completion of this
offering, we will not, without the consent of the representatives, purchase or
sell any shares of capital stock or issue any options or warrants or other
securities convertible into or exercisable for shares of our capital stock,
except for grants of options under the stock option plan at an exercise price
of not less than the public offering price in this offering.

We have agreed to issue to the representative, for a total of Cdn$100,
warrants to purchase up to 100,000 Class B shares at an exercise price per
share equal to 135% of the public offering price of the Class B shares in this
offering. These warrants will be exercisable for a period of four years
beginning one year after the date of this prospectus and may not be
transferred, assigned or hypothecated for a period of one year, except to
officers of the representatives and any successors to the representatives. The
representatives' warrants include a so-called net exercise provision permitting
the holders to pay the exercise price by cancellation of a number of the

56
<PAGE>

Class B shares covered by the warrants with a fair market value equal to the
exercise price of the representatives' warrants. The holders of the warrants
will have no voting, dividend or other shareholder rights until the warrants
are exercised.

We have agreed to pay The Seidler Companies Incorporated a non-accountable
expense allowance equal to 2% of the total proceeds from the sale of Class B
shares in this offering.

In November 1998, we entered into an agreement with Erickson Consulting
Group, Inc., a consulting company controlled by Dean Erickson, under which Mr.
Erickson and his company agreed to provide us financial relations and similar
consulting services. In connection with entering into the consulting agreement,
we granted Mr. Erickson an option to purchase 25,000 common shares at an
exercise price of Cdn$3.00 per share, which approximated the market price of
the common shares at the time. The number of option shares and the exercise
price of Mr. Erickson's options do not give effect to our recent share
reclassification and consolidation. After entering into the consulting
agreement Mr. Erickson, who died earlier this year, introduced us to The
Seidler Companies Incorporated. In light of this introduction, the options
granted to the late Mr. Erickson could be deemed a finder's fee or other
underwriting compensation.

The representatives have advised us that they do not expect any sales of the
Class B shares to be made to discretionary accounts controlled by the
underwriters.

The underwriting agreement provides that we will indemnify the underwriters
and their controlling persons against liabilities under the U.S. Securities Act
or will contribute to payments the underwriters and their controlling persons
may be required to make in respect thereof. We are generally obligated to
indemnify the underwriters and their respective controlling persons in
connection with losses or claims arising out of any untrue statement of a
material fact contained in this prospectus or in related documents filed with
the Securities and Exchange Commission or with any state securities
administrator or arising out of any omission to state in any of such documents
any material fact required to be stated in such documents or necessary to make
the statements made in such documents, in light of the circumstances under
which they were made, not misleading. In addition, we are generally obligated
to indemnify the underwriters and their respective controlling persons in
connection with losses or claims arising out of any breach of any of our
representations, warranty agreements or covenants contained in the underwriting
agreement.

The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids as permitted under Regulation
M under the U.S. Securities Exchange Act of 1934. Over-allotment involves
syndicate sales in excess of the number of Class B shares to be sold in this
offering, which creates a syndicate short position. Stabilizing transactions
permit bids for and purchases of Class B shares so long as the stabilizing bids
do not exceed a specified maximum. Syndicate covering transactions involve the
purchase of Class B shares in the open market in order to cover a syndicate
short position. Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the Class B shares originally sold by
such syndicate member are purchased in a stabilizing transaction or syndicate
covering transaction to cover syndicate short positions. Stabilizing
transactions, syndicate covering transactions, and penalty bids may cause the
price of the Class B shares to be higher than it would otherwise be in the
absence of such transactions. These transactions may be effected on the
American Stock Exchange, or otherwise, and, if commenced, may be discontinued
at any time.

57
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have outstanding approximately
5,035,942 shares, comprised of approximately 1,517,971 Class A shares and
2,517,971 Class B shares, of which 1,000,000 Class B shares are offered under
this prospectus. The 1,000,000 Class B shares to be sold in this offering will
be freely tradeable under the U.S. Securities Act without restriction or
limitation, except for any such shares held by any of our "affiliates," as the
term is defined in Rule 144 of the U.S. Securities Act. Any Class B shares
purchased by our affiliates generally may only be publicly sold subject to the
requirements of Rule 144 or pursuant to a registration statement or an
exemption therefrom.

The remaining 3,035,942 outstanding shares have not been registered under the
U.S. Securities Act and therefore will be treated as "restricted securities"
and may be publicly sold into the U.S. only if registered or if the sale is
made in accordance with an exemption from registration, such as Rule 144 or
Regulation S promulgated under the U.S. Securities Act. Under these exemptions,
substantially all of the other 1,517,971 Class B shares and 1,517,971 Class B
shares issuable to such persons upon conversion of the Class A shares, other
than those held by "affiliates", generally will be eligible for resale in the
U.S. without registration. This may adversely affect the market price of the
Class B shares and could effect the amount of trading of such shares on the
American Stock Exchange, particularly if the trading price on the American
Stock Exchange were to be higher than the trading price on The Toronto Stock
Exchange at any particular time.

Our officers, directors and some of our shareholders have agreed not to sell,
offer or otherwise dispose of any of our securities for a period of six months
from the date of this prospectus without the prior written consent of
representatives of the underwriters. Upon the expiration of this six-month
lock-up period, or earlier upon the consent of the representatives, all of
these shares will become eligible for sale subject to the restrictions of Rule
144.

In general, under Rule 144, as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least one
year, including an affiliate of Peace Arch, would be entitled to sell, within
any three-month period, that number of shares that does not exceed the greater
of 1% of the then-outstanding Class B shares, approximately 25,000 shares after
this offering, and the average weekly trading volume in our Class B shares
during the four calendar weeks immediately preceding the date on which the
notice of sale is filed with the U.S. Securities and Exchange Commission,
provided manner of sale and notice requirements and requirements as to the
availability of current public information about the company are satisfied. In
addition, our affiliates must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
Class B shares. As defined in Rule 144, an "affiliate" of an issuer is a person
who, directly or indirectly, through the use of one or more intermediaries
controls, or is controlled by, or is under common control with, such issuer.
Under Rule 144(k), a holder of "restricted securities" who is not deemed an
affiliate of the issuer and who has beneficially owned shares for at least two
years would be entitled to sell shares under Rule 144(k) without regard to the
limitations described above.

As of April 30, 1999, options to purchase a total of 196,850 Class A shares
and 196,850 Class B shares were outstanding, with a weighted average exercise
price of Cdn$10.10 and expiration dates ranging from 1999 to March 2004. Of
such options, our directors and officers as a group, or 9 persons, held options
to purchase a total of 114,075 Class A shares and 114,075 Class B shares, with
exercise prices ranging from Cdn$9.50 to Cdn$14.00 and expiration dates ranging
from March 2001 to February 2004. All such information gives retroactive
effective to the share reclassification. In addition, at our shareholders
meeting held on July 14, 1999, the shareholders approved an increase in the
number of shares eligible for issuance under the option plan to 800,000 Class B
shares upon the completion of this offering. Class B shares issued upon the
exercise of options granted under our option plan or Class B shares issued upon
conversion of Class A shares issued upon exercise of options granted under our
option plan will be eligible for resale in the public market from time to time
subject to vesting and the expiration of the lock-up agreements referred to
above. These shares may be freely

58
<PAGE>

tradable subject to the requirements of Rule 701 and contractual obligations
beginning six months after the date of this prospectus. Any employee, officer
or director of or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits non-affiliates to sell their
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the commencement of
this offering.

Following the completion of this offering, we intend to file a registration
statement to register for resale the Class B shares reserved for issuance under
our option plan. Such registration statement will become effective immediately
upon filing.

As of April 30, 1999, warrants exercisable for 50,000 Class A shares and
50,000 Class B shares were outstanding, with an exercise price of Cdn$6.25
expiring October 2000, after giving effect to the share reclassification. The
holders had the right to require us to use reasonable efforts to include 25,000
of the Class B shares underlying the warrants in our registration statements to
the extent allowed under applicable securities laws. It is not anticipated that
any of such shares will be included in this offering and therefore, in the
event of future offerings, we may be required to include such shares. In the
alternative, the holders would be entitled to sell, pursuant to Rule 144, their
50,000 Class B shares issuable upon exercise of the warrants and the 50,000
Class B shares issuable upon conversion of the 50,000 Class A shares issuable
upon exercise of the warrants.

We cannot predict the effect, if any, that future sales of Class B shares or
the availability of Class B shares for future sale will have on the market
price of the Class B shares. Sales of substantial numbers of Class B shares in
the public market or the perception that such sales will occur could adversely
affect the market price of the Class B shares and could impair our ability to
raise capital through the offering of our equity securities.

LEGAL MATTERS

Legal matters with respect to the validity of the Class B shares being
offered hereby are being passed upon for us by a member of Page Fraser &
Associates, Vancouver, British Columbia, Canada. Legal matters related to the
offering are being passed upon for us by Brand Farrar & Buxbaum LLP, Los
Angeles, California, with respect to U.S. law, and for the underwriters by Troy
& Gould Professional Corporation, Los Angeles, California. Legal matters
related to Canadian legal matters are being passed upon for the underwriters by
Bull, Housser & Tupper, Vancouver, British Columbia, Canada.

EXPERTS

The consolidated financial statements as of August 31, 1998 and for the year
then ended have been included in this prospectus in reliance upon the report of
KPMG LLP, independent chartered accountants, appearing elsewhere herein and in
the registration statement and upon the authority of said firm as experts in
accounting and auditing. The consolidated financial statements as of August 31,
1997 and for each of the years ended August 31, 1997 and August 31, 1996 have
been included in this prospectus in reliance upon the report of Ellis Foster,
independent chartered accountants, appearing elsewhere herein and in the
registration statement and upon the authority of said firm as experts in
accounting and auditing. In February 1999, we changed auditors from Ellis
Foster to KPMG LLP. There were no reportable disagreements with Ellis Foster in
the two years preceding the date of the change in auditors.

59
<PAGE>

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the U.S. Securities and Exchange Commission a registration
statement on Form F-1 under the U.S. Securities Act of 1933, as amended,
covering the Class B shares offered under this prospectus. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits. For further information about us and the Class B shares, please
read the entire registration statement. Statements contained in this prospectus
about any contract, agreement or any other document are not necessarily
complete. You should refer to the copy of the document filed as an exhibit to
the registration statement or otherwise with the Securities and Exchange
Commission. Our statements in the Registration Statement are qualified by the
full text of the exhibits. The registration statement, including all exhibits,
may be inspected without charge at the Securities and Exchange Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, as well as
the Securities and Exchange Commission's regional offices at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite
1300, New York, New York 10048, and copies may be obtained from the offices.
You may obtain information regarding the operation of the public reference
rooms at 1-800-SEC-0330.

We will furnish our shareholders with annual reports containing financial
statements and a reconciliation with U.S. GAAP audited by an independent
chartered accounting firm. We will also furnish quarterly reports for the first
three quarters of each fiscal year containing unaudited financial information.
Our annual reports and quarterly reports are prepared in accordance with
Canadian GAAP and in Canadian dollars. We will be subject to the reporting
requirements of the U.S. Securities Exchange Act of 1934, applicable to foreign
private issuers and we will file reports and other information with the
Securities and Exchange Commission. As a foreign private issuer, we are exempt
from provisions of the U.S. Securities Exchange Act of 1934 prescribing the
furnishing and content of proxy statements and periodic reports and from
provisions of the U.S. Securities Exchange Act of 1934 relating to short-swing
profits reporting and liability.

In addition, all of our continuous disclosure documents are available on-line
on SEDAR, the System for Electronic Document Analysis and Retrieval, used by
companies to electronically file information with the Canadian Securities
Administrators. SEDAR is located on the internet at www.sedar.com and is
operated by The Canadian Depository for Securities.

FINANCIAL STATEMENT PRESENTATION

Our audited consolidated financial statements as of August 31, 1998 and 1997
and for each of the three years ended August 31, 1998 and related notes,
together with the unaudited interim consolidated financial statements as at
February 28, 1999 and for the six months ended February 28, 1999 and 1998, are
referred to herein as the "consolidated financial statements." Although
unaudited, the interim consolidated financial statements for the six months
ended February 28, 1999 and 1998 reflect all adjustments, consisting solely of
normal recurring adjustments which are, in the opinion of management, necessary
to fairly present the financial results for the periods presented.

60
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Auditors' Report (KPMG LLP)............................................. F-2

Auditors' Report (Ellis Foster)......................................... F-3

Consolidated Balance Sheets as at August 31, 1997 and 1998 (audited),
and February 28, 1999 (unaudited)...................................... F-4

Consolidated Statements of Operations and Deficit for the years ended
August 31, 1996, 1997 and 1998 (audited), and for the six months ending
February 28, 1998 and 1999 (unaudited)................................. F-5

Consolidated Statements of Cash Flows for the three years ended August
31, 1996, 1997 and 1998 (audited), and for the six months ended
February 28, 1998 and 1999 (unaudited)................................. F-6

Notes to Consolidated Financial Statements for the years ended August
31, 1996, 1997 and 1998 (audited), and for the six months ended
February 28, 1998 and 1999 (unaudited)................................. F-7
</TABLE>

F-1
<PAGE>

AUDITORS' REPORT

The Board of Directors
Peace Arch Entertainment Group Inc.
(formerly known as Vidatron Entertainment Group Inc.)

We have audited the consolidated balance sheet of Peace Arch Entertainment
Group Inc. (formerly known as Vidatron Entertainment Group Inc.) as at August
31, 1998 and the consolidated statements of operations and deficit and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at August 31,
1998 and the results of its operations and its cash flows for the year then
ended in accordance with generally accepted accounting principles in Canada.

Significant differences between Canadian and United States accounting
principles are explained and quantified in note 19 to the financial statements.

The consolidated financial statements as at August 31, 1997 and for the years
ended August 31, 1997 and 1996 were audited by other auditors who expressed an
opinion without reservation on these statements in their report dated November
12, 1997.

/s/ KPMG LLP
Chartered Accountants

Vancouver, Canada
February 19, 1999, except
as to note 20(c) which
is as of July 14, 1999

F-2
<PAGE>

AUDITORS' REPORT

The Board of Directors
Peace Arch Entertainment Group Inc.
(formerly Vidatron Entertainment Group Inc.)

We have audited the consolidated balance sheet of Peace Arch Entertainment
Group Inc. (formerly Vidatron Entertainment Group Inc.) as at August 31, 1997
and the consolidated statements of income and deficit and cash flows for the
years ended August 31, 1997 and 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at August 31,
1997 and the results of its operations and its cash flows for the years ended
August 31, 1997 and 1996 in accordance with generally accepted accounting
principles in Canada.

Significant differences between Canadian and United States accounting
principles are explained and quantified in note 19 to the financial statements.

/s/ Ellis Foster
Chartered Accountants

Vancouver, Canada

November 12, 1997

F-3
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of Canadian dollars)

<TABLE>
<CAPTION>
August 31,
----------------- February 28,
1997 1998 1999
-------- ------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
------

Cash and cash equivalents....................... $ 1,744 $ 1,876 $ 445
Accounts receivable............................. 2,429 2,505 4,104
Tax credits receivable (note 3)................. 2,370 7,730 13,213
Production costs in progress.................... 3,862 11,906 3,771
Prepaid expenses and deposits................... 181 367 290
Investments in television programming (note 4).. 2,057 5,632 9,534
Property and equipment (note 5)................. 5,048 9,498 9,565
Deferred costs.................................. 222 129 160
Goodwill (note 6)............................... 597 2,544 2,479
-------- ------- -------
$ 18,510 $42,187 $43,561
======== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

Bank indebtedness (note 7)...................... $ 945 $ 2,649 $ 9,357
Accounts payable and accrued liabilities........ 1,008 3,317 3,604
Due to directors and shareholders (note 8)...... 22 400 --
Deferred revenue................................ 4,230 10,770 2,947
Deferred income taxes........................... -- -- 205
Long-term debt, including current portion
(note 9)....................................... 3,185 7,318 8,104
-------- ------- -------
9,390 24,454 24,217
-------- ------- -------
Shareholders' equity:
Share capital (note 10)....................... 19,323 26,178 26,644
Authorized:
100,000,000 Class A Multiple Voting Shares
without par value; issued--1,512,971
(August 31, 1998--1,512,971; August 31,
1997--1,251,654)
100,000,000 Class B Subordinate Voting
Shares without par value; issued--1,512,971
(August 31, 1998--1,512,971; August 31,
1997--1,251,654)
25,000,000 preference shares, issuable in
series, without par value; issued--nil
Other paid-in capital......................... -- -- 136
Deficit....................................... (10,203) (8,445) (7,436)
-------- ------- -------
9,120 17,733 19,344
-------- ------- -------
$ 18,510 $42,187 $43,561
======== ======= =======
Uncertainty due to the Year 2000 Issue (note 17)
Subsequent events (note 20)
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in thousands of Canadian dollars, except per share information)

<TABLE>
<CAPTION>
Six months ended
Years ended August 31, February 28,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- -------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue........................ $ 5,723 $ 23,584 $ 32,457 $ 16,233 $30,252
Expenses:
Amortization of television
programming................. -- 14,972 24,124 12,461 25,406
Other costs of production and
sales....................... 3,767 4,261 3,577 1,866 1,508
Depreciation and
amortization................ 254 273 389 123 204
Selling, general and
administration.............. 2,404 2,453 2,201 925 1,330
Interest (note 11)........... 308 367 576 203 489
Foreign exchange (gain)
loss........................ 17 (176) (465) (34) (339)
------- -------- -------- -------- -------
6,750 22,150 30,402 15,544 28,598
------- -------- -------- -------- -------
Earnings (loss) from operations
before undernoted............. (1,027) 1,434 2,055 689 1,654
Other income (expenses):
Loss on sale of assets (note
12)......................... -- (333) -- -- --
Provision against Limited
Partnership interests
(note 13)................... (1,073) (2,313) -- -- --
------- -------- -------- -------- -------
(1,073) (2,646) -- -- --
------- -------- -------- -------- -------
Earnings (loss) before income
taxes......................... (2,100) (1,212) 2,055 689 1,654
Income taxes (note 14)......... -- -- 297 -- 645
------- -------- -------- -------- -------
Net earnings (loss)............ (2,100) (1,212) 1,758 689 1,009
Deficit, beginning of period... (6,891) (8,991) (10,203) (10,203) (8,445)
------- -------- -------- -------- -------
Deficit, end of period......... $(8,991) $(10,203) $ (8,445) $ (9,514) $(7,436)
======= ======== ======== ======== =======
Basic net earnings (loss) per
common share (note 2(l))...... $ (1.68) $ (0.65) $ 0.68 $ 0.28 $ 0.33
======= ======== ======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of Canadian dollars)

<TABLE>
<CAPTION>
Six months ended
Years ended August 31, February 28,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in):
Cash flows from operating
activities:
Net earnings (loss)............. $(2,100) $(1,212) $ 1,758 $ 689 $ 1,009
Items not involving cash:
Depreciation and
amortization................. 254 15,245 24,513 12,584 25,610
Deferred income taxes......... -- -- -- -- 289
Loss on sale of assets........ -- 333 -- -- --
Provision against Limited
Partnership interest......... 1,073 2,313 -- -- --
Other......................... 15 20 19 -- --
Changes in non-cash operating
working capital (note 18)...... 243 (3,257) (4,817) (1,136) (6,004)
------- ------- ------- ------- -------
Cash provided by (used for)
operating activities............. (515) 13,442 21,473 12,137 20,904
------- ------- ------- ------- -------
Cash flows from investing
activities:
Investments in television
programming.................... (385) (16,567) (27,698) (13,387) (29,307)
Increase in deferred costs...... (54) (208) -- (35) (97)
Property and equipment
acquired....................... (687) (709) (633) (272) (161)
Proceeds on asset sale of
subsidiaries, net.............. -- 545 -- -- --
------- ------- ------- ------- -------
Cash flows used for investing
activities....................... (1,126) (16,939) (28,331) (13,694) (29,565)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Net cash proceeds on issue of
common shares.................. 1,246 5,755 4,875 2 --
Increase (repayments) in due to
directors and shareholders..... 206 (221) 378 -- (400)
Increase (decrease) in bank
indebtedness................... (69) 454 1,704 395 6,708
Increase in long-term debt...... 2,341 17 1,737 -- 1,200
Repayment of long-term debt..... (2,029) (887) (1,704) (207) (278)
------- ------- ------- ------- -------
Cash flows provided by financing
activities....................... 1,695 5,118 6,990 190 7,230
------- ------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents................. 54 1,621 132 (1,367) (1,431)
Cash in cash and cash equivalents,
beginning of period.............. 69 123 1,744 1,744 1,876
------- ------- ------- ------- -------
Cash in cash and cash equivalents,
end of period.................... $ 123 $ 1,744 $ 1,876 $ 377 $ 445
======= ======= ======= ======= =======
Supplementary information:
Interest paid (net of amounts
capitalized)................... $ 274 $ 338 $ 543 $ 203 $ 489
Income taxes paid............... -- -- -- -- 10
Non-cash transactions:
Property acquired through
increase in long-term debt..... 1,600 -- 4,100 4,100 --
Value assigned to common shares
issued:
On acquisition of product
revenue interests............ 1,073 2,300 -- -- --
For services and assets....... 246 -- -- -- --
For acquisition of Sugar
Entertainment Ltd............ -- 260 1,980 -- --
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in tables expressed in thousands of Canadian dollars, except
per share amounts)

Years ended August 31, 1996, 1997 and 1998 and
Six months ended February 28, 1998 and 1999 (Unaudited)

1. Operations:

Based in Vancouver, British Columbia, Canada, Peace Arch Entertainment Group
Inc. (formerly Vidatron Entertainment Group Inc.), together with its
subsidiaries, (collectively, the "Company") is a fully integrated television
production company that produces and distributes film, television, video and
interactive programming for world-wide markets. The Company's business
represents a single operating segment, as described above, for financial
reporting purposes.

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 19, 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 distribution licensing
agreements are recognized when the license period has commenced, the
program has been delivered and other conditions as specified in the
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.

Cash equivalents includes highly liquid investments with terms to maturity of
90 days or less when acquired.

(d) Production costs in progress:

Production costs in progress, including interest, represent the accumulated
identifiable costs of incomplete programs, which are in the process of being
produced by the Company. Production costs in progress are carried at the lower
of cost and estimated net realizable value.

(e) Investments in television programming:

Investments in television programming represent the unamortized cost of
completed programs (net of related tax credits received or receivable) which
have been produced by the Company or to which the Company

F-7
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

has acquired distribution rights. Completed programs are stated at the lower of
cost, net of amortization, and net realizable value.

The individual film forecast method is used to amortize the net cost of
completed programs whereby the amortization is based on the ratio that current
revenue earned from that program bears to estimated total revenue to be
realized. Management periodically reviews its estimates on a program-by-program
basis, and when unamortized costs exceed net realizable value for a program,
that program's unamortized costs are written down to net realizable value. When
estimates of total revenue indicate that a program will result in an ultimate
loss, the entire loss is recognized.

Based on the Company's current estimates of anticipated future revenues at
August 31, 1998, approximately 94% of the gross investment in television
programming will be amortized by August 31, 2001.

(f) Property and equipment:

Property and equipment are stated at cost and depreciated on the following
annual basis:

<TABLE>
<CAPTION>
Asset Rate
----- ----
<S> <C>
Buildings........................................... 5% declining balance
Computer furniture and equipment.................... 20% declining balance
Production equipment................................ 20% declining balance
Other............................................... 2-5 year straight line
</TABLE>

(g) Deferred costs:

Deferred costs primarily consist of costs related to program development and
the issuance of debt. Deferred costs are recorded net of amortization of
$156,943 at February 28, 1999 (August 31, 1998-- $136,624; August 31, 1997--
$65,422).

Program development costs, including investments in scripts, represent
expenditures incurred on projects prior to production. Upon commencement of
production, the development costs are charged to production costs. Development
costs are written off when it is determined that they will not be recovered.

Amortization of deferred financing costs is provided over the term of the
related debt.

(h) Goodwill:

Goodwill is recorded at cost and is amortized on a straight line basis over
20 years. 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. The assessment of the recoverability of goodwill will
be impacted if the estimated future operating cash flows are not achieved.

(i) Financial instruments:

The Company carries financial liabilities with stated interest rates that may
differ from the prevailing market interest rates on the cost basis.

(j) Income taxes:

The Company accounts for income taxes on the tax allocation basis by the
deferral method. Deferred income taxes are recognized at current rates for all
differences in the timing of recognition of transactions for

F-8
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

accounting and income tax purposes. No adjustment is made to deferred income
taxes for subsequent changes in income tax rates. Deferred income taxes arise
as a result of timing differences primarily occurring when amortization of
investment in films and television programs differs for income tax purposes.

(k) Foreign currency translations:

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. At each of the periods presented, the Company has no long-
term monetary assets or liabilities denominated in a foreign currency.

(l) Net earnings (loss) per common share:

Net earnings (loss) per common share has been calculated by dividing into
earnings (loss) the weighted average number of common shares outstanding,
including issued shares held in escrow, after giving retroactive effect to the
share consolidation in 1997 (note 10(a)) and the change in capital structure
and conversion prior to the effective date (note 20(c)). The weighted average
number of shares outstanding for each of the periods presented is as follows:

<TABLE>
<S> <C>
Year ended August 31,
1996......................................................... 1,246,640
1997......................................................... 1,860,616
1998......................................................... 2,602,742

Six months ended February 28,
1998......................................................... 2,503,510
1999......................................................... 3,025,942
</TABLE>

The fully diluted earnings per share amount for the six months ended February
28, 1999 is $0.33 per share (six months ended February 28, 1998--$0.28; year
ended August 31, 1998--$0.63). For all other periods fully diluted per share
amounts have not been presented since the impact of outstanding options,
warrants and convertible securities is anti-dilutive.

(m) Use of estimates:

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported 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. Significant areas
requiring the use of management estimates relate to the recoverability of
assets and future forecasted revenue used in the assessment of the
recoverability of productions in progress and investments in television
programming.

(n) Unaudited interim financial information:

The financial information as at February 28, 1999 and for the six month
periods ended February 28, 1998 and 1999 is unaudited. However, such interim
financial information reflects all adjustments, consisting solely of normal
recurring adjustments, which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented.

F-9
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(o) Comparative figures:

Certain comparative figures have been restated to conform to the basis of
presentation adopted for the current period.

3. Tax credits receivable:

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 six months ended February 28, 1999, tax credits
aggregating $6,076,000 were recognized (August 31, 1998--$5,723,000; August 31,
1997--$2,370,000).

4. Investments in television programming:

As at August 31, 1997:
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Amortization Value
------- ------------ --------
<S> <C> <C> <C>
Television movies................................. $ 5,924 $ 5,725 $ 199
Television series................................. 11,105 9,247 1,858
------- ------- ------
$17,029 $14,972 $2,057
======= ======= ======
</TABLE>

As at August 31, 1998:

<TABLE>
<CAPTION>
Accumulated Net Book
Cost Amortization Value
------- ------------ --------
<S> <C> <C> <C>
Television movies................................. $ 5,924 $ 5,725 $ 199
Television series................................. 38,804 33,371 5,433
------- ------- ------
$44,728 $39,096 $5,632
======= ======= ======
</TABLE>

As at February 28, 1999 (unaudited):

<TABLE>
<CAPTION>
Accumulated Net Book
Cost Amortization Value
------- ------------ --------
<S> <C> <C> <C>
Television movies................................. $ 5,924 $ 5,725 $ 199
Television series................................. 68,112 58,777 9,335
------- ------- ------
$74,036 $64,502 $9,534
======= ======= ======
</TABLE>

F-10
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Property and equipment:

As at August 31, 1997:

<TABLE>
<CAPTION>
Accumulated Net book
Cost depreciation value
-------- ------------ --------
<S> <C> <C> <C>
Land.......................................... $ 3,198 $ -- $3,198
Buildings..................................... 1,465 196 1,269
Computer furniture and equipment.............. 385 241 144
Production equipment.......................... 716 299 417
Other......................................... 58 38 20
-------- ------ ------
$ 5,822 $ 774 $5,048
======== ====== ======

As at August 31, 1998:

Land.......................................... $ 6,594 $ -- $6,594
Buildings..................................... 2,432 314 2,118
Computer furniture and equipment.............. 372 219 153
Production equipment.......................... 1,034 421 613
Other......................................... 77 57 20
-------- ------ ------
$ 10,509 $1,011 $9,498
======== ====== ======

As at February 28, 1999:

Land.......................................... $ 6,594 $ -- $6,594
Buildings..................................... 2,521 316 2,205
Computer furniture and equipment.............. 342 227 115
Production equipment.......................... 1,070 470 600
Other......................................... 77 26 51
-------- ------ ------
$ 10,604 $1,039 $9,565
======== ====== ======
</TABLE>

F-11
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. Goodwill:

Effective September 1, 1996, the Company acquired 100% of the shares of Sugar
Entertainment Ltd. ("Sugar") for consideration comprised of an aggregate of
22,500 Class A shares and Class B shares and an aggregate of 350,000
performance Class A shares and Class B shares which are releasable from escrow
at a rate of one share for every $10 of cash flow (as defined by regulatory
authorities) generated by Sugar. The acquisition was accounted for by the
purchase method with the results of Sugar's operations consolidated from
September 1, 1996. The release of shares from escrow is subject to regulatory
approval. Shares not released from treasury by September 2001 are returnable to
treasury. At the date of acquisition, the fair value assigned to the shares
issued was $260,000 representing $10 per share for the 22,500 shares and $0.10
per share assigned to the 350,000 performance shares and was allocated to the
fair value of the identifiable assets acquired of $3,320,438 and liabilities
assumed of $3,379,670 with the excess value being assigned to goodwill of
$318,232. The performance shares were accounted for as contingent consideration
at the date of acquisition as they are returnable to treasury if the escrow
release conditions are not met.

During the year ended August 31, 1998, 200,000 of the 350,000 performance
shares were released from escrow, as a result of cash flow generated by Sugar,
resulting in increases in both goodwill and share capital of $1,980,000. This
additional goodwill is being amortized prospectively.

As at February 28, 1999, accumulated amortization of goodwill amounted to
$168,880 (August 31, 1998--$104,258; August 31, 1997--$70,736). As at February
28, 1999, the remaining 150,000 performance shares have not been approved for
release from escrow by the regulatory authority.

7. Bank indebtedness:

Bank indebtedness is drawn under a revolving credit facility of up to $14
million for production financing and is comprised of demand loans bearing
interest at prime plus 1.5% per annum with monthly payments of interest only
withdrawn from interest reserves held by the bank. As at February 28, 1999, the
prime rate was 6.75% (August 31, 1998--7.50%; August 31, 1997--4.75%). 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. Due to directors and shareholders:

Amounts due to directors and shareholders bear interest at 12% per annum, are
unsecured and have no specific terms of repayment.

F-12
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Long-term debt:

<TABLE>
<CAPTION>
August 31,
------------- February 28,
1997 1998 1999
------ ------ ------------
(unaudited)
<S> <C> <C> <C>
Mortgage due May 1, 1999 bearing interest at 8.5%
per annum with aggregate monthly payments of
principal and interest of $9, secured by a first
mortgage on property.............................. $ 973 $ 950 $ 938
Mortgage due February 1, 2000 bearing interest at
8% per annum with aggregate monthly payments of
principal and interest of $19, secured by a first
mortgage and a general security agreement on all
assets located in or on the property.............. 1,461 1,970 1,935
Mortgage due March 1, 2001 bearing interest at
6.55% per annum with aggregate monthly payments of
principal and interest of $25, secured by a first
mortgage on property.............................. -- 2,755 2,700
Loans to purchase equipment, bearing interest at an
average annual rate of the bank rate plus 2.0%
secured by the equipment acquired................. 222 275 137
Loans due $300 on March 1, 1999 and $500 on April
15, 1999 bearing interest at 12% per annum, with
monthly payments of interest only, secured by a
charge on property................................ -- 800 800
Convertible debentures bearing interest at 12% per
annum, payable quarterly and secured by a charge
on the assets of the Company and due March 25,
1999. The principal amount is convertible into
shares of the Company at a deemed price of $19.00
per share on or before March 31, 1999............. 500 500 500
Debentures having an original face value of $1,200
bearing interest at 10% per annum, payable
quarterly, secured by a charge on the assets of
the Company, and due October 21, 2000. Debentures
in the amount of $600 are convertible at a deemed
price of $7.50 per share after April 21, 1999 (net
of deemed debt discount of $136).................. -- -- 1,064
Other.............................................. 29 68 30
------ ------ ------
$3,185 $7,318 $8,104
====== ====== ======
</TABLE>

Included with the issuance of the $1,200,000 debentures, were warrants to
purchase 50,000 Class A and 50,000 Class B shares at an exercise price of $6.25
per share (note 10(d)). A value of $136,000 has been attributed to the warrants
issued and recorded as debt discount and other paid-in capital. This discount
is being amortized against income as interest expense over the term of the
debentures.

As at February 28, 1999, principal due in each of the next three fiscal years
ending August 31 are approximately as follows (unaudited):

F-13
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. Share capital:

(a) Issued:

Effective February 5, 1997, the Company consolidated its common shares on a
basis of one new share for four old shares. Prior to the effective date of the
offering, the Company will change its capital structure and convert its
outstanding common shares on a 2-for-5 basis (note 20(c)). Of the number of
shares shown in the following table 1/2 are Class A shares and 1/2 are Class B
shares. The following shares are issued and fully paid for and have been
restated to reflect these capital changes and share consolidations and
conversion.

<TABLE>
<CAPTION>
Number
of common
shares Amount
--------- -------
<S> <C> <C>
Balance, August 31, 1995................................... 1,118,814 $ 8,444
Changes during the year:
Issued for cash.......................................... 184,663 1,279
Issued for consideration for loan guarantees............. 1,100 15
Issued for services...................................... 14,500 150
Issued on acquisition of assets.......................... 6,500 81
Issued on acquisition of product revenue interests....... 50,377 1,073
Less share issue costs................................... -- (33)
--------- -------
Balance, August 31, 1996................................... 1,375,954 11,009
Changes during the year:
Issued for cash.......................................... 45,637 420
Issued for cash, pursuant to private placement........... 534,000 6,007
Issued on acquisition of Sugar Entertainment Ltd. (note
6)...................................................... 372,500 260
Issued on acquisition of product revenue interest (note
13)..................................................... 175,217 2,300
Less share issue costs................................... -- (673)
--------- -------
Balance, August 31, 1997................................... 2,503,308 19,323
Changes during the year:
Issued for cash.......................................... 537,634 5,027
Performance shares returned to treasury.................. (15,000) --
Value assigned to performance shares issued on
acquisition of Sugar released from escrow (note 6)...... -- 1,980
Less share issue costs................................... -- (152)
--------- -------
Balance, August 31, 1998................................... 3,025,942 26,178
Change during the period:
Tax recovery, prior year share issue costs............... -- 466
--------- -------
Balance, February 28, 1999 (unaudited)..................... 3,025,942 $26,644
========= =======
</TABLE>

Shares issued for non-cash consideration have been valued at their estimated
fair value at the date of issuance.

During the year ended August 31, 1998, 15,000 performance shares issued and
held in escrow pending certain earn-out provisions were canceled and returned
to treasury.

F-14
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(b) Options:

For each of the periods presented, the following stock options to directors
and officers were outstanding. Of number the shares shown in the following
table 1/2 are Class A shares and 1/2 are Class B shares.

<TABLE>
<CAPTION>
August 31,
------------------------
1996 1997 1998
------ ------- ------- February 28, Exercise price
Number of shares 1999 per share Expiry date
------------------------------------ -------------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
300 300 -- -- $ 15.50 March 30, 1998
1,850 -- -- -- 4.80 August 31, 1999
11,750 4,400 -- -- 5.20 June 12, 2000
800 800 -- -- 6.20 July 10, 2000
12,925 6,275 1,350 750 11.20 January 24, 2001
49,500 47,500 47,000 47,000 14.00 March 29, 2001
6,000 3,500 1,000 1,000 19.40 May 9, 2001
-- 63,500 49,500 48,350 13.50 October 15, 2001
-- 52,400 39,600 37,600 13.00 June 2, 2002
-- 6,000 6,000 6,000 10.25 August 26, 2002
-- -- 158,200 148,000 9.50 March 23, 2003
-- -- -- 24,000 7.50 November 19, 2003
-- -- -- 1,000 11.25 February 1, 2004
-- -- -- 50,000 US 7.50 February 5, 2002
------ ------- ------- -------
83,125 184,675 302,650 363,700
====== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
August 31,
------------------------- February 28,
1996 1997 1998 1999
------- ------- ------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Balance, beginning of period......... 81,300 83,125 184,675 302,650
Granted.............................. 78,500 127,900 152,200 75,000
Exercised............................ (76,675) (26,350) (825) --
Expired or cancelled................. -- -- (33,400) (13,950)
------- ------- ------- -------
Balance, end of period............... 83,125 184,675 302,650 363,700
======= ======= ======= =======
</TABLE>

Stock options are granted having 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.

In connection with a public offering in 1997, the Company granted as
compensation 26,700 two-year underwriter's options exercisable to March 31,
1999 at $11.25 each to purchase one common share and one half of one common
share purchase warrant with each common share purchase warrant exercisable to
purchase one additional common share at $13.75 for one year and $16.25 during
the second year.

F-15
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(d) Share purchase warrants:

For each of the periods presented, warrants were outstanding to acquire
common shares as indicated in the table. Of the number of shares shown in the
following table 1/2 are Class A shares and 1/2 are Class B shares:

<TABLE>
<CAPTION>
August 31,
------------------------February 28,
1996 1997 1998 1999
------ ------- ------- ------------ Exercise price
Number of shares per share Expiry date
------------------------------------ --------------- ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
12,500 -- -- -- $10.00 December 19, 1996
27,880 -- -- -- 10.00 September 14, 1996
4,400 -- -- -- 17.20 May 10, 1997
-- 267,000 267,000 267,000 16.25 March 31, 1999
-- -- -- 100,000 6.25 October 21, 2000
------ ------- ------- -------
44,780 267,000 267,000 367,000
====== ======= ======= =======
</TABLE>

During the six months ending February 28, 1999, warrants to acquire a total
of 100,000 common shares were issued (August 31, 1998--nil; August 31, 1997--
267,000; August 31, 1996--nil). Warrants to acquire a total of nil common
shares expired (August 31, 1998--nil; August 31, 1997--14,280; August 31,
1996--nil), and nil warrants were exercised (August 31, 1998--nil; August 31,
1997--warrants to acquire 30,500 common shares; August 31, 1996--nil).

(e) Dividends:

Covenants attached to the debentures limit the Company's ability to pay
dividends without the approval of the lenders.

11. Interest expense

<TABLE>
<CAPTION>
Six months
ended
Years ended February
August 31, 28,
-------------- -----------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest expense:
Long-term debt.................................. $269 $337 $447 $ 162 $ 339
Other........................................... 39 30 129 41 150
Interest capitalized.............................. -- -- 32 -- 108
</TABLE>

12. Loss on asset sale of subsidiaries:

During the year ended August 31, 1997, the Company sold the material assets
of its educational video and software distribution subsidiary, Image Media Ltd.
and its wholly owned subsidiary 802117 Ontario Ltd. (D.B.A. Pilot Software
Ltd.) for proceeds of $575,000. For the year ended August 31, 1997 to the date
of sale, the subsidiaries reported combined revenue of $3,064,340, gross profit
of $1,165,339 and a loss from operations of $158,617.

F-16
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

13. Limited partnership product revenue interest:

On March 6, 1996, the Company entered into a joint venture marketing
agreement with New Media Marketing II Limited Partnership whereby the
Partnership would provide marketing services in exchange for an entitlement to
future revenue of the Company above a base level, until December 31, 2006. The
Company purchased the Partnership's revenue interest by issuing 175,217 common
shares of the Company at the fair value of $13.13 per common share. In the year
ended August 31, 1997, the amount was written off resulting in a charge to
earnings of $2,312,722.

14. Income taxes:

The provision for income taxes is comprised of:

<TABLE>
<CAPTION>
Six months
Years ended ended
August 31, February 28,
------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Corporate statutory income tax rate....... 45.6% 45.6% 45.6% 45.6% 45.6%
Add (deduct) the effect of:
Utilization of previously unrecognized
tax losses............................. (48.6) (48.6) (35.1) (49.5) (14.8)
Miscellaneous, including expenses not
deductible for income tax purposes..... 3.0 3.0 3.9 3.9 8.2
----- ----- ----- ------ ------
-- % -- % 14.4% -- % 39.0%
===== ===== ===== ====== ======
</TABLE>

At August 31, 1998, the Company has operating losses for income tax purposes
of approximately $2,400,000, the benefit of which has been recognized as a
reduction of the Company's deferred income tax. The losses expire as follows:

15. Financial instruments:

(a) Fair values:

As at August 31, 1998 and 1997, the Company's financial instruments included
cash and cash equivalents, accounts receivable, tax credits receivable, bank
indebtedness, accounts payable and accrued liabilities and 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
receivable which are receivable over a period of up to two years. As at August
31, 1998, the fair value of tax credits receivable is estimated to be
$7,300,000 (August 31, 1997--$2,225,000).

F-17
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Also included as a financial instrument is long-term debt consisting of
mortgages, demand loans and convertible 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

During the year ended August 31, 1998, the Company derived over 82% (1997--
74%; 1996--nil) of its revenues from export sales denominated in U.S. dollars.
Although all of revenue is generated from Canada, the majority of these
revenues can be attributed to five customers in the USA and Europe and resulted
from the sale of production and distribution of film and video programming. 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. In the year ended August 31, 1997, one of these
customers represented 37%, a second customer represented 22% and a third
customer represented 13% of total revenues. No customers represented in excess
of 10% of revenues for the year ended August 31, 1996.

The Company did not use derivative instruments to reduce its exposure to
foreign currency 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 9.

16. Related party transactions:

Related party transactions not disclosed elsewhere in these consolidated
financial statements are as follows:

<TABLE>
<CAPTION>
Six months
Years ended ended
August 31, February 28,
---------------- -------------
1996 1997 1998 1998 1999
---- ---- ------ ----- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Production fees paid to an officer of the
Company....................................... $ -- $725 $1,285 $490 $1,196
Consulting fees paid to companies owned by
officers and directors of the Company......... $ -- $ 58 $ 120 $ 60 $ 60
</TABLE>

At February 28, 1999 additional fees payable to an officer of the Company
totaling $583,090 were accrued and included in accounts payable and accrued
liabilities at period end.

At February 28, 1999 and August 31, 1998 and 1997 long-term debt includes
$200,000 in convertible debentures due to directors of the Company.

17. Uncertainty due to the Year 2000 Issue:

The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. The effects of the Year 2000 Issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure which could affect a company's ability to conduct
normal business operations. It is not possible to be certain that all aspects
of the Year 2000 Issue affecting the Company, including those related to the
efforts of customers, suppliers, or other third parties, will be fully
resolved.

F-18
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

18. Changes in non-cash operating working capital:

<TABLE>
<CAPTION>
Six months ended
Years ended August 31, February 28,
----------------------- ----------------
1996 1997 1998 1998 1999
----- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Accounts receivable................ $ 135 $(1,155) $ (76) $ 1,223 $(1,599)
Production costs in progress....... 47 (667) (8,044) 3,263 8,135
Prepaid expenses and deposits...... 165 (12) (186) 221 97
Tax credits receivable............. -- (2,370) (5,360) (1,855) (5,101)
Accounts payable and accrued
liabilities....................... (109) (120) 2,309 (268) 287
Deferred revenue................... 5 1,067 6,540 (3,720) (7,823)
----- ------- ------- ------- -------
$ 243 $(3,257) $(4,817) $(1,136) $(6,004)
===== ======= ======= ======= =======
</TABLE>

19. 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) Income taxes:

For US GAAP purposes, income taxes are accounted for in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires the asset and liability method of
accounting for income taxes. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is provided on deferred tax assets
to the extent it cannot be considered at the balance sheet date to be more
likely than not that such deferred tax assets will be realized. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.

F-19
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following sets forth the tax effect of temporary differences that give
rise to significant portions of the deferred tax asset and deferred tax
liabilities:

<TABLE>
<CAPTION>
August 31,
---------------- February 28,
1997 1998 1999
------- ------- ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Loss carry forwards...................... $ 1,078 $ 1,039 $ 1,039
Investment in television programming..... 1,360 681 --
------- ------- -------
Gross deferred tax assets.................. 2,438 1,720 1,039
Valuation allowance........................ (1,159) (184) --
------- ------- -------
Net deferred tax assets.................... 1,279 1,536 1,039
Deferred tax liabilities:
Investment in television programming..... -- -- (809)
Property and equipment................... (91) (82) (74)
Deferred revenue......................... (1,188) (1,454) (361)
------- ------- -------
(1,279) (1,536) (1,244)
------- ------- -------
Net deferred tax asset (liability)......... $ -- $ -- $ (205)
======= ======= =======
</TABLE>

(b) Earnings (loss) 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 (loss) per share for all periods prior to the
period in which the contingency is resolved and the shares are released from
escrow. The exclusion of the escrowed shares issued on the acquisition of Sugar
(note 6) would reduce the weighted average number of shares outstanding to as
follows:

<TABLE>
<S> <C>
Year ended August 31,
1996........................................................... 1,246,640
1997........................................................... 1,510,580
1998........................................................... 2,303,988
Six months ended February 28,
1998........................................................... 2,153,511
1999........................................................... 2,875,942
</TABLE>

In addition, under US GAAP the weighted average number of shares used in the
calculation of diluted earnings (loss) 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.

As discussed in note 6, effective September 1, 1996 the Company issued
350,000 performance shares on the acquisition of Sugar. 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 assigned value of $0.10 per share. Subsequently, 91,428 of
these shares were released from escrow. The balance of the performance shares
transferred continue to be held in escrow.

F-20
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On transfer, for US GAAP purposes, the excess of the market value over the
transfer price is charged against income as compensation expense.

The effect of this difference 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:

<TABLE>
<CAPTION>
Six months ended
Years ended August 31, February 28,
------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings (loss), Canadian
GAAP........................... $(2,100) $(1,212) $ 1,758 $ 689 $1,009
Compensatory value of
transferred shares............. -- -- (1,224) (1,224) --
------- ------- ------- ------- ------
Net earnings (loss), US GAAP.... $(2,100) $(1,212) $ 534 $ (535) $1,009
======= ======= ======= ======= ======
Net earnings (loss) per share,
US GAAP:
Basic and diluted............. $ (1.68) $ (0.80) $ 0.23 $ (0.25) $ 0.35
======= ======= ======= ======= ======
</TABLE>

There would be no difference from total assets or shareholders' equity
calculated under Canadian GAAP.

(d) Stock-based compensation:

As described in note 10(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 the maximum term, no dividends will be paid, and expected
average volatility and risk free interest rates as follows:

<TABLE>
<CAPTION>
Six months
Years ended ended
August 31, February 28,
-------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Volatility %.................................... 50 25 22 -- 38
Risk free interest rate %....................... 7.02 5.46 5.11 -- 4.76
</TABLE>

F-21
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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:

<TABLE>
<CAPTION>
Six months
ended
Years ended August 31, February 28,
----------------------- --------------
Notes 1996 1997 1998 1998 1999
----- ------- ------- ----- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Earnings (loss), US GAAP.......... $(2,100) $(1,212) $ 534 $ (535) $1,009
Stock compensation expense........ (85) (331) (490) (207) (310)
------- ------- ----- ------ ------
Pro forma earnings (loss), US
GAAP............................. $(2,185) $(1,543) $ 44 $ (742) $ 699
======= ======= ===== ====== ======
Pro forma basic earnings (loss)
per share, US GAAP............... $ (1.75) $ (1.02) $0.02 $(0.34) $ 0.24
======= ======= ===== ====== ======
</TABLE>

(e) Provision against Limited Partnership interest:

Under US GAAP, the provision against Limited Partnership interest would be
included in the earnings (loss) from operations.

(f) Supplementary information--allowance for doubtful accounts:

Accounts receivable are disclosed net of allowance for doubtful accounts.
Changes in the allowance for each of the periods presented are as follows:

<TABLE>
<CAPTION>
Six months
ended
Years ended February
August 31, 28,
--------------- ------------
1996 1997 1998 1998 1999
----- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period................... $ -- $ 31 $169 $ 169 $ 245
Charges to expenses:
Expensed..................................... 31 138 76 1 82
Recovered/written-off........................ -- -- -- (7) --
----- ---- ---- ----- -----
Balance, end of period......................... $ 31 $169 $245 $ 163 $ 327
===== ==== ==== ===== =====
</TABLE>

20. Subsequent events (unaudited):

(a) Long-term debt:

Subsequent to February 28, 1999:

(i) the Company exercised its right and repaid the $600,000 10%
convertible debenture in full;

(ii) the $500,000 12% convertible debentures due March 31, 1999 were
extended to July 31, 1999 under the same terms and conditions; and

(iii) the $300,000 12% loan due March 1, 1999 and the $938,000 mortgage
due May 1, 1999 were not repaid on the due date as they are currently being
renegotiated by the Company.

(b) Expiry of warrants and options:

On March 31, 1999, 267,000 warrants and 26,700 underwriter's options expired.
In addition, subsequent to February 28, 1999, 6,000 stock options exercisable
at $10.25 per common share and 4,000 stock options exercisable at $9.50 per
common share were cancelled.

F-22
<PAGE>

PEACE ARCH ENTERTAINMENT GROUP INC.

(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In May, 1999 the Company filed a prospectus and registration statement with
the Securities and Exchange Commission in the United States for the sale and
issuance of up to 1,150,000 Class B Shares at a proposed offering price of
approximately US $5.00 per share.

Effective July 14, 1999, the Company has changed its capital structure as
follows:

(a) the authorized share capital has been increased to 225,000,000 shares
without par value divided into 100,000,000 Class A Multiple Voting
Shares, 100,000,000 Class B Subordinate Voting Shares and 25,000,000
preference shares; and

(b) every five common shares issued and outstanding will be converted into
one Class A share and one Class B share, subject to the condition that
any fractional shares resulting from such conversion will be combined
and issued as one Class B share; and

Except for voting and conversion rights and rights with respect to dividends
and issuer bids, the Class A shares and the Class B shares have the same rights
in all material respects. The holders of Class A shares are entitled to ten
votes per share held and the holders of Class B shares are entitled to one vote
per share held. Subject to the prior rights of holders of preference shares, if
any, the Class B shares and Class A shares will share ratably in any dividend
declared, paid or set aside for payment on the Class A shares. However, the
board of directors will have the right to declare dividends on the Class B
shares without declaring dividends on the Class A shares or while declaring a
dividend in a lesser amount. Finally, in the event that an offer is made to
purchase Class A shares and the offer is one which must, pursuant to applicable
securities legislation or the rules of a stock exchange on which the Class A
shares are then listed, be made to all or substantially all the holders of
Class A shares in a province of Canada to which the requirement applies, each
Class B share will become convertible at the option of the holder, at any time
while the offer is in effect, into one Class A share. The Class B Shares will
not otherwise be convertible. The Class A shares will be convertible, at any
time, at the option of the holder into one Class B share.

The accompanying consolidated financial statements give retroactive effect to
these changes in capital structure, including the 2-for-5 share conversion.

F-23
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

You may rely on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor sale of the Class B
shares means that information contained in this prospectus is correct after
the date of this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy these Class B shares in any circumstances
under which the offer or solicitation is unlawful. Until , 1999, all
dealers that buy, sell or trade in our Class B shares, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

---------------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 13
Determination of Offering Price........................................... 14
Dilution.................................................................. 15
Capitalization............................................................ 16
Price Range and Trading Volume of Common Shares........................... 17
Dividend Policy........................................................... 17
Selected Consolidated Financial and Operating Data........................ 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 21
Business.................................................................. 28
Description of Property................................................... 38
Legal Proceedings......................................................... 38
Management................................................................ 39
Control of Registrant..................................................... 42
Compensation of Directors and Officers.................................... 43
Interest of Management in Certain Transactions............................ 46
Description of Capital Stock.............................................. 48
Tax Considerations........................................................ 52
Underwriting.............................................................. 56
Shares Eligible for Future Sale........................................... 58
Legal Matters............................................................. 59
Experts................................................................... 59
Where You Can Find More Information....................................... 60
Financial Statement Presentation.......................................... 60
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

[LOGO OF PEACE ARCH]
ENTERTAINMENT GROUP INC.

1,000,000 Class B Shares

---------------

PROSPECTUS

---------------

The Seidler Companies Incorporated

Josephthal & Co. Inc.

, 1999

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following sets forth the expenses, other than underwriting discounts and
commissions, expected to be incurred in connection with the issuance and
distribution of the securities registered under this Registration Statement.
All expenses are estimated except for the Securities and Exchange Commission's
(the "Commission") registration fee, the National Association of Securities
Dealers filing fee and the American Stock Exchange listing fee.

<TABLE>
<CAPTION>
Description Amount
------------------------------------------------------------------- --------
<S> <C>
SEC Registration Fee............................................... $ 5,755
Blue Sky Fees and Expenses......................................... 1,000
NASD Filing Fee.................................................... 2,750
AMEX Listing Fees.................................................. 13,750
Underwriter Non-Accountable Expense Allowance...................... 100,000
Printing and Engraving Expenses.................................... 125,000
Legal Fees and Expenses............................................ 200,000
Accounting Fees and Expenses....................................... 50,000
Registrar and Transfer Agent's Fee................................. 5,000
Miscellaneous...................................................... 71,745
--------
Total............................................................ $575,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS

Under the British Columbia Company Act and our articles, we may, with the
approval of the British Columbia Supreme Court, indemnify a present or former
director or officer or a person who acts or acted at our request as a director
or officer of another corporation of which we are or were a shareholder, and
his heirs and legal representatives, against all costs, charges and expenses,
including an amount paid to settle an action or satisfy a judgment, reasonably
incurred by him in respect of any civil, criminal or administrative action or
proceeding to which he is made a party by reason of his being or having been a
director or officer of Peace Arch and provided that the director or officer
acted honestly and in good faith with a view to our best interests and, in the
case of a criminal or administrative action or proceeding that is enforced by a
monetary penalty, had reasonable grounds for believing that his conduct was
lawful.

Our articles provide, subject to the provisions of the British Columbia
Company Act, that we will indemnify each director or former director against
all costs, charges and expenses actually and reasonably incurred to settle an
action or satisfy a judgment in a civil, criminal or administrative action or
proceeding to which such director is made a party by reason of his being or
having been a director of Peace Arch. The directors may, subject to the
provisions of the British Columbia Company Act, cause Peace Arch to indemnify
any of our officers, employees or agents against all costs, charges and
expenses incurred by him and resulting from his actions as our officer,
employee or agent.

The Underwriting Agreement contains provisions by which the underwriters
agree to indemnify us, each of our directors, each of our officers who have
signed this Registration Statement and each person who controls us within the
meaning of the Securities Act with respect to information furnished by the
underwriters for use in this Registration Statement.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following discussion gives effect to the share reclassification and
consolidation to be consummated prior to the completion of this offering.

II-1
<PAGE>

In March 1997, we issued 1,335,000 Special Warrants at a price of Cdn$4.50
per Special Warrant to various investors in Canada. Each Special Warrant
entitled the holder to receive, without payment of any additional
consideration, one of our common shares and one-half of one whole share
purchase warrant (each whole share purchase warrant a "Warrant"). Each Warrant
entitled the holder to acquire one of our common shares (a "Warrant Share") at
a price of Cdn$5.50 per Warrant Share at any time on or before March 31, 1998
and thereafter at an exercise price of Cdn$6.50 per Warrant Share at any time
on or before March 31, 1999. The Warrants were not transferable. All of the
Warrants expired unexercised. Yorkton Securities Inc. received a commission of
Cdn$0.315 per share, for an aggregate fee of Cdn$420,525, for its placement
services in connection with the Special Warrant issue. In addition, Yorkton
received a compensation option of 66,750 non-transferable warrants. These
warrants entitled Yorkton to acquire one common share and one half of one
common share purchase warrant, at an exercise price of Cdn$4.50 per Warrant on
or before March 31, 1999. All of these warrants also expired unexercised. To
the extent U.S. law applied, the transactions were undertaken in reliance on
Regulation S, Rule 901 and, in any event, in reliance on the exemption from
registration in Section 4(2) of the Securities Act, as transactions not
involving any public offering. The above common shares are reported prior to
the share reclassification and conversion.

On July 22, 1998 we issued 106,667 Class A and 106,667 Class B shares at a
price of Cdn$9.38 per share to Royal Bank Capital Corporation. To the extent
U.S. law applied, the transaction was undertaken in reliance on Regulation S,
Rule 901 and, in any event, in reliance on the exemption from registration in
Section 4(2) of the Securities Act, as a transaction not involving any public
offering.

On May 27, 1998 we issued 160,000 Class A and 160,000 Class B shares at a
price of Cdn$9.38 per share to Working Opportunity Fund (EVCC) Ltd., a British
Columbia company. To the extent U.S. law applied, the transaction was
undertaken in reliance on Regulation S, Rule 901 and, in any event, in reliance
on the exemption from registration in Section 4(2) of the Securities Act, as a
transaction not involving any public offering.

In October and November 1998, we issued a Cdn$600,000 convertible debenture
to Royal Bank Capital Corporation and we issued a Cdn$600,000 debenture to
Working Opportunity Fund (EVCC) Ltd. The debentures bear interest at a rate of
10% per annum. The RBCC debenture was convertible into common shares at an
exercise price of Cdn$3.00 per share after April 21, 1999. Subsequent to
February 28, 1999, we repaid in full the Cdn$600,000 convertible debenture held
by Royal Bank Capital Corporation. We intend to repay in full the Cdn$600,000
debenture held by Working Opportunity Fund (EVCC) Ltd. with the proceeds of
this offering. In connection with such financing we also issued Royal Bank
Capital Corporation and Working Opportunity Fund (EVCC) Ltd. warrants to
purchase 50,000 Class A and 50,000 Class B shares at a price of Cdn$6.25
per share on or before October 21, 2000. To the extent U.S. law applied, each
of these transactions, was undertaken in reliance on Regulation S, Rule 901
and, in any event, in reliance on the exemption from registration in
Section 4(2) of the Securities Act, as a transaction not involving any public
offering.

II-2
<PAGE>

The following table sets forth the stock options granted by us in the last
three years, with the class of persons to whom issued, the dates of the option
grants, number of shares, the term and exercise price for each grant. Also
indicated are the dates of exercise, if any, and the balance of outstanding
options remaining unexercised. Of the number of shares indicated, one-half are
Class A shares and one-half are Class B shares. To the extent U.S. law applied,
the grants and issuances upon exercise were made in reliance on Regulation D,
Rule 701 and, in any event, in reliance the exemption from registration in
Section 4(2), Regulation S, Rule 901of the Securities Act as transactions not
involving any public offering.

<TABLE>
<CAPTION>
Date No. of Exercise Date Balance
Optionee Granted Shares Term Price Exercised Outstanding
-------- ------------- ------ ------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Director/Officer........ Oct. 15, 1996 24,050 5 Years $13.50 24,050
Officer................. Oct. 15, 1996 10,000 5 Years $13.50 10,000
Officer................. Oct. 15, 1996 10,000 5 Years $13.50 10,000
Officer................. Oct. 15, 1996 5,000 5 Years $13.50 Apr. 30, 1998 0
Employee................ Oct. 15, 1996 5,000 5 Years $13.50 Sept. 30, 1997 0
Employee................ Oct. 15, 1996 2,500 5 Years $13.50 Sept. 30, 1997 0
Employee................ Oct. 15, 1996 1,500 5 Years $13.50 Sept. 30, 1997 0
Employee................ Oct. 15, 1996 1,500 5 Years $13.50 1,500
Employee................ Oct. 15, 1996 1,000 5 Years $13.50 1,000
Employee................ Oct. 15, 1996 750 5 Years $13.50 Sept. 1, 1998 0
Employee................ Oct. 15, 1996 500 5 Years $13.50 500
Employee................ Oct. 15, 1996 500 5 Years $13.50 500
Employee................ Oct. 15, 1996 400 5 Years $13.50 Nov. 12, 1998 0
Employee................ Oct. 15, 1996 400 5 Years $13.50 400
Employee................ Oct. 15, 1996 400 5 Years $13.50 400
Director/Officer........ June 2, 1997 8,000 5 Years $13.00 8,000
Officer................. June 2, 1997 7,600 5 Years $13.00 7,600
Director/Officer........ June 2, 1997 8,000 5 Years $13.00 8,000
Director................ June 2, 1997 2,000 5 Years $13.00 Sept. 20, 1998 0
Director................ June 2, 1997 2,000 5 Years $13.00 0
Employee................ June 2, 1997 3,000 5 Years $13.00 3,000
Employee................ June 2, 1997 2,000 5 Years $13.00 Sept. 30, 1997 0
Employee................ June 2, 1997 1,800 5 Years $13.00 1,800
Employee................ June 2, 1997 1,500 5 Years $13.00 1,500
Employee................ June 2, 1997 1,500 5 Years $13.00 May 30, 1998 0
Employee................ June 2, 1997 1,500 5 Years $13.00 1,500
Employee................ June 2, 1997 1,250 5 Years $13.00 1,250
Employee................ June 2, 1997 1,250 5 Years $13.00 1,250
Employee................ June 2, 1997 1,000 5 Years $13.00 1,000
Employee................ June 2, 1997 1,000 5 Years $13.00 1,000
Employee................ June 2, 1997 1,000 5 Years $13.00 Oct. 1997 0
Employee................ June 2, 1997 800 5 Years $13.00 Nov. 15,1997 0
Employee................ June 2, 1997 800 5 Years $13.00 Sept. 30, 1997 0
Employee................ June 2, 1997 800 5 Years $13.00 Sept. 30, 1997 0
Employee................ June 2, 1997 800 5 Years $13.00 Sept. 30, 1997 0
Employee................ June 2, 1997 800 5 Years $13.00 Sept. 30, 1997 0
Employee................ June 2, 1997 600 5 Years $13.00 600
Employee................ June 2, 1997 600 5 Years $13.00 600
Employee................ June 2, 1997 600 5 Years $13.00 Sept. 30, 1997 0
Employee................ June 2, 1997 600 5 Years $13.00 Sept. 30, 1997 0
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
Date No. of Exercise Date Balance
Optionee Granted Shares Term Price Exercised Outstanding
-------- ------------- ------- ------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Employee................ June 2, 1997 600 5 Years $ 13.00 Sept. 30,1997 0
Employee................ June 2, 1997 500 5 Years $ 13.00 500
Employee................ June 2, 1997 500 5 Years $ 10.25 Sept. 30, 1997 0
Director................ Aug. 26, 1997 6,000 5 Years $ 9.50 Mar. 16, 1999 0
Director/Officer........ Mar. 23, 1998 14,000 5 Years $ 9.50 14,000
Director/Officer........ Mar. 23, 1998 14,000 5 Years $ 9.50 14,000
Officer................. Mar. 23, 1998 10,000 5 Years $ 9.50 10,000
Director................ Mar. 23, 1998 10,000 5 Years $ 9.50 10,000
Director................ Mar. 23, 1998 20,000 5 Years $ 9.50 20,000
Director................ Mar. 23, 1998 4,000 5 Years $ 9.50 Mar. 16, 1999 0
Director................ Mar. 23, 1998 4,000 5 Years $ 9.50 Sept. 20, 1998 0
Officer................. Mar. 23, 1998 8,000 5 Years $ 9.50 8,000
Employee................ Mar. 23, 1998 10,000 5 Years $ 9.50 10,000
Employee................ Mar. 23, 1998 8,000 5 Years $ 9.50 8,000
Employee................ Mar. 23, 1998 6,000 5 Years $ 9.50 6,000
Employee................ Mar. 23, 1998 6,000 5 Years $ 9.50 6,000
Employee................ Mar. 23, 1998 5,000 5 Years $ 9.50 5,000
Employee................ Mar. 23, 1998 4,000 5 Years $ 9.50 4,000
Employee................ Mar. 23, 1998 4,000 5 Years $ 9.50 4,000
Employee................ Mar. 23, 1998 4,000 5 Years $ 9.50 June 30, 1998 0
Aug. 1, 1998
Employee................ Mar. 23, 1998 4,000 5 Years $ 9.50 4,000
Employee................ Mar. 23, 1998 4,000 5 Years $ 9.50 4,000
Employee................ Mar. 23, 1998 3,000 5 Years $ 9.50 3,000
Employee................ Mar. 23, 1998 2,000 5 Years $ 9.50 2,000
Employee................ Mar. 23, 1998 2,000 5 Years $ 9.50 2,000
Employee................ Mar. 23, 1998 1,200 5 Years $ 9.50 Jan. 1, 1999 0
Employee................ Mar. 23, 1998 1,000 5 Years $ 9.50 1,000
Employee................ Mar. 23, 1998 1,000 5 Years $ 9.50 Sept. 1, 1998 0
Employee................ Mar. 23, 1998 1,000 5 Years $ 9.50 1,000
Employee................ Mar. 23, 1998 8,000 5 Years $ 7.50 8,000
Employee................ Nov. 19, 1998 1,000 5 Years $ 7.50 1,000
Employee................ Nov. 19, 1998 1,600 5 Years $ 7.50 1,600
Employee................ Nov. 19, 1998 2,000 5 Years $ 7.50 2,000
Employee................ Nov. 19, 1998 1,000 5 Years $ 7.50 1,000
Employee................ Nov. 19, 1998 1,200 5 Years $ 7.50 1,200
Employee................ Nov. 19, 1998 1,600 5 Years $ 7.50 1,600
Consultant.............. Nov. 19, 1998 10,000 1 Year $ 7.50 June 29, 1999 0
Employee................ Nov. 19, 1998 4,000 5 Years $ 7.50 4,000
Employee................ Nov. 19, 1998 1,600 5 Years $ 7.50 1,600
Employee................ Feb. 1, 1999 1,000 5 Years $ 11.25 1,000
Consultant.............. Feb. 5, 1999 50,000 3 Years $US7.50 50,000
Director................ Feb. 16, 1999 10,000 5 Years $ 9.50 10,000
Director................ Feb. 16, 1999 10,000 5 Years $ 9.50 10,000
Director................ Feb. 16, 1999 10,000 5 Years $ 9.50 10,000
Director................ Feb. 16, 1999 10,000 5 Years $ 9.50 10,000
------- -------
395,100 334,950
======= =======
</TABLE>

II-4
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

The following exhibits are filed pursuant to Item 601 of Regulation S-K.

<TABLE>
<CAPTION>
Exhibit
Number Description
------- ----------------------------------------------------------------------
<C> <S>
1.1 Form of underwriting agreement**
1.2 Form of Representatives' Warrant Agreement and form of
Representatives' Warrant**
3.1 Special Resolution of Vidatron Enterprises Ltd., filed May 1, 1990,
cancelling previous Articles and substituting new Articles of
Vidatron Enterprises Ltd.*
3.2 Certificate of Change of Name and Special Resolution of Vidatron
Enterprises Ltd., filed February 13, 1992*
3.3 Certificate of Change of Name and Special Resolution of The Vidatron
Group Inc., filed February 5, 1997*
3.4 Special Resolution Amending the Memorandum and Articles of the Company
adopted February 16, 1999*
3.5 Special Resolutions Amending the Memorandum and Articles of Vidatron
Entertainment Group Inc. adopted July 14, 1999.*
4.1 Form of stock option agreement*
4.2 Single Series "A" Debenture, dated March 31, 1996, issued by The
Vidatron Group Inc. to Darcy Krogh, Timothy Gamble, Nesbitt Burns,
Frank Groff, Ann Nixon and Historic Lofts II in the amount of
$500,000*
4.3 Escrow Agreement--Performance Shares, dated September 1, 1996, by and
among The Vidatron Entertainment Group Inc., 531172 B.C. Ltd. and The
R-M Trust Company*
4.4 Subscription Agreement, dated May 27, 1998, by and between Vidatron
Entertainment Group Inc. and Working Opportunity Fund (EVCC) Ltd.*
4.5 Shareholders Agreement, dated May 27, 1998, by and among Vidatron
Entertainment Group, Inc., Working Opportunity Fund (EVCC) Ltd.,
Larry Sugar, Cameron White and Timothy Gamble*
4.6 Agreement, dated July 22, 1998, by and between Vidatron Entertainment
Group Inc. and Royal Bank Capital Corporation*
4.7 Convertible Debenture, dated as of October 21, 1998, by and between
Royal Bank Capital Corporation and Vidatron Entertainment Group Inc.
in the amount of $600,000*
4.8 Debenture, dated as of November 5, 1998, by and between Working
Opportunity Fund (EVCC) Ltd. and Vidatron Entertainment Group Inc. in
the amount of $600,000*
4.9 Amending Agreement, dated March 31, 1999, by and among Vidatron
Entertainment Group Inc. and Timothy Gamble, Ann Nixon, Darcy Krogh,
Frank Groff, W.D. Cameron White, and Soho Interactive Communications
Inc.*
5.1 Opinion of Page Fraser & Associates*
10.1 Commitment Letter agreement for mortgage loan, dated March 22, 1996,
by and among Aetna Trust Company, Soho Enterprises Ltd., The Vidatron
Group Inc., Timothy Gamble and Cameron White*
10.2 Share Option Plan of Vidatron Entertainment Group Inc., dated July 17,
1997*
10.3 Asset Purchase Agreement, dated August 18, 1997, by and among Magic
Lantern Communications Ltd., Image Media Ltd., 802117 Ontario Inc.
dba Pilot Software and Vidatron Entertainment Group Inc.*
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- ----------------------------------------------------------------
<C> <S>
10.4 Commitment Letter agreement for mortgage loan, dated January 15,
1998, by and among Canadian Western Trust Company, Soho
Enterprises Ltd. and Vidatron Entertainment Group Inc.*
10.5 Commitment Letter agreement for mortgage loan, dated January 22,
1998, by and among Vancouver City Savings Credit Union, 552552
B.C. Ltd., Vidatron Entertainment Group Inc., Timothy Gamble
and Cameron White*
10.6 Letter Agreement, dated January 30, 1998, by and among Vidatron
Entertainment Group Inc., Rick Friesen and Phil Leonard and
Promissory Note dated January 30, 1998 by Vidatron
Entertainment Group Inc. in favor of Rick Friesen and Phil
Leonard*
10.7 Canada Television and Cable Production Fund-Equity Investment
Program Letter Agreement dated April 27, 1998, by and between
the Canadian Film Development Corporation and Citizen
Productions Inc.*
10.8 Canada Television and Cable Production Fund--License Fee
Program--Interim Certificate of Eligibility, dated August 19,
1998, by and between Canada Television and Cable Production
Fund and Harm's Way Productions Inc.*
10.9 Share Purchase Warrant, dated October 21, 1998, issued by
Vidatron Entertainment Group Inc. to Royal Bank Capital
Corporation*
10.10 Share Purchase Warrant, dated November 4, 1998, issued by
Vidatron Entertainment Group Inc. to Working Opportunity Fund
(EVCC) Ltd.*
10.11 Employment Agreement, dated September 1, 1997, by and between
Vidatron Entertainment Group Inc. and W. D. Cameron White, as
amended by the Amending Employment Agreement dated April 1,
1999*
10.12 Employment Agreement, dated September 1, 1997, by and between
Vidatron Entertainment Group Inc. and Timothy Gamble, as
amended by the Amending Employment Agreement dated April 1,
1999*
10.13 Employment Agreement, dated September 1, 1996, by and between
Sugar Entertainment Ltd. and Larry Sugar*
10.14 Employment Agreement, dated September 1, 1997, by and between
Vidatron Entertainment Group Inc. and Juliet Jones, as amended
by the Amending Employment Agreement dated April 1, 1999*
10.15 Letter agreement, dated March 1, 1999, by and between Vidatron
Entertainment Group Inc. and Redwood Investments Ltd.*
10.16 Letter agreement, dated May 26, 1999, by and among Canadian
Western Trust and Soho Enterprises Ltd., the Vidatron Group
Inc., Timothy Roy Gamble and William Douglas Cameron White*
10.17 Lease, dated November 20, 1996, by and between Laidar Holdings
Ltd., and Dr. Gerald Wittenberg, and the Playhouse Theatre of
British Columbia*
10.18 Offer to Purchase, dated April 22, 1999 by and between Soho
Enterprises Ltd. and Wilcox Donnelley Capital Corp., as
modified April 28, 1999*
11.1 Statement re: computation of per share earnings*
21.1 List of Subsidiaries of the Company**
23.1 Consent of KPMG LLP**
23.2 Consent of Ellis Foster**
23.3 Consent of Page Fraser & Associates* (included in their opinion
filed as Exhibit 5.1)
23.4 Consent of Brand Farrar & Buxbaum LLP*
23.5 Consent of Thorsteinssons*
24.4 Power of Attorney*
</TABLE>
- --------
* Previously filed.
** Filed herewith.

II-6
<PAGE>

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

The undersigned registrant hereby undertakes:

(1) Insofar as indemnification for liabilities arising under the U.S.
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the U.S. Securities Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the U.S. Securities Act and will be governed
by the final adjudication of such issue.

(2) That, for the purposes of determining any liability under the U.S.
Securities Act, the information omitted from a form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the U.S. Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.

(3) That, for the purpose of determining any liability under the U.S.
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes to provide to the underwriter at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

II-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has authorized this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, in the City of Vancouver, Province of British
Columbia, Canada on July 23, 1999.

VIDATRON ENTERTAINMENT GROUP INC.

/s/ W.D. Cameron White
By: _________________________________
W.D. Cameron White
Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
* Director, President July 23, 1999
____________________________________
Timothy Gamble

/s/ W.D. Cameron White Director, Chief Executive July 23, 1999
____________________________________ Officer
W.D. Cameron White

* Chief Financial Officer, July 23, 1999
____________________________________ Secretary (Principal
Juliet Jones Accounting Officer)

* Director July 23, 1999
____________________________________
Stephen Cheikes

* Director July 23, 1999
____________________________________
Darrell Elliott

* Director July 23, 1999
____________________________________
Yad Garcha

* Director July 23, 1999
____________________________________
Vincent Lum

*By: /s/ W.D. Cameron White
-----------------------
W.D. Cameron White
Attorney-in-Fact
</TABLE>

II-8

<PAGE>

EXHIBIT 1.1

PEACE ARCH ENTERTAINMENT GROUP INC.

1,000,000 Class B Subordinate Voting Shares

UNDERWRITING AGREEMENT

July __, 1999

THE SEIDLER COMPANIES INCORPORATED
JOSEPHTHAL & CO. INC.
As Representatives of the
Several Underwriters
named in Schedule I hereto
c/o The Seidler Companies Incorporated
515 South Figueroa Street
Suite 1100
Los Angeles, California 90071-3328

Ladies and Gentlemen:

Peace Arch Entertainment Group Inc. (formerly known as Vidatron
Entertainment Group Inc.), a corporation incorporated under the laws of British
Columbia, Canada (the "Company"), proposes to sell to the several underwriters
named in Schedule I hereto (collectively, the "Underwriters") an aggregate of
1,000,000 Class B Subordinate Voting Shares of the Company (the "Firm Shares"),
and to sell to The Seidler Companies Incorporated and Josephthal & Co. Inc.,
individually, and not in their capacity as the Representatives, five-year
warrants (the "Representatives' Warrants") to purchase an aggregate of up to
100,000 Class B Subordinate Voting Shares (the "Representatives' Warrant
Shares"), pursuant to the terms and conditions of the Representatives' Warrant
Agreement (the "Representatives' Warrant Agreement") filed as an exhibit to the
Registration Statement (as hereinafter defined). The Firm Shares are to be sold
to each Underwriter, acting severally and not jointly, in such amount as is set
forth in Schedule I opposite the name of such Underwriter. In addition, for the
sole purpose of covering over-allotments in connection with the sale of the Firm
Shares, the Company proposes to grant to the Underwriters an option to purchase
up to an additional 150,000 Class B Subordinate Voting Shares (the "Option
Shares"). The Firm Shares and any Option Shares purchased pursuant to this
Agreement are herein referred to as the "Shares." The Class B Subordinate
Voting Shares of the Company are sometimes referred to herein as the "Limited
Voting Shares."
<PAGE>

You have advised the Company that you are authorized to enter into this
Agreement on behalf of the several Underwriters for whom you are acting as
representatives (the "Representatives"), and that The Seidler Companies
Incorporated has authority to execute this Agreement, bind the Underwriters and
the Representatives and take all actions on behalf of the Representatives
referenced in this Agreement.

1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, each Underwriter that:

(a) The Company has prepared and filed with the United States
Securities and Exchange Commission (the "Commission") in accordance with the
provisions of the Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder (collectively, the "Act"), a
registration statement on Form F-1 (No. 333-10354), including a preliminary
prospectus, subject to completion, relating to the Shares. The registration
statement, as amended at the time it becomes effective, including financial
statements and exhibits and the information (if any) contained in a prospectus
that is deemed to be a part of the registration statement at the time of its
effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as
the "Registration Statement," and the prospectus in the form first used to
confirm sales of the Shares is hereinafter referred to as the "Prospectus."

(b) No order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of the Prospectus or any
preliminary prospectus has been issued by the Commission and no proceedings for
that purpose are pending, threatened or, to the knowledge of the Company,
contemplated by the Commission; no stop order suspending the sale of the Shares
in any jurisdiction designated by you pursuant to Section 5(d) hereof has been
issued and no proceedings for that purpose are pending, threatened or, to the
knowledge of the Company, contemplated; and any request of the Commission and
each securities authority or agency of each other jurisdiction for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) has been complied with.

(c) Each preliminary prospectus in the form filed as part of the
Registration Statement as originally filed or filed as part of any amendment
thereto, or, if different, in the form used in connection with the offering of
the Shares, complied fully in all material respects when so filed or used with
the Act, and when the Registration Statement becomes effective and at all times
subsequent thereto, the Registration Statement (including, if applicable, the
information deemed to be part of the Registration Statement at the time it was
declared effective pursuant to Rule 430A under the Act) and the Prospectus and
any supplements or amendments thereto, shall comply in all material respects
with the provisions of the Act and the Registration Statement and any such
amendment thereto at the time such Registration Statement or such amendment
becomes effective will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and the Prospectus and any supplements or
amendments thereto, will not at any such time contain any untrue statement

2
<PAGE>

of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, except that the Company makes no representation, warranty
or agreement as to statements in, or omissions from, any such document, in
reliance upon, and in conformity with, written information furnished to the
Company by you specifically for use in the preparation thereof. The Company
acknowledges for all purposes under this Agreement (including, without
limitation, this paragraph and Sections 6(b) and 7 hereof) that the statements
appearing in any preliminary prospectus, the Prospectus or the Registration
Statement in the first, second, third, eighth and last paragraphs under the
caption "Underwriting" constitute the only written information furnished to the
Company by you for use in the Registration Statement or the Prospectus or any
preliminary prospectus (or any amendment or supplement thereto). There is no
contract or document required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement which
is not described or filed as required.

(d) KPMG LLP and Ellis Foster, Chartered Accountants, whose respective
reports appear in the Prospectus, are, to the best knowledge of the Company,
independent public accountants with respect to the Company as required by the
Act. The financial statements (including the related notes) included in the
Prospectus and the Registration Statement (and any amendments or supplements
thereto) comply as to form with the requirements of the Act, present fairly and
accurately the financial condition, the results of the operations and changes in
cash flows and equity of the entities purported to be shown thereby at the dates
and for the periods indicated and have been prepared in accordance with Canadian
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as stated therein); and the other
financial and statistical information and the supporting schedules included in
the Prospectus and the Registration Statement (and any amendments or supplements
thereto), present fairly and accurately, in all material respects, the
information required to be stated therein. Such financial statements have been
reconciled as required under Item 18 of Form 20-F and Registration S-X under the
Act to United States generally accepted accounting principles consistently
applied throughout the periods involved. No other financial statements are
required by Form F-1, or otherwise, to be included in the Prospectus or the
Registration Statement. The selected financial information and statistical data
set forth under the captions "Summary Financial and Operating Data" and
"Selected Consolidated Financial and Operating Data" in the Prospectus have been
prepared on a basis consistent with the consolidated financial statements of the
Company.

(e) The Company does not control or have any interest in, directly or
indirectly, any corporation, partnership, association or other entity other than
those corporations listed or described on Exhibit 21.1 to the Registration
Statement (each, a "Subsidiary" and, collectively, the "Subsidiaries"). The
Company and each Subsidiary has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction in which it
is incorporated, with full power and authority to own or lease and occupy its
properties and conduct its business as it is currently being conducted and as
described in the Prospectus, and is duly qualified to do business and is in good
standing in

3
<PAGE>

each jurisdiction in which the character of the business conducted by it or the
location of the properties owned or leased by it makes such qualification
necessary except where the failure to be so qualified or be in good standing
would not have a Material Adverse Effect (as defined in Section 1(k)); and the
Company and each Subsidiary holds all licenses, certificates, permits and
approvals from governmental authorities necessary for the conduct of its
business as it is currently being conducted and as described in the Prospectus.
The expiration of any such licenses, permits or other governmental
authorizations would not have a Material Adverse Effect. Complete and correct
copies of the respective memorandum, articles of the Company and each of API
Aviatar Pictures, Inc., The Eyes Multi-Media Productions, Inc., Soho
Enterprises, Inc., Sugar Entertainment Ltd. and Vidatron Television, Inc.
(collectively, the "Significant Subsidiaries"), and all amendments thereto, have
been delivered to you, and no changes therein will be made subsequent to the
date hereof and prior to the date of the consummation of the sale of the Shares
except as disclosed in the Prospectus. None of the Subsidiaries, other than the
Significant Subsidiaries, is a "significant subsidiary" within the meaning of
Rule 1-20(v) of Regulation S-X under the Act or is otherwise material to the
business or operations of the Company. All of the issued and outstanding shares
of capital stock of each Subsidiary have been duly and validly issued, are fully
paid and nonassessable and, with the exception of 552551 B.C. Ltd. (in which the
Company owns a 50% interest only), are owned, of record and beneficially, by the
Company, free and clear of any mortgage, pledge, lien, encumbrance, claim or
equity. There are no options, warrants, subscriptions, securities or other
agreements outstanding or in existence, absolute or contingent, entitling any
person to purchase or otherwise acquire any capital stock or other equity
interest, or any security convertible into or exercisable or exchangeable for
any capital stock or equity interest, in any Subsidiary.

(f) The capitalization of the Company is as set forth under the
caption "Capitalization" in the Prospectus, and the Limited Voting Shares and
the Class A Multiple Voting Shares of the Company (the "Multiple Voting Shares"
and, together with the Limited Voting Shares, the "Voting Shares") conform to
all statements relating thereto contained in the Registration Statement and the
Prospectus; the outstanding Voting Shares have been, and the Shares, upon
issuance and delivery and payment therefor in the manner herein described, will
be, duly authorized, validly issued, fully paid and nonassessable. Except for
the capital stock of the Subsidiaries and approximately 300,000 shares of
capital stock of Voyageur Film Capital Corp., the Company does not own, and at
the date of the consummation of the sale of the Shares will not own, directly or
indirectly, any shares of stock or any other equity or long-term debt securities
of any corporation or have any partnership interest or equity interest in any
firm, partnership, joint venture, association or other entity. Except as
described in the Registration Statement and Prospectus, there are no preemptive
or other rights to subscribe for or to purchase, or any restriction upon the
voting or transfer of, any Voting Shares pursuant to the Company's memorandum,
articles or other governing documents or any agreement or other instrument to
which the Company is a party or by which it may be bound. Neither the filing of
the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any Voting
Shares.

4
<PAGE>

(g) There has not been any material adverse change in, or any adverse
development which would have a material adverse effect on, the business,
properties, financial condition, results of operations or prospects of the
Company and the Subsidiaries taken as a whole from the date as of which
information is given in the Registration Statement and the Prospectus, except as
otherwise stated therein, and neither the Company nor any Subsidiary has,
directly or indirectly, incurred any liabilities or obligations, direct or
contingent, or entered into any transactions, not in the ordinary course of
business, which are material to the business of the Company and the Subsidiaries
taken as a whole, and there has not been any change in the capital stock of, or
any incurrence of long-term debt or material increase in short-term debt by, the
Company or any Subsidiary, or any issuance or grant of options, warrants or
rights to purchase the capital stock of the Company, or any declaration or
payment of any dividend or other distribution on the capital stock of the
Company from the date as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein.

(h) Neither the Company nor any Subsidiary is, nor with the giving of
notice or lapse of time or both would be, in violation of or in default under
its memorandum, articles or bylaws, or any material agreement, indenture or
other instrument, to which it is a party or by which it is bound, or to which
its properties are subject. Neither the issuance, sale or delivery by the
Company of the Shares, nor the execution, delivery and performance of this
Agreement nor the consummation by the Company of the transactions contemplated
hereby will result in a violation of, or constitute a default under, the
memorandum, articles or bylaws of the Company or any Subsidiary, or any
agreement, indenture or other instrument to which the Company or any Subsidiary
is a party or by which any of them is bound, or to which any of their respective
properties or assets is subject, nor will the performance by the Company of its
obligations hereunder violate any law, ordinance, rule, administrative
regulation or decree of any court or any governmental agency or body having
jurisdiction over the Company or any Subsidiary or any of their respective
properties or assets, or result in the creation or imposition of any lien,
charge, claim or encumbrance upon any property or asset of the Company or any
Subsidiary. Except for permits and similar authorizations required under the
Act and the securities or "blue sky" laws of certain jurisdictions and for such
permits and authorizations which have been obtained, no consent, approval,
authorization or order of any court, governmental agency or body is required in
connection with the Company's execution and delivery of this Agreement or
consummation of the transactions contemplated hereby.

(i) The Company has the requisite power and authority to authorize the
offering of the Shares and to execute, deliver and perform this Agreement, the
Representatives' Warrant Agreement and the Representatives' Warrants and to
issue, sell and deliver the Shares and the Representatives' Warrants. This
Agreement, the Representatives' Warrant Agreement and the Representatives'
Warrants have been duly and validly authorized, executed and delivered by the
Company and constitute the valid and binding agreements of the Company,
enforceable against the Company in accordance with their respective terms except
as rights to indemnity and contribution hereunder or thereunder may be limited
by federal, state or provincial securities laws or principles of public policy,
and

5
<PAGE>

except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to creditors' rights
generally or by general equitable principles.

(j) The Company and the Subsidiaries have good and marketable title to
their respective properties and assets, free and clear of all liens,
encumbrances and defects except such as are described or referred to in the
Prospectus or such as do not have a material adverse effect on the value of such
properties and assets and do not interfere with the use made or proposed to be
made of such properties and assets by the Company and the Subsidiaries, and any
real property and buildings held under lease by the Company or any Subsidiary
are held by it under valid, existing and enforceable leases with such exceptions
as are not material and do not interfere with the use made or proposed to be
made of such property and buildings by the Company or such Subsidiaries. The
properties owned by the Company and the Subsidiaries conform to all relevant
zoning regulations, development controls, use restrictions and other applicable
laws and regulations. The properties and assets of the Company and the
Subsidiaries necessary to the conduct of their respective businesses (as
presently conducted and as described in the Prospectus) are in good repair
(reasonable wear and tear excepted), insured in accordance with industry
practice and suitable for their current and intended uses. To the Company's
knowledge, each of the buildings on the properties owned by the Company and the
Subsidiaries fully complies with all applicable laws, is structurally sound, in
good repair and condition and free of defects, except for reasonable wear and
tear, and is not subject to any outstanding municipal work orders, fire up-
grading requirements, health orders or other notices of building deficiencies
from any governmental authority which requires the Company or any Subsidiary to
cure, repair or rectify any breach or non-compliance of the building or any use
thereof.

(k) Neither the Company nor any Subsidiary is in violation of any
federal, state, local, provincial or foreign laws or regulations relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata), including, without limitation, laws and regulations relating to
emissions, discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum or
petroleum products, asbestos or asbestos-containing materials, or
polychlorinated biphenyls ("Materials of Environmental Concern"), or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Materials of Environmental Concern
(collectively, "Environmental Laws"), which violation could have a material
adverse effect on the condition, financial or otherwise, or the earnings, cash
flow, business affairs or business prospects of the Company and the Subsidiaries
taken as a whole (a "Material Adverse Effect"). "Violation" includes, but is
not limited to, noncompliance with any permit or other governmental
authorization required under applicable Environmental Laws and noncompliance
with the terms and conditions of any such permit or authorization.

6
<PAGE>

(l) Neither the Company nor any Subsidiary has received any
communication (written or oral), whether from a governmental authority,
citizens' group, employee or otherwise, alleging that the Company or any
Subsidiary, or any other person or entity for whom the Company or any Subsidiary
is or may be liable is not in full compliance with any Environmental Laws or
permit or authorization required under applicable Environmental Laws, and, to
the Company's knowledge, there are no circumstances that may prevent or
interfere with such full compliance in the future, except where failure to so
comply would not have a Material Adverse Effect.

(m) There is no claim, action, cause of action, investigation or
notice (written or oral) by any person or entity alleging potential liability
(including, without limitation, potential liability for investigatory costs,
natural resources damages, property damages, personal injuries or penalties)
arising out of, based on or resulting from (i) the presence in or release into
the environment of any Materials of Environmental Concern at any location owned,
leased or operated, now or in the past, by the Company or any Subsidiary, or any
other person or entity for whom the Company or any Subsidiary, is or may be
liable, or (ii) circumstances forming the basis of any violation or, to the
Company's knowledge, alleged violation of any Environmental Law (collectively,
"Environmental Claims") pending or, to the Company's knowledge, threatened
against the Company or, to the Company's knowledge, pending or threatened
against any other person or entity whose liability for any Environmental Claim
the Company or any Subsidiary has retained or assumed either contractually or by
operation of law.

(n) Except as set forth in the Registration Statement and Prospectus,
to the Company's knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the release, emission, discharge, presence or disposal of any Materials of
Environmental Concern, that could form the basis of any Environmental Claim
against the Company or any Subsidiary with respect to property owned, leased or
operated by or for the Company or any Subsidiary, now or in the past, or against
any person or entity whose liability for any Environmental Claim the Company or
any Subsidiary has retained or assumed either contractually or by operation of
law.

(o) Except as would not, singly or in the aggregate, have a Material
Adverse Effect, neither the Company nor any Subsidiaries has (A) violated any
applicable federal, state, provincial or foreign law relating to employment or
employment practices or the terms and conditions of employment, including,
without limitation, discrimination in the hiring or other human rights matters,
promotion or pay of employees, wages, hours of work, overtime pay, plant
closings and layoffs, collective bargaining, and occupational safety and health,
or any provisions of Employment Standards Act of British Columbia or the rules
and regulations promulgated thereunder or any other applicable law (whether
foreign or domestic) relating to or governing the operation or maintenance of
any employee benefit plan or arrangement, nor (B) engaged in any unfair labor
practice. There is no unfair labor practice charge or complaint pending or, to
the Company's knowledge, threatened against the Company before the British
Columbia Labor Relations Board or any corresponding state,

7
<PAGE>

local, provincial or foreign agency, and no grievance or arbitration proceeding
arising out of or under any collective bargaining agreement is so pending or, to
the Company's knowledge, threatened against the Company which would, singly or
in the aggregate, have a Material Adverse Effect; and no union representation
claim pending with respect to the employees of the Company or any Subsidiary,
and to the Company's knowledge, no union organizing activities taking place. No
labor dispute involving the employees of the Company or any Subsidiary is
pending or, to the Company's knowledge, threatened or imminent which could
singly or in the aggregate have a Material Adverse Effect; and the Company is
not aware of any existing, threatened or imminent labor disturbance by the
employees of any principal vendors, suppliers or contractors of the Company
which could singly or in the aggregate have a Material Adverse Effect.

(p) There is no legal or governmental proceeding to which the Company
or any Subsidiary is a party or to which any of their respective properties or
assets is subject or which is pending or, to the Company's knowledge, threatened
or contemplated against the Company or any Subsidiary which could result in any
Material Adverse Effect or which is required to be disclosed in the Registration
Statement or the Prospectus.

(q) Neither the Company nor any Subsidiary is in violation of any law,
ordinance, rule, administrative regulation or decree known to the Company of any
court or governmental agency or body having jurisdiction over the Company or any
Subsidiary or any of their respective properties or assets, which violation
could have a Material Adverse Effect.

(r) Neither the Company nor any Subsidiary has taken, or shall take,
directly or indirectly, any action designed to cause or result in, or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of the Limited Voting Shares to facilitate the sale or resale of the
Shares, provided, however, that the Company shall be entitled to make such
disclosures and filings as may be required by applicable law or the rules of The
Toronto Stock Exchange.

(s) The Company and each Subsidiary have timely (giving effect to
permitted extensions) and properly prepared and filed all necessary federal,
state, provincial, local and foreign income, franchise and any other required
tax returns and have paid all taxes shown as due thereon (other than those being
contested in good faith), and neither the Company nor any Subsidiary has any
knowledge of any tax deficiency which has been or might have a Material Adverse
Effect.

(t) (A) Neither the Company nor any Subsidiary has at any time and, to
the Company's knowledge, (B) no employee or agent acting on behalf of the
Company or any Subsidiary has at any time within the last five years, (i) made
any contributions to any candidate for political office in violation of law, or
failed to disclose fully any contributions to any candidate for political office
in accordance with any applicable statute, rule, regulation or ordinance
requiring such disclosure, (ii) made any payment to any local, state,
provincial, federal or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments required
or allowed by applicable law, or

8
<PAGE>

(iii) engaged in any transaction, maintained any bank account or used any
corporate funds except for transactions, bank accounts and funds which have been
and are reflected in the normally maintained books and records of the Company
and the Subsidiaries.

(u) Except as contemplated by this Agreement, the Company is not aware
of any claims for services in the nature of a finder's fee, brokerage fee or
otherwise with respect to this offering for which the Company or any Subsidiary
or any of the several Underwriters may be responsible.

(v) The Company and the Subsidiaries own or possess adequate rights to
use all trademarks, service marks, trade names and copyrights necessary for the
conduct of their respective businesses as currently conducted and as described
in the Prospectus and have taken reasonable security measures to protect the
secrecy, confidentiality and value of their respective trade secrets and know-
how which are valid and protectible and are not part of the public knowledge or
literature and which are necessary for, used in, or proposed to be used in the
conduct of their respective businesses as described in the Prospectus. Neither
the Company nor any Subsidiary has received any notice of infringement of or
conflict with, and neither the Company nor any Subsidiary, to the best of the
Company's knowledge, is infringing or in conflict with, asserted rights of
others with respect to any trademarks, service marks, trade names, copyrights,
trade secrets or other intellectual property rights which could, singly or in
the aggregate, have a Material Adverse Effect.

(w) There are no outstanding loans or advances or guarantees of
indebtedness by the Company or any Subsidiary to or for the benefit of any
affiliate of the Company or any Subsidiary, any of the officers or directors of
the Company or any Subsidiary, or any of the members of the families of any of
the foregoing, which are required by the Act to be described in the Registration
Statement or the Prospectus except such that are so described.

(x) The Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary in order to permit
preparation of financial statements in accordance with Canadian generally
accepted accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.

(y) The Company has not received any notice from the American Stock
Exchange (the "AMEX") that the AMEX intends to decline to permit the listing of
the Shares.

9
<PAGE>

(z) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, an "investment company" under the United States
Investment Company Act of 1940.

(aa) The Company or its Subsidiaries, as the case may be, currently is
eligible to receive refundable tax credits under the Income Tax Act (Canada) and
the Income Tax Act (British Columbia) as contemplated by the Prospectus, and
neither the Company nor any Subsidiary has taken, or shall take, directly or
indirectly, any action designed to cause or result in, or which might reasonably
be expected to cause the loss of eligibility for or material reduction in these
tax credits.

(ab) There are no reports or information that in accordance with the
requirements of the securities commission or similar regulatory authority (each,
Canadian Securities Regulators) must be made publicly available in connection
with the offering of the Shares that have not been made publicly available as
required; and there are no documents required to be filed with the Canadian
Securities Regulators in connection with the offering that have not been filed
as required.

(ac) The Representatives' Warrant Shares have been duly authorized and
reserved for issuance upon the exercise of the Representatives' Warrants and,
when issued upon payment of the purchase price therefor provided in the
Representatives' Warrants, will be validly issued, fully paid and nonassessable.

Any certificate signed by any duly authorized officer of the Company and
delivered to you or counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.

2. Sale and Delivery of the Shares to the Underwriters.
---------------------------------------------------

(a) Subject to the terms and conditions and upon the basis of the
representations and warranties herein set forth, the Company agrees to sell to
the several Underwriters, and each Underwriter agrees, severally and not
jointly, to purchase from the Company the number of Firm Shares set forth
opposite such Underwriter's name on Schedule I hereto at a price per share of
U.S.$_____________ (the "Purchase Price").

(b) Subject to the terms and conditions and upon the basis of the
representations and warranties herein set forth, the Company hereby grants an
option to the several Underwriters to purchase from the Company at the Purchase
Price any or all of the Option Shares (the "Option"). The Option may be
exercised only to cover over-allotments in connection with the distribution and
sale of the Firm Shares by the Underwriters. The Option may be exercised in
whole or in part at any time on or before the 45th day after the effective date
of the Registration Statement upon written notice by the Representatives to the
Company setting forth the number of Option Shares as to which the several
Underwriters are exercising the Option. Delivery of certificates for the Option
Shares by the Company and payment therefor to the Company shall be made as
provided in Section 3 hereof. The

10
<PAGE>

number of Option Shares to be purchased by each Underwriter shall be the
same percentage of the total number of Option Shares to be purchased by the
Underwriters as such Underwriter is purchasing of the Firm Shares, subject to
such readjustments as the Representative in their absolute discretion shall make
to eliminate fractional shares. As Representatives of the several Underwriters,
you may cancel the Option at any time by giving written notice of cancellation
to the Company. If the Option is cancelled or expires unexercised in whole or in
part, the Company shall promptly deregister under the Act the Option Shares not
sold hereunder.

3. Delivery of and Payment for Shares. Delivery of certificates for the
----------------------------------
Firm Shares to be purchased by the Underwriters from the Company shall be made
against payment therefor by certified or official bank check or checks drawn
upon or by a New York Clearing House bank and payable in next-day funds to the
account of the Company. Such delivery and payment shall be made at 6:30 A.M.,
local time, at the offices of The Seidler Companies Incorporated, 515 South
Figueroa Street, Suite 1100, Los Angeles, California (or such other place as
mutually may be agreed upon by you and the Company), on the third full business
day following the date of the public offering as advised by you to the Company
or at such other date not more than seven full business days thereafter as shall
be determined by you and the Company (unless, in either case, postponed pursuant
to Section 11) (the "First Closing Date").

The Option granted in Section 2 hereof may be exercised during the term
thereof by written notice to the Company from you. Such notice shall set forth
the aggregate number of Option Shares as to which the Option is being exercised
and the time and date, not earlier than either the First Closing Date or the
second business day after the date on which the Option shall have been exercised
nor later than the seventh business day after the date of such exercise, as
determined by you, when the Option Shares are to be delivered (the "Option
Closing Date"). Delivery and payment for such Option Shares is to be at the
offices set forth above for delivery and payment of the Firm Shares. Delivery
of certificates for the Option Shares to be purchased by the Underwriters shall
be made against payment therefor by certified or official bank checks drawn upon
or by a New York Clearing House bank and payable in next-day funds to the
account of the Company. The First Closing Date and the Option Closing Date are
herein individually referred to as the "Closing Date" and collectively referred
to as the "Closing Dates."

Delivery of certificates for the Shares shall be made by or on behalf of
the Company to you, or the respective accounts of the Underwriters, against
payment by you, for the several accounts of the Underwriters, to the Company.
The certificates for the Shares shall be registered in such names and
denominations as you shall have requested at least three full business days
prior to the applicable Closing Date, and shall be made available for checking
and packaging at a location as may be designated by you not later than 10:00
A.M. at least one full business day prior to such Closing Date. Time shall be
of the essence and delivery at the time and place specified in this Agreement is
a further condition to the obligations of each Underwriter.

11
<PAGE>

4. Offering by Underwriters. On the terms and subject to the conditions
------------------------
hereof, as soon after the Registration Statement becomes effective as in the
judgment of the Representatives is advisable, the several Underwriters propose
to offer the Shares to the public as set forth in the Prospectus. The
Representatives may from time-to-time increase or decrease the public offering
price after distribution of the Shares has been completed to such extent as the
Representatives, in their sole discretion deem advisable. The Underwriters may
enter into one or more agreements as the Underwriters, in each of their sole
discretion, deem advisable with one or more broker-dealers who shall act as
dealers in connection with such public offering.

The Underwriters represent and warrant to, and covenant and agree with, the
Company that during the course of the distribution of the Shares to the public
by or through the Underwriters:

(a) the Underwriters will offer the Shares for sale to the public and
will sell the Shares only in those jurisdictions where they may be lawfully
offered for sale or sold, and, in any event, the Underwriters will not offer the
Shares for sale to the public in Canada and will not knowingly sell the Shares
to any residents of Canada;

(b) the Underwriters will ensure that any agreement entered into by
the Underwriters with any one or more broker-dealers, who act as dealers in
connection with the public offering of the Shares, will contain a covenant
whereby the broker-dealers agree not to offer the Shares for sale to the public
in Canada and not to knowingly sell the Shares to any residents of Canada;

(c) the Underwriters acknowledge that the Company will insert a
provision in the transfer agency agreement between the U. S. transfer agent and
the Company requiring the transfer agent not to register the Shares in the name
of any resident of the Province of Ontario for a period of 90 days from the
First Closing Date; and

(d) the Underwriters will comply with all Prospectus delivery
requirements under the Act.

The Company authorizes the Underwriters to use preliminary prospectuses and
to make them available for use by prospective underwriters and dealers and
authorize the Underwriters and all dealers acquiring Shares from an Underwriter
to use the Prospectus (as amended or supplemented, if the Company shall have
furnished any amendments or supplements thereto) in connection with the sale of
the Shares until the earlier of the completion of the public offering or the
90th day following the effectiveness of the Registration Statement.

12
<PAGE>

5. Covenants. The Company covenants and agrees with each Underwriter
---------
that:

(a) The Company shall use its reasonable best efforts to cause the
Registration Statement to become effective at the earliest possible time or, if
the procedure in Rule 430A of the Act is utilized, to comply with the provisions
of, and make all requisite filings with the Commission pursuant to, Rule 430A of
the Act and to notify you promptly (in writing, if requested) of all such
filings. The Company shall notify you promptly and confirm such notification in
writing, (i) when the Registration Statement has become effective (if such
Registration Statement has not otherwise become effective prior to the execution
of this Agreement), if and when any Prospectus is mailed (or otherwise sent for
filing pursuant to Rule 424 under the Act), and when any post-effective
amendment to the Registration Statement becomes effective, (ii) of the happening
of any event during the period referred to in paragraph (c) below that makes any
statement of a material fact made in the Registration Statement untrue or that
requires the making of any additions to or changes in the Registration Statement
(as amended or supplemented from time to time) in order to make the statement
therein not misleading or that makes any statement of a material fact made in
the Prospectus (as amended or supplemented from time to time) untrue or that
requires the making of any additions to or changes in the Prospectus (as amended
or supplemented from time to time) in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading, and
(iii) of any request by the Commission for any amendment of or supplement to the
Registration Statement or the Prospectus or for additional information relating
thereto. The Company shall prepare and file with the Commission, promptly upon
your request, any amendments of or supplements to the Registration Statement or
the Prospectus which, in the opinion of counsel to the several Underwriters, may
be necessary or advisable in connection with the distribution of the Shares and
shall use every reasonable effort to cause the same to become effective as
promptly as possible; and the Company shall not file any amendment of or
supplement to the Registration Statement or the Prospectus, whether before or
after the time when the Registration Statement becomes effective, which has not
previously been submitted to you a reasonable time before the proposed filing
thereof or to which you shall reasonably object in writing. The Company shall
advise you promptly after it shall receive notice thereof of the issuance by the
Commission or any State or other regulatory body of any stop order or other
order suspending the effectiveness of the Registration Statement, suspending or
preventing the use of any preliminary prospectus or the Prospectus or suspending
the qualification of the Shares for offering or sale in any jurisdiction, or of
the institution or threatening of any proceedings for any such purpose; and the
Company shall use every reasonable effort to prevent the issuance of any stop
order or other such order and, should a stop order or other such order be
issued, to obtain as soon as possible the lifting thereof.

(b) The Company shall furnish to the Underwriters, from time to time
and without charge, a reasonable number of copies of the Registration Statement
of which, upon request, two for you and one for counsel to the Underwriters
shall be signed, and shall include exhibits and all amendments and supplements
to such Registration Statement.

13
<PAGE>

(c) Within the time during which a Prospectus relating to the Shares
is required to be delivered under the Act, the Company shall furnish to each
Underwriter, at the Company's expense, as many copies of the Prospectus (and of
each amendment or supplement thereto) as such Underwriter may reasonably
request, and the Company shall comply with all requirements imposed upon it by
the Act, as now and hereafter amended, so far as is necessary to permit the
continuance of sales of or dealings in the Shares as contemplated by the
provisions hereof and the Prospectus. If during such period any event occurs as
a result of which, in the opinion of counsel for the Underwriters or in the
judgment of the Company, the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances then
existing, not misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Prospectus to comply with the Act, the
Company shall promptly notify you and, subject to the provisions of Section
5(a), shall amend the Registration Statement or supplement the Prospectus (at
the expense of the Company) so as to correct such statement or omission or
effect such compliance, and will furnish to each Underwriter and to such dealers
as you shall specify such number of copies as such Underwriter or dealers may
reasonably request.

(d) The Company shall use its reasonable best efforts to take or cause
to be taken all necessary action and furnish to whomever you may direct such
information as may be required in qualifying the Shares for sale under the laws
of such state jurisdictions which you shall designate and to continue such
qualifications in effect for as long as may be required for the distribution of
the Shares; except that in no event shall the Company be obligated in connection
therewith to file any general consent to service of process or to qualify as a
foreign corporation in any jurisdiction in which it is not otherwise so subject.
The Company shall file such statements and reports as may be required by the
laws of each jurisdiction in which the Shares have been qualified as above
provided.

(e) As soon as practicable, but in any event not later than 60 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs the Company will make generally available to its
shareholders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Representatives, an earnings statement which will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, covering
a period of at least 12 consecutive months after the effective date of the
Registration Statement.

(f) For a period of six months following the First Closing Date, the
Company will not, without your prior written consent, (i) purchase any Voting
Shares or equity securities of the Company or (ii) offer, issue, sell, contract
to sell, transfer or otherwise dispose of, for value or otherwise, directly or
indirectly, any Voting Shares or other equity securities of the Company or any
securities convertible into or exchangeable for, or warrants to purchase or
acquire, Voting Shares, except (w) pursuant to this Agreement or (x) pursuant to
the exercise of stock options, warrants or performance share escrow agreement
outstanding as of the date of the Prospectus and disclosed therein, (y) pursuant
to

14
<PAGE>

the grant of options to employees, officers, consultants or directors of the
Company or its Subsidiaries pursuant to the Company's Stock Option Plan to
purchase Voting Shares at an exercise price of not less than the public offering
price of the Shares as set forth in the Prospectus, provided that such options
do not become exercisable prior to six months following the First Closing Date,
or (z) Limited Voting Shares issued pursuant to the conversion of Multiple
Voting Shares outstanding as of the date of the Prospectus.

(g) The Company shall apply the net proceeds of the sale of the Shares
sold by it in the manner specified under the caption "Use of Proceeds" in the
Prospectus.

(h) The Company shall timely complete all required filings and
otherwise fully comply in a timely manner with all provisions of the Act in
connection with the public offering of the Shares.

(i) The Company shall pay or cause to be paid (A) all expenses
(including stock transfer taxes) incurred in connection with the delivery to the
several Underwriters of the Shares, (B) all fees and expenses (including,
without limitation, fees and expenses of the Company's accountants and counsel)
in connection with the preparation, printing, filing, delivery and shipping of
the Registration Statement (including the financial statements therein and all
amendments and exhibits thereto), each preliminary prospectus and the
Prospectus, as amended or supplemented, and the printing, delivery and shipping
of this Agreement and other underwriting documents, including Underwriters'
Questionnaires, Underwriters' Powers of Attorney, Blue Sky Memoranda, Agreements
Among Underwriters and Selected Dealer Agreements and any letters transmitting
the offering material to Underwriters or selling group members (including costs
of mailing and shipment), (C) all filing fees and reasonable fees and
disbursements of counsel to the Underwriters incurred in connection with the
qualification of the Shares under state securities laws as provided in Section
5(d) hereof up to a maximum of U.S.$10,000, (D) the filing fee of the National
Association of Securities Dealers, Inc., (E) any applicable listing fees,
including the fee for listing the Company's Limited Voting Shares on the AMEX,
(F) the cost of printing certificates representing the Shares, (G) the cost and
charges of any transfer agent or registrar, (H) the costs and expenses of all
pre-closing and post-closing advertisements relating to the offering of the
Shares, (I) the costs and charges of preparing and distributing to the
Representatives four bound volumes of documents and instruments relating to the
transactions contemplated by this Agreement, (J) the costs and expenses of
travel and lodging of the Company's officers and representatives relating to
meetings with and presentations to prospective purchasers of the Shares, and (K)
all other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise provided for in this section; provided,
however, that the Underwriters shall pay the fees and expenses of their counsel
(other than as provided in clause (c) above) and their costs and expenses
relating to meetings with and presentations to prospective purchases of the
Shares. In addition, at the First Closing and at each Option Closing, the
Company shall also pay to The Seidler Companies Incorporated, individually, and
not in its capacity as one of the Representatives, a non-accountable expense
allowance equal to two percent (2%) of the initial public offering price of the
Shares purchased and sold at such closing.

15
<PAGE>

(j) The Company, at its expense, shall furnish to its shareholders an
annual report (including financial statements prepared in accordance with
Canadian generally accepted accounting principles audited by independent
certified public accountants), and, as soon as practicable after the end of each
of the first three quarters of each fiscal year, a statement of operations of
the Company for such quarter (which may be in summary form), all in reasonable
detail, and during the five-year period after the date hereof, at its expense,
will furnish you (i) concurrently with providing such reports to its
shareholders, a balance sheet of the Company and any subsidiaries as and at the
end of such fiscal year, together with statements of income or operations,
shareholders' equity and cash flows of the Company and any consolidated
subsidiaries for such fiscal year, all in reasonable detail and accompanied by a
copy of the certificate or report thereon of independent certified public
accountants; (ii) as soon as they are available, a copy of all reports
(financial or other) mailed to security holders; (iii) as soon as they are
available, a copy of all periodic reports and financial statements furnished to
or filed with the Commission, the AMEX or the NASD; and (iv) such other
information of a public nature concerning the Company as you may from time to
time reasonably request. In addition, during such five-year period the Company
shall furnish you, concurrently with its release, every material press release
and every material news item or article in respect of the Company or its affairs
that is released or prepared by the Company.

(k) So long as the Company has an active subsidiary or subsidiaries,
the financial statements provided for in Section 5(j) shall be on a consolidated
basis to the extent the accounts of the Company and its subsidiary or
subsidiaries are consolidated in reports furnished to its shareholders
generally. Separate financial statements shall be furnished for any
subsidiaries whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Act.

(l) The Company shall use its best efforts to cause each of the
Company's officers, and directors to execute and deliver to you on or before the
First Closing Date a written agreement, in form and content satisfactory to you
and counsel for the Underwriters, not to offer, sell, contract to sell, transfer
or otherwise dispose of, directly or indirectly, for value or otherwise, any
Voting Shares or other equity securities of the Company or any securities
convertible into or exchangeable for, or warrants to purchase or acquire, Voting
Shares, now owned or hereafter acquired by such person, for a period of six
months from the First Closing Date, except with your prior written consent.

(m) The Company and its subsidiaries shall continue to maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
in order to permit preparation of financial statements in accordance with
Canadian generally accepted accounting principles and to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

16
<PAGE>

(n) The Company shall comply with all registration, filing and
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which may from time to time be applicable to the Company.

(o) The Company shall make all filings required, including
registration under the Exchange Act, to obtain and maintain the listing of the
Limited Voting Shares on the AMEX concurrently with the effective date of the
Registration Statement.

(p) The Company shall maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for the Limited Voting Shares.

(q) As soon as practicable, but in no event more than 30 days from the
effective date of the Registration Statement, the Company take all necessary and
appropriate actions to be included in Standard and Poors Corporation
Descriptions and Moodys OTC Manual and to continue such inclusion for a period
of not less than five years.

(r) For a period equal to the lesser of five years from the date
hereof, and the sale to the public of the Representatives' Shares, the Company
will not take any action or actions which may prevent or disqualify the
Company's use of Form F-1 (or other appropriate form) for the registration under
the Act of the Representatives' Shares.

(s) If any time during the 25-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price of the Limited Voting Shares has been or is likely to be materially
affected (regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company shall, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and if deemed appropriate
by the Company and its counsel in consultation with you and your counsel,
disseminate a press release or other public statement reasonably satisfactory to
you responding to or commenting on such rumor, publication or event.

(t) Commencing not later than the First Closing Date, the Company's
Board of Directors shall include at least two independent directors.

(u) The Company shall supply the Underwriters with copies of all
correspondence to and from and all documents issued to and by the Commission or
the Commission's staff in connection with the registration of the Shares under
the Act.

17
<PAGE>

(v) At or prior to the First Closing Date, the Company shall enter
into with The Seidler Companies Incorporated and Josephthal & Co. Inc.,
individually, and not in their capacity as the Representatives, the
Representatives' Warrant Agreement and sell and issue to The Seidler Companies
Incorporated and Josephthal & Co. Inc. the Representatives' Warrants.

6. Conditions to the Underwriters' Obligations. The obligations of the
-------------------------------------------
several Underwriters hereunder are subject to the accuracy, as of the date
hereof and each Closing Date (as if made at such Closing Date), of the
representations and warranties of the Company contained herein or in
certificates of any officer of the Company delivered pursuant to the provisions
hereof, to the performance by the Company of its obligations hereunder and to
the following additional conditions:

(a) The Registration Statement and all post-effective amendments
thereto shall have become effective not later than 5:30 P.M., eastern time, on
the date following the date of this Agreement or, with your consent, at a later
time and date as you may agree in writing; all filings required by Rule 424 and
Rule 430A of the Act shall have been made; no stop order suspending the
effectiveness of the Registration Statement or any amendment or supplement
thereto shall have been issued; no proceedings for the issuance of such an order
shall have been commenced or shall be pending, or, to the knowledge of the
Company, threatened or contemplated by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been disclosed to you and
complied with to your satisfaction; and no stop order suspending the sale of the
Shares in any jurisdiction shall have been issued, and no proceeding for that
purpose shall have been instituted, or, to the knowledge of the Company,
threatened or contemplated.

(b) On each Closing Date (i) the Registration Statement and the
Prospectus, as they may then be amended or supplemented, shall contain all
statements that are required to be stated therein under the Act and shall
conform in all material respects to the Act, the Company shall have complied in
all material respects with Rule 430A (if it shall have elected to rely thereon)
and neither the Registration Statement nor the Prospectus, as they may then be
amended or supplemented, shall contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein (with respect to the Prospectus, in the light of the
circumstances under which they were made) not misleading; (ii) there shall not
have been since the respective dates as of which information is given in the
Registration Statement, any material adverse change, or any development which
might reasonably be viewed as resulting in a material adverse change in or
affecting the assets, properties, results of operation, financial condition or
business prospects of the Company and the Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business; (iii) the Company shall have
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the applicable Closing Date; and (iv) the
representations and warranties of the Company set forth in Section 1 shall be
accurate as though expressly made at and as of the applicable Closing Date. At
each applicable Closing Date, you shall have received a certificate executed by
the

18
<PAGE>

Chief Executive Officer and the Chief Financial Officer of the Company, dated as
of the applicable Closing Date, to such effect and with respect to the following
additional matters: (A) based on the oral advice of the Commission, the
Registration Statement has become effective under the Act and no stop order
suspending the effectiveness of the Registration Statement or preventing or
suspending the use of the Prospectus has been issued, and no proceedings for
that purpose have been instituted or are pending or, to the best of their
knowledge, threatened under the Act; and (B) they have carefully reviewed the
Registration Statement and the Prospectus and when the Registration Statement
became effective and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus and any amendments or
supplements thereto contained all statements and information required to be
included therein or necessary to make the statements therein (with respect to
the Prospectus, in the light of the circumstances under which they were made)
not misleading and neither the Registration Statement nor the Prospectus and any
amendment or supplement thereto included any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein (with respect to the Prospectus, in
light of the circumstances under which they were made) not misleading, and,
since the effective date of the Registration Statement, there has occurred no
event required to be set forth in an amended or supplemented Prospectus that has
not been so set forth; and (C) all representations, warranties, covenants and
statements made herein by the Company are true and correct in all material
respects at such Closing Date, with the same effect as if made on and as of such
Closing Date, and all agreements herein to be performed by the Company on or
prior to such Closing Date have been duly performed; provided, however, that the
Chief Executive Officer and the Chief Financial Officer need not make any
certification with respect to any statements made in reliance upon, and in
conformity with, written information furnished to the Company by you,
specifically for use in the preparation of the Registration Statement and the
Prospectus.

(c) You shall have received from Ellis Foster, Chartered Accountants,
a letter, dated the date hereof, in form and substance satisfactory to you,
together with signed or reproduced copies of such letter for each of the other
Underwriters, confirming that they are independent public accountants with
respect to the Company within the meaning of the Act, stating in effect that:

(i) in their opinion, the consolidated financial statements
included in the Registration Statement and covered by their report thereon
comply as to form in all material respects with the applicable accounting
requirements of the Act; and

(ii) in addition to the procedures referred to in clause (i)
above and the audit referred to in their report included in the Registration
Statement, they have carried out certain specific procedures, not constituting
an audit in accordance with Canadian generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified by
you which are derived from the general accounting records of the Company, which
appear in the Registration Statement or the exhibits or schedules thereto and
are specified by you, and have compared such amounts, percentages and financial

19
<PAGE>

information with the accounting records of the Company and with material derived
from such records and have found them to be in agreement.

(d) You shall have received from KPMG LLP, a letter, dated the date
hereof, in form and substance satisfactory to you, together with signed or
reproduced copies of such letter for each of the other Underwriters, confirming
that they are independent public accountants with respect to the Company within
the meaning of the Act, stating in effect that:

(ii) on the basis of limited procedures (set forth in detail in
such letter and made in accordance with such procedures as may be reasonably
specified by you) not constituting an audit in accordance with generally
accepted auditing standards, consisting of (but not limited to) a reading of the
latest available internal unaudited consolidated financial statements of the
Company, a reading of minute books of the Company, inquiries of officials of the
Company responsible for financial and accounting matters, and such other
inquiries and procedures, as may be specified in such letter:

(A) nothing has come to their attention which caused them
to believe that the unaudited consolidated financial statements of the Company
included in the Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the Act or are not
presented in conformity with Canadian generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements included in the Registration Statement;

(B) the financial data for the five fiscal years ended
August 31, 1998 and for the six-month periods ended February 28, 1998 and 1999,
included in the Prospectus under the caption "Prospectus Summary -Summary
Selected Financial Data" agree with the corresponding amounts in the audited
consolidated financial statements or unaudited consolidated financial
statements, as appropriate, of the Company for such periods;

(C) at a specified date not more than five business days
prior to the date of delivery of such letter, there was no change in the capital
stock, bank indebtedness, due to directors and shareholders, or long-term debt
of the Company other than scheduled repayments, or any decreases in total
assets, shareholders' equity or other items specified by the Underwriters from
that set forth in the consolidated balance sheet at February 28, 1999, included
in the Prospectus, except as described in the Prospectus or such letter; or

(D) for the period from February 28, 1999, to a specified
date not more than five days prior to the date of delivery of such letter, there
were no

20
<PAGE>

decreases in revenue, earnings from operations, earnings before income taxes, or
total or per share amounts of net earnings of the Company, in each case as
compared with the corresponding period of the preceding year, except in each
case for decreases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and

(iii) in addition to the procedures referred to in clause (ii)
above and the audit referred to in their report included in the Registration
Statement, they have carried out certain specific procedures, not constituting
an audit in accordance with Canadian generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified by
you which are derived from the general accounting records of the Company, which
appear in the Registration Statement or the exhibits or schedules thereto and
are specified by you, and have compared such amounts, percentages and financial
information with the accounting records of the Company and with material derived
from such records and have found them to be in agreement.

(e) At each Closing Date you shall have received from KPMG LLP a
letter, in form and substance satisfactory to you and dated as of such Closing
Date, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (c) above, except that the specified date
referred to shall be a date not more than five business days prior to such
Closing Date.

(f) In the event that any of the letters to be delivered pursuant to
subsections (d) and (e) above sets forth any such changes, decreases or
increases, it shall be a further condition to your obligations that you shall
have determined, after discussions with officers of the Company responsible for
financial and accounting matters and with KPMG LLP, that such changes, decreases
or increases as are set forth in such letters do not reflect a material adverse
change in the capital stock, bank indebtedness, due to directors and
shareholders, long-term debt, total assets, or shareholders' equity of the
Company as compared with the amounts shown in the latest consolidated balance
sheet of the Company, or a material adverse change in revenues or the total or
per share amounts of net earnings, of the Company, in each case as compared with
the corresponding period of the prior year.

(g) On each Closing Date, you shall have received from Troy & Gould
Professional Corporation, U.S. counsel for the Underwriters, and Bull Housser &
Tupper Canadian counsel for the Underwriters, such opinions with respect to the
Registration Statement, the Prospectus and other related matters as you
reasonably may require and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters.

21
<PAGE>

(h) On each Closing Date, there shall have been furnished to you the
opinions (addressed to the Underwriters) of Brand Farrar & Buxbaum LLP, U.S.
counsel for the Company (as to matters of U.S. law), Page Fraser & Associates,
Canadian counsel for the Company (as to matters of Canadian law), and
Thorsteinssons, Tax Lawyers, special Canadian tax counsel for the Company (as to
Canadian tax matters discussed under the caption "Tax Considerations" in the
Prospectus), dated such Closing Date and in form and substance reasonably
satisfactory to you and counsel for the Underwriters and stating that it may be
relied upon by counsel for the Underwriters in giving their opinions, to the
collective effect that:

(i) The Company and each Subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction in which it is incorporated, with full corporate power and
authority to own or lease and occupy its properties and conduct its business as
described in the Prospectus, and is duly qualified to do business and is in good
standing in each jurisdiction in which, to such counsel's knowledge, the
character of the business conducted by it or the location of the properties
owned or leased by it makes such qualification necessary, except where the
failure to so qualify would not have a Material Adverse Effect.

(ii) The authorized, issued and outstanding capital stock of the
Company conforms as to legal matters in all material respects to the description
thereof as set forth under the caption "Description of Capital Stock" in the
Prospectus. The Voting Shares and the Representatives' Warrants conform as to
legal matters in all material respects to the description thereof contained in
the Registration Statement and the Prospectus. The outstanding Voting Shares
have been, and the Shares that are being sold by the Company, upon issuance and
delivery and payment therefor in the manner herein described will be, duly
authorized, validly issued, fully paid and nonassessable. Except as described in
the Registration Statement and Prospectus, there are no preemptive or, to the
knowledge of such counsel, other rights to subscribe for or to purchase, or any
restrictions upon the voting or transfer of, any shares of Voting Shares
pursuant to the Company's memorandum or articles or any agreement or other
instrument known to such counsel to which the Company is a party or by which it
may be bound; and to such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Shares as contemplated by
this Agreement, or the offer and sale of the Representatives' Warrants (or the
Representatives' Warrant Shares) as contemplated by the Representatives' Warrant
Agreement, gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any Voting Shares. To such
counsel's knowledge, the Company has no subsidiaries other than the
Subsidiaries.

(iii) Neither the issuance, sale or delivery by the Company of
the Shares or the Representatives' Warrants, nor the execution, delivery and
performance of this Agreement and the Representatives' Warrant Agreement by the
Company, nor the consummation by the Company of any of the other transactions
contemplated hereby and thereby will result in a violation of, or constitute a
default under, the memorandum or articles of the Company, or result in a
material violation of or constitute a default under any

22
<PAGE>

material agreement, indenture or other instrument known to such counsel, to
which the Company or any Subsidiary is a party or by which any of them is bound,
or to which any of their properties is subject, nor, to such counsel's
knowledge, will the performance by the Company of its obligations hereunder
violate any law, ordinance, rule, administrative regulation or decree of any
court or any governmental agency or body having jurisdiction over the Company or
any Subsidiary or any of their respective properties or assets, or result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of the Company or any Subsidiary; provided, however, that no
opinion need be rendered regarding any state or provincial securities or "blue
sky" laws. Except for permits and similar authorizations required under the Act,
by the NASD or under the securities or "blue sky" laws of certain jurisdictions
and for such permits and authorizations which have been obtained, no consent,
approval, authorization or order of any court or governmental agency or body is
required in connection with the consummation by the Company of the transactions
contemplated by this Agreement and the Representatives' Warrant Agreement.

(iv) To such counsel's knowledge, no event has occurred that
renders, or with the giving of notice or lapse of time or both would render, the
Company or any Subsidiary in violation of or in default under its memorandum or
articles or, to such counsel's knowledge, in violation of any material
agreement, indenture or other instrument known to such counsel, to which the
Company or any Subsidiary is a party or by which any of them is bound or to
which any of their respective properties or assets is subject.

(v) Based upon the oral advice of the Commission, the
Registration Statement and all post-effective amendments thereto have become
effective under the Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending before or
contemplated by the Commission and all filings required by Rule 424 and Rule
430A of the Act have been made in a timely manner; and the Registration
Statement and the Prospectus and any amendment or supplement thereto, as of
their respective effective dates and as of each Closing Date, complied as to
form in all material respects with the requirements of the Act (except that
counsel need express no opinion on or take any responsibility for the financial
statements contained therein or any financial or statistical data derived
therefrom).

(vi) The statements under the captions "Dividend Policy,"
"Business -Regulatory Considerations," "Description of Capital Stock," "Shares
Eligible for Future Sale," "Underwriting," "Management," and "Tax
Considerations" in the Prospectus and in Items 14 and 15 of Part II of the
Registration Statement, insofar as such statements constitute a summary of legal
matters, documents or proceedings referred to therein, provide a fair summary of
such legal matters, documents and proceedings; and such counsel does not know of
any contracts or documents of a character required to be summarized or described
in the Registration Statement or the Prospectus or required to be filed as
exhibits to the Registration Statement which are not so summarized, described or
filed. There are no statutes or regulations applicable to the Company or any
Subsidiary or certificates, permits or other authorizations from governmental
regulatory officials or bodies required to be obtained

23
<PAGE>

or maintained by the Company or any Subsidiary of a character required to be
disclosed in the Registration Statement or the Prospectus which have not been so
disclosed and described therein.

(vii) Except as described in the Prospectus, such counsel does
not know of any past, pending or threatened action, suit, proceeding, inquiry or
investigation before any court or before or by any public, regulatory or
governmental body or board against or involving the properties or businesses of
the Company or any Subsidiary of a character required to be disclosed in the
Prospectus or, as to threatened litigation, of a character which would be
required to be disclosed if filed, or in either case which, if successful, would
have a Material Adverse Effect.

(viii) Such contracts and documents as are summarized in the
Prospectus are fairly summarized in all material respects; and, to such
counsel's knowledge, each contract or document so described is in full force and
effect in accordance with its terms.

(ix) The Company has the corporate power and authority to enter
into and perform this Agreement and the Representatives' Warrant Agreement, and
to issue, sell and deliver the Shares and the Representatives' Warrants being
issued, sold and delivered by the Company hereunder; this Agreement and the
Representatives' Warrant Agreement have been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution and delivery
by the other parties thereto, constitute the valid and binding agreement of the
Company, enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to the rights of creditors generally
and by general equitable principles, and except as rights to indemnification or
contribution may be limited under federal and state securities laws or may be
contrary to public policy.

(x) All corporate action required in connection with the
authorization and issuance of the Shares and the Representatives' Warrants and
the sale of the Shares and the Representatives' Warrants by the Company in
accordance with the terms of this Agreement and the Representatives' Warrants
have been taken and all authorizations, consents, approvals, licenses or other
orders of any regulatory body, administrative agency or other governmental body
or, to such counsel's knowledge, any other person or entity required for the
valid issuance, sale and delivery of the Shares and the Representatives'
Warrants hereunder and thereunder have been obtained (except that no opinion
need be expressed with respect to such authorizations, consents, approvals,
licenses or other orders as may be required by the state or provincial
securities or "blue sky" laws of any jurisdiction in connection with the sale of
the Shares and the Representatives' Warrants ).

(xi) To such counsel's knowledge, the Company and each
Subsidiary has obtained all material licenses, permits and other governmental
authorizations necessary to the conduct of its business as described in the
Prospectus and such licenses,

24
<PAGE>

permits and other governmental authorizations are in full force and effect and
the Company and each Subsidiary is in all material respects complying therewith.

(xii) The form of certificate representing the Limited Voting
Shares and filed as an exhibit to the Registration Statement is in due and
proper form under the laws of British Columbia, Canada, and other applicable
laws.

(xiii) The Representatives' Warrant Shares have been duly
authorized and reserved for issuance and, when issued and delivered upon payment
therefor in accordance with the terms of the Representatives' Warrants, will be
duly and validly issued, fully paid and non-assessable.

(xiv) The offer and sale of all securities of the Company made
within the last three years as set forth in Item 15 of the Registration
Statement were exempt from the registration requirements of the Act and from the
registration and prospectus requirements of all relevant state, provincial and
local securities laws.

(xv) The Shares have been approved for listing on the AMEX,
subject to official notice of issuance.

(xvi) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, an "investment company" under the
United States Investment Company Act of 1940.

(xvii) No stamp tax or other issuance, goods and services or
transfer taxes or duties and no capital gains, income, withholding or other
taxes are payable by or on behalf of the Underwriters to any authority in Canada
or in any of its provinces in connection with (A) the issuance, sale and
delivery of the Shares to the Underwriters in the manner contemplated in this
Agreement, (B) the resale and delivery of such Shares by the Underwriters in the
United States in the manner contemplated in the Prospectus, or (C) the payment
by the Company of any commission or fee to or for the account of the
Underwriters in connection with their services with respect to clauses (A) and
(B) above or any other transaction contemplated hereby;

(xviii) This Agreement is in proper legal form under the laws of
the Province of British Columbia for the enforcement thereof against the Company
in the Province of British Columbia without further action on the part of the
Underwriters; and to ensure the legality, validity, enforceability or
admissibility in evidence of this Agreement in the Province of British Columbia
it is not necessary that it be filed or recorded with any court or other
authority in the Province of British Columbia (except at the time of enforcement
so as to enter same as evidence) or that any stamp or similar tax be paid on or
in respect of any such document or the Shares;

25
<PAGE>

(xix) Assuming the choice of the law of the State of California
provided for in this Agreement is effective under such law, the Company has the
corporate power to submit to the jurisdiction of the courts of the State of
California or the courts of the United States having jurisdiction in the State
of California in respect of any legal actions or proceedings arising out of this
Agreement;

(xx) A court of competent jurisdiction in the Province of
British Columbia (a "British Columbia Court") would uphold the choice of the law
of the State of California as the proper law governing this Agreement, and
subject to paragraph (xxi) below, would apply the internal laws of the State of
California, to the extent specifically pleaded and proven, in any action seeking
to enforce this Agreement;

(xxi) Subject to the qualifications contained herein and to the
qualification that enforcement in the Province of British Columbia of the
indemnity and contribution provisions set forth in Section 8 of this Agreement
may be limited by the laws of the Province of British Columbia and the federal
laws of Canada applicable therein, there are no reasons under the present laws
of the Province of British Columbia and the federal laws of Canada applicable
therein upon the grounds of public order as understood in international
relations for avoiding recognition of a judgment of a California Court enforcing
the performance of this Agreement by a judgment awarding a sum of money as
compensatory damages or for avoiding to enforce the choice of law provisions of
this Agreement; and

(xxii) Except as described in the Prospectus, to such counsel's
knowledge, there are no claims, payments, issuances, arrangements or
understandings of the Company for services in the nature of a finder's or
origination fee with respect to the sale of the Shares hereunder.

In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company, counsel for
the Underwriters, representatives of the independent public accountants for the
Company, you and your counsel, at which the contents of the Registration
Statement and the Prospectus and related matters were discussed and, although
such counsel is not passing upon, and does not assume responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (other than as set forth in clause (v)
above), on the basis of the foregoing, no facts have come to such counsel's
attention that lead them to believe either that the Registration Statement at
the time such Registration Statement became effective contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus, at the applicable Closing Date contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, except that such counsel need express no opinion with
respect to, or take any responsibilities for, the financial statements included
in the Registration Statement or the Prospectus or any financial or statistical
data derived therefrom.

26
<PAGE>

In rendering the foregoing opinion, such counsel may rely on the following:

(A) as to matters involving the application of laws other
than the laws of the United States, the State of California, Canada and the
Province of British Columbia in which they are admitted, to the extent such
counsel deems proper and to the extent specified in such opinion, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' counsel) of other counsel familiar with applicable laws; and

(B) as to matters of fact, to the extent they deem proper,
on certificates of officers of the Company and of the Subsidiaries and
certificates or other written statements of officers or departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company and the Subsidiaries and certificates of the
Company's transfer agent, provided that copies of all such opinions, statements
or certificates shall be delivered to Underwriters' counsel, and, if written
confirmation of the Commission is not available at the time such opinion is
rendered, upon the current oral representations of members of the Commission's
staff with respect to the Registration Statement or any amendment or supplement
thereto having become effective and the lack of issuance of a stop order or
institution of proceedings for that purpose.

(i) At or prior to the First Closing Date, the Representatives'
Warrant Agreement shall have been entered into among the Company, The Seidler
Companies Incorporated and Josephthal & Co. Inc. and the Representatives'
Warrants shall have been sold and issued to The Seidler Companies and Josephthal
& Co. Inc. as provided therein.

(j) At or prior to the First Closing Date, you shall have received the
written agreements described in Section 5(l) hereof.

(k) At the Closing Date, the Shares shall have been approved for
listing on the AMEX, subject to official notice of issuance.

(l) The Company shall have furnished to you such additional documents
and certificates as you may reasonably request.

All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you and to counsel for the Underwriters. The Company
shall furnish you with such conformed copies of such opinions, certificates,
letters and other documents as you shall reasonably request for each of the
Underwriters. If any of the conditions specified in this Section 6 shall not
have been fulfilled when and as required by this Agreement, this Agreement and
all obligations of the Underwriters hereunder may be cancelled at, or at any
time prior to, each Closing Date, by you. Any such cancellation shall be
without liability of the Underwriters to the Company. Notice of such
cancellation shall be given to the Company in writing, or by telephone and
confirmed in writing.

27
<PAGE>

7. Conditions to the Company's Obligations. The obligations of the
---------------------------------------
Company are subject to the condition that, on each Closing Date, the Company
shall have received a certificate executed by the Representatives that the
Underwriters have not offered the Shares for sale to the public in Canada or
knowingly sold any of the Shares to residents of Canada.

8. Indemnification.
---------------

(a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject under the Act, the Exchange Act or other
United States or Canadian federal, state or provincial law or regulation,
specifically including but not limited to losses, claims, damages or liabilities
related to negligence on the part of any Underwriter, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any breach of any warranty or covenant of the Company herein
contained or any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus, the
Prospectus, or any amendment or supplement thereto, or in any "blue sky"
application or other document executed by the Company or based upon any
information furnished in writing by the Company, filed in any jurisdiction in
order to qualify any or all of the Shares under the securities laws thereof
("Blue Sky Application"), or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements (with respect to the Prospectus, in the
light of the circumstances under which they were made) therein not misleading;
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such preliminary prospectus or the Prospectus, or such
amendment or supplement, or any Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by you or by any
Underwriter through you expressly for use therein; provided, further, that the
Company will not be liable for any such losses, claims, damages, or liabilities
arising from the sale of the Shares to any person if a copy of the Prospectus
(as first filed pursuant to Rule 424(b)) or the Prospectus as amended or
supplemented by all amendments or supplements thereto which has been furnished
to the Underwriters shall not have been sent, mailed or given to such person, at
or prior to the written confirmation of the sale of such Shares to such person,
but only if and to the extent that such Prospectus, if so sent or delivered,
would have cured the defect giving rise to such losses, claims, damages or
liabilities. In addition to its other obligations under this Section 8(a), the
Company agrees that, as an interim measure during the pendency of any such
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 8(a), it will reimburse the Underwriters on a monthly
basis for all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to

28
<PAGE>

reimburse the Underwriters for such expense and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. This indemnity agreement shall be in addition to any liabilities
that the Company may otherwise have including under this Agreement.

(b) Each Underwriter, severally but not jointly, will indemnify and
hold harmless the Company against any losses, claims, damages or liabilities to
which the Company may become subject, under the Act, the Exchange Act or other
United States or Canadian federal, state or provincial law or regulation,
specifically including but not limited to losses, claims, damages or liabilities
related to negligence on the part of the Company, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any breach of any warranty or covenant by you herein contained or
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any preliminary prospectus, the Prospectus, or
any amendment or supplement thereto, or any Blue Sky Application or arise out of
or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, such preliminary prospectus or
the Prospectus, or such amendment or supplement or any Blue Sky Application, in
reliance upon and in conformity with information furnished to the Company by
such Underwriter expressly for use therein; and will reimburse the Company for
any legal or other expenses reasonably incurred by the Company in connection
with investigating or defending any such loss, claim, damage, liability or
action. In addition to their other obligations under this Section 8(b), the
Underwriters agree that, as an interim measure during the pendency of any such
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 8(b), they will reimburse the Company on a monthly
basis for all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding notwithstanding the absence of a judicial determination as to
the propriety and enforceability of their obligation to reimburse the Company
for such expense and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. This indemnity
agreement shall be in addition to any liabilities which the Underwriters may
otherwise have including under this Agreement.

The indemnity agreement in this Section 8(b) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer and
director or partner of the Company and each person, if any, who controls the
Company within the meaning of the Act to the same extent as such agreement
applies to the Company.

29
<PAGE>

(c) Within ten days after receipt by an indemnified party under
subsection (a) or (b) above of notice of commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; no indemnification provided in Section 8(a)
or 8(b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
prejudiced by the failure to give such notice, but the omission so to notify the
indemnifying party will not relieve the indemnifying party from any liability
that it may have to any indemnified party otherwise than under this Section 8 or
to the extent that it is not prejudiced as a proximate result of such failure.
In case any such action shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein, and, to the extent
that it shall elect by written notice delivered to the indemnified party,
jointly with any other indemnifying party, similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses, other than
reasonable costs of investigation, subsequently incurred by such indemnified
party in connection with the defense thereof. The indemnified party shall have
the right to employ its own counsel in any such action, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the employment of counsel by such indemnified party has been
authorized by the indemnifying party, (ii) the indemnified party shall have been
advised by such counsel that there may be a conflict of interest between the
indemnifying party and the indemnified party in the conduct of the defense of
such action (in which case the indemnifying party shall not have the right to
direct the defense of such action on behalf of the indemnified party) or (iii)
the indemnifying party shall not in fact have employed counsel to assume the
defense of such action, in any of which events such fees and expenses shall be
borne by the indemnifying party. The indemnifying party shall not be liable for
any settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.

(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 8(a) and 8(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration or
a written notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make such
designation of an arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Any such
arbitration will be limited to the operation of the interim reimbursement
provisions contained in Sections 8(a) and 8(b) hereof and will not

30
<PAGE>

resolve the ultimate propriety or enforceability of the obligation to indemnify
for expenses that is created by the provisions of Sections 8(a) and 8(b).

(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 8 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company and the
Underwriters shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by such indemnity incurred by
the Company and one or more of the Underwriters, as incurred, in such
proportions that (i) the Underwriters are responsible pro rata for that portion
represented by the underwriting discount appearing on the cover page of the
Prospectus bears to the public offering price (before deducting expenses)
appearing thereon, and (ii) the Company is responsible for the balance;
provided, however, that no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation; provided,
however, that if the allocation provided above is not permitted by applicable
law, the Company and the Underwriters shall contribute to the aggregate losses
in such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages or liabilities referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of this
Section 8(e), each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act shall have the same rights to contribution as
such Underwriter, and each director of the Company, each officer of the Company
who signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act shall have the same rights
to contribution as the Company.

(f) The parties to this Agreement acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions of this Agreement, including without
limitation, the provisions of this Section 8, and are fully informed regarding
said provisions. They further acknowledge that the

31
<PAGE>

provisions of this Section 8 fairly allocate the risks in light of the ability
of the parties to investigate the Company and its business in order to assure
that adequate disclosure is made in the Registration Statement and Prospectus as
required by the Act. The parties are advised that federal or state public
policy, as interpreted by the courts in certain jurisdictions, may be contrary
to certain of the provisions of this Section 8, and the parties hereto hereby
expressly waive and relinquish any right or ability to assert such public policy
as a defense to a claim under this Section 8 and further agree not to attempt to
assert any such defense.

9. Representations and Agreements to Survive Delivery. The
--------------------------------------------------
representations, warranties, indemnities, agreements and other statements of the
Underwriters, the Company or its officers set forth in or made pursuant to this
Agreement will remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Company, or any Underwriter or
controlling person, with respect to an Underwriter or the Company and will
survive delivery of and payment for the Shares or termination of this Agreement.

10. Effective Date of Agreement and Termination.
-------------------------------------------

(a) This Agreement shall become effective (i) if at the time of
execution of this Agreement the Registration Statement has not become effective,
at 10:00 A.M. eastern time on the first full business day following the
effectiveness of the Registration Statement, or (ii) if at the time of execution
of this Agreement, the Registration Statement has been declared effective, at
10:00 A.M. eastern time on the first full business day following the date of
execution of this Agreement; but this Agreement shall nevertheless become
effective at such earlier time after the Registration Statement becomes
effective as you may determine on and by notice to the Company or by release of
any of the Shares for sale to the public. For the purposes of this Section 10,
the Shares shall be deemed to have been so released upon the release for
publication of any newspaper advertisement relating to the Shares or upon the
release by you of telegrams or facsimile messages (i) advising the Underwriters
that the Shares are released for public offering, or (ii) offering the Shares
for sale to securities dealers, whichever may occur first. By giving notice
before the time this Agreement becomes effective, you, as the Representatives of
the several Underwriters, or the Company, may prevent this Agreement from
becoming effective, without liability of any party to any other party, except
that the Company shall remain obligated to pay costs and expenses to the extent
provided in Sections 5(i) and 10(d) hereof.

(b) You may terminate this Agreement by notice to the Company at any
time at or prior to the Closing Date (i) in accordance with the last paragraph
of Section 6 of this Agreement; or (ii) if there has been, since the respective
dates as of which information is given in the Registration Statement, any
material adverse change, or any development which might reasonably be viewed as
resulting in a material adverse change in or affecting the assets, properties,
results of operation, financial condition or business prospects of the Company
and the Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business; or (iii) if there has occurred or accelerated any outbreak
of hostilities or other national or international calamity or crisis or change
in economic or political conditions the effect of which on the financial markets
of the United States is such as to make it, in

32
<PAGE>

your judgment, impracticable to market the Shares or enforce contracts for the
sale of the Shares; or (iv) if trading in any securities of the Company has been
suspended by the Commission or by the NASD or the AMEX, or if trading generally
on the AMEX or in the over-the-counter market has been suspended, or limitations
on prices for trading (other than limitations on hours or numbers of days of
trading) have been fixed, or maximum ranges for prices for securities have been
required, by such exchange or the NASD or by order of the Commission or any
other governmental authority; or (v) if a banking moratorium has been declared
by federal or New York or California authorities; or (vi) any federal or state
statute, regulation, rule or order of any court or other governmental authority
has been enacted, published, decreed or otherwise promulgated which in your
reasonable opinion materially adversely affects or will materially adversely
affect the business or operations of the Company and the Subsidiaries taken as a
whole, or (vii) any action has been taken by any federal, state, provincial or
local government or agency in respect of its monetary or fiscal affairs which in
your reasonable opinion has a material adverse effect on the securities markets
in the United States.

(c) If this Agreement is terminated pursuant to this Section 10, such
termination shall be without liability of any party to any other party, except
to the extent provided in Sections 5(i) and 10(d). Notwithstanding any such
termination, the provisions of Section 8 shall remain in effect.

(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof, or if the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth herein is not satisfied or because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or to comply with any
provision hereof (other than by reason of a default of the Underwriters), the
Company agrees, subject to demand by you, to reimburse the Underwriters for all
reasonable out-of-pocket expenses (including the reasonable fees and expenses of
counsel to the Underwriters), incurred by the Underwriters in connection
herewith.

11. Default by One or More of the Underwriters.
------------------------------------------

(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares hereunder, and if the Firm Shares with
respect to which such default relates do not (after giving effect to
arrangements, if any, made pursuant to subsection 11(b) below) exceed in the
aggregate 10% of the number of shares of Firm Shares that all Underwriters have
agreed to purchase hereunder, then such Firm Shares to which the default relates
shall be purchased by the non-defaulting Underwriters in the respective
proportions that the numbers of Firm Shares set forth opposite their respective
names in Schedule I hereto bear to the aggregate number of Firm Shares set forth
opposite the names of the non-defaulting Underwriters.

33
<PAGE>

(b) If such default relates to more than 10% of the Firm Shares, you
may, in your discretion, arrange for another party or parties (including any
non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares to which such default relates on the terms contained herein. If within
36 hours after such a default you do not arrange for the purchase of the Firm
Shares to which such default relates as provided in this Section 11, this
Agreement shall thereupon terminate, without liability on the part of the
Company with respect thereto (except as provided in Sections 5(i) and 8 hereof)
or the several non-defaulting Underwriters (except as provided in Section 8
hereof), but nothing in this Agreement shall relieve a defaulting Underwriter or
Underwriters of its or their liability, if any, to the other several
Underwriters and the Company for damages occasioned by its or their default
hereunder.

(c) If the Firm Shares to which the default relates are to be
purchased by the non-defaulting Underwriters, or are to be purchased by another
party or parties as aforesaid, you or the Company shall have the right to
postpone the First Closing for a period not exceeding seven business days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement, the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus that, in the opinion
of counsel to the Underwriters, may thereby be made necessary or advisable. The
term "Underwriter" as used in this Agreement shall include any party substituted
under this Section 11 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares.

12. Default by the Company. If the Company shall fail at the First
----------------------
Closing Date to sell and deliver the respective aggregate number of Firm Shares
that it is obligated to sell, then this Agreement shall terminate without any
liability on the part of any non-defaulting party, except to the extent provided
in Sections 5(i) and 10(d) and except that the provisions of Section 8 shall
remain in effect. No action taken pursuant to this Section shall relieve the
Company from liability, if any, in respect of its default.

13. Notices. Except as otherwise provided in this Agreement, (a) whenever
-------
notice is required by the provisions of this Agreement to be given to the
Company, such notice shall be in writing, addressed to the Company at Number
302, 1132 Hamilton Street, Vancouver VB6-2S2, British Columbia, Canada, or by
telecopier (confirmed in writing) at (604) 681-3299, Attention: President, with
a copy to Brand Farrar & Buxbaum LLP at 515 South Flower Street, Suite 3600, Los
Angeles, California 90071-2201, or by telecopier at (213) 426-6222, Attention:
Margaret G. Graf, Esq., and (b) whenever notice is required by the provisions of
this Agreement to be given to the several Underwriters, such notice shall be in
writing addressed to the Underwriters in care of The Seidler Companies
Incorporated, 515 South Figueroa Street, Suite 1100, Los Angeles, California
90071-3328, or by telecopier at (213) 688-8896, Attention: Joseph C. Sherwood,
III, with a copy to Troy & Gould Professional Corporation at 1801 Century Park
East, Suite 1600, Los Angeles, California 90067, or by telecopier at (310) 201-
4746, Attention: Dale E. Short, Esq.

34
<PAGE>

14. Parties. This Agreement is made solely for the benefit of the several
-------
Underwriters, the Company, any officer, director or controlling person referred
to in Section 8 hereof, and their respective successors and assigns, and no
other person shall acquire or have any right by virtue of this Agreement. The
term "successors and assigns," as used in this Agreement, shall not include any
purchaser of any of the Shares from any of the Underwriters merely by reason of
such purchase. In all dealings with the Company under this Agreement, you shall
act on behalf of each of the several Underwriters and the Representatives, and
the Company shall be entitled to act and rely upon any statement, request,
notice or agreement made or given by you jointly or by The Seidler Companies
Incorporated on your behalf.

15. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
the choice of law or conflict of laws principles thereof.

16. Consent to Jurisdiction and Service of Process. All judicial
----------------------------------------------
proceedings arising out of or relating to this Agreement and the
Representatives' Warrant Agreement or the transactions contemplated hereby or
thereby may be brought in any state or federal court of competent jurisdiction
in the County of Los Angeles, State of California, and by execution and delivery
of this Agreement, each of the parties hereto accepts for itself and in
connection with its properties, generally and unconditionally, the nonexclusive
jurisdiction of the aforesaid courts and waives any defense of forum non
----- ---
conveniens and irrevocably agrees to be bound by any judgment rendered thereby
- ----------
in connection with this Agreement. Each of the parties hereby agrees that
service of process sufficient for personal jurisdiction in any action against
such party in the State of California may be made by any means permitted in
California to the party at the address provided in Section 13 hereof, and each
of the parties hereby acknowledges that such service shall be effective and
binding in every respect. Nothing herein shall affect the right to serve
process in any other manner permitted by law or shall limit the right of a party
to bring proceedings against the other party in the courts of any other
jurisdiction.

17. Counterparts; Facsimile Transmissions. This Agreement may be signed
-------------------------------------
in one or more counterparts, each of which shall constitute an original and all
of which together shall constitute one and the same agreement. Delivery of an
executed counterpart of this Agreement by facsimile shall be equally as
effective as delivery of a manually executed counterpart of this Agreement.
Upon the request of any party, any party who shall have delivered an executed
counterpart of this Agreement by facsimile shall deliver a manually executed
counterpart as well, but the failure to so deliver a manually executed
counterpart shall not affect the validity, enforceability or binding effect of
this Agreement.

35
<PAGE>

Please confirm, by signing and returning to us counterparts of this
Agreement, that you are acting on behalf of yourselves and the several
Underwriters and that the foregoing correctly sets forth the Agreement among the
Company and the several Underwriters.

Very truly yours,

PEACE ARCH ENTERTAINMENT INC.

By
-----------------------------------------
Name: W. D. Cameron White
Title: Chief Executive Officer

Confirmed and accepted as of
the date first above mentioned

THE SEIDLER COMPANIES INCORPORATED
JOSEPHTHAL & CO. INC.,

By: THE SEIDLER COMPANIES INCORPORATED
On behalf of themselves and the other
Underwriters named in Schedule I hereto

By
-------------------------------------
Name: Joseph C. Sherwood, III
Title: Managing Director

<PAGE>

-----------------------------------

REPRESENTATIVES' WARRANT AGREEMENT

among

PEACE ARCH ENTERTAINMENT GROUP INC.

and

THE SEIDLER COMPANIES INCORPORATED

and

JOSEPHTHAL & CO. INC.

-----------------------------------

Dated as of , 1999
------------------
<PAGE>

REPRESENTATIVES' WARRANT AGREEMENT

THIS REPRESENTATIVES' WARRANT AGREEMENT (the "Agreement"), dated as of
______________,1999, is made and entered into by and among PEACE ARCH
ENTERTAINMENT GROUP INC. (formerly Vidatron Entertainment Group Inc.), a
corporation organized under the laws of British Columbia, Canada (the
"Company"), and THE SEIDLER COMPANIES INCORPORATED and JOSEPHTHAL & CO. INC.
(each, a "Warrantholder").

The Company agrees to issue and sell, and each Warrantholder agrees to
purchase, for the price of $.001 per warrant, receipt of which is hereby
acknowledged by the Company, warrants, as hereinafter described (the
"Warrants"), to purchase up to the number of Class B Subordinate Voting Shares
(collectively, the "Shares") of the Company shown opposite the Warrantholder's
name on Schedule 1 to this Agreement in connection with a public offering (the
"Public Offering") by the Company of 1,000,000 Class B Subordinate Voting Shares
of the Company ("Limited Voting Shares") pursuant to an Underwriting Agreement
(the "Underwriting Agreement"), dated as of ______________, 1999, among the
Company and each Warrantholder, as Representatives of the several Underwriters
named in the Underwriting Agreement. The purchase and sale of the Warrants
shall occur on the Closing Date, as defined in the Underwriting Agreement, and
be subject to the conditions to the Underwriters' obligations to purchase
Limited Voting Shares thereunder.

In consideration of the foregoing, and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and each Warrantholder, for value received, hereby agree
as follows:

Section 1. Transferability and Form of Warrants.

1.1 Registration. The Warrants shall be numbered and shall be
registered on the books of the Company when issued.

1.2 Transfer. The Warrants shall be transferable only on the books of
the Company maintained at its principal office in Vancouver, British Columbia,
Canada, or wherever its principal office may then be located, upon delivery
thereof duly endorsed by a Warrantholder or by its duly authorized attorney or
representative, accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration or transfer, the Company shall
execute and deliver new Warrants to the person entitled thereto. At the
Company's request, a transferee shall furnish the Company such written
assurances as it may reasonably request in order to comply with the foregoing
requirements.

1.3 Limitations on Transfer of the Warrants. Subject to the provisions
of section 11 hereof, the Warrants shall not be sold, transferred, assigned or
hypothecated by a Warrantholder until __________________, 2000, except to (i)
one or more persons, each of whom on the date of transfer is an officer of the
Warrantholder; (ii) a general partnership or general partnerships, the general
partners of which are the Warrantholder and one or more persons, each of whom on
the date of transfer is an officer of the Warrantholder; (iii) a successor to
the Warrantholder in merger or consolidation; (iv) a purchaser of all or
substantially all of the Warrantholder's assets; or (v) any person receiving the
Warrants from one or more of the persons listed in this subsection 1.3 at such
person's or persons' death pursuant to will, trust or the laws of intestate
succession. The Warrants may be divided or combined, upon request to the
Company by a Warrantholder, into a certificate or certificates representing the
right to purchase the same aggregate number of Shares. Unless the context
indicates otherwise, the term "Warrantholder" shall include any transferee or
transferees of the Warrants pursuant to this subsection 1.3, and the term
"Warrants" shall include any and all warrants outstanding

1
<PAGE>

pursuant to this Agreement, including those evidenced by a certificate or
certificates issued upon division, exchange, substitution or transfer pursuant
to this Agreement.

1.4 Form of Warrants. The text of the Warrants and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit A
attached hereto. The number of Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants shall be executed on behalf of the Company by its
President or by a Vice President, attested to by its Secretary or an Assistant
Secretary. A Warrant bearing the signature of an individual who was at any time
the proper officer of the Company shall bind the Company, notwithstanding that
such individual shall have ceased to hold such office prior to the delivery of
such Warrant or did not hold such office on the date of this Agreement.

The Warrants shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.

1.5 Legend on Shares. Each certificate for Shares initially issued
upon exercise of the Warrants shall bear the following legend, unless, at the
time of exercise, such Shares are subject to an effective registration statement
under the Securities Act of 1933, as amended (the "Act"):

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT
BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN
COMPLIANCE WITH SECTION 11 OF THE AGREEMENT PURSUANT TO WHICH THEY WERE
ISSUED."

Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to an effective registration statement under
the Act of the securities represented thereby) shall also bear the above legend
unless, in the opinion of counsel satisfactory to the Company, the securities
represented thereby need no longer be subject to such restrictions.

Section 2. Exchange of Warrant Certificate. Any Warrant certificate may be
exchanged for another certificate or certificates entitling the Warrantholder to
purchase a like aggregate number of Shares as the certificate or certificates
surrendered then entitled such Warrantholder to purchase. Any Warrantholder
desiring to exchange a Warrant certificate shall make such request in writing
delivered to the Company, and shall surrender, properly endorsed, with
signatures guaranteed, the certificate evidencing the Warrant to be so
exchanged. Thereupon, the Company shall execute and deliver to the person
entitled thereto a new Warrant certificate as so requested.

Section 3. Term of Warrants; Exercise of Warrants.

(a) Subject to the terms of this Agreement, a Warrantholder shall have
the right, at any time during the period commencing at 9:00 a.m., Pacific Time,
on _________________, 2000 and ending at 5:00 p.m., Pacific Time, on
________________, 2004 (the "Termination Date"), to purchase from the Company up
to the number of fully paid and nonassessable Shares to which the Warrantholder
may at the time be entitled to purchase pursuant to this Agreement, upon
surrender to the Company, at its principal office, of the certificate evidencing
the Warrants to be exercised, together with the purchase form on the reverse
thereof duly filled in and signed, with signatures guaranteed, and upon payment
to the Company of the Warrant Price (as defined in and determined in accordance
with the provisions of this section 3 and sections 7 and 8 hereof), for the
number of Shares in respect

2
<PAGE>

of which such Warrants are then exercised, but in no event for less than 100
Shares (unless less than an aggregate of 100 Shares are then purchasable under
all outstanding Warrants held by a Warrantholder).

(b) Payment of the aggregate Warrant Price shall be made, at the
election of a Warrantholder, in cash, by wire transfer to an account of the
Company designated for this purpose, by the Warrantholder's check payable to the
Company or by the Warrantholder's notice to the Company authorizing it to
withhold from issuance such number of Shares otherwise issuable upon the
exercise of the Warrants which, when multiplied by the Current Market Price (as
defined in section 9), equals the aggregate Warrant Price (a "Net Exercise"), or
any combination of the foregoing methods of payment. Upon surrender of the
Warrants as provided in paragraph (a) of this section 3 and payment of such
Warrant Price as aforesaid, the Company shall issue and cause to be delivered
with all reasonable dispatch to or upon the written order of the Warrantholder,
and in such name or names as the Warrantholder may designate, a certificate or
certificates for the number of full Shares so purchased upon the exercise of the
Warrant, together with cash, as provided in section 9 hereof, in respect of any
fractional Share otherwise issuable upon such surrender. Such certificate or
certificates shall be deemed to have been issued and any person so designated to
be named therein shall be deemed to have become a holder of record of such
securities as of the date of surrender of the Warrants and payment of the
Warrant Price, as aforesaid, notwithstanding that the certificate or
certificates representing such securities shall not actually have been delivered
or that the stock transfer books of the Company shall then be closed. The
Warrants shall be exercisable, at the election of a Warrantholder, either in
full or from time to time in part and, in the event that a certificate
evidencing the Warrants is exercised in respect of less than all of the Shares
specified therein at any time prior to the Termination Date, a new certificate
evidencing the remaining portion of the Warrants will be issued by the Company.

Section 4. Payment of Taxes. The Company will pay all documentary stamp
taxes, if any, attributable to the initial issuance of the Warrants or the
securities comprising the Shares; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the securities comprising the Shares.

Section 5. Mutilated or Missing Warrants. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of a Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon the Company's receipt of the Warrantholder's affidavit that such
Warrant has been lost, stolen or destroyed and its agreement, in form
satisfactory to the Company, to indemnify the Company from any damages incurred
by it as a result of such lost, stolen or destroyed certificate. Applicants for
such substitute Warrant certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.

Section 6. Reservation of Shares. There has been reserved, and the Company
shall at all times keep reserved so long as the Warrants remain outstanding, out
of its authorized Common Stock, such number of shares of Common Stock as shall
be subject to purchase under the Warrants. Every transfer agent for the Common
Stock and other securities of the Company issuable upon the exercise of the
Warrants will be irrevocably authorized and directed at all times to reserve
such number of authorized shares and other securities as shall be required for
such purpose. The Company will keep a copy of this Agreement on file with every
transfer agent for the Common Stock and other securities of the Company issuable
upon the exercise of the Warrants. The Company will supply every such

3
<PAGE>

transfer agent with duly executed stock and other certificates, as appropriate,
for such purpose and will provide or otherwise make available any cash which may
be payable as provided in section 9 hereof.

Section 7. Warrant Price. The price per Share at which Shares shall be
purchasable upon the exercise of the Warrants (the "Warrant Price") shall be
$____________, subject to adjustment pursuant to section 8 hereof.

Section 8. Adjustment of Number of Shares. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant Price
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:

8.1 Adjustments. In case the Company shall (i) pay a dividend in
Limited Voting Shares or make a distribution in Limited Voting Shares, (ii)
subdivide its outstanding Limited Voting Shares, (iii) combine its outstanding
Limited Voting Shares into a smaller number of shares of Limited Voting Shares,
(iv) effect any increase or decrease in the number of outstanding shares of
Limited Voting Shares without receipt of consideration by the Company (other
than by reason of conversion into Limited Voting Shares of multiple voting
shares of the Company in accordance with the terms of the multiple voting shares
in effect on the date hereof), or (v) issue by reclassification of its Limited
Voting Shares other securities of the Company, the Warrant Price and the number
of Shares purchasable upon exercise of the Warrants immediately prior thereto
shall be proportionally adjusted so that a Warrantholder shall be entitled to
receive the kind and number of Shares or other securities of the Company which
it would have owned or would have been entitled to receive immediately after the
happening of any of the events described above, had the Warrants been exercised
at the Warrant Price immediately prior to the happening of such event or any
record date with respect thereto. Any adjustment made pursuant to this
subsection 8.1 shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.

Except for purposes of this subsection 8.1, the term "Limited Voting
Shares" shall mean (i) the class of stock designated as the Limited Voting
Shares of the Company at the date of this Agreement, or (ii) any other class of
stock resulting from successive changes or reclassification of such Limited
Voting Shares consisting solely of changes in par value or from par value to no
par value or from no par value to par value.

8.2 No Adjustment for Dividends. Except as provided in subsection 8.1,
no adjustment in respect of any dividends or distributions out of earnings shall
be made during the term of the Warrants or upon exercise of the Warrants.

8.3 Certificate of Adjustments. Whenever the number of Shares
purchasable upon the exercise of the Warrants is adjusted as herein provided,
the Company shall cause to be promptly mailed to each Warrantholder by first
class mail, postage prepaid, notice of such adjustment, certified by the chief
financial officer of the Company, setting forth the number of Shares purchasable
upon the exercise of the Warrants after such adjustment, a brief statement of
the facts requiring such adjustment and the computation by which such adjustment
was made.

8.4 Preservation of Purchase Rights upon Reclassification,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with each
Warrantholder an agreement that the Warrantholder shall have the right
thereafter upon payment of the Warrant Price in effect immediately prior to such
action to purchase, upon exercise of the Warrants, the kind and amount of shares
and

4
<PAGE>

other securities and property which it would have owned or have been
entitled to receive after the happening of such consolidation, merger, sale or
conveyance had the Warrants been exercised immediately prior top such action.
In the event of a merger described in Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended, in which the Company is the surviving
corporation, the right to purchase Shares under the Warrants shall terminate on
the date of such merger and thereupon the Warrants shall become null and void,
but only if the controlling corporation shall have agreed in writing in advance
of, and as a condition to, such merger to substitute for the Warrants its
warrant which entitles the holder hereof to purchase upon its exercise the kind
and amount of shares and other securities and property which it would have owned
or been entitled to receive had the Warrants been exercised immediately prior to
such merger. Any such agreements referred to in this subsection 8.4 shall
provide for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in section 8 hereof. The provisions
of this subsection 8.4 shall similarly apply to successive consolidations,
merger, sales or conveyances.

8.5 Par Value of Limited Voting Shares. Before taking any action which
would cause an adjustment effectively reducing the portion of the Warrant Price
allocable to each Share issuable upon exercise of the Warrants below the then
par value per Limited Voting Share, or if not so reported, the fair value of a
Share as determined in good faith by the Board of Directors of the Company, the
Company will take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable Common Stock upon exercise of the Warrants.

8.6 Independent Public Accountant. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this section 8, and a certificate signed by such firm shall be prima facie
evidence of the correctness of any computation made under this section 8.

8.7 Statement on Warrant Certificates. Irrespective of any adjustments
in the number of securities issuable upon exercise of Warrants, Warrant
certificates theretofore or thereafter issued may continue to express the same
number of securities as are stated in the similar Warrant certificates initially
issuable pursuant to this Agreement. However, the Company may, at any time in
its sole discretion, make any change in the form of Warrant certificate that it
may deem appropriate and that does not affect the substance thereof; and any
Warrant certificate thereafter issued, whether upon registration or transfer of,
or in exchange or substitution for, an outstanding Warrant certificate, may be
in the form so changed.

Section 9. Fractional Shares; Current Market Price. The Company shall not
be required to issue fractional Shares on the exercise of the Warrants. If a
fraction of a Share would, except for the provisions of this section 9, be
issuable on the exercise of the Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to then Current Market Price
multiplied by such fraction. For purposes of this Agreement, the term "Current
Market Price" shall mean (i) if the Limited Voting Shares are traded in the
over-the-counter market and not in the Nasdaq National Market nor on the
American Stock Exchange or other national securities exchange, the average of
the per share closing bid prices of the Limited Voting Shares on the 30
consecutive trading days immediately preceding the date in question, as reported
by Nasdaq or an equivalent generally accepted reporting service, or (ii) if the
Limited Voting shares are traded in the Nasdaq National Market or on the
American Stock Exchange or other national securities exchange, the average for
the 30 consecutive trading days immediately preceding the date in question of
the daily per share closing prices of the Limited Voting Shares in the Nasdaq
National Market or on the American Stock Exchange or other principal national
securities exchange on which it is listed, as the case may be. For purposes of
clause

5
<PAGE>

(i) above, if trading in the Limited Voting Shares are not reported by The
Nasdaq Small Cap Market, the bid price referred to in said clause shall be the
lowest bid price as reported on The Nasdaq Electronic Bulletin Board or, if not
reported thereon, as reported in the "pink sheets" published by National
Quotation Bureau, Incorporated, or if not so reported, the fair value of a Share
as determined in good faith by the Board of Directors of the Company. The
closing price referred to in clause (ii) above shall be the last reported sale
price or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case in the Nasdaq National
Market or on the principal national securities exchange on which the Limited
Voting Shares are then listed.

Section 10. No Rights as Shareholder; Notices to Warrantholder. Nothing
contained in this Agreement or in the Warrants shall be construed as conferring
upon a Warrantholder or its transferees any rights as a shareholder of the
Company, including the right to vote, receive dividends, consent or receive
notices as a shareholder in respect to any meeting of shareholders for the
election of directors of the Company or any other matter. If, however, at any
time prior to the expiration of the Warrants and prior to their exercise, any
one or more of the following events shall occur:

(a) any action which would require an adjustment pursuant to
subsection 8.1;

(b) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation, merger or sale of its property, assets
and business as an entirety or substantially as an entirety) shall be proposed;

or
(c) any dividend, distribution, subscription rights or other rights
are to be given to shareholders;

then the Company shall give notice in writing of such event to each
Warrantholder, as provided in section 14 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
shareholders entitled to vote on such proposed dissolution, liquidation or
winding up. In the case of any permitted transfer of a Warrant, notice shall be
sufficient if the Company provides notice in the manner set forth in section 14
to the last known address of such holder on the books and records of the
Company. Such notice shall specify such record date or the date of closing the
transfer books, as the case may be. Failure to mail or receive such notice or
any defect therein shall not affect the validity of any action taken with
respect thereto.

Section 11. Restriction on Transfer; Registration Rights.

(a) Each Warrantholder agrees that prior to making any disposition of
the Warrants or the Shares, other than to persons or entities identified in
clauses (i) through (vi), inclusive, of subsection 1.3 hereof, the Warrantholder
shall give written notice to the Company describing briefly the manner in which
any such proposed disposition is to be made; and no such disposition shall be
made if the Company has notified the Warrantholder that in the opinion of
counsel reasonably satisfactory to the Warrantholder a registration statement or
other notification or post-effective amendment thereto (hereinafter collectively
a "Registration Statement") under the Act is required with respect to such
disposition and no such Registration Statement has been filed by the Company,
and declared effective, if necessary, by, the United States Securities and
Exchange Commission (the "Commission").

6
<PAGE>

(b) The Company shall be obligated to the owners of the Warrants and
the Shares to file a Registration Statement as follows:

(i) Whenever during the period commencing ____________, 2000 and
ending on _______________, 2004, the Company proposes to file with the
Commission a Registration Statement (other than as to securities issued pursuant
to an employee benefit plan or as to a transaction subject to Rule 145
promulgated under the Act or which a Form S-4 Registration Statement could be
used), it shall, at least 30 days prior to each such filing, give written notice
of such proposed filing to each Warrantholder and each holder of Shares at their
respective addresses as they appear on the records of the Company, and shall
offer to include and shall include in such filing any proposed disposition of
the Shares upon receipt by the Company, not less than ten days prior to the
proposed filing date, of a request therefor setting forth the facts with respect
to such proposed disposition and all other information with respect to such
person reasonably necessary to be included in such Registration Statement. In
the event that the managing underwriter for said offering advises the Company in
writing that the inclusion of such securities in the offering would be
materially detrimental to the offering, the Company shall include in the
Registration Statement the number of such securities that, in the opinion of
such managing underwriter, can be sold.

(ii) In addition to any Registration Statement pursuant to
subparagraph (i) above, during the period commencing _________________, 2000 and
ending on _______________, 2004, the Company will, as promptly as practicable
(but in any event within 60 days), after written request (the "Request") by The
Seidler Companies Incorporated and Josephthal & Co. Inc., or by a person or
persons holding (or having the right to acquire by virtue of holding the
Warrants) at least 50% of the Shares which have been (or may be) issued upon
exercise of the Warrants, prepare and file at its own expense a Registration
Statement with the Commission and appropriate state "blue sky" authorities
sufficient to permit the public offering of the Shares and will use its best
efforts at its own expense through its officers, directors, auditors and
counsel, in all matters necessary or advisable, to cause such Registration
Statement to become effective as promptly as practicable and to maintain such
effectiveness so as to permit resale of the Shares covered by the Request until
the earlier of the time that all such Shares have been sold or the expiration of
120 days from the effective date of the Registration Statement; provided,
however, that the Company shall only be obligated to file one such Registration
Statement under this subparagraph (ii).

(c) All fees, disbursements and out-of-pocket expenses (other than
Warrantholders' brokerage fees and commissions and legal fees of counsel to the
Warrantholders, if any) in connection with the filing of any Registration
Statement under paragraph (b) of this section 11 (or obtaining the opinion of
counsel and any no-action position of the Commission with respect to sales under
Rule 144) and in complying with applicable securities and blue sky, laws shall
be borne by the Company. The Company at its expense will supply each
Warrantholder and any holder of Shares with copies of such Registration
Statement and the prospectus included therein and other related documents and
any opinions and no-action letters in such quantities as may be reasonably
requested by the Warrantholder or holder of Shares.

(d) The Company shall not be required by this section 11 to file such
Registration Statement if, in the opinion of counsel for the Warrantholders and
holders of Shares and the Company (or, should they not agree, in the opinion of
another counsel experienced in securities law matters acceptable to counsel for
such holders and the Company), the proposed offering or other transfer as to
which such Registration Statement is requested is exempt from applicable United
States federal and state securities laws and would result in all purchasers or
transferees obtaining securities which are not "restricted securities," as
defined in Rule 144 under the Act.

7
<PAGE>

(e) The provisions of this section 11 and section 12 hereof shall
apply to the extent as provided herein if the Company chooses to file an
Offering Statement under Regulation A promulgated under the Act.

(f) The Company agrees that until all Shares have been sold under a
Registration Statement or pursuant to Rule 144 under the Act, it will keep
current in filing all materials required to be filed with the Commission in
order to permit the holders of Shares to sell the same under Rule 144.

Section 12. Indemnification.

(a) In the event of the filing of any Registration Statement with
respect to the Shares pursuant to section 11 hereof, the Company agrees to
indemnify and hold harmless each Warrantholder or holder of such Shares and each
person, if any, who controls the Warrantholder or any holder of such Shares
within the meaning of the Act, against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), to which the Warrantholder or any holder of such Shares or
such controlling person may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any such Registration Statement, or any
related preliminary prospectus, final prospectus, or amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in such Registration
Statement, preliminary prospectus, final prospectus or amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by such Warrantholder or the holder of such Shares specifically
for use in the preparation thereof. This indemnity will be in addition to any
liability which the Company may otherwise have.

(b) Each Warrantholder and holder of the Shares agree that they will
indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include but not be limited to,
all costs of defense and investigation and all attorneys' fees) to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in such Registration
Statement, preliminary prospectus, final prospectus or amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by the Warrantholder or such holder of Shares specifically for
use in the preparation thereof. This indemnity agreement will be in addition to
any liability which the Warrantholder or such holder of Shares may otherwise
have.

8
<PAGE>

(c) Promptly after receipt by an indemnified party under this section
12 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this section 12, notify the indemnifying party of the commencement thereof; but
the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this section 12. In case any such action is
brought against any indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, reasonably assume the defense thereof, subject to the
provisions herein stated, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
section 12 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, unless the indemnifying party shall not pursue the
action to its final conclusion. The indemnified party shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall not be at the expense
of the indemnifying party if the indemnifying party has assumed the defense of
the action with counsel reasonably satisfactory to the indemnified party;
provided that if the indemnified party is a Warrantholder or a holder of Shares
or a person who controls a Warrantholder or a holder of Shares within the
meaning of the Act, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party or (ii) the named
parties to any such action, including any impleaded parties, include both a
Warrantholder or a holder of Shares or such controlling person and the
indemnifying party and a Warrantholder or a holder of Shares or such controlling
person shall have been advised by such counsel that there may be one or more
legal defenses available to a Warrantholder or a holder of Shares or controlling
person which are not available to or in conflict with any legal defenses which
may be available to the indemnifying party (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of a
Warrantholder or a holder of Shares or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for the Warrantholders, the holders of the Shares and
controlling persons, which firm shall be designated in writing by a majority in
interest of such holders and controlling persons based upon the value of the
securities included in the Registration Statement). No settlement of any action
against an indemnified party shall be made without the consent of the
indemnified and the indemnifying parties, which shall not be unreasonably
withheld in light of all factors of importance to such parties.

Section 13. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) a Warrantholder or any
holder of the Shares or controlling person makes a claim for indemnification
pursuant to section 12 hereof but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of section 12 hereof provide for indemnification in such
case or (ii) contribution under the Act may be required on the part of any
Warrantholder or any of the Shares or controlling person, then the Company and
any Warrantholder or any such holder of the Shares or controlling person shall
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all attorneys'
fees), in either such case (after contribution from others) on the basis of
relative fault as well as any other relevant equitable considerations. The
relative fault shall be determined by, reference to, among other things, whether

9
<PAGE>

the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company on the one hand or a Warrantholder or holder of Shares or controlling
person on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and such holders of such securities and such controlling persons
agree that it would not be just and equitable if contribution pursuant to this
section 13 were determined by pro rata allocation or by any other method which
does not take account of the equitable considerations referred to in this
section 13. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this section 13 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.

Section 14. Notices. Any notice pursuant to this Agreement by the Company
or by a Warrantholder or a holder of Shares shall be in writing and shall be
deemed to have been duly given if delivered or mailed by certified mail, return
receipt requested:

(a) If to The Seidler Companies Incorporated, or any of its direct or
indirect transferees, addressed to the Warrantholder or holder of Shares c/o The
Seidler Companies Incorporated, 515 South Figueroa, Suite 1100, Los Angeles,
California 90071, Attention: Managing Director, with a copy to Josephthal & Co.
Inc.

(b) If to Josephthal & Co. Inc., or any of its direct or indirect
transferees, addressed to the Warrantholder or holder of Shares c/o Josephthal &
Co. Inc., 200 Park Avenue, New York, New York 10166, with a copy to The Seidler
Companies Incorporated.

(c) If to the Company, addressed to it at Number 302, 1132 Hamilton
Street, Vancouver, B.C. V6B 2S2, Canada, Attention: President.

Each party may from time to time change the address to which notices to it are
to be delivered or mailed hereunder by notice in accordance herewith to the
other party.

Section 15. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company, the Warrantholders, or the holders of
Shares shall bind and inure to the benefit of their respective successors and
assigns hereunder.

Section 16. Merger or Consolidation of the Company. The Company will not
merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of subsection 8.4 hereof are complied with.

Section 17. Survival of Representations and Warranties. All statements
contained in any schedule, exhibit, certificate or other instrument delivered by
or on behalf of the parties hereto, or in connection with the transactions
contemplated by this Agreement, shall be deemed to be representations and
warranties hereunder. Notwithstanding any investigations made by or on behalf
of the parties to this Agreement, all representations, warranties and agreements
made by the parties to this Agreement or pursuant hereto shall survive.

Section 18. Applicable Law. This Agreement shall be deemed to be a
contract made under the laws of the State of California and for all purposes
shall be construed in accordance with the laws of said State.

10
<PAGE>

Section 19. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the County of Los Angeles,
State of California, and by execution and delivery of this Agreement, each of
the parties hereto accepts for itself and in connection with its properties,
generally and unconditionally, the nonexclusive jurisdiction of the aforesaid
courts and waives any defense of forum non conveniens and irrevocably agrees to
----- --- ----------
be bound by any judgment rendered thereby in connection with this Agreement.
The parties hereby agrees that service of process sufficient for personal
jurisdiction in any action against a party in the State of California may be
made by any means permitted in California to the party at the address provided
in section 14 hereof, and the parties hereby acknowledge that such service shall
be effective and binding in every respect. Nothing herein shall affect the
right to serve process in any other manner permitted by law or shall limit the
right of a party to bring proceedings against the other party in the courts of
any other jurisdiction.

Section 20. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrantholders and the holders of Shares any legal or equitable right, remedy or
claim under this Agreement. This Agreement shall be for the sole and exclusive
benefit of the Company, the Warrantholders and the holders of Shares.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.

PEACE ARCH ENTERTAINMENT GROUP INC.

By
--------------------------------------------
W. D. Cameron White, Chief Executive Officer

THE SEIDLER COMPANIES INCORPORATED

By
---------------------------------------------
Joseph C. Sherwood, III, Managing Director

JOSEPHTHAL & CO. INC.

By:
--------------------------------------------
__________________,______________________

11
<PAGE>

SCHEDULE 1
----------

<TABLE>
<CAPTION>
Name Number of Class B Subordinate Voting Shares
- ----
<S> <C>
The Seidler Companies, Incorporated.................
Josephthal & Co. Inc................................ ----------------------
Total................... 100,000
=======
</TABLE>

12
<PAGE>

EXHIBIT A
---------

THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED,
HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 11
OF THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED.
Warrant Certificate No. ___

REPRESENTATIVES' WARRANTS TO PURCHASE _____________ CLASS B SUBORDINATE VOTING
SHARES

VOID AFTER 5:00 P.M.,
PACIFIC TIME, ON _________, 2004

PEACE ARCH ENTERTAINMENT GROUP INC.

INCORPORATED UNDER THE LAWS
OF THE PROVINCE OF BRITISH COLUMBIA, CANADA

This certifies that, for value received, _________________________________,
the registered holder hereof or permitted assigns (the "Warrantholder"), is
entitled to purchase from Peace Arch Entertainment Group Inc. (formerly Vidatron
Entertainment Group Inc. and herein the "Company"), at any time during the
period commencing at 9:00 A.M., Pacific Time, on ____________, 2000, and before
5:00 p.m., Pacific Time, on _____________________, 2004, at the purchase price
per Share of $____ (the "Warrant Price"), the number of Class B Subordinate
Voting Shares of the Company set forth above (the "Shares"). The number of
Shares issuable upon exercise of each Warrant evidenced hereby shall be subject
to adjustment from time to time as set forth in the Representative's Warrant
Agreement referred to below.

The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price at the principal office of the Company. Payment of
such price shall be made at, the election of the Warrantholder, in cash, by wire
transfer to an account of the Company designated for this purpose, by the
Warrantholder's check payable to the Company or by means of a "Net Exercise" (as
defined in the Representatives' Warrant Agreement referred to below), or any
combination of the foregoing methods of payment.

The Warrants evidenced hereby represent the right to purchase an aggregate
of up to _______________ Shares and are issued under and in accordance with a
Representatives' Warrant Agreement, dated as of ______________________, 1999
(the "Representatives' Warrant Agreement"), among the Company, The Seidler
Companies Incorporated, and Josephthal & Co. Inc., and are subject to the terms
and provisions contained in the Representatives' Warrant Agreement, to all of
which the Warrantholder by acceptance hereof consents.

Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the Shares of Common Stock as to which the Warrants evidenced hereby shall not
have been exercised. These Warrants may be exchanged at the office of the
Company by surrender of this Warrant Certificate properly endorsed for one or
more new Warrants of the same aggregate number of Shares of Common Stock as here
evidenced by the Warrant or Warrants exchanged. No fractional Share of Common
Stock will be issued upon the exercise of rights to purchase hereunder, but the
Company shall pay the cash value of any fraction upon the exercise of one or
more Warrants. These Warrants are transferable at the office of the Company in
the manner and subject to the limitations set forth in the Representative's
Warrant Agreement.

This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a shareholder of the Company.

PEACE ARCH ENTERTAINMENT GROUP INC.

Dated:______________, ____ By___________________________________________
Chief Executive Officer

ATTEST: [Seal]

- -----------------------------------------
Secretary

13
<PAGE>

[_________________________________]

PURCHASE FORM

Peace Arch Entertainment Group Inc.
Number 302, 1132 Hamilton Street
Vancouver, B.C. V6B 2S2, Canada

The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
______________ Class B Subordinate Voting Shares of (the "Shares") provided for
therein, and requests that certificates for the Shares be issued in the name of:

---------------------------------------------------------------
(Please Print or Type Name, Address and Social Security Number)

---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------

and, if said number of shares shall not be all the Shares purchasable hereunder,
that a new Warrant Certificate for the balance of the Shares purchasable under
the within Warrant Certificate be registered in the name of the undersigned
Warrantholder or his Assignee as below indicated and delivered to the address
stated below.

Dated:
---------------------------

Name of Warrantholder or Assignee:
--------------------------------------
(Please Print)

Address:
---------------------------------------

---------------------------------------

Signature:
---------------------------------------

Note: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been
assigned.

ASSIGNMENT

(To be signed only upon assignment of Warrants)

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto

(Name, Address, and Social Security or Employer Identification Number of
Assignee Must Be Printed or Typewritten)

---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------

_________________ of the within Warrants, hereby irrevocably constituting and
appointing _____________________ Attorney to transfer said Warrants on the books
of the Company, with full power of substitution in the premises. If such number
of Warrants is less than all the Warrants, a new Warrant shall be issued in the
undersigned's name for the balance of the Warrants.

Dated:
--------------------- --------------------------------------
Signature of Registered Holder

Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant Certificate in every
particular, without alteration or enlargement or any change whatever.

<PAGE>

EXHIBIT 21.1

(Note: All of the following are corporations of, and doing business solely
within, British Columbia, Canada, unless otherwise noted.)

A. 100% subsidiaries of Vidatron Entertainment Group Inc.

1. 552552 B.C. Ltd.
2. API Aviator Pictures Inc. (commercials and music videos)
3. The Eyes Multi-Media Productions Inc. (video and multi-media productions)
4. Soho Enterprises Ltd. (production facilities)
5. Sugar Entertainment Ltd. (television production)
6. Vidatron Television Inc. (development and production)

B. 50% subsidiaries of Vidatron Entertainment Group Inc.

1. 552551 B.C. Ltd.

C. 100% subsidiaries of Sugar Entertainment Ltd.

1. Annie O Productions Ltd.
2. D.M.G. Too Productions Inc.
3. Dead Man's Gun Productions Inc.
4. Diva Productions Inc.
5. First Wave Productions Inc.
6. Forty Winks Productions Inc.
7. Jetlag Productions Inc.
8. Prisoner of Zenda Productions Inc.
9. Robin Eh? Productions Inc.
10. Ronnie and Julie Productions Inc.
11. S & F Productions Inc.
12. X Marks the Spot Productions Inc.

D. 100% subsidiaries of Vidatron Television Inc.

1. 1730 Holdings Ltd.
2. Baby Pinsky Productions Inc.
3. Citizen Productions Inc.
4. Harm's Way Productions Inc.
5. Island of Whales Productions Inc.
6. Outside Chance Productions Inc.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS

The Board of Directors
Vidatron Entertainment Group Inc.:

We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.

/s/ KPMG LLP
_____________________________________
Chartered Accountants

Vancouver, Canada

July 23, 1999

<PAGE>

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

To the Board of Directors
VIDATRON Entertainment Group Inc.

In connection with the filing of the Registration Statement on Form F-1 with
the U.S. Securities and Exchange Commission by Vidatron Entertainment Group
Inc., we consent to the use of our reports included herein and to the
reference to our firm under the heading "Experts" in the prospectus included
as part of the Registration Statement.

/s/ Ellis Foster
Chartered Accountants

Vancouver, Canada

July 23, 1999