<PAGE>
APPENDIX 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of December, 1999
PEACE ARCH ENTERTAINMENT GROUP INC.
- ------------------------------------------------------------------------------
(Translation of Registrant's name into English)
#302, 1132 Hamilton Street, Vancouver, B.C., Canada, V6B 2S2
- ------------------------------------------------------------------------------
(Address of principal executive office)
[Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20F or Form 40-F.
Form 20-F [ X ] Form 40-F [___]]
[Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [___] No [ X ]
(If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-_______________ )]
<PAGE>
PEACE ARCH ENTERTAINMENT GROUP INC.
(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)
AMERICAN STOCK EXCHANGE - SYMBOL PAE
TORONTO STOCK EXCHANGE - SYMBOL PAE.A, PAE.B
ANNUAL REPORT
FOR THE YEARS ENDED
AUGUST 31, 1997, 1998 AND 1999
<PAGE>
PEACE ARCH ENTERTAINMENT GROUP INC.
(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)
CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31, 1998 AND 1999
<TABLE>
<CAPTION>
(Expressed in thousands of Canadian dollars)
============================================================================================================================
1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,876 $ 4,455
Accounts receivable (note 3) 10,235 19,901
Productions in progress 11,906 3,446
Prepaid expenses and deposits 367 292
Investment in television programming (note 4) 5,632 10,227
Property and equipment (note 5) 9,498 7,079
Deferred costs 129 278
Goodwill and trademarks (note 6) 2,544 3,185
- ----------------------------------------------------------------------------------------------------------------------------
$ 42,187 $ 48,863
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank indebtedness (note 7) $ 2,649 $ 6,932
Accounts payable and accrued liabilities 3,317 6,674
Loans due to directors and shareholders (note 8) 400 -
Deferred revenue 10,770 3,980
Deferred gain (note 13(b)) - 514
Future income taxes (note 15) - 797
Debt (note 9) 7,318 4,240
- ----------------------------------------------------------------------------------------------------------------------------
24,454 23,137
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Share capital (note 11) 26,178 32,182
Authorized:
100,000,000 Class A Multiple Voting Shares
Issued - 1,517,965 (August 31, 1998 - 1,512,965)
100,000,000 Class B Subordinate Voting Shares
Issued - 2,267,978 (August 31, 1998 - 1,512,978)
25,000,000 Preference Shares, issuable in series;
Issued - nil
Other paid-up capital - 136
Deficit (8,445) (6,592)
- ----------------------------------------------------------------------------------------------------------------------------
17,733 25,726
- ----------------------------------------------------------------------------------------------------------------------------
$ 42,187 $ 48,863
============================================================================================================================
</TABLE>
Commitments and contingencies (notes 10 and 21)
/s/ TIMOTHY GAMBLE /s/ W.D. CAMERON WHITE
- ----------------------------------- -----------------------------------
Timothy Gamble W.D. Cameron White
President and Director Chief Executive Officer and Director
The accompanying notes are an integral part of the
consolidated financial statements
-3-
<PAGE>
PEACE ARCH ENTERTAINMENT GROUP INC.
(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
(Expressed in thousands of Canadian dollars except per share information)
============================================================================================================================
1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 23,584 $ 32,457 $ 51,547
Expenses:
Amortization of television programming 14,796 23,659 40,296
Other costs of production and sales 4,261 3,577 2,905
Depreciation and amortization 273 389 484
Selling, general and administrative 2,453 2,201 3,049
Interest (note 12) 367 576 1,188
- ----------------------------------------------------------------------------------------------------------------------------
22,150 30,402 47,922
- ----------------------------------------------------------------------------------------------------------------------------
Earnings from operations before undernoted 1,434 2,055 3,625
Gain (loss) on sale of assets (note 13) (333) - 360
Provision against Limited Partnership interests (note 14) (2,313) - -
- ----------------------------------------------------------------------------------------------------------------------------
(2,646) - 360
- ----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (1,212) 2,055 3,985
Income taxes (note 15) - 297 2,132
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (1,212) $ 1,758 $ 1,853
============================================================================================================================
Basic net earnings (loss) per common share (note 16) $ (0.65) $ 0.68 $ 0.60
============================================================================================================================
Fully diluted earnings (loss) per common share (note 16) $ (0.65) $ 0.63 $ 0.58
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
-4-
<PAGE>
PEACE ARCH ENTERTAINMENT GROUP INC.
(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)
CONSOLIDATED STATEMENTS OF DEFICIT
For the Years Ended August 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
(Expressed in thousands of Canadian dollars)
============================================================================================================================
1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ (8,991) $ (10,203) $ (8,445)
Net earnings (loss) for the year (1,212) 1,758 1,853
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (10,203) $ (8,445) $ (6,592)
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
-5-
<PAGE>
PEACE ARCH ENTERTAINMENT GROUP INC.
(FORMERLY VIDATRON ENTERTAINMENT GROUP INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1997, 1998 AND 1999
(Expressed in thousands of Canadian dollars)
<TABLE>
<CAPTION>
============================================================================================================================
1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net earnings (loss) $ (1,212) $ 1,758 $ 1,853
Items not involving cash:
Depreciation and amortization 15,245 24,513 40,119
Interest on debt discount - - 96
Future income taxes - - 1,816
Loss (Gain) on sale of assets 333 - (361)
Provision against Limited Partnership interest 2,313
Other 20 19 7
Changes in non-cash working capital (note 17) (3,257) (4,817) (3,759)
- ----------------------------------------------------------------------------------------------------------------------------
13,442 21,473 39,771
- ----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Investment in television programming (16,567) (27,698) (44,231)
Increase in deferred costs (208) - (243)
Increase in goodwill and trademarks - - (12)
Property and equipment acquired (709) (633) (270)
Proceeds on sale of assets, net (note 13) 545 - 626
- ----------------------------------------------------------------------------------------------------------------------------
(16,939) (28,331) (44,130)
- ----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Issue of common shares, net 5,755 4,875 4,177
Increase (repayments) in loans due to directors and shareholders (221) 378 (386)
Increase in bank indebtedness 454 1,704 4,282
Increase in debt 17 1,737 1,200
Repayment of debt (887) (1,704) (2,335)
- ----------------------------------------------------------------------------------------------------------------------------
5,118 6,990 6,938
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,621 132 2,579
Cash and cash equivalents, beginning of year 123 1,744 1,876
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,744 $ 1,876 $ 4,455
- ----------------------------------------------------------------------------------------------------------------------------
Supplementary information:
Interest paid (net of amounts capitalized) $ 338 $ 543 $ 1,142
Income taxes paid - - 12
Non-cash transactions:
Property acquired through increase in long-term debt - 4,100 -
Property sold through decrease in long-term debt and increase
in accounts receivable (note 13(b)) - - 2,467
Value assigned to common shares issued:
On acquisition of product revenue interests 2,300 - -
For acquisition of Peace Arch Productions Inc. (note 6) 260 1,980 803
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
- 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)
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.
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 22, comply,
in all material respects, with generally accepted accounting
principles in the United States. In particular, the Company's
accounting policies are in accordance with industry guidance in
the United States as set out in Statement of Financial Accounting
Standards No.53, "Financial Reporting by Producers and
Distributors of Motion Picture Films" ("SFAS 53").
These consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned.
All material intercompany balances and transactions have been
eliminated. In accordance with the provisions of SFAS 53, the
Company has elected to present an unclassified balance sheet.
(b) REVENUE RECOGNITION
(i) Revenues from television programming are recognized when
the license period has commenced, the program has been
delivered and other conditions as specified in the
agreements have been met.
(ii) Revenues from production services for third parties are
recognized when the production is completed and delivered.
All associated production costs are deferred and charged
against earnings when the film is delivered and the revenue
recognized.
(iii) Cash received in advance of meeting the revenue recognition
criteria described above is recorded as deferred revenue.
(c) CASH EQUIVALENTS
Cash equivalents include highly liquid investments with terms to
maturity of 90 days or less when acquired.
(d) PRODUCTIONS IN PROGRESS
Productions in progress represent the costs of incomplete programs
and are carried at the lower of cost and estimated net realizable
value.
(e) INVESTMENT IN TELEVISION PROGRAMMING
Investment in television programming represents the unamortized
cost of completed proprietary television programs (net of related
tax credits received or receivable) which have been produced by
the Company or to which the Company has acquired distribution
rights.
The Company records amortization based on the ratio that current
revenues bear to expected total gross revenues for a program.
Investment in television programming is recorded at the lower of
unamortized cost and net realizable value, determined on an
individual program basis.
- 7 -
<PAGE>
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on the
following basis:
<TABLE>
<CAPTION>
<S> <C>
Buildings.........................................................5% declining balance
Computers, furniture and equipment................................20% declining balance
Production equipment..............................................20% declining balance
Other.............................................................2-5 year straight line
</TABLE>
(g) DEFERRED COSTS
Deferred costs represent financing costs, which are recognized
over the term of the related financing, and development costs
incurred on projects prior to production. Upon commencement of
production, the development costs are reclassified to productions
in progress. Development costs are written off when it is
determined that they will not be recovered.
(h) GOODWILL
Goodwill is recorded at cost and 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.
(i) INCOME TAXES
Effective September 1, 1998 the Company adopted Section 3465 of
the CICA Handbook, which requires a change from the deferred
method of accounting for income taxes to the asset and liability
method. Under the asset and liability method, future tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Future tax assets and liabilities are
measured using enacted or substantively enacted tax rates expected
to apply when the asset is realized or the liability settled. The
effect on future tax assets and liabilities of a change in tax
rates is recognized in income in the period that substantive
enactment or enactment occurs. To the extent that the Company does
not consider it to be more likely than not that a future tax asset
will be recovered, it provides a valuation allowance against the
excess.
As there was no material cumulative effect of this change in
accounting for income taxes, no adjustment to previously reported
balances for the years ended August 31, 1997 and 1998 is required.
(j) FOREIGN CURRENCY TRANSLATION
The Company's functional currency is the Canadian dollar. Foreign
currency denominated monetary assets and liabilities are
translated into Canadian dollars at exchange rates in effect at
the end of the period. Revenues and expenses are translated at
exchange rates in effect at the time of the transaction.
Translation gains and losses are included in income except for
unrealized gains and losses arising from the translation of
long-term monetary assets and liabilities, which are deferred and
amortized over the life of the asset or liability. For each year
presented, the Company has no long-term monetary assets or
liabilities denominated in a foreign currency.
(k) USE OF ESTIMATES
The presentation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results may ultimately differ from those estimates.
Investment in television programming, productions in progress and
goodwill are asset accounts that require significant use of
management estimates to determine recoverability.
- 8 -
<PAGE>
(l) COMPARATIVE FIGURES
Certain comparative figures have been restated to conform to the
basis of presentation adopted for the current year.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
======================================================================================================================
1998 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $ 2,505 $ 4,360
Tax credits receivable 7,730 14,724
Short-term note (note 13(b)) - 817
----------------------------------------------------------------------------------------------------------------------
$ 10,235 $ 19,901
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Tax credits receivable are federal and provincial refundable tax credits
related to specific film productions in Canada. The credits are recorded
as a reduction to the related investment in television programming in the
period in which the related production is completed and then amortized in
accordance with note 2(e). During the year, tax credits aggregating
$10,830,223 were recorded (August 31, 1998 - $5,723,000).
4. INVESTMENT IN TELEVISION PROGRAMMING
<TABLE>
<CAPTION>
======================================================================================================================
1998 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost $ 44,728 $ 88,716
Accumulated amortization (39,096) (78,489)
----------------------------------------------------------------------------------------------------------------------
Net book value $ 5,632 $ 10,227
----------------------------------------------------------------------------------------------------------------------
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
======================================================================================================================
1998 1999
----------------------------------------------------------------------------------------------------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Land $ 6,594 $ - $ 5,203 $ -
Buildings 2,432 314 1,532 409
Computers, furniture and equipment 372 219 443 273
Production equipment 1,034 421 1,101 527
Other 77 57 23 14
----------------------------------------------------------------------------------------------------------------------
10,509 1,011 8,302 1,223
----------------------------------------------------------------------------------------------------------------------
Net book value $ 9,498 $ 7,079
----------------------------------------------------------------------------------------------------------------------
</TABLE>
6. GOODWILL AND TRADEMARKS
Effective September 1, 1996, the Company acquired 100% of the shares of
Peace Arch Productions Inc. (formerly Sugar Entertainment Ltd.), for
consideration of 22,500 common shares at a deemed price of $10.00 per
common share and contingent consideration of 350,000 cancelable performance
shares at a deemed price of $0.10 per common share. The shares were
comprised 50% of Class A shares and 50% of Class B shares. The performance
shares were releasable from escrow at a rate of one share for every $10.00
of cash flow generated by Peace Arch Productions Inc. Goodwill recorded at
the time of acquisition was $318,232.
The Company records additional goodwill at the time the performance shares
are releasable from escrow. During the year ended August 31, 1998, 200,000
of the performance shares were released from escrow, resulting in an
increase in purchase goodwill and share capital of $1,980,000. During the
year ended August 31, 1999, the remaining 150,000 performance shares were
earned and additional purchase goodwill and share capital in the amount of
$802,500 was recorded. On September 28, 1999, the remaining shares were
released from escrow.
- 9 -
<PAGE>
As at August 31, 1999, accumulated amortization of goodwill amounted to
$224,020 (August 31, 1998 - $104,258).
7. BANK INDEBTEDNESS
Bank indebtedness is drawn under a credit facility of up to $14 million for
production financing and is comprised of demand loans bearing interest at
prime plus 1% per annum for 1999 (1.5% for 1998) with monthly payments of
interest only withdrawn from reserves held by the bank. As at August 31,
1999, the prime rate was 6.25% (August 31, 1998 - 7.50%). 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. LOANS DUE TO DIRECTORS AND SHAREHOLDERS
Loans due to directors and shareholders bearing interest at 12% per annum,
were unsecured and had no specific terms of repayment.
9. DEBT
<TABLE>
<CAPTION>
======================================================================================================================
1998 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage due May 1, 2001 bearing interest at 7.2% per annum with aggregate
monthly payments of principal and interest of $9, secured by a first mortgage
on property $ 950 $ 927
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
(note 13(b)) 1,970 -
Mortgage due March 1, 2001 bearing interest at 6.95% per annum with aggregate
monthly payments of principal and interest of $25, secured by a first mortgage
on property 2,755 2,641
Loans to purchase equipment, bearing interest at an average annual rate of the
bank rate plus 2.0% secured by the equipment acquired 275 90
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 -
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 per share on or before March 31, 1999 500 -
Debentures having a face value of $600 (recorded net of deemed debt discount of
$40) bearing interest at 10% per annum, payable quarterly, secured by a charge
on the assets of the Company, and due October 21, 2000 - 560
Other 68 22
----------------------------------------------------------------------------------------------------------------------
$ 7,318 $ 4,240
======================================================================================================================
</TABLE>
Included with the issuance of the debentures in the amount of
$1,200,000, $600,000 of which remain outstanding, were warrants to
purchase 50,000 Class A and 50,000 Class B shares at an exercise price
of $6.25 per share (note 11(d)). A value of $68,000 has been attributed
to the warrants issued and recorded as debt discount and other paid-in
capital. This debt discount is being amortized against income as
interest expense over the term of the debentures, and has a current
unamortized value of approximately $40,000.
-10-
<PAGE>
Principal due in each of the next five fiscal years ending August 31 is
approximately as follows:
<TABLE>
<S> <C>
2000 $ 238
2001 1,609
2002 2,393
2003 nil
2004 nil
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Pursuant to the sale of real estate (note 13(b)), the purchaser assumed
debt in the amount of $1,897,705 that is secured by a charge on the
property by indemnifying the Company against all liability to make future
payments of principal and interest under the terms of the debt. This debt
becomes due on February 1, 2000. In the event that the purchaser fails to
retire the debt by the due date, the Company may be required to refinance
or retire the debt.
Also pursuant to the sale of real estate, the Company entered into a lease
agreement under which it is obligated, at minimum, to make annual payments
of $322,123 for 1999 and $241,593 for 2000.
11. SHARE CAPITAL
(a) ISSUED
Effective July 20, 1999, every five common shares were consolidated and
reclassified into one Class A Multiple Voting share and one Class B
Subordinate Voting share. Class A shares are entitled to ten votes per
share and Class B shares are entitled to one vote per share. Each Class
A share is convertible at any time into one Class B share at the option
of the holder. The information in these consolidated financial
statements have been restated to reflect the share consolidation and
reclassification.
<TABLE>
<CAPTION>
======================================================================================================================
CLASS A CLASS B
NUMBER OF NUMBER OF TOTAL
SHARES AMOUNT SHARES AMOUNT AMOUNT
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1996 687,972 $ 5,504 687,982 $ 5,505 $ 11,009
Change during the year:
Issued for cash 22,818 210 22,819 210 420
Issued for cash, pursuant to private
placement 267,000 3,003 267,000 3,004 6,007
Issued on acquisition of Peace Arch
Productions Inc. (note 6) 186,250 130 186,250 130 260
Issued on acquisition of product revenue
interest (note 14) 87,608 1,150 87,609 1,150 2,300
Less share issue costs - (336) - (337) (673)
---------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1997 1,251,648 9,661 1,251,660 9,662 19,323
Change during the year:
Issued for cash 268,817 2,513 268,818 2,514 5,027
Performance shares returned to treasury (7,500) - (7,500) - -
Performance shares released from escrow
(note 6) - 990 - 990 1,980
Less share issue costs - (76) - (76) (152)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
-11-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1998 1,512,965 13,088 1,512,978 13,090 26,178
Change during the year:
Tax recovery, prior year share issue costs - 168 - 168 336
Performance shares released from escrow
(note 6) - 390 - 413 803
Issued for cash 5,000 37 5,000 37 74
Issued for cash, pursuant to public
offering - - 750,000 5,601 5,601
Less share issue costs, net of tax benefit - (1) - (809) (810)
---------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1999 1,517,965 $ 13,682 2,267,978 $ 18,500 $ 32,182
=====================================================================================================================
</TABLE>
Shares issued for non-cash consideration have been valued at their
estimated fair value at the date of issuance.
(b) OPTIONS
For each of the periods presented, the following stock options were
outstanding. 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>
===============================================================================================================
1997 1998 1999
NUMBER OF NUMBER OF NUMBER OF EXERCISE
SHARES SHARES SHARES PRICE EXPIRY DATE
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
300 $ 15.50 March 30, 1998
4,400 5.20 June 12, 2000
800 6.20 July 10, 2000
6,275 1,350 750 11.20 January 24, 2001
47,500 47,000 47,000 14.00 March 29, 2001
3,500 1,000 1,000 19.40 May 9, 2001
63,500 49,500 47,950 13.50 October 15, 2001
52,400 39,600 35,000 13.00 June 2, 2002
6,000 6,000 - 10.25 August 26, 2002
- 158,200 130,000 9.50 March 23, 2003
- - 14,000 7.50 November 19, 2003
- - 1,000 11.25 February 1, 2004
- - 40,000 9.50 February 16, 2004
---------------------------------------------------------------------------------------------------------------
184,675 302,650 316,700
---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================================
1997 1998 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year 83,125 184,675 302,650
Granted 127,900 152,200 65,000
Exercised (26,350) (825) (11,000)
Expired or cancelled - (33,400) (39,950)
---------------------------------------------------------------------------------------------------------------
Balance, end of year 184,675 302,650 316,700
===============================================================================================================
</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.
(c) UNDERWRITER'S OPTION AND WARRANTS
During the year, 750,000 Class B shares were issued by way of public
offering. In connection with this offering, the Company granted the
underwriter an option to purchase up to 112,500 Class B shares at $US
4.61 for the sole purpose of covering over-allotments, exercisable for
a period of 45 days after July 28, 1999. Subsequent to August 31, 1999,
this option expired.
Also, in connection with the public offering in 1999, the Company
granted as compensation a warrant to purchase up to 75,000 Class B
shares at an exercise price of $US 6.75 per share. The warrant is
exercisable for a period of four years beginning one year after August
3, 1999, and may not be transferred, assigned or hypothecated for a
period of one year, except to officers of the underwriter and any
successors to the underwriter.
-12-
<PAGE>
(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>
================================================================================================================
1997 1998 1999 EXERCISE PRICE
NUMBER OF SHARES PER SHARE EXPIRY DATE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
267,000 267,000 - $ 6.25 March 31, 1999
- - 100,000 6.25 October 21, 2000
----------------------------------------------------------------------------------------------------------------
267,000 267,000 100,000
----------------------------------------------------------------------------------------------------------------
</TABLE>
(e) DIVIDENDS
Covenants attached to the debentures limit the Company's ability to pay
dividends without the approval of the lenders.
12. INTEREST EXPENSE
<TABLE>
<CAPTION>
======================================================================================================================
YEARS ENDED AUGUST 31,
1997 1998 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense:
Long-term debt $ 337 $ 447 $ 727
Other 30 129 461
Interest capitalized - 32 240
----------------------------------------------------------------------------------------------------------------------
</TABLE>
13. SALE OF ASSETS
(a) 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.
(b) Effective August 31, 1999 the Company sold one of its three properties
for gross proceeds of $3,265,000. As consideration, the Company
received cash in the amount of $550,000 and a note in the amount of
$817,295 bearing interest at 12% per annum, payable monthly with
principal due on February 28, 2000. The interest rate will increase to
18% in the event that the note remains unpaid after the due date. In
addition, the purchaser assumed the Company's mortgage in the amount of
$1,897,705, which comes due on February 1, 2000. The Company continues
to occupy the property through a lease arrangement, with an option to
terminate after two years. The gain on the sale in excess of the
present value of the minimum lease payments, being $284,528, has been
realized in 1999. The remaining amount of $513,493 is deferred and
amortized over the lease term (note 10).
14. 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 costs of the Limited
Partnership interest was written off resulting in a charge to earnings of
$2,312,722.
15. INCOME TAXES
The differences between the effective tax rate reflected in the provision
for income taxes and the Canadian statutory income tax rate are as follows:
- 13 -
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================================
YEARS ENDED AUGUST 31,
1997 1998 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate statutory income tax rate 45.6% 45.6% 45.6%
Add (deduct) the effect of:
Utilization of previously unrecognized tax losses (48.6) (35.1) (5.0)
Expenses not deductible for income tax purposes 3.0 3.9 12.9
----------------------------------------------------------------------------------------------------------------------
Effective tax rate - 14.4% 53.5%
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The temporary differences which give rise to future tax assets and
liabilities at August 31 consist of the following:
<TABLE>
<CAPTION>
======================================================================================================================
1998 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FUTURE INCOME TAX ASSETS:
Property and equipment $ - $ 278
Share issue costs - 704
Investment in television programming 681 -
Other - 229
Losses available for future periods 1,039 580
---------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 1,720 1,791
Valuation allowance (184) -
---------------------------------------------------------------------------------------------------------------------
Net future income tax assets 1,536 1,791
FUTURE INCOME TAX LIABILITIES:
Property and equipment (82) -
Investment in television programming (1,454) (2,539)
Other - (49)
---------------------------------------------------------------------------------------------------------------------
$ - $ (797)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
At August 31, 1999, the Company has operating losses for income tax
purposes of approximately $1,260,000, the benefit of which has been
recognized as a reduction of the Company's future income tax liability.
The losses expire as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 54
2001 106
2002 338
2003 190
2004 71
2005 364
2006 137
---------------------------------------------------------------------------------------------------------------------
$ 1,260
---------------------------------------------------------------------------------------------------------------------
</TABLE>
16. 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 and share consolidation and
reclassification on July 20, 1999 (note 11(a)). For the year ended August
31, 1997, fully diluted earnings per share were equal to basic earnings
(loss) per share as the effect of stock options and warrants was
anti-dilutive. The weighted average number of shares outstanding for each
of the periods presented is as follows:
<TABLE>
<CAPTION>
======================================================================================================================
YEARS ENDED AUGUST 31 BASIC FULLY DILUTED
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 1,860,616 1,860,616
1998 2,602,742 3,124,007
1999 3,083,121 3,473,357
---------------------------------------------------------------------------------------------------------------------
</TABLE>
- 14 -
<PAGE>
17. CHANGES IN NON-CASH OPERATING WORKING CAPITAL
<TABLE>
<CAPTION>
======================================================================================================================
YEARS ENDED AUGUST 31,
1997 1998 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable $ (3,525) $ (5,436) $ (8,848)
Productions in progress (667) (8,044) 8,460
Prepaid expenses and deposits (12) (186) 75
Accounts payable and accrued liabilities (120) 2,309 3,343
Deferred revenue 1,067 6,540 (6,789)
----------------------------------------------------------------------------------------------------------------------
$ (3,257) $ (4,817) $ (3,759)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
18. FINANCIAL INSTRUMENTS
(a) FAIR VALUES
As at August 31, 1999 and 1998, the Company's financial instruments
included cash and cash equivalents, accounts receivable, bank indebtedness,
accounts payable and accrued liabilities and amounts due to directors and
shareholders. As at these dates, the carrying value of these financial
instruments approximated their fair value due to their ability for prompt
liquidation or short term to maturity, with the exception of tax credits
and short-term notes included in accounts receivable, which are receivable
over a period of up to two years. As at August 31, 1999, the fair value of
tax credits receivable is estimated to be $14,080,764 (August 31, 1998 -
$7,300,000).
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
Although all of its revenue is generated from production in Canada, the
Company derived over 85% (1998 - 82%) of its revenues from export sales to
the U.S. and Europe. In the year ended August 31, 1999, one customer
represented 36%, two customers represented 14% each and a third customer
represented 19% of total revenues. In the year ended August 31, 1998, one
of these customers represented 32%, two customers represented approximately
20% each and a fourth customer represented 11% of total revenues. In the
year ended August 31, 1997, one of these customers represented 37%, a
second represented 22% and a third customer represented 13% of total
revenues.
On August 31, 1999, approximately 74% (1998 - 76%) of accounts receivable
was comprised of refundable federal and provincial tax credits. These
credits are subject to audit by the appropriate regulatory authorities.
(c) CURRENCY RISK
During the year ended August 31, 1999 the Company derived approximately 74%
(1998 - 82%) of its revenues in U.S. funds. The Company estimates its
obligations payable in $US funds and converts all U.S. funds in excess of
these obligations into Canadian currency as they are received. The Company
did not use derivative instruments to reduce its exposure to foreign
currency risk.
(d) INTEREST RATE RISK
The Company's exposure to interest rate risk is limited to the cash flow
risk associated with variable rate debt as disclosed in notes 7 and 9.
19. SEGMENTED INFORMATION
The Company manages its operations in two business segments: production
services for projects in which the Company does not hold a financial
interest in a film or video program, and proprietary programming which is
programming the Company owns or in which it holds a financial interest. The
Company operates only in Canada, although its programs are distributed
throughout the world (note 18(b)). Selected information for the Company's
operating segments, net of inter-company amounts, is as follows:
- 15 -
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================================
PRODUCTION PROPRIETARY
1997 SERVICES PROGRAMMING OTHER TOTAL
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 3,039 $ 17,412 $ 3,133 $ 23,584
Gross profits 591 2,541 1,395 4,527
Total assets 1,172 14,440 2,898 18,510
1998
-----------------------------------------------------------------------------------------------------------------------
Revenue $ 4,178 $ 27,945 $ 334 $ 32,457
Gross profits 1,075 3,727 419 5,221
Total assets 1,203 37,791 3,193 42,187
1999
-----------------------------------------------------------------------------------------------------------------------
Revenue $ 3,765 $ 47,298 $ 484 $ 51,547
Gross profits 1,220 6,972 154 8,346
Total assets 1,597 45,628 1,638 48,863
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross profits are comprised of revenue less amortization of television
programming and other costs of production and sales.
In 1998 and 1999 revenues from other business were mainly attributable to
the rental of production assets. In 1997 revenues from other business also
included rental of production assets, along with educational software and
video sales of approximately $3 million and gross profit of $591,272.
20. RELATED PARTY TRANSACTIONS
Related party transactions not disclosed elsewhere in these consolidated
financial statements are as follows:
<TABLE>
<CAPTION>
======================================================================================================================
YEARS ENDED AUGUST 31,
1997 1998 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Production fees paid to an officer of the Company $ 725 $ 1,285 $ 1,956
Consulting fees paid to companies owned by officers and
Directors of the Company $ 58 $ 120 $ 70
----------------------------------------------------------------------------------------------------------------------
</TABLE>
At August 31, 1998 debt includes $200,000 in convertible debentures due to
directors of the Company.
21. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. 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.
22. 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:
-16-
<PAGE>
(a) 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. They would be included in diluted
earnings (loss) per share prior to release under certain limited
circumstances. 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.
The effect of these items would be to reduce the weighted average
number of shares outstanding to as follows:
<TABLE>
<CAPTION>
=====================================================================================================================
YEAR ENDED AUGUST 31, BASIC DILUTED
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 1,510,580 1,510,580
1998 2,303,988 2,303,988
1999 2,935,202 2,954,319
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) APPLICATION OF US GAAP:
(i) As discussed in note 6, effective September 1, 1996, the Company
issued 350,000 performance shares on the acquisition of Peace Arch
Productions Inc. In the year ended August 31, 1998, and prior to
the release of 200,000 shares from escrow, the holder of the
performance shares transferred, within escrow, 160,000 performance
shares to three officers of the Company. The 160,000 shares were
transferred subject to the terms and conditions of the escrow
agreement for their initial value of $0.10 per share. In the year
ended August 31, 1999, the balance of the performance shares were
recorded as described in note 6.
On transfer, for US GAAP purposes, the excess of the market value
over the transfer price is charged against income as compensation
expense.
(ii) As described in note 13(b), for Canadian accounting purposes, the
Company has recognized a partial gain on the sale of real estate.
For US GAAP purposes, no gain is recognized in the current year
due to the existence of the note receivable. Under US GAAP, this
transaction would be accounted for using the finance method.
The effect of these differences on net earnings (loss) and earnings
(loss) per share (calculated by reference to the weighted average
number of shares outstanding) under US GAAP would be as follows:
<TABLE>
<CAPTION>
===================================================================================================================
YEARS ENDED AUGUST 31,
1997 1998 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss), Canadian GAAP $ (1,212) $ 1,758 $ 1,853
Compensatory value of transferred shares - (1,224) -
Gain on sale of asset, net of income tax - - (187)
-------------------------------------------------------------------------------------------------------------------
Net earnings (loss), US GAAP $ (1,212) $ 534 $ 1,666
-------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share, US GAAP:
basic and diluted $ (0.80) $ 0.23 $ 0.56
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Under US GAAP, total assets would be $51,330,499 and shareholders'
equity would be $25,550,299. There would be no difference from total
assets or shareholder's equity calculated under Canadian GAAP in 1998
and 1997.
(c) STOCK-BASED COMPENSATIONS
As described in Note 12(b), the Company has granted stock options to
certain directors and employees. These options are granted for services
provided to the Company. For US GAAP purposes, Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), requires that an enterprise recognize or, at its option,
disclose the impact of the fair value of stock options and other forms
of stock-based compensation in the determination of income. The Company
has elected under SFAS
-17-
<PAGE>
123 to continue to measure compensation cost on the intrinsic value
basis set out in APB Opinion No. 25. As options are granted at exercise
prices based on the market value of the Company's share at the date of
grant, no adjustment for compensation expense is required.
Under SFAS 123, where a company chooses to continue to apply APB
Opinion No. 25 in its basic financial statements supplementary pro
forma information as if the fair value method was applied must be
disclosed. This pro forma information is set out below. The pro forma
stock compensation expense has been determined by reference to an
option-pricing model that takes into account the stock price of the
grant date, the exercise price, the expected life of the option, the
estimated volatility of the underlying stock, expected dividends and
the risk free interest rate over the term of the option.
The calculations applied have assumed that the expected life of all
options granted equals 60% of the maximum term based on actual
experience, no dividends will be paid, and expected average volatility
and risk free interest rates as follows:
<TABLE>
<CAPTION>
====================================================================================================================
YEARS ENDED AUGUST 31,
1997 1998 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Volatility % 25 22 43
Risk free interest rate % 5.46 5.11 4.86
--------------------------------------------------------------------------------------------------------------------
</TABLE>
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:
-18-
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
YEARS ENDED AUGUST 31,
1997 1998 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (loss), US GAAP $ (1,212) $ 534 $ 1,666
Stock compensation expense (331) (490) (403)
--------------------------------------------------------------------------------------------------------------------
Pro forma earnings (loss), US GAAP $ (1,543) $ 44 $ 1,263
===================================================================================================================
Pro forma basic earnings (loss) per share, US GAAP $ (1.02) $ 0.02 $ 0.43
====================================================================================================================
</TABLE>
(d) PROVISION AGAINST LIMITED PARTNERSHIP INTEREST
Under US GAAP, the provision against Limited Partnership interest would
be included in the earnings (loss) from operations.
(e) SUPPLEMENTARY INFORMATION - ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts receivable is disclosed net of allowance for doubtful
accounts. Changes in the allowance for each of the periods presented
are as follows:
<TABLE>
<CAPTION>
====================================================================================================================
YEARS ENDED AUGUST 31,
1997 1998 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 31 $ 169 $ 316
Charges to expenses:
Expensed 138 147 37
Recovered/written-off - - (49)
--------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 169 $ 316 $ 304
====================================================================================================================
</TABLE>
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Peace Arch Entertainment Group Inc.
-----------------------------------
(Registrant)
Date December 21, 1999 By /s/ JULIET JONES
------------------------------- -----------------------------------
(Signature)*
Juliet Jones, CFO
- --------------------------------------
*Print the name and title under the signature of the signing officer.
GENERAL INSTRUCTIONS
A. Rule as to Use of Form 6-K,
This form shall be used by foreign private issuers which are required to
furnish reports pursuant to Rule 13a-16 or 15d-16 under the Securities
Exchange Act of 1934.
B. Information and Document required to be Furnished,
Subject to General Instruction D herein, an issuer furnishing a report on
this form shall furnish whatever information, not required to be furnished on
Form 40-F or previously furnished, such issuer (I) makes or is required to
make public pursuant to the law of the jurisdiction of its domicile or in
which it is incorporated or organized, or (ii) files or is required to file
with a stock exchange on which its securities are traded and which was ;made
public by that exchange, or (iii) distributes or is required to distribute to
its security holders.
The information required to be furnished pursuant to (I), (ii) or (iii) above
is that which is material with respect to the issuer and its subsidiaries
concerning: changes in business; changes in management or control;
acquisitions or dispositions of assets; bankruptcy or receivership; changes
in registrant's certifying accountants; the financial condition and results
of operations; material legal proceedings; changes in securities or in the
security for registered securities; defaults upon senior securities; material
increases or decreases in the amount outstanding of securities or
indebtedness; the results of the submission of matters to a vote of security
holders; transactions with directors, officers or principal security holders;
the granting of options or payment of other compensation to directors or
officers; and any other information which the registrant deems of material
importance to security holders.
This report is required to be furnished promptly after the material contained
in the report is made public as described above. The information and
documents furnished in this report shall not be deemed to be "filed" for the
purpose of Section 18 of the Act or otherwise subject to the liabilities of
that section.
If a report furnished on this form incorporates by reference any information
not previously filed with the Commission, such information must be attached
as an exhibit and furnished with the form.
C. Preparation and Filing of Report
This report shall consist of a cover page, the document or report furnished
by the issuer, and a signature page. Eight complete copies of each report on
this form shall be deposited with the Commission. At least one complete copy
shall be filed with each United States stock exchange on which any security
of the registrant is listed and registered under Section 12(b) of the Act. At
least one of the copies deposited with the Commission and one filed with each
such exchange shall be manually signed. Unsigned copies shall be conformed.
D. Translations of Papers and Documents into English
Reference is made to Rule 12b-12(d) [17 CFR 240.12b-12(d)]. Information
required to be furnished pursuant to General Instruction B in the form of
press releases and all communications or materials distributed directly to
security holders of each class of securities to which any reporting
obligation under Section 13(a) or 15(d) of the Act relates shall be in the
English language. English versions or adequate summaries in the English
language of such materials may be furnished in lieu of original English
translations.
Notwithstanding General Instruction B, no other documents or reports,
including prospectuses or offering circulars relating to entirely foreign
offerings, need be furnished unless the issuer otherwise has prepared or
caused to be prepared English translations, English versions or summaries in
English thereof. If no such English translations, versions or summary have
been prepared, it will be sufficient to provide a brief description in
English of any such documents or reports. In no event are copies of original
language documents or reports required to be furnished.
-20-
