UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF DECEMBER, 2002
Commission File Number ____________________
PEACE ARCH ENTERTAINMENT GROUP INC.
(Registrant's name)
500, 56 EAST 2ND AVENUE VANCOUVER, BRITISH COLUMBIA, CANADA V5T 1B1
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F______ Form 40-F______
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): ______
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a
Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101 (b)(7):_______
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a
Form 6-K if submitted to furnish a report or other document that the registrant
foreign private issuer must furnish and make public under the laws of the
jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes______ No______
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- ______
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant, XXXX XXX Ltd., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: December 18, 2002
By:
/s/ Juliet Jones
----------------------------------------------------------------------------
JULIET JONES
President and CEO
[LOGO PEACH ARCH]
FOR THE YEARS ENDED AUGUST 31, 2000, 2001 AND 2002
AMERICAN STOCK EXCHANGE - PAE
TORONTO STOCK EXCHANGE - PAE.A, PAE.B
This document includes statements that may constitute forward-looking
statements, usually containing the words "believe", "estimate", "project",
"expect", or similar expressions. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
Factors that would cause or contribute to such differences include, but are not
limited to, continued acceptance of the Company's products and services in the
marketplace, competitive factors, dependence upon third-party vendors, and other
risks detailed in the Company's periodic report filings with the Securities and
Exchange Commission. By making these forward-looking statements, the Company
undertakes no obligation to update these statements for revisions or changes.
TO OUR SHAREHOLDERS
In fiscal 2002 we made meaningful progress in light of the many challenges that
we faced. The challenges we faced are not unique to Peace Arch. In fact, many
major entertainment companies around the world have been feeling the effect of
these difficult times. During fiscal 2002:
o We shifted our focus from dramatic television programming to factual
programming in response to a shift in market demand. Our factual
programming subsidiary experienced its best year ever,
o Our prime-time television series ANIMAL MIRACLES (MIRACLE PETS in the
United States) was renewed for a third season. This program and other
factual programs have significant unsold territories which are expected to
contribute short-term cash flow to our operations,
o We sold our two remaining real estate properties for net proceeds of $6.9
million,
o We increased our working capital by $5 million by restructuring a $7.9
million current liability into 10% interest-bearing long-term debt,
o We refinanced $5.7 million of subordinate debt that was in default due to a
shortfall in working capital, primarily the result of non-payment by a US
broadcaster and sales shortfalls due to a poor US syndication market,
o We repaid $7.5 million of subordinate debt and $16.6 million of bank
indebtedness with cash flows generated from operations and from net
proceeds from sales of our real estate properties. Subsequent to the end of
the year we repaid the remaining $537,000 of subordinate debt. During the
year we paid $2.0 million in interest, which is expected to significantly
decrease in fiscal 2003 due to this substantial repayment of debt, and
o We reduced selling, general and administrative expense by 31% during the
year.
During the year we experienced a significant reduction in revenue, resulting
mainly from a worldwide downturn in the market for dramatic television
programming. However, our ability to recognize and respond quickly to changes in
market conditions enabled us to shift our focus from dramatic television
programming to factual programming, to meet market demand. Although factual
programming contributes significant rights to our television library, it
contributes modest revenues. During the year we were in production of 13
episodes of WHISTLER STORIES for Life Network in Canada, ANIMAL MIRACLES for
Life Network and Pax TV in the US, and several award-winning documentary
specials. We will continue our efforts to build our factual programming library.
Subsequent to August 31, 2002, and subject to shareholder approval, we entered
into an agreement with one of Canada's largest independent motion picture
producers, to acquire its interest in five films that are in production,
together with certain related assets, and to continue its future operations. The
Company, GFT Entertainment, focuses on producing feature films with budgets from
$4 to $25 million, designed for the theatrical marketplace as well as television
and DVD arenas. Over the past five years, GFT Entertainment has produced over 30
feature films.
To close at the same time as the acquisition, and subject to shareholder
approval, we have agreed to issue shares, pursuant to a private placement with
third parties, for cash proceeds of $1.5 million. Also, in connection with these
transactions we will restructure our term debt with a remaining balance of $7.6
million and a third party loan guarantee to a US bank in the amount of US$1.1
million. Under restructuring agreements we have agreed that the repayment and
security for these liabilities will be restricted to the income streams and
assets of the Company immediately prior to closing the acquisition. There are no
set repayment dates, however any principal amounts outstanding at December 31,
2004 with respect to the term debt and December 31, 2005 with respect to the
guarantee may be converted into Class B Subordinate Voting Shares at a premium
to the current market price.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-1-
TO OUR SHAREHOLDERS (continued)
This acquisition will expand our program library into the area of theatrical
motion pictures, which has a relatively strong worldwide market when compared
with the currently weak market for dramatic television series. This
complementary business will assist us in diversifying our program mix. As well,
the acquisition will strengthen our management team. Gary Howsam, who has over
20 years of experience in senior level roles in the entertainment industry, will
become President and CEO of the Company. Under his direction, we will continue
to focus on building the Company's programming library and building long-term
shareholder value.
The above transactions will be a significant accomplishment for the Company, as
they will not only address the Company's current working capital position, but
will also put the Company on strong footing for future growth.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
I would like to thank our employees, directors and shareholders for their
support over the past year.
/s/ Juliet Jones
---------------------------------------
Juliet Jones
President and Chief Executive Officer
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this annual report.
GENERAL
We develop, produce and distribute proprietary television programming for
worldwide markets. These activities have comprised our core business since 1996,
when we commenced taking ownership in our programming. Peace Arch continues to
operate its other businesses, which include production activities on a fee for
service basis. Our growth is dependent on our ability to identify, develop and
acquire rights to ideas, storylines and other creative concepts and to
successfully finance, produce and market our proprietary programming.
Our business operates through several subsidiaries, which are established for
each production or series. The costs of production are financed by advances
obtained from customers, borrowings under a bank credit facility, contributions
from equity participants and working capital. Typically, we retain the rights to
our proprietary programming for exploitation in future periods and in additional
markets and media.
Revenues and expenses for television programming are realized when the license
period has commenced and the program or episode has been shipped. Deferred
revenues represent payments received in advance of a program or episode revenue
being realized.
Generally, the costs incurred in producing a film or television program are
capitalized. These costs include direct production costs, certain exploitation
costs, production overhead and interest relating to financing the project. Until
the date a program is completed, these costs are capitalized into "Productions
in progress" on the consolidated balance sheet. Costs related to completed
proprietary programming are included, net of tax credits and amortization, in
"Investment in television programming" on the consolidated balance sheet. Tax
credits are recorded when a program or episode is complete and reasonable
assurance exists of the amount realizable.
OPERATING RESULTS
The Company's continued growth is dependent not only on its ability to
successfully identify, develop, finance and produce proprietary television
programming, but also on its ability to distribute its programming in all
markets and media throughout the world. The impact of economic recession in the
United States and Europe has sharply reduced the demand for television
programming. In particular, due to a decline in United States advertising
revenues and a general downturn in international television markets, earning
revenues from our library of proprietary programming and commencing production
of new dramatic programming has been a challenge in fiscal 2001 and 2002. This
reduced demand contributed to an acceleration of amortization of capitalized
costs related to certain television programs. World television markets are an
important factor for the growth and success of our television business in the
future.
In accordance with Company policy, during fiscal 2002 we wrote off the remaining
unamortized cost of goodwill of approximately $166,000 related to our 1995
acquisition of The Eyes Multimedia Productions Inc. as the Company determined
that the goodwill balance could not be supported by future undiscounted cash
flows. During fiscal 2001, we wrote off the remaining unamortized cost of
goodwill of $2.7 million related to our 1996 acquisition of Peace Arch
Productions Inc. (formerly Sugar Entertainment Ltd.).
The net loss for the year ended August 31, 2002 was $7.0 million compared to a
net loss of $14.3 million (2000 - $3.3 million) in 2001.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-3-
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
The net loss before taxes for 2002 decreased by 44% over the prior comparable
year, primarily due to substantial non-cash charges taken in the prior year. The
net loss before taxes for 2002 was comprised 30% of interest expense, 2% of a
write off of purchase goodwill, 77% from other operations, and (9%) of other
income and gains. For the year ended August 31, 2001, net losses before taxes
increased by 365% over the prior comparable year, primarily due to the write
down of goodwill, and the increased amortization of the capitalized costs of our
investment in television programming, resulting from a change in accounting
policy.
REVENUE. The Company reported an 88% reduction in revenue for fiscal 2002, from
$54.9 million to $6.5 million, due to a reduction in the amount of dramatic
television programming produced and sold in 2002. Revenue for fiscal 2001
increased by 58% to $54.9 million up from revenue of $34.7 million for the prior
comparable year. Due to the worldwide reduction in demand for programming, and
reduced cash flow available for development, the Company has experienced a sharp
decline in its production and distribution activities for dramatic television
programming, which typically makes up the majority of its revenues. During the
year the Company increased production of lifestyle and documentary programming,
which reports less revenues but adds value to the company's library of
television programming.
During the year ended August 31, 2002, approximately 43% of revenue was derived
from the production and distribution of proprietary programming, compared with
84% in 2001 and 92% in 2000. For 2002, revenue from proprietary programming
decreased by 94% in comparison to 2001. For 2001, revenue from proprietary
programming increased by 45% in comparison to 2000. During 2002, we delivered 13
episodes of the second season of our prime-time series "Animal Miracles", eight
episodes of our new 13-episode series "Whistler Stories", and our one hour
documentary special "Rites of Passage".
Production services revenue represented 55% of total revenue compared with 16%
in 2001 and 8% in 2000. The increase in the relative amount of service revenues
for 2002 was primarily due to the significant decrease in proprietary
programming for the year. Production services revenue for 2002 included delivery
of the remaining four episodes of the 13-episode series "Sausage Factory" and
for 2001 included 9 episodes.
Management anticipates that revenue for the first two quarters of 2003 will
reflect a decrease when compared to the comparable quarters of fiscal 2002 due
to a reduction in the amount of production services revenues. We anticipate that
we will deliver our third 13-episode season of "Animal Miracles", the remaining
five episodes of our 13-episode series "Whistler Stories", and our one-hour
documentary specials "Raven in the Sun" and "Fantasy Lands".
AMORTIZATION OF TELEVISION PROGRAMMING. During fiscal 2002 we earned a gross
margin (loss) on our proprietary programming of (41%), compared with (11%) for
2001 and 2% for 2000. We periodically review our estimates for future revenue
from television programming and adjust amortization accordingly.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expense decreased by 31% primarily due to cost cutting measures, including staff
reductions. We have taken further steps to reduce certain selling, general and
administrative expenses for fiscal 2003.
BAD DEBT EXPENSE. During fiscal 2001, the Company guaranteed a loan to a maximum
of US$2.1 million on behalf of a co-production partner. At August 31, 2002, the
amount of the outstanding related debt was $1.7 million (US$1.1 million). During
fiscal 2002, the Company recognized its obligation as an increase in debt and an
increase in receivable from the co-producer. As the amount was not deemed
recoverable, the receivable balance was written off.
INTEREST EXPENSE. Interest expense of $2.4 million includes interest on
long-term debt of $1.6 million, non-cash amortization of deferred finance and
debt discount costs of $0.7 million, and $14,000 of interest on bank
indebtedness and other balances. Interest on long-term debt includes $0.1
million related to loans to acquire plant and equipment and $1.5 million related
to other long-term debt.
Interest expense increased by 3% in 2002 over the prior year. The reduction in
interest expense for the year due to the substantial repayment of debentures and
the repayment of mortgages from the proceeds of the sale of the Company's
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-4-
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
remaining real estate properties, was offset by the increase in interest rate
for the debentures and the restructuring of a non-interest bearing liability of
$7.6 million into a 10% interest-bearing term debt.
Interest expense is expected to decrease in 2003 due to the substantial
repayment of debentures bearing interest at rates ranging from 18% to 36%.
In fiscal 2002, $671,000 of interest on bank indebtedness relating to production
of our television programs was capitalized. In 2001 and 2000, interest on bank
indebtedness capitalized in each year was $1,066,000 and $82,000, respectively.
TAXES. At August 31, 2002, we had operating losses for tax purposes of $27.0
million which are available for carry forward to future years. The benefits of
the tax loss carry-forwards have not been reflected in the financial statements.
During the year ended August 31, 2002, we reported an effective tax rate of
(9.8%) which is comprised of the corporate statutory income tax rate of (40.3%),
a (4.1%) increase from the utilization of previously unrecognized tax losses,
less 5.6% due to non-deductible expenses, and less 29.0% for the change in
valuation allowance of future tax assets. Our effective tax rate for fiscal 2001
was 2.3% (2000 - 8.8%) comprised of the statutory income tax rate of (45.0%), an
increase of (0.4%) from the utilization of previously unrecognized tax losses,
less 2.4% for non-deductible expenses, and less 45.3% for the change in
valuation allowance of future tax assets.
CRITICAL ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles in Canada and makes estimates and
assumptions that affect its reported amounts of assets, liabilities, revenues
and expenses, and the related disclosure of contingencies.
The Company bases its estimates on historical experience and other assumptions
and information that it believes are reasonable in the circumstances. Actual
results may differ from these estimates. The Company's most significant use of
estimates and assumptions used in preparing its consolidated financial
statements relate to assessing the underlying value of the investment in
television programming, productions in progress, goodwill, accounts and tax
credits receivable.
The Company records amortization of television programming based upon the ratio
that current revenues bear to estimated remaining unrecognized ultimate revenue
as of the beginning of the current fiscal year. Investment in television
programming is recorded at the lower of remaining unamortized film costs and
fair value and productions in progress are recorded at the lower of cost and
estimated fair value.
Estimates of future television programming revenue and fair value are impacted
by changes in general economic or industry conditions and market preferences.
These factors are primarily outside of the Company's control. In addition,
changes to the Company's distribution operations in the future due to
restructuring or other business decisions may impact management's estimates of
future cash flows. Management makes its estimates of future cash flows based on
its best estimates of future economic conditions as they impact the Company.
These estimates are reviewed periodically in accordance with Company policy.
Significant decreases in future estimates of revenue may result in accelerating
amortization of television programming costs or requiring unamortized costs and
productions in progress being written down to their fair value, based upon
estimated future discounted net cash flows from the related productions or
series.
The Company assesses the impairment of identifiable intangible assets,
long-lived assets (excluding the investment in television programming which is
described above) and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
the Company considers important, which could trigger an impairment review,
include significant underperformance relative to historical or budgeted
strategy, significant negative industry or economic trends, or a significant
decline in the Company's stock price or market capitalization for a sustained
period of time. When the Company determines that the carrying value of
intangibles, long-lived assets and related goodwill may not be recoverable due
to the existence of indicators of impairment, the Company measures impairment,
if any, based upon projected net undiscounted cash flows expected to be
generated by those assets. During the year
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-5-
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
ended August 31, 2002, the Company wrote down the remaining balance of goodwill
of $166,000 related to its 1995 acquisition of The Eyes Multimedia Productions
Inc., as the Company determined that the goodwill balance could not be supported
by future undiscounted cash flows.
The Company maintains an allowance for doubtful accounts for estimated losses
that may arise if any of its customers or note holders are not able to make
required payments or if the Company no longer becomes eligible to receive tax
credits claimable under Canadian federal and provincial government assistance
programs. Management specifically analyses the age of outstanding customer
balances, historical bad debt experience, credit-worthiness and changes in
payment terms, and the Company's ability to meet eligibility requirements for
government assistance when making estimates of the uncollectability of the
Company's accounts and other receivable balances. If the Company determines that
the financial condition of any of its debtors deteriorates, increases in the
allowance may be made.
The consolidated financial statements have been prepared on the going concern
basis which assumes the realization of assets and liquidation of liabilities in
the normal course of operations. If the Company were not to continue as a going
concern, it would likely not be able to realize its assets at values comparable
to the carrying value or the fair value estimates reflected in the balances set
out in the preparation of the consolidated financial statements. As described
elsewhere in this report, at August 31, 2002, there are certain conditions that
currently exist which raise doubt about the validity of this assumption. While
the Company has entered into agreements to raise additional funds, restructure
certain obligations and acquire a business and assets, these proposed
transactions are subject to shareholder approval and are, therefore, not
assured. If the Company fails to complete these proposed transactions or other
financing it may be required to significantly reduce or cease operations and
liquidate assets, or seek potential buyers of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As at August 31, 2002, we had available cash or cash equivalents of $1,968,000.
We are required to fund significant expenditures to produce television programs
in advance of receipt of revenues from these programs, which are received over
an extended period of time after their completion. We typically finance the
capitalized costs of our proprietary television programming through presales
from customers, borrowings under our bank credit facility, contributions from
equity participants and working capital. In the past, we have also funded our
capital requirements through the issuance of shares, warrants and debt. We use
leases to finance the acquisition of our production equipment.
During the year, $19 million was contributed by operating activities, compared
to $12.7 and $5.1 million being used for operating activities in 2001 and 2000,
respectively. Included within the operating activities is the 2002 investment in
television programming of $1.6 million, compared with $52.1 million in 2001 and
$31.6 in 2000. Also included in operating activities is a $20.7 million inflow
from changes in non-cash working capital, primarily due to a $24.3 million
reduction in accounts and other receivables, net of other operating items. In
2001 and 2000, the Company reported a use of funds from changes in non-cash
working capital of $1.1 million and $2.4 million, respectively. During the year,
investing activities contributed cash flow of $6.4 million, compared with a use
of cash from investing activities of $0.3 million in 2001 and $1.3 million in
2000. Investing activities for the year were comprised mainly of the sale of the
Company's remaining real estate properties. We used $27.4 million in fiscal 2002
for financing activities, comprised of $16.6 million used to repay our senior
bank debt and $10.9 million used to repay long-term debt. In the prior year,
$12.6 million was contributed from financing activities primarily from the
increase in senior bank debt and in 2000, $6.4 million was contributed from
financing activities primarily from the issuance of debentures.
We finance our production activities through our bank credit facility, which
bears interest at a rate equal to the Canadian prime rate plus 1% per annum,
with monthly payments of interest only drawn under the credit facility. The
facility is secured by refundable tax credits and a general security interest on
our assets. During the year ended August 31, 2002, we reduced borrowings under
our credit facility by $16.6 million, compared with an increase in borrowings of
$12.7 million in the prior year.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-6-
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
By November 30, 2001, we had repaid $2.2 million of our $7.9 million of our
convertible debentures. On November 30, 2001, we refinanced $5.7 million of the
debentures and entered into an amended loan agreement to extend the maturity of
the debentures to December 31, 2002, from February 16, 2002. Under the
amendment, with the exception of $251,963 of debentures due to Officers of the
Company, the interest rate was increased to 36% per annum, compounded monthly,
and payable monthly. The amended agreement was structured with no prepayment
penalties and we repaid a further $5.2 million during the balance of 2002.
Subsequent to August 31, 2002, we repaid the remaining balance of $537,000,
including the amounts due to officers.
The Company's consolidated financial statements have been prepared on a going
concern basis, which assumes the realization of assets and settlement of
liabilities in the normal course of operations. There is substantial doubt about
the appropriateness of the Company's use of the "going concern" assumption
because of significant losses from operations, material working capital and
shareholders' deficiencies as at August 31, 2002, contingency related to the
listing of its shares, non-compliance with certain debt covenants, and
dependence upon the continued financial support of its secured lenders. The
Company's consolidated financial statements do not reflect adjustments that
would be necessary if the "going concern" basis is not appropriate.
Subsequent to August 31, 2002, we entered into an agreement to issue common
shares of the Company for the acquisition of a business and certain related
assets for a price of $2.5 million and for a private placement financing for
cash proceeds of $1.5 million. We also entered into an agreement to restructure
our $7.6 million term debt, restricting its security to assets of the Company
immediately prior to the above transactions, and to limit repayment of this debt
to the net income streams from these assets. In the event that there is a
balance of the debt remaining on December 31, 2004, the creditor at its option,
for a period of 90 days, may convert the debt to common shares of the Company at
a price equal to the greater of $3.00 and the lesser of the average trading
price and $5.00 per share. We also entered into an agreement to reconstitute our
loan guarantee to the Comerica Bank, whereby the Comerica Bank would release the
Company from the guarantee and would be repaid the amount of its guarantee out
of the net income streams of the above assets after repayment of the term debt.
In the event that there is any amount outstanding under this guarantee on
December 31, 2005, the Comerica Bank, at its option, for a period of 90 days,
may convert such balance to common shares of the Company at a price of $5.00 per
common share. These transactions are contingent on each other and are subject to
shareholder and regulatory approvals.
In the event that we do not complete these transactions, we believe that we will
not have adequate resources to meet our cash requirements into 2003. If the
business climate does not improve so that we may earn revenues from our library
of television programming, if we are unable to raise capital from outside
sources, and if we do not have the continued support of our creditors, it is
likely that we will be unable to continue operations.
RISKS AND UNCERTAINTIES
There are risks and uncertainties that could impact revenues and earnings from
operations. In addition to interest rate risk and credit risk, that is referred
to in the notes to the consolidated financial statements, there are several
other risks specific to Peace Arch and our industry.
BUSINESS RISKS
The business of producing and distributing television programming is highly
competitive. We face intense competition from other producers and distributors,
many of whom are substantially larger and have greater financial resources. We
compete with other companies for ideas and storylines created by third parties,
as well as for actors, directors and other personnel.
Results of operations for any period depend on the number of television programs
that are delivered. Consequently, results may vary from period to period, and
the results of any one period may not indicate results for future periods. Cash
flows may also fluctuate and may not directly correspond with revenue
recognition.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-7-
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
Actual production costs may exceed budget, perhaps significantly, due to factors
within or beyond our control. These factors may delay or prevent completion of a
production. If there are significant cost overruns, we may have to seek
additional financing to complete the production. Financing on terms acceptable
to us may not be available. We may be unable to recoup the additional costs,
which could have a material adverse impact on operating results and liquidity.
Revenues derived from the production and distribution of television programming
depend primarily upon acceptance by the public, which is difficult to predict.
Some or all of our proprietary television programs may not be commercially
successful, resulting in our failure to recoup its investment or realize its
anticipated profits.
The film and television industry in British Columbia operates under collective
agreements with several unions. In the event that one or more of these unions
should take strike action, we may be unable to hire the required personnel to
produce our programming. This could result in a delay or cancellation of
production, causing a reduction in revenues and operating profits.
Investments in television programming are amortized against revenues in the
ratio that current revenues bear to management's estimate of ultimate revenues
for each program. As a result of our policy, we typically amortize a minimum of
80% of the costs over a three-year period. Management periodically reviews its
estimates and adjusts the amortization of its programming accordingly. In the
event that management should determine that the capitalized costs for a program
exceed its fair value, capitalized costs would be written down in the current
period, resulting in a corresponding decrease in earnings.
Our revenues have decreased from $54.9 million for fiscal 2001 and $34.7 million
for fiscal 2000 to $6.5 million for fiscal 2002. There is no assurance that we
will have the liquidity and financial resources to achieve future revenue growth
or maintain current revenue. In addition, if the proposed acquisition and
financing transactions are not completed, we may fail to make the contracted
payments or meet the financial terms of our debt, causing our lenders to demand
immediate repayment of our debt.
GOVERNMENT INCENTIVES
Refundable tax credits and other government incentives are important to our
business. If these tax credits and incentives were to be discontinued, we may be
unable to pursue our growth strategy.
CURRENCY RISK
We receive a portion of our revenues from U.S. and international sources in U.S.
dollars, while our costs are payable primarily in Canadian dollars. Accordingly,
operating results can be affected by fluctuations in the US dollar exchange
rate. We do not maintain US currency balances in excess of our estimated US
payables. In addition, costs may be payable in currencies other than Canadian
and US dollars. Occasionally we use derivative instruments to reduce our
exposure to foreign currency risk. At August 31, 2002, we have no derivative
financial instruments outstanding.
INFLATION
Historically, inflation has not had a material impact on our results of
operations.
OUTLOOK
Our primary objective is to expand our operations in the development, production
and distribution of proprietary programming, focusing on programming that will
add long-term library value. We will continue to focus on programming that has
worldwide market appeal.
Due to a reduction in demand for high cost drama programming as a result of
downward price pressure on worldwide television markets, we experienced a
significant reduction in our production levels of dramatic programming. We will
periodically evaluate our development activities for dramatic television
programming, based on the worldwide market for this programming. We will
continue our efforts to license our completed productions.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-8-
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
In response to this shift in demand, we increased the production of factual
programming, which has a relatively lower cost. Our factual programming
subsidiary that produces high quality lifestyle programming, documentaries and
reality series, experienced its best year ever, adding significant rights to its
program library. In the ensuing year, we will continue to focus on the growth of
our factual programming library.
We will endeavor to expand our business internally and by merger and acquisition
activities. We have entered into an agreement, subject to shareholder approval,
to acquire the business of GFT Entertainment ("GFT") and certain related assets.
GFT is one of Canada's largest independent motion picture producers. With the
proposed acquisition of this complementary business, we will expand our program
library in the area of theatrical motion pictures. We will focus on creating
feature films, with budgets between $4 million and $25 million, designed for the
theatrical marketplace as well as television and DVD markets. We anticipate that
this proposed acquisition, in addition to adding significant revenues and
library value, will add valuable management resources and operational strength.
Subject to closing the proposed acquisition, Gary Howsam, the President of GFT,
who has over 20 years of experience in senior level roles in the entertainment
industry, will become President and CEO of the Company. Under his direction, we
will continue to focus on building the Company's programming library and
building long-term shareholder value.
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The management of Peace Arch Entertainment Group Inc. is responsible for the
preparation of the accompanying consolidated financial statements and the
preparation and presentation of all information in the Annual Report. The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada and are considered by
management to present fairly the financial position and operating results of the
Company.
The Company maintains various systems of internal control to provide reasonable
assurance that transactions are appropriately authorized and recorded, that
assets are safeguarded, and that financial records are properly maintained to
provide accurate and reliable financial statements.
The Company's audit committee is composed of three non-management directors who
are appointed by the Board of Directors annually. The committee meets
periodically with the Company's management and independent auditors to review
financial reporting matters and internal controls and to review the consolidated
financial statements and the independent auditor's report. The audit committee
reported its findings to the Boards of Directors who have approved the
consolidated financial statements
The Company's independent auditors, KPMG LLP, have audited the consolidated
financial statements and their report follows [GRAPHIC OMITTED][GRAPHIC OMITTED]
/s/ Juliet Jones
----------------------------------------
Juliet Jones
President and Chief Executive Officer
December 17, 2002
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-9-
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Peace Arch Entertainment
Group Inc. as at August 31, 2002 and 2001 and the consolidated statements of
operations, deficit and cash flows for each of the years in the three year
period ended August 31, 2002. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
With respect to the consolidated financial statements for the year ended August
31, 2002 and 2001, we conducted our audits in accordance with Canadian generally
accepted auditing standards and auditing standards generally accepted in the
United States of America. With respect to the consolidated financial statements
for the year ended August 31, 2000, 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, 2002
and 2001 and the results of its operations and its cash flows for each of the
years in the three year period ended August 31, 2002 in accordance with Canadian
generally accepted accounting principles. As required by the Company Act
(British Columbia), we report that in our opinion these principles have been
applied, after giving retroactive effect to the change in accounting for net
loss per share as described in note 3(k), on a consistent basis.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
December 6, 2002, except for note 21 which is as of December 17, 2002
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 2 to the financial statements. Our report to the shareholders dated
December 6, 2002, except for note 21 which is as of December 17, 2002, is
expressed in accordance with Canadian reporting standards which do not permit a
reference to such events and conditions in the auditor's report when these are
adequately disclosed in the financial statements.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
December 6, 2002, except for note 21 which is as of December 17, 2002
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS
ENDED AUGUST 31, 2000, 2001 AND 2002
-10-
PEACE ARCH ENTERTAINMENT GROUP INC.
CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31, 2001 AND 2002
(Expressed in thousands of Canadian dollars)
---------------------------------------------------------------------------------------------------------------------------------
2001 2002
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 3,977 $ 1,968
Accounts and other receivables (note 4) 28,203 3,871
Productions in progress 3,039 1,356
Prepaid expenses and deposits 459 206
Investment in television programming (note 5) 3,667 2,332
Property and equipment (note 6) 7,277 842
Deferred costs 410 188
Goodwill and trademarks (note 7) 238 -
----------------------------------------------------------------------------------------------------------------------------
$ 47,270 $ 10,763
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Bank indebtedness (note 8) $ 18,447 $ 1,855
Accounts payable and accrued liabilities 12,876 2,650
Deferred revenue (note 17(a)) 3,191 1,197
Deferred gain (note 9) - 436
Debt (note 12) 11,215 9,892
----------------------------------------------------------------------------------------------------------------------------
45,729 16,030
----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (deficiency):
Share capital (note 13) 31,870 31,870
Authorized:
100,000,000 Class A Multiple Voting Shares without par value Issued -
1,091,875 (August 31, 2001 - 1,105,875)
100,000,000 Class B Subordinate Voting Shares without par value Issued -
2,795,969 (August 31, 2001 - 2,781,969)
25,000,000 Preference Shares, issuable in series without par value
Issued - nil
Other paid-in capital (note 12) 467 680
Deficit (30,796) (37,817)
----------------------------------------------------------------------------------------------------------------------------
1,541 (5,267)
----------------------------------------------------------------------------------------------------------------------------
$ 47,270 $ 10,763
============================================================================================================================
Future operations (note 2)
Commitments and contingencies (notes 17)
Subsequent events (note 21)
/s/ Cameron White /s/ Juliet Jones
----------------------- ----------------------------
Cameron White Juliet Jones
Director Director
The accompanying notes are an integral part of the
consolidated financial statements
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-11-
PEACE ARCH ENTERTAINMENT GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 2000, 2001 AND 2002
(Expressed in thousands of Canadian dollars except per share information)
---------------------------------------------------------------------------------------------------------------------------------
2000 2001 2002
---------------------------------------------------------------------------------------------------------------------------------
Revenue $ 34,663 $ 54,900 $ 6,494
Expenses:
Amortization of television programming and Production
costs (note 3(d)) 31,144 57,612 6,639
Other costs of production and sales 2,157 1,755 615
Other amortization 781 748 476
Selling, general and administrative 3,668 4,521 3,101
Bad debt (note 17(b)) - - 1,675
----------------------------------------------------------------------------------------------------------------------------
37,750 64,636 12,506
----------------------------------------------------------------------------------------------------------------------------
Loss from operations before undernoted (3,087) (9,736) (6,012)
Interest income 775 499 597
Interest expense (note 14) (963) (2,295) (2,364)
Loss on write-down of assets (note 7) - (2,665) (166)
Gain on sale of assets (note 9) 272 233 176
----------------------------------------------------------------------------------------------------------------------------
84 (4,228) (1,757)
----------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (3,003) (13,964) (7,769)
Income tax expense (recovery) (note 11) 265 316 (748)
----------------------------------------------------------------------------------------------------------------------------
Net loss $ (3,268) $ (14,280) $ (7,021)
============================================================================================================================
Basic net loss per common share (note 15) $ (0.86) $ (3.71) $ (1.81)
============================================================================================================================
Diluted loss per common share (note 15) $ (0.86) $ (3.71) $ (1.81)
============================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-12-
PEACE ARCH ENTERTAINMENT GROUP INC.
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE YEARS ENDED AUGUST 31, 2000, 2001 AND 2002
(Expressed in thousands of Canadian dollars)
---------------------------------------------------------------------------------------------------------------------------------
2000 2001 2002
---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ (13,248) $ (16,516) $ (30,796)
Net loss for the year (3,268) (14,280) (7,021)
----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (16,516) $ (30,796) $ (37,817)
============================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-13-
PEACE ARCH ENTERTAINMENT GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2000, 2001 AND 2002
(Expressed in thousands of Canadian dollars)
---------------------------------------------------------------------------------------------------------------------------------
2000 2001 2002
---------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net loss $ (3,268) $ (14,280) $ (7,021)
Items not involving cash:
Amortization of television programming (note 3(d)) 31,144 50,970 4,070
Amortization of deferred finance costs 28 358 470
Other amortization 781 748 476
Interest on debt discount 48 221 250
Future income taxes (124) - -
Loss (gain) on sale of assets 290 (233) (176)
Loss on write-down of assets (note 7) - 2,665 166
Bad debt (note 17(b)) - - 1,675
Investment in television programming (31,599) (52,077) (1,577)
Changes in non-cash operating working capital
(note 16) (2,361) (1,105) 21,674
----------------------------------------------------------------------------------------------------------------------------
(5,061) (12,733) 20,007
----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Increase in deferred costs (998) (142) (430)
Increase in goodwill and trademarks (39) (17) (1)
Property and equipment acquired (589) (178) (44)
Reduction of note receivable 817 - -
Proceeds on sale of assets, net (note 9) - - 5,870
Acquisition of assets (note 10) (477) - -
----------------------------------------------------------------------------------------------------------------------------
(1,286) (337) 5,395
----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Issue of common shares, net 191 196 -
Increase in loans due to directors
and shareholders 350 - -
Increase (decrease) in bank indebtedness (1,135) 12,650 (16,592)
Increase in debt 7,817 - -
Repayment of debt (872) (258) (10,819)
----------------------------------------------------------------------------------------------------------------------------
6,351 12,588 (27,411)
----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4 (482) (2,009)
Cash and cash equivalents, beginning of year 4,455 4,459 3,977
----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,459 $ 3,977 $ 1,968
============================================================================================================================
Supplementary information:
Interest paid (net of amounts capitalized) $ 787 $ 1,217 $ 1,978
Income taxes paid 505 12 18
Income taxes received 242 8 349
Non-cash transactions:
Conversion of an accounts payable to debt - - 6,626
Increase in investment in television
programming and debt - - 1,158
Increase in note receivable on sale of
property (note 9) - - 1,000
Increase in liabilities and receivable from
co-producer (note 17(b)) - - 1,675
Discounts on debt - 332 213
The accompanying notes are an integral part of the
consolidated financial statements
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-14-
PEACE ARCH 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., together with its subsidiaries, (collectively, the "Company")
is a fully integrated company that creates, develops, produces and
distributes film, television and video programming for world-wide markets.
2. FUTURE OPERATIONS
These consolidated financial statements have been prepared on the "going
concern" basis, which assumes the realization of assets and the settlement
of liabilities in the normal course of operations. The application of the
"going concern" basis is dependent upon the Company achieving profitable
operations to generate sufficient cash flows to fund continuing operations
or, in the absence of adequate cash flows from operations, obtaining
additional financing to meet its obligations as they come due. There is
substantial doubt about the appropriateness of the Company's use of the
"going concern" assumption because of the significant losses from
operations, material working capital and shareholder deficiencies as at
August 31, 2002, contingency related to the listing of its shares (17(e)),
non-compliance with certain debt covenants and dependence upon the
continued financial support of its secured lenders. The Company only has
sufficient cash resources to maintain its current level of operations until
December 2002. As a result of these factors, realization of assets and
discharge of liabilities are subject to significant uncertainty.
Significant restructuring initiatives, including staff reductions, were
carried out during the year ended August 31, 2002 in an effort to reduce
operating costs. Management continues to review operations in order to
identify additional strategies, including further cost reductions and
obtaining future sales contracts, to increase cash flow, improve the
Company's financial position and enable timely discharge of the Company's
obligations. The Company has entered into a term sheet for a potential
financing and restructuring transaction (note 21). There is no assurance
the Company will be successful in its restructuring initiatives, its
financing efforts and in achieving profitable operations. If the Company is
unsuccessful, the Company may be required to significantly reduce or cease
operations and liquidate assets or seek potential buyers of the Company.
The Company has credit facilities with a Canadian chartered bank and loans
from subordinated lenders, all of which are secured by charges on the
assets of the Company. As discussed in notes 8 and 12, the credit facility
balance and certain loans are due on demand pursuant to the original terms
of their agreements. The Company was not in compliance with certain loan
covenants at August 31, 2002. There is also no assurance that the Company
will remain in compliance with its other debt covenants and repayment
requirements, which if violated could result in such obligations being
immediately due and payable.
These consolidated financial statements do not reflect adjustments that
would be necessary if the "going concern" basis is not appropriate. If the
"going concern" basis is not appropriate for the consolidated financial
statements, then significant adjustments would be necessary in the carrying
value of assets and liabilities, the reported revenues and expenses, and
the balance sheet classifications used. Additionally, the amounts reported
could materially change because of any plan of reorganization in the
future, since the reported amounts in the consolidated financial statements
do not give effect to adjustments to the carrying value of the underlying
assets or amounts of liabilities that may ultimately result.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-15-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
3. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements of the Company are prepared in
accordance with generally accepted accounting principles in Canada and,
except as explained and quantified in note 20, comply, in all material
respects, with generally accepted accounting principles in the United
States of America.
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.
(b) Revenue Recognition
(i) Revenues from television programming are recognized only when
persuasive evidence of a sale or licensing arrangement with a
customer exists, the film is complete and has been delivered or
is available for immediate and unconditional delivery, the
license period has commenced, the arrangement fee is fixed or
determinable, collection of the arrangement fee is reasonably
assured, and other conditions as specified in the respective
agreements have been met.
(ii) Revenues from production services for third parties are
recognized when the production is completed and delivered. All
associated production costs are deferred and charged against
earnings when the film is delivered and the revenue recognized.
(iii) Cash received in advance of meeting the revenue recognition
criteria described above is recorded as deferred revenue.
(c) Cash Equivalents
Cash equivalents include highly liquid investments with terms to
maturity of 90 days or less when purchased.
(d) Investment in Television Programming and Productions in Progress
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.
Productions in progress represent the costs of incomplete programs and
are carried at the lower of cost and estimated fair value.
For episodic television series, capitalized costs are limited to the
amount of revenue contracted for each episode until estimates of
secondary market revenue can be established. Costs in excess of this
limitation are expensed as incurred.
Participation and exploitation costs are capitalized when they are
likely to be incurred and can be reasonably determined.
The Company records amortization based on the ratio that current
revenues bear to estimated remaining unrecognized ultimate revenue as
of the beginning of the current fiscal year. Investment in television
programming is recorded at the lower of remaining unamortized film
costs and estimated fair value, determined on an individual program
basis.
Estimates of ultimate revenue to be received in respect of a
particular film includes revenue from a market or territory only when
persuasive evidence exists that such revenue will occur, or the
Company has a history of earning such revenue in the market or
territory.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-16-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
(e) Property and Equipment
Property and equipment are stated at cost and amortized on the
following basis:
Buildings..............................................................5% declining balance
Computers, furniture and equipment.....................................20% declining balance
Production equipment...................................................20% declining balance
Other..................................................................2-5 year straight line
Equipment under capital lease is amortized using the above rates.
The Company monitors the recoverability of long-lived assets based
upon factors such as current market value, future asset utilization,
business climate and future undiscounted cash flows expected to result
from the use of the related assets. The Company's policy is to record
an impairment loss in the period when it is determined that the
carrying amount of the asset may not be recoverable. The impairment
loss is calculated as the amount by which the carrying amount of the
asset exceeds the undiscounted estimate of future cash flows from the
asset.
(f) Deferred Costs
Deferred costs represent financing costs, which are amortized to
interest expense 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, normally within three
years of the first capitalized transaction for each project not yet
set for production.
(g) Goodwill
Goodwill is amortized on a straight-line basis over 10 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.
Effective July 1, 2001, the Company adopted the provisions of the
Canadian Institute of Chartered Accountants recommendations under
Handbook 1581 "Business Combinations", and certain provisions of
Handbook 3062 "Goodwill and Other Intangible Assets", as required for
goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001. Handbook 1581 requires the purchase
method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is
prohibited. Handbook 3062 changes the accounting for goodwill from an
amortization method to an annual impairment test and is required for
goodwill arising on business combinations made after June 30, 2001
and, otherwise to the Company will be applied prospectively effective
September 1, 2002. Under Handbook 3062, the Company is required to
perform an initial benchmark test of impairment within six months of
adoption and subsequent annual tests of goodwill will be at the
reporting unit level. If the carrying value of goodwill of a reporting
unit exceeds the fair value of the reporting unit's goodwill, the
carrying value must be written down to fair value.
(h) Government Assistance
The Company has access to several government programs that are
designed to assist film and television production in Canada. Amounts
received in respect of government programs are recorded as revenue in
accordance with the Company's revenue recognition policy for completed
film and television programs. Refundable tax credits are recorded as a
reduction of the cost of related films as described in note 3(d).
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-17-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
(i) Income Taxes
Future income taxes are recorded for using the asset and liability
method. Under the asset and liability method, future tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply when the asset is
realized or the liability settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the
period that substantive enactment 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.
(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 of the fiscal years presented, the Company has no
long-term monetary assets or liabilities denominated in a foreign
currency.
(k) Net Earnings (Loss) per Common Share
Effective September 1, 2001, the Company adopted the new Canadian
Institute of Chartered Accountants recommendations relating to the
calculation and disclosure of net earnings (loss) per share. The new
recommendations have been applied retroactively and did not require a
change to previously reported amounts. Under the revised policy, the
calculation of basic net earnings (loss) per share has not been
impacted. Basic net earnings (loss) per share is computed using the
weighted average number of common shares outstanding during the
periods. Under the new recommendations, the treasury stock method is
used for the calculation of diluted net earnings (loss) per share
instead of the imputed income approach used previously. Under the
treasury stock method, the weighted average number of common shares
outstanding for the calculation of diluted net earnings (loss) per
share assumes that the proceeds to be received on the exercise of
dilutive stock options and warrants are applied to repurchase common
shares at the average market price for the period. Stock options and
warrants are dilutive when the average market price of the common
shares during the period exceeds the exercise price of the options and
warrants.
Shares that are contingently returnable to treasury are excluded from
the weighted average number of shares outstanding for purposes of the
calculation of basic earnings per share for all periods prior to the
period in which the contingency is resolved and the shares are
releasable from escrow. Contingent returnable shares are included in
diluted earnings per share prior to release if conditions for their
release have been achieved or would be if the contingency was not
determined as at a later date.
(l) Stock-Based Compensation
The Company accounts for stock-based compensation granted to certain
directors, employees and other service providers in exchange for
services rendered using the intrinsic value method set out in APB
Opinion No. 25 and related interpretations. Under this method,
compensation expense is recorded on the date of grant only if the then
current market price of the underlying stock exceeds the exercise
price. As the Company's policy is to grant options and warrants with
the exercise prices equal to the market price of the underlying stock
on the date of grant, no expense is typically recognized for these
type of awards.
(m) Comparative Figures
Certain comparative figures have been restated to conform to the basis
of presentation adopted for the current year. For fiscal 2002,
interest revenue earned on refundable tax credits have been
reclassified from revenues to interest income.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-18-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
(n) 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.
Investments in television programming are carried at the lesser of
unamortized capitalized cost and estimated fair value determined on a
film-by-film basis. Future changes in general economic conditions,
market preferences and other factors may result in the carrying value
of a particular film becoming impaired as management revises its
estimates of the ultimate revenue to be received in respect of each
film.
Productions in progress, goodwill, and accounts and tax credits
receivable are asset accounts that also require significant use of
management estimates to determine recoverability.
4. ACCOUNTS AND OTHER RECEIVABLES
2001 2002
-------------------------------------------------------------------------------------------------------------------------
Trade receivables $ 4,448 $ 559
Note receivable (note 9) - 1,000
Tax credits receivable 23,729 2,312
Income taxes recoverable 26 -
-------------------------------------------------------------------------------------------------------------------------
$ 28,203 $ 3,871
=========================================================================================================================
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 3(d). All amounts are subject to final determination
by the relevant tax authorities. During the year, tax credits aggregating
$1,752,020 were recorded (2001 - $13,538,134).
5. INVESTMENT IN TELEVISION PROGRAMMING
2001 2002
-------------------------------------------------------------------------------------------------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
-------------------------------------------------------------------------------------------------------------------------
Television movies $ 7,910 $ 6,376 $ 8,274 $ 7,213
Television series 164,926 162,793 167,297 166,026
-------------------------------------------------------------------------------------------------------------------------
172,836 169,169 175,571 173,239
-------------------------------------------------------------------------------------------------------------------------
Net book value $ 3,667 $ 2,332
=========================================================================================================================
Investment in television programming is expected to be amortized not less
than 80% within the next three years. The Company expects amortization of
August 31, 2002 completed films will be approximately $2,000,000 in the
next fiscal year ending August 31, 2003.
As at August 31, 2002, the Company has no accrued participation costs that
it expects to pay in the next year.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-19-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
6. PROPERTY AND EQUIPMENT
2001 2002
-------------------------------------------------------------------------------------------------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
-------------------------------------------------------------------------------------------------------------------------
Land $ 5,203 $ - $ - $ -
Buildings 1,229 231 - -
Computers, furniture and equipment 488 322 483 341
Production equipment 1,352 799 1,366 911
Equipment under capital lease 325 108 267 113
Other 192 52 161 70
-------------------------------------------------------------------------------------------------------------------------
8,789 1,512 2,277 1,435
-------------------------------------------------------------------------------------------------------------------------
Net book value $ 7,277 $ 842
=========================================================================================================================
During the year ended August 31, 2002, the Company sold its remaining two
buildings (note 9).
7. GOODWILL AND TRADEMARKS
Effective September 1, 1996, the Company acquired 100% of the shares of
Peace Arch Productions Inc. (formerly Sugar Entertainment Ltd.), for
consideration of 22,500 common shares at a deemed price of $10.00 per
common share and contingent consideration of 350,000 cancelable performance
shares at a deemed price of $0.10 per common share. The shares were
comprised of 50% Class A shares and 50% Class B shares. The performance
shares were releasable from escrow at a rate of one share for every $10.00
of cash flow generated by Peace Arch Productions Inc. Goodwill recorded at
the time of acquisition was $318,232.
The Company recorded additional goodwill at the time the performance shares
were 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 150,000 shares
were released from escrow.
During the year ended August 31, 2001, the Company wrote off the remaining
unamortized cost of goodwill of $2,665,000 related to its 1996 acquisition
of Peace Arch Productions Inc. (formerly Sugar Entertainment Ltd.) in
accordance with Company policy as described in note 3(g).
During the year ended August 31, 2002, the Company wrote off the remaining
unamortized cost of goodwill of $166,000 related to its 1995 acquisition of
The Eyes Multimedia Productions Inc. in accordance with Company policy as
described in note 3(g).
8. BANK INDEBTEDNESS
Bank indebtedness is drawn under a credit facility of up to $15 million
(August 31, 2001 - $29.5 million) for production financing and is comprised
of demand loans bearing interest at prime plus 1% per annum with monthly
payments of interest drawn under the credit facility. As at August 31,
2002, the prime rate was 4.50% (August 31, 2001 - 5.75%). The loans are
secured by the refundable tax credits of $2,311,902, accounts receivable of
$274,370, and distribution rights of the film properties with a carrying
value of $2,218,845 as of August 31, 2002 to which the loans relate and a
first priority general security agreement covering the assets of the
Company.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-20-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
9. DEFERRED GAIN
In August 1999, the Company sold one of its three properties for gross
proceeds of $3,265,000. As consideration, the Company received cash in the
amount of $550,000 and a note in the amount of $817,295 bearing interest at
12% per annum. The principal was due and repaid in the year ended August
31, 2000. The gain on the sale in excess of the present value of the
minimum lease payments, being $284,528, was realized in 1999. The remaining
amount of the gain on sale of $513,493 was deferred and amortized over the
two-year minimum lease term. As at August 31, 2001, the deferred gain had
been fully amortized.
During the year ended August 31, 2002, the Company sold its remaining two
properties. In October 2001, the first property was sold for gross proceeds
of $2,313,000 and realized a gain on the sale of $88,322. In January 2002,
the second property was sold for gross proceeds of $4,722,200. As
consideration, the Company received cash in the amount of $3,722,200 and a
note in the amount of $1,000,000 bearing interest at 9% per annum
commencing January 10, 2002. The note receivable secured by a second
mortgage on the real property. The principal is due and payable January 1,
2004. At August 31, 2002, the Company continues to occupy the second
property through an operating lease arrangement. As the present value of
the minimum lease payments is greater than the gain on the sale of
$523,483, the gain was deferred and is being amortized over the four-year
minimum lease term. As at August 31, 2002, the unamortized balance of the
deferred gain was $436,236.
10. ACQUISITION OF MVP MOVIE VISTA PRODUCTIONS INC.
Effective August 31, 2000, the Company acquired 100% of the issued and
outstanding shares of MVP Movie Vista Productions Inc. for cash
consideration of $476,975. Assets acquired included film rights and tax
loss carry-forwards valued at $1,566,762. The benefit of the tax loss
carry-forwards has not been recognized in the financial statements.
11. FUTURE INCOME TAXES
Temporary differences give rise to the following future income tax assets
and liabilities at August 31:
====================================================================================================================
2001 2002
--------------------------------------------------------------------------------------------------------------------
FUTURE INCOME TAX ASSETS:
Property and equipment $ 119 $ 115
Share issue costs 298 193
Investment in television programming 278 1,330
Deferred gain 2 1
Other 112 109
Losses available for future periods 9,110 10,313
--------------------------------------------------------------------------------------------------------------------
Gross future tax assets 9,919 12,061
Valuation allowance (9,851) (11,996)
--------------------------------------------------------------------------------------------------------------------
Net future income tax assets 68 65
FUTURE INCOME TAX LIABILITIES:
Property and equipment (68) (65)
Investment in television programming - -
Other - -
--------------------------------------------------------------------------------------------------------------------
$ - $ -
====================================================================================================================
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-21-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
At August 31, 2002 the Company has approximately $26,952,000 in non-capital
losses available for deduction against taxable income in future years.
These losses expire as follows:
2003 $ 265
2004 393
2005 919
2006 1,358
2007 1,337
2008 16,779
2009 5,901
-------------------------------------------------------------------------------------------------------------------------
$ 26,952
=========================================================================================================================
The differences between the effective tax rate reflected in the provision
for income taxes and the Canadian statutory income tax rate are as follows:
==========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
--------------------------------------------------------------------------------------------------------------------------
Corporate statutory income tax rate (45.6)% (45.0)% (40.3)%
Add (deduct) the effect of:
Utilization of previously unrecognized tax losses (7.4) (0.4) (4.1)
Expenses not deductible for income tax purposes 13.5 2.4 5.6
Change in valuation allowance on future tax assets 48.3 45.3 29.0
--------------------------------------------------------------------------------------------------------------------------
Effective tax rate 8.8% 2.3% (9.8)%
==========================================================================================================================
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-22-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
12. DEBT
2001 2002
-------------------------------------------------------------------------------------------------------------------------
(i) Mortgage due Nov 1, 2001 bearing interest at 7.55% per annum with
aggregate monthly payments of principal and interest of $9, secured by
a
first mortgage on property. $ 863 $ -
(ii) Mortgage due March 1, 2002 bearing interest at 7.95% per annum
with aggregate monthly payments of principal and interest of $25,
secured by a
first mortgage on property. 2,392 -
(iii)Debentures having a face value of $7,900 (recorded net of deemed
debt discount) bearing interest at 14% per annum, payable quarterly,
and 4% interest compounded quarterly, payable at maturity. The debt is
secured by a charge on the assets of the Company, and is due Feb 16,
2002 (notes
13(c)(ii) and 13(c)(iii)). 7,799 -
(iv) Debentures having an original face value of $5,687 (recorded net
of deemed debt discount) bearing interest from 18% to 36% per annum,
payable monthly. The debt is secured by a charge on the assets of the
Company,
subordinated to bank indebtedness (note 8) and due Dec 31, 2002. - 537
(v) Term loan, bearing interest at 10% per annum, 8.5% payable monthly,
and accruing 1.5% monthly and payable at such time as the debentures
(iv) have been paid in full. The term loan, secured by a charge on the
personal property of the Company, subordinated to debentures (iv) and
bank
indebtedness (note 8), and a secured interest in certain copyrights to - 7,606
productions, due Jun 30, 2004.
(vi) Bank guarantee with Comerica Bank to a maximum of US$2,074 on behalf
of a co-production partner, bearing interest at U.S. prime plus 1.5%
per annum, payable monthly, secured by a charge on the assets of the
co-production
partner (note 5). - 1,675
(vii)Capital leases to purchase equipment, bearing interest from 7.2 to 10.2% per annum, 161 74
secured by the equipment acquired.
-------------------------------------------------------------------------------------------------------------------------
$11,215 $9,892
=========================================================================================================================
Of the $7,900,000 debentures issued (note 12(iii)), $350,000 was to related
parties. Included with the issuance were warrants to purchase 210,000 Class
A and 27,000 Class B shares at an exercise price of $5.00 per share (note
13(c)(ii)). A value of $322,000 was attributed to the warrants issued and
recorded as debt discount and other paid-in capital. This debt discount was
amortized against income as interest expense over the term of the
debentures. As at August 31, 2002, the debt discount has been fully
amortized. Also in connection with the debt issue, the Company granted as
contingent compensation warrants to purchase 105,000 Class A and 13,500
Class B shares at an exercise price of $5.00 per share (note 13(c)(ii)).
The warrants were only exercisable if the lenders agreed to an extension of
the original maturity date of the debentures on February 16, 2002.
Subsequent to August 31, 2001, the Company entered into a new loan
agreement and cancelled 83,403 Class A and 542 Class B warrants granted as
contingent consideration. Of the remaining 21,597 Class A warrants and
12,958 Class B warrants, 6,479 Class A warrants were re-priced to $1.20 and
expire February 16, 2004.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-23-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
As a result of breach of covenants with the former debenture holders (note
12(iii)), in November 2001 the Company renegotiated its remaining
obligation of $5,687,000, with certain debt holders having their position
repaid and assumed by another existing debt holder. Included with the
renegotiated $5,687,000 debt (note 12(iv)) were warrants to purchase
230,000 Class B shares at an exercise price of $1.20 per share (note
13(c)(v)). A value of $212,650 has been attributed to the warrants issued
and recorded as debt discount and other paid-in capital. This debt discount
is being amortized against income as interest expense over the term of the
debentures, and has a current unamortized value of approximately $65,513.
The debentures bear interest at rates ranging from 18% to 36% percent, are
due December 31, 2002 and require earlier payments of principal upon cash
flow collections from certain current and future refundable tax credits
claims, proceeds from certain asset sales received and other transactions
by the Company. For accounting purposes, the debt re-negotiation
transaction was accounted for as a modification of the original debentures,
with any existing unamortized debt discounts and deferred financing costs
amortized over the remaining term of the new debt instrument.
At August 31, 2002, the Company was not in compliance with debt covenants
with the debenture holders causing the obligation to be due on demand. The
debentures were fully repaid subsequent to year end (note 21(b)).
Included in debt outstanding at August 31, 2002 (notes 12(iii) and 12(iv))
are amounts owing to related party shareholders of $581,963 (2001 -
$2,150,000)
During the year-ended August 31, 2002, the Company entered into an
agreement with an existing trade creditor whereby the creditor agreed to
exchange its trade payable balance of $7,783,470 for a long-term promissory
note obligation (note 12(v) having a security interest in copyrights to
certain productions. The promissory note bears interest at 10% per annum
and matures June 30, 2004. Subsequent to August 31, 2002 and pursuant to
the promissory note obligation, the Company failed to make payments of
principal of $500,000 and also interest owing. The Company has entered into
a proposed debt restructuring transaction with this creditor subsequent to
August 31, 2002 (note 21(a)(iii)).
The Company is also required to make other future principal repayments as
follows:
December 31, 2002 1,000,000
June 30, 2003 1,000,000
December 31, 2003 1,000,000
March 31, 2004 1,500,000
June 30, 2004 2,606,000
=====================================================================================================================
The creditor is entitled to accelerated repayments under certain
situations, including the right to 100% of amounts collected by the Company
on the $1,000,000 note receivable (note 4).
Principal due in each of the next five fiscal years ending August 31 on
debt is approximately as follows:
2003 $ 4,786
2004 5,106
2005 -
2006 -
2007 -
--------------------------------------------------------------------------------------------------------------------
$ 9,892
====================================================================================================================
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-24-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
13. SHARE CAPITAL
(a) Issued
Class A shares are entitled to ten votes per share and Class B shares
are entitled to one vote per share. Each Class A share is convertible
at any time into one Class B share at the option of the holder. The
information in these consolidated financial statements has been
restated to reflect the share consolidation and reclassification.
========================================================================================================================
CLASS A CLASS B
NUMBER OF NUMBER OF TOTAL
SHARES AMOUNT SHARES AMOUNT AMOUNT
------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1999 1,517,965 13,682 2,267,978 17,796 31,478
Change during the year:
Issued for cash on exercise of stock options - - 36,800 202 202
Converted (130,174) (1,173) 130,175 1,173 -
Less share issue costs, net of tax benefit - 29 - (35) (6)
------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2000 1,387,791 12,538 2,434,953 19,136 31,674
Change during the year:
Issued for cash on exercise of stock options - - 65,100 196 196
Converted (281,916) (2,611) 281,916 2,611 -
Less share issue costs, net of tax benefit - 63 - (63) -
------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2001 1,105,875 9,990 2,781,969 21,880 31,870
Change during the year:
Converted (14,000) (129) 14,000 129 -
Less share issue costs, net of tax benefit - 3 - (3) -
------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2002 1,091,875 $ 9,864 2,795,969 $ 22,006 $ 31,870
========================================================================================================================
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-25-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
(b) Options
In 1997, the Company adopted a stock option plan (the "Plan") pursuant
to which the Company's Board of Directors may grant stock options to
officers and key employees. The Plan authorizes grants of options to
purchase up to 115,950 Class A and 650,000 Class B shares authorized
but unissued common stock. Stock options are granted with an exercise
price in Canadian dollars equal to the stock's fair market value at
the date of grant. All stock options have terms between three and five
years and vest and become fully exercisable immediately or after up to
21 months.
As at August 31, 2002, the following stock options were outstanding.
=======================================================================================================================
EXERCISE OPTIONS OUTSTANDING OPTIONS EXERCISABLE
PRICE
Expiry Date PER SHARE CLASS A CLASS B CLASS A CLASS B
-----------------------------------------------------------------------------------------------------------------------
January 13, 2003 5.50 - 106,700 - 106,700
February 2, 2003 US 5.00 - 10,500 - 10,500
March 23, 2003 9.50 28,000 28,000 28,000 28,000
July 27, 2003 5.00 - 27,000 - 27,000
November 19, 2003 7.50 2,800 2,800 2,800 2,800
December 21, 2003 3.00 - 14,100 - 14,100
February 16, 2004 9.50 5,000 5,000 5,000 5,000
March 29, 2004 3.35 - 25,000 - 25,000
April 9, 2004 3.60 - 20,000 - 20,000
April 12, 2004 3.60 - 122,500 - 122,500
July 24, 2004 4.75 - 14,000 - 14,000
August 21, 2005 0.30 - 274,400 - -
-----------------------------------------------------------------------------------------------------------------------
35,800 650,000 35,800 375,600
=======================================================================================================================
Weighted average remaining contractual life 0.70 years 2.00 years 0.70 years 0.60 years
=======================================================================================================================
=======================================================================================================================
CLASS A CLASS B
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE EXERCISE PRICE
NUMBER OF PRICE NUMBER OF
SHARES SHARES
-----------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1999 158,350 11.11 158,350 11.11
Granted - - 346,570 6.08
Exercised - - (36,800) (5.50)
Expired or cancelled (31,900) (10.90) (61,850) (8.54)
-----------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2000 126,450 11.17 406,270 7.72
Granted - - 302,600 3.49
Exercised - - (65,100) (3.00)
Expired or cancelled (51,825) (12.57) (112,345) (9.70)
-----------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2001 74,625 10.20 531,425 5.47
Granted - - 284,400 0.30
Exercised - - - -
Expired or cancelled (38,825) (10.98) (165,825) (6.86)
-----------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2002 35,800 9.34 650,000 2.77
=======================================================================================================================
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-26-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
Excluded from the above option tables are 38,100 Class B options
expiring August 21, 2005, which were issued subject to the approval of
the shareholders of the Company, unless an equivalent amount of
options become available due to the expiry or cancellation of
outstanding options.
At August 31, 2002, a total of 411,400 options were exercisable
(August 31, 2001 - 599,383; August 31, 2000 - 467,071) at a weighted
average exercise price of $4.78 (August 31, 2001 - $6.08; August 31,
2000 - $8.79).
(c) Warrants
(i) In 1999, 750,000 Class B shares were issued by way of public
offering. In connection with the public offering, the Company
granted as compensation a warrant to purchase up to 75,000 Class
B shares at an exercise price of $US 6.75 per share. The warrant
is exercisable to August 3, 2004.
(ii) In connection with the debentures issued in 2000 (note 12(iii)),
the Company issued share purchase warrants to purchase an
aggregate 210,000 Class A shares and 27,000 Class B shares, all
at an exercise price of $5.00 per share, exercisable for a
period of 42 months from August 16, 2000.
(iii) In 2001, in connection with the debentures issued in 2000 (note
12(iii)), the Company granted as consideration to the
debentureholders for a release of certain security interests
warrants to purchase up to 100,000 Class B shares at an exercise
price of $5.30 per share. The warrants are exercisable for a
period of six months following the due date of the debenture on
February 16, 2002. As the warrants were granted at an exercise
price equal to the market value of Company's shares on the date
of grant, no expense has been recorded.
(iv) Also during 2001, the Company granted as partial compensation to
retain an investment banker as its financial advisor a warrant
to purchase up to 100,000 Class B shares at an exercise price of
$US 2.72 per share, exercisable to April 16, 2006. As the
warrants were granted at an exercise price equal to the market
value of Company's shares on the date of grant, no compensation
expense has been recorded.
(v) During the year, in connection with the debentures issued (note
12(iv)), the Company issued share purchase warrants to purchase
up to 230,000 Class B shares at an exercise price of $1.20 per
share, exercisable to Jun 30, 2003.
For each of the periods presented, warrants were outstanding to
acquire common shares as indicated in the table.
=======================================================================================================================
EXERCISE 2000 2001 2002
PRICE
Expiry Date PER SHARE CLASS A CLASS B
-----------------------------------------------------------------------------------------------------------------------
October 21, 2000 $ 6.25 100,000 - - -
August 16, 2002 5.30 - 100,000 - -
June 30, 2003 1.20 - - - 230,000
February 16, 2004 (note 12) 1.20 - - 6,479 -
February 16, 2004 5.00 342,000 342,000 225,118 39,958
August 3, 2004 US 6.75 75,000 75,000 - 75,000
April 16, 2006 US 2.72 - 100,000 - 100,000
-----------------------------------------------------------------------------------------------------------------------
517,000 617,000 231,597 444,958
=======================================================================================================================
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-27-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
(d) Dividends
Covenants attached to the debentures limit the Company's ability to
pay dividends without the approval of the lenders.
14. INTEREST EXPENSE
=========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
-------------------------------------------------------------------------------------------------------------------------
Interest expense:
Long-term debt $ 369 $ 1,707 $ 1,630
Amortization of deferred finance costs and debt discounts 76 579 720
Other 518 9 14
Interest capitalized 82 1,066 671
-------------------------------------------------------------------------------------------------------------------------
15. NET LOSS PER COMMON SHARE
Basic loss per common share has been calculated by dividing into net loss
the weighted average number of common shares outstanding. As the Company
has a net loss in each of the periods presented, basic and diluted net loss
per share are the same as the exercise of all warrants or options would be
anti-dilutive. The weighted average number of shares outstanding for each
of the years presented is as follows:
YEARS ENDED AUGUST 31,
2000 2001 2002
--------------------------------------------------------------------------------------------------------------------------
Basic 3,794,714 3,843,929 3,887,844
Diluted 3,794,714 3,843,929 3,887,844
--------------------------------------------------------------------------------------------------------------------------
16. CHANGES IN NON-CASH OPERATING WORKING CAPITAL
==========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
--------------------------------------------------------------------------------------------------------------------------
Accounts and other receivables $ 2,641 $ (11,760) $ 25,332
Productions in progress (12,191)
12,598 1,683
Prepaid expenses and deposits (590) 253
423
Accounts payable and accrued liabilities 3,421 2,781 (3,600)
Deferred revenue 4,358 (5,147) (1,994)
--------------------------------------------------------------------------------------------------------------------------
$ (2,361) $ (1,105) $ 21,674
==========================================================================================================================
17 COMMITMENTS AND CONTINGENCIES
(a) Government Assistance
During the year ended August 31, 2002, the Company received $94,907 (2001 -
$1,369,470; 2000 - $1,369,471) in production assistance and nil (2001 -
$2,350,000; 2000 - $100,000) in equity participation from government
sources. The production assistance is not repayable and the equity
participation is repayable from distribution revenues in respect of which
the financing was made.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-28-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
Deferred revenue as at August 31, 2002 includes $151,852 (2001 - nil; 2000
- $1,369,471) related to production assistance and nil (2001 - nil; 2000 -
$100,000) in equity participation obtained from government sources during
the year.
(b) Loan Guarantee
The Company guaranteed a loan to a maximum of US$2,074,750 on behalf of a
co-production partner during the year ended August 31, 2001. During the
fiscal year ended August 31, 2002, the co-production partner defaulted on
its loan payments. As a result, the Company agreed to make interest
payments on behalf of the co-producer partner to keep the loan current. As
at August 31, 2002, the amount of the outstanding related debt was
$1,675,000 (US$1,074,791) (note 12(vi)) and the Company has recognized its
obligation as an increase in debt and an increase in receivable from
co-producer. The receivable balance was written off at August 31, 2002, as
the amount was not deemed recoverable. The amount owing of $1,675,000
(US$1,074,791) is currently due and payable under the original terms of the
agreement with the co-producer.
(c) Legal claims
Western International Syndication
The Company has filed a claim against Western International Syndication
("WIS") asserting chain of title to The Immortal ("Series"), a television
series that was produced and distributed by the Company in the United
States. The Company also asserts that WIS is liable for damages as a result
of the manner in which it syndicated the first season of the Series. WIS
has responded to the Company's claims by asserting counterclaims against
the Company for breach of contract, fraud and is seeking a declaration that
it controls the rights to any future distribution of the Series in the
United States. The Company believes the claim is without merit. A trial
date of April 15, 2003 has been established for the declaratory relief
claim only.
The Company has determined that it is not possible at this time to predict
the final outcome of these legal proceedings, including the outcome of
WIS's claim of title to the Series. It is not possible to establish a
reasonable estimate of the possible damages, if any, or reasonably estimate
the range of damages that may be awarded. Accordingly no provision with
respect to this lawsuit has been made in the Company's consolidated
financial statements.
Forgotten Kingdom Productions I. Inc. et al.
On December 2, 2001 Forgotten Kingdom Productions I. Inc. and Danny Virtue
and Lloyd Simandl instituted an action against the Company in the British
Columbia Supreme Court for failing to finance and co-produce a television
series entitled Ariana's Quest. The Plaintiffs seek damages of
approximately US$1,500,000 in lost fees, lost development costs of
$100,000, breach of contract of $25,000 and lost profits. The Company
believes the claim is without merit.
The Company has determined that it is not possible at this time to predict
the final outcome of these legal proceedings. It is not possible to
establish a reasonable estimate of the possible damages, if any, or
reasonably estimate the range of damages that may be awarded. Accordingly
no provision with respect to this lawsuit has been made in the Company's
consolidated financial statements.
Viacom, Inc.
On October 2, 2001 the Company initiated an action against Viacom Inc., MTV
Networks, VH1 Music First, et al in British Columbia Supreme Court for
damages in the amount of US$2,750,000 and consequential damages arising
from the Defendants' failure to honour a contract for the co-financing of
the television series Big Sound. A recovery or award to the Company, if
any, will be recognized in the statement of operations when it is realized.
Other
The Company is a party to other legal proceedings in the ordinary course of
its business but does not expect that the outcome of any other proceedings,
individually or in aggregate, to have a material adverse effect on the
Company's financial position, results of operations or liquidity.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-29-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
(d) Operating lease commitments
The Company is committed to operating lease payments for premises in
the following approximate amounts:
2003 $ 265
2004 271
2005 272
2006 145
2007 -
--------------------------------------------------------------------------------------------------------------------
$ 953
====================================================================================================================
(e) Listing requirements
The Company has been advised by the Toronto Stock Exchange ("TSX")
that the Company currently does not meet the eligibility requirements
for the continued listing of its Class A and Class B shares on the
TSX. The Company has been granted a 45 day extension from December 27,
2002 to meet the eligibility requirements, but the TSX may limit this
extension if the proposed transaction under 21(a) is not completed. If
the Company cannot meet TSX requirements before the expiration of the
45 day extension, the TSX has indicated that the Company's securities
will be suspended from trading. The Company will have an opportunity
to make a submission to TSX before any final suspension decision is
made.
18. FINANCIAL INSTRUMENTS
(a) Fair Values
As at August 31, 2002, 2001 and 2000, the Company's financial
instruments included cash and cash equivalents, accounts and other
receivables, bank indebtedness, and accounts payable and accrued
liabilities. 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, 2002, the fair value of tax credits receivable is estimated to be
$2,301,000 (August 31, 2001 - $22,643,000) based on discounted cash
flows to the expected timing of receipt of the tax credits.
Also included as a financial instrument is long-term debt consisting
of mortgages, demand loans and debentures. The fair value of long-term
debt has been estimated to approximate carrying value based upon
discounting future cash flows at the rate currently offered for debt
that is estimated by management to be of similar maturity and credit
quality.
(b) Concentration of Credit Risk
Although all of its revenue is generated from production in Canada,
the Company derived over 64% (2001 - 77%, 2000 - 84%) of its revenues
from export sales to the U.S. and Europe.
In the year ended August 31, 2002, one customer represented 45%, two
customers represented 14% each, and a fourth represented 8% of total
revenues.
In the year ended August 31, 2001, two customers represented 19% each,
a third represented 16%, a fourth represented 11%, a fifth represented
9%, a sixth represented 7%, and two represented 5% of total revenues.
In the year ended August 31, 2000, one customer represented 48%, a
second represented 21%, a third represented 13%, and a fourth
represented 7% of total revenues.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-30-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
At August 31, 2002, approximately 59% (August 31, 2001 - 84%) of
accounts and other receivable was comprised of refundable federal and
provincial tax credits. These credits are subject to audit by the
appropriate regulatory authorities.
Substantially all capital assets and goodwill of the Company is
located in Canada.
(c) Currency Risk
During the year ended August 31, 2002, the Company derived
approximately 64% (2001 - 59%; 2000 - 41%) of its revenues in U.S.
funds. The Company estimates its obligations payable in U.S. funds and
converts all U.S. funds in excess of these obligations into Canadian
currency as they are received. The Company earns revenue in foreign
currencies and employs from time to time derivative instruments to
reduce its exposure to foreign currency risk. The Company had no
derivative instruments outstanding at August 31, 2002, 2001 and 2000.
(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 8
and 12.
19. SEGMENTED INFORMATION
The Company manages its operations in two business segments: production
services for projects in which the Company does not hold a financial
interest in a film or video program, and proprietary programming which is
programming the Company owns or in which it holds a financial interest. The
Company operates only in Canada, although its programs are distributed
throughout the world (note 18(b)). Selected information for the Company's
operating segments, net of inter-company amounts, is as follows:
PRODUCTION PROPRIETARY
2000 SERVICES PROGRAMMING OTHER TOTAL
-------------------------------------------------------------------------------------------------------------------------
Revenue $ 2,853 $ 31,723 $ 87 $ 34,663
Gross profits 696 579 87 1,362
Total assets 1,553 49,678 109 51,340
-------------------------------------------------------------------------------------------------------------------------
2001
-------------------------------------------------------------------------------------------------------------------------
Revenue $ 9,017 $ 45,860 $ 23 $ 54,900
Gross profits 620 (5,110) 23 (4,467)
Total assets 10,349 35,354 1,567 47,270
-------------------------------------------------------------------------------------------------------------------------
2002
-------------------------------------------------------------------------------------------------------------------------
Revenue $ 3,582 $ 2,781 $ 131 $ 6,494
Gross profits 398 (1,139) 131 (610)
Total assets 658 8,539 1,566 10,763
-------------------------------------------------------------------------------------------------------------------------
Gross profits are comprised of revenue less amortization of television
programming, production costs, and other costs of production and sales.
Revenues from other business include interest earned on short-term
investments.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-31-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada ("Canadian GAAP")
which differ in certain respects with accounting principles generally
accepted in the United States ("US GAAP"). Material differences to these
consolidated financial statements are as follows:
(a) Application of US GAAP:
(i) As described in note 9, for Canadian accounting purposes, during
the years ended August 31, 1999 and 2002, the Company recognized
a partial gain on the sale of real estate. For US GAAP purposes,
no gain is recognized due to the existence of the note
receivable. Under US GAAP, this transaction would be accounted
for using the deposit method. Under the deposit method, the
transaction would not be recognized as a sale. As a result, the
Company would continue to record the property and related
depreciation in the consolidated financial statements and
recognize the cash collected as a deposit until sales
recognition and sales-lease back accounting is appropriate.
(ii) During the year ended August 31, 2001, the Company early adopted
Statement of Position 00-2 ("SOP 00-2"), "Accounting by
Producers or Distributors of Films" which established new
accounting standards on revenue recognition, capitalization and
amortization of film costs, accounting for exploitation costs,
including advertising and marketing expenses, and presentation
and disclosure of related information in financial statements.
For Canadian accounting purposes, changes in accounting policy
are applied retroactively with the prior years' financial
statements restated accordingly. For US GAAP purposes, changes
in accounting policy are applied prospectively with a cumulative
adjustment to the current year's financial statements.
(iii) As described in note 13(c)(iv), the Company granted warrants for
release of certain security interests or to retain an investment
banker as its financial advisor. As discussed in note 3(l), for
Canadian accounting purposes, the Company accounted for these
warrants using the intrinsic value method and did not record an
adjustment for compensation expense. For US GAAP purposes,
compensation expense would be recorded based on the fair value
of the warrants at the date of grant.
During fiscal year 2002, 21,597 Class A warrants and 12,958
Class B warrants were earned by creditors upon granting an
extension on debt, of which 6,497 Class A warrants were
re-priced to $1.20 per share (note 12). Furthermore, in fiscal
year 2001, 100,000 Class B warrants were granted to debtholders
to release certain security rights (note 13(c)(iii)). For U.S.
GAAP purposes, the fair value of these warrants would be
recognized as an additional debt discount and additions to other
paid-up capital. The debt discount is amortized against income
as interest expense over the term of the debt. For Canadian GAAP
purposes, the Company's policy is described in note 3(l).
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-32-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
The effect of these differences on net earnings (loss) and earnings
(loss) per share (calculated by reference to the weighted average
number of shares outstanding) under US GAAP would be as follows:
==========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
--------------------------------------------------------------------------------------------------------------------------
Net earnings (loss), Canadian GAAP $ (3,268) $ (14,280) $ (7,021)
Gain on sale of asset, net of income tax (note 20(a)(i)) 187 - (53)
Adjustment to eliminate retroactive change in accounting for film
costs, net of 4,080 - -
income tax (note 20(a)(ii))
Stock compensation expense to service providers (note 20(a(iii)) - (24) (44)
Additional debt discount - warrants (note 20(a)(iii) (60) (133)
--------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) before cumulative adjustment to reflect change in
accounting for films costs, US GAAP 999 (14,364) (7,251)
Cumulative adjustment to reflect change in accounting for film costs
(note 20(a)(ii)) - (10,736) -
--------------------------------------------------------------------------------------------------------------------------
Net earnings (loss), US GAAP $ 999 $ (25,100) $ (7,251)
==========================================================================================================================
Basic net earnings (loss) per share, US GAAP:
==========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
--------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) before cumulative adjustment to reflect change in
accounting for films costs, US GAAP $ 0.26 $ (3.74) $ (1.87)
Cumulative adjustment to reflect change in accounting for film costs - (2.79) -
--------------------------------------------------------------------------------------------------------------------------
Net earnings (loss), US GAAP $ 0.26 $ (6.53) $ (1.87)
==========================================================================================================================
Diluted net earnings (loss) per share, US GAAP:
==========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
--------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) before cumulative adjustment to reflect change in
accounting for films costs, US GAAP $ 0.26 $ (3.74) $ (1.87)
Cumulative adjustment to reflect change in accounting for film costs - (2.79) -
--------------------------------------------------------------------------------------------------------------------------
Net earnings (loss), US GAAP $ 0.26 $ (6.53) $ (1.87)
==========================================================================================================================
NET LOSS PER COMMON SHARE, US GAAP
The weighted average number of shares outstanding for each of the years
presented is as follows:
==========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
--------------------------------------------------------------------------------------------------------------------------
Basic 3,794,714 3,843,929 3,887,844
Diluted 3,808,430 3,843,929 3,887,844
--------------------------------------------------------------------------------------------------------------------------
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-33-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
Under US GAAP, total assets and shareholders' equity would be:
==========================================================================================================================
AUGUST 31,
2001 2002
--------------------------------------------------------------------------------------------------------------------------
Total assets $ 47,270 $ 14,774
Liabilities 45,603 20,070
Shareholders' equity (deficiency) 1,667 (5,296)
--------------------------------------------------------------------------------------------------------------------------
(b) Stock-Based Compensation
As described in notes 12 and 13, the Company has granted stock options
and warrants to certain directors, employees, and service providers.
These options and warrants 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 employee 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 awards to employees by the intrinsic value basis
set out in APB Opinion No. 25 and related interpretations. As options
and warrants are granted at exercise prices based on the market value
of the Company's shares at the date of grant, no adjustment for
employee 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 to employee
awards 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 Company's calculations applied are based on the expected life of
all options granted equaling 60% of the maximum term. Based on actual
experience, no dividends will be paid, and expected average volatility
and risk free interest rates are:
==========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
-------------------------------------------------------------------------------------------------------------------------
Volatility % 57 104 189
Risk free interest rate % 6.38 4.40 3.38
-------------------------------------------------------------------------------------------------------------------------
Unaudited pro forma information with respect to impact of the fair
value of stock options at the date of grant on reported loss for the
periods presented is as follows:
==========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
-------------------------------------------------------------------------------------------------------------------------
Earnings (loss), US GAAP $ 999 $ (25,100) $ (7,251)
Stock compensation expense (753) (589) (22)
-------------------------------------------------------------------------------------------------------------------------
Pro forma earnings (loss), US GAAP $ 246 $ (25,689) (7,273)
=========================================================================================================================
Pro forma basic earnings (loss) per share, US GAAP $ 0.06 $ (6.68) (1.87)
=========================================================================================================================
The per share weighted average fair value of stock options granted
during 2002 was $0.30 (2001 - $3.58; 2000 - $5.78) on the date of
grant using the Black Scholes option-pricing model with the
assumptions reported above.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-34-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
(c) Supplementary Information - Allowance for Doubtful Accounts:
Accounts receivable is disclosed net of allowance for doubtful
accounts. Changes in the allowance for each of the periods presented
are as follows:
=========================================================================================================================
YEARS ENDED AUGUST 31,
2000 2001 2002
-------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 304 $ 66 $ 50
Charges to expenses:
Expensed 25 911 1,823
Recovered/written-off (263) (927) (1,676)
-------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 66 $ 50 $ 197
=========================================================================================================================
(d) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No. 142 requires companies to
test goodwill for impairment annually in lieu of amortization at a
reporting unit level. Goodwill is impaired if the reporting unit's
fair value is less than its carrying amount, and if impaired, the
Company would recognize an impairment loss by writing down the
goodwill to its implied fair value. SFAS No. 142 is effective in
fiscal years beginning after December 15, 2001. The SFAS No. 142 is
substantively consistent with the CICA Handbook in Canada (note 3(g)).
SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No.
143) establishes accounting standards for recognition and measurement
of a liability for asset retirement cost. SFAS No. 143 is effective
for fiscal years commencing after June 15, 2002. SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS No.
144), addresses financial accounting and reporting for the impairment
of long-lived assets to be disposed of. SFAS No. 144 is effective for
fiscal years commencing after December 15, 2001.
In July 2002, the FASB released SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146), which
addresses the financial accounting and reporting for costs associated
with exit or disposal activities. SFAS No. 146 relates to the
recognition of a liability for a cost associated with an exit or
disposal activity and requires that a liability be recognized for
those costs only when the liability is incurred, that is, when it
meets the definition of a liability under the FASB's conceptual
framework. SFAS No. 146 also established fair value as the objective
for initial measurement of liabilities related to exit or disposal
activities. As a result, SFAS 146 significantly reduces an entity's
ability to recognize a liability for future expenses related to a
restructuring. SFAS No. 146 is effective for exit and disposal
activities initiated after December 31, 2002.
The Company does no believe that the adoption of SFAS No. 142, SFAS
No. 143, SFAS No. 144, or SFAS No. 146 will have a material affect on
the Company's financial results.
In November 2001, the Accounting Standards Board ("AcSB") in Canada
issued final amendments to Handbook Section 1650, Foreign Currency
Translation, that eliminate the deferral and amortization of foreign
currency translation gains and losses on long-lived monetary items.
This change is required to be applied to all financial statements for
fiscal years beginning on or after January 1, 2002, with retroactive
restatement of prior periods. The amendments also add a requirement to
disclose exchange gains and losses. The Company does not believe that
the amendments to the Handbook Section will have a material impact on
the Company's financial results.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-35-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
In December 2001, the AcSB issued new Handbook Section 3870,
Stock-Based Compensation and Other Stock-Based Payments. This new
Section establishes new standards for the recognition, measurement and
disclosure of stock-based compensation and other stock-based payments
made to employees and non-employees in exchange for goods and
services. The new section requires a fair value based method of
accounting for all awards granted to other than employees
("non-employees"), and for certain, but not all, awards granted to
employees. For all other types of awards ("exempt awards"), the
enterprise may elect not to apply the fair value based method as a
matter of policy. HB 3870 is effective for fiscal years beginning on
or after January 1, 2002, and applies to awards granted on or after
the date of adoption. Certain types of awards granted prior to, but
remain outstanding at, the date of adoption, however, will be captured
within the scope of the new standard. The Company does not have any of
these certain types of awards outstanding at August 31, 2002.
21. SUBSEQUENT EVENT
(a) Subsequent to August 31, 2002, the Company has entered into agreements
with regard to a series of transactions, which are all subject to
shareholder and regulatory approval. Pursuant to such agreements, the
Company has agreed to affect a private placement financing, an asset
acquisition, a debt restructuring and the release and reconstitution
of a loan guarantee (collectively the "Proposed Transactions"), as
described below. The Proposed Transactions are each contingent upon
certain of the other transactions and will close concurrently.
(i) Proposed Private Placement Financing
The Company has agreed to issue 5,000,000 Class B Subordinate
Voting Shares at an agreed price of $0.30 per share, for total
cash proceeds of $1,500,000.
(ii) Asset Acquisition
The Company has agreed to acquire a portfolio of assets owned
and controlled by CPC Communications Inc. ("CPC") and/or its
subsidiaries, unrelated third parties, in exchange for
consideration of 8,333,333 Class B Subordinate Voting Shares of
the Company at a deemed price of $0.30 per share. The assets
include five films that are in production, certain loans, tax
credits and accounts receivable and the future business
activities of Greenlight Film and Television Inc., a wholly
owned subsidiary of CPC. The assets, described herein, are
represented by CPC to have a value of not less than $2,500,000.
(iii) Debt Restructuring
Subsequent to August 31, 2002, the Company entered into an
agreement to restructure its $7.6 million of term debt due to
FremantleMedia Enterprises Ltd. ("Fremantle"). Fremantle has
agreed that the scope of its debt and collateral charged will be
restricted to the business, assets, and undertakings of the
Company as they exist immediately prior to the closing of the
acquisition and financing transactions and any proceeds derived
from the pre-existing business of the Company after closing the
transactions described in note 21(a)(i) and (a)(ii). The Company
has agreed that if there is any amount of the Fremantle Debt
which remains outstanding as of December 31, 2004, Fremantle
will for a period of ninety (90) days have the right to convert
such unpaid amount to Class B Subordinate Voting Shares in the
capital of the Company at the lesser of either (a) $5.00 per
share or (b) the average trading close price of the shares for
the thirty (30) days prior to December 31, 2004, provided that
in no event shall the conversion price be less than $3.00 per
share.
(iv) Release and Reconstitution of a Loan Guarantee
The Company has entered into a release and reconstitution
agreement with Comerica Bank - California ("Comerica") which
will reconstitute the Company's guarantee of a third party loan
in the amount of a US$1,075,000 million liability. Repayment of
the liability will be restricted to the specific exploitation
rights secured under the original loan agreement and, subject to
priority interests including repayment to Fremantle, to income
streams from the business, assets, and undertakings of the
Company as they exist immediately prior to the closing of the
transactions described in note 21(a)(i) and (a)(ii). If there is
any
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-36-
PEACE ARCH ENTERTAINMENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollar amounts in tables expressed in thousands of Canadian dollars,
except per share amounts)
amount of the Comerica liability which remains outstanding as of
December 31, 2005, Comerica will for a period of ninety (90) days
have the right to convert such unpaid amount to Class B
Subordinate Voting Shares in the capital of the Company at a
price of $5.00 per share.
(b) Subsequent to August 31, 2002, the Company fully repaid its outstanding
debentures at August 31, 2002 of $537,000 and accrued interest.
PEACE ARCH ENTERTAINMENT GROUP INC. ANNUAL REPORT FOR THE YEARS ENDED
AUGUST 31, 2000, 2001 AND 2002
-37-
CORPORATE INFORMATION
BOARD OF DIRECTORS AND OFFICERS
Juliet Jones, President, Chief Executive Officer & Director
W.D. Cameron White, Chairman & Director
Derek Douglas, Director
Alan Hibben, Director
Vincent Lum, Director
CORPORATE OFFICE
Suite 500 - 56 East 2nd Avenue
Vancouver, British Columbia
Canada V5T 1B1
Phone: (604) 681-9308
Fax: (604) 681-3299
E-Mail: investorrelations@peacearch.com
REGISTRAR AND TRANSFER AGENT
CIBC Mellon Trust Company
Phone: (604) 891-3025
Toll free: (800) 387-0825
AUDITOR
KPMG Chartered Accountants
777 Dunsmuir Street
Vancouver, British Columbia
Canada V7Y 1K3
SHARES LISTED
TSE: PAE.A, PAE.B
AMEX: PAE
WWW.PEACEARCH.COM