It pretty long ...
Vidatron's fortunes ride on First Wave
Vidatron Entertainment Group Inc VE
Shares issued 7,592,356 1999-06-09 close $3.9
Wednesday Jun 9 1999
MORE SUGAR MEANS LESS GAMBLE
by Stockwatch Business Reporter
Timothy Gamble, president of Vidatron Entertainment Group, is ambivalent about his company winning two Leo awards - which honour excellence in B.C. film and T.V. - for the sci-fi series First Wave and western anthology Dead Man's Gun. "Recognition is a big part of this business, so in that respect we gained some exposure. But I was embarrassed that we issued a press release about the awards. Other things are happening which are far more important to us."
Three things are vitally important to the 13-year-old company. Vidatron executives are trying to ensure they do not forfeit tax credits which go a long way in making the production of their two Vancouver-filmed series affordable. They are also awaiting the sale of two million limited voting shares in a public offering, the proceeds of which would fund a third series. Finally, they are attempting to capitalize on the international success of First Wave, now in its second year of production, by opening shop in Los Angeles. "We are organizing in the hopes we will eventually knock the ball clean out of the park," Mr. Gamble says.
Vidatron's stock is currently trading in the $3-$3.60 range, compared to lows of $1.72-$2.92 during the last quarter of 1998. Revenues for the six months ended February 28, 1999, increased by 86 per cent to $30.2-million from $16.2-million for the prior six months. Earnings were $1-million or $0.13 per share (1998 - $689,000 or $0.11 per share). It would seem Vidatron is finally hitting its stride after years of obscurity. But Vidatron executives are concerned they could lose their status as a Canadian production company which qualifies for tax credits if the majority of outstanding common shares cease to be held by Canadians.
Tax credits are a boon to any Canadian entertainment company competing in the international marketplace. For every dollar Vidatron spends on production, it receives a tax credit of 20 cents from the federal and provincial governments. "First Wave costs over $1-million per episode to make, and we have a commitment for 66 episodes, so the savings is enormous," says Mr. Gamble. "That and the low Canadian dollar is an incredible advantage to us."
The company would like to have its Canadian cake and eat some U.S. cake too; so like many companies with such goals, it has cooked up a stock market fanagle. Vidatron is implementing a reclassification and a consolidation of its existing share structure, with the result being that each five existing common shares will be exchanged for one multiple voting share and one limited voting share. The shares will be identical in all respects, except that the multiple voting shares will be entitled to 10 votes per share and the limited voting shares will be entitled to one vote per share. Shareholders have already approved the reclassification, and will consider the consolidation later this month. "The federal and provincial governments review our status yearly and have no qualms about rescinding the tax credits," Mr. Gamble says. "This is our method of ensuring we qualify."
The consolidation will proceed, however, only if a U.S. public offering is completed in July as anticipated. The offering is expected to put $20-million into Vidatron coffers, and Mr. Gamble says, rather guardedly: "We would be in an ideal position to launch a third television series." To increase the odds of acquiring that third series, Vidatron is also opening an office in Los Angeles. "We need to be in proximity to that huge body of agents and writers to find the sort of creative talent that gave rise to First Wave," the president explains.
Mr. Gamble is impatient for these developments to come to fruition. The modest success of Dead Man's Gun aside, Vidatron has graduated from the minor leagues mainly because First Wave is an international hit that may develop an X-Files-size following; a third successful series would prove that Vidatron is capable of playing in the big leagues.
Mr. Gamble, 42, created Vidatron 13 years ago by investing $80,000 he obtained through the sale of his White Rock cottage. The company almost folded before it got out of the starting gate. "Within a week I had three corporate video projects worth $60,000, and all three projects fell through because the economy tanked," he recalls. "My first job was for $300. We struggled for years."
Mr. Gamble, who graduated from the University of B.C. with a Bachelor of Education in 1980, had only one significant experience to his credit in the entertainment field prior to the rise of Vidatron: negotiating a joint venture with Sony of America in 1984 for the production and distribution of Home Video: Shoot Like a Pro. Pro sold 75,000 copies.
Vidatron was incorporated as Vidatron Enterprises in 1986 and went public in 1987. Although he functioned modestly for years, Mr. Gamble was convinced that sticking to television would enable him to avoid the financial pitfalls of other firms that produced various forms of entertainment. "Besides thinking it would be fun, TV production rarely goes over budget like film production does," he explains. "I saw too many other companies focus on film and do poorly, and I still consider it to be too much of a business risk."
Vidatron has managed some diversification, but it has not been as much nineties-style fun as TV. In 1995, it acquired 100 per cent of Image Media, an educational video distribution firm, for periodic payments of $500,000 and 127,551 common shares (Image was sold in 1997 after it failed to perform to expectations). That same year it acquired The Eyes Multimedia Productions, a producer of corporate and informational videos, for $215,000 over three years and 25,000 common shares. In 1996, it purchased a property on West 4th Avenue for $1.8-million; the facility was converted into a studio. Other acquisitions include API Aviator Pictures, a television commercial production house; and another building, this one in Mount Pleasant, for the First Wave series.
Vidatron may well have struggled and flopped had it not acquired Sugar Entertainment in 1996. Mr. Gamble admits his company's increase in revenues and profitability (revenues for the six months ended in February of 1997 was $13,104,672, compared to $2,493,731 for the six months ended in February of 1996) is largely - well, almost completely - due to the inclusion of Sugar Entertainment's results. The brains behind the company - and the driving force behind Dead Man's Gun and First Wave - is Larry Sugar, former president of Lorimar International and former president of distribution for Republic Pictures and CBS.
Mr. Sugar, a one-time Los Angeles resident, relocated to Vancouver in 1996 to shoot a series of television films titled Contemporary Classics. Mr. Gamble recalls that "unlike most producers in B.C., we had the infrastructure and corporate organization to support his projects, and that is how we got together."
Dead Man's Gun was the first television series resulting from this relationship. In March of this year, Vidatron sold the second season of Gun to the CHUM Television group; it is also distributed by MGM, and airs on Showtime Networks in the United States.
Mr. Sugar has made a tidy profit via Vidatron. His company was purchased for 56,250 common shares and 875,000 performance common shares which were releasable from escrow at a rate of one share for every $4 of cash flow generated by Sugar Entertainment. During the year ended August 31, 1998, 500,000 of the 875,000 performance shares were released.
Mr. Gamble says that after a year's hiatus, he will produce and sell another season of Gun, bringing the total number of episodes up to 66 - the magic number required for syndication and perpetual royalty payments. The success of First Wave, which is financed by tax credits, international pre-sales and broadcast sales, far eclipses Gun: USA Networks has ordered 66 episodes of the series, meaning cameras will be rolling well into fiscal 2001. As is typical with television ventures, each project is carried out through a single purpose corporation that in this case is formed and wholly owned by Mr. Sugar. "Single purpose corporations limit your liabilities and enable you to divest a project from the parent company in the event of cost overruns or other negative factors," Mr. Gamble explains.
Mr. Gamble has high hopes for the durability of First Wave. The most optimistic one is that it will eventually achieve the financial success of the X-Files, which is produced for just under $2-million per episode and sold for $12-million per episode worldwide. "First Wave is a critical, financial and ratings success, and it is important to keep in mind that X-Files did not emerge from its cult status into the mainstream until its third year," Mr. Gamble says. Even a moderately popular series like Outer Limits, now in its sixth year of production, sells for $3-million per episode compared to a $1.5-million per episode investment.
The other hope for First Wave is that it, along with the public offering and new L.A. office, will give Vidatron enough clout to produce a third series. "There is a mentality to crank out as many series as possible," Mr. Gamble says. "Alliance Releasing has eight or nine shows, but none have sold successfully in the U.S. I think the way to go is to concentrate our time, money and creative efforts on only three or four series. Otherwise, making a hit show becomes entirely problematic."
Whether or not he gets his third series, Mr. Gamble has no intention of changing Vidatron's mandate in the near or distant future. "With television you have complete control of your budgets and, thanks to presales, don't have to worry about collecting your cheques like you do in film," he says. "If you have a hit film, you only have that single film; but if you have a hit series like First Wave, you can stretch out that hit for years. As television producers, we make the sale of a product directly to customers; in film there are a lot of in-between men, resulting in a huge loss of control. So I'm sold on the medium. I just want to do more of it."
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