National Post from Toronto, Ontario, Canada • 15

Finding funding constant challenge to film-makers Page 16 Vancouver, Toronto vie for honor as Hollywood North Page 17 Wednesday, September 7, 1994 Pages 15-18 tf DM ODD fefe mi sniper scirini By Susan Noakes The Financial Post incentives and government fund ing that built Canada's film industry are fading out, but prospects for the film industry have never looked IT -lt'S I Canadian production houses are seeing plenty of action producing feature films for home and U.S. markets. brighter. The explosive growth of demand for television programming in North America and around the world has meant booming business and new markets for Canadian producers. The recent public offerings of several Canadian producers have given them the cash to fund new projects.

And the low has helped lure foreign producers who employ Canadians and use Canadian locations. Throughout the recession the film industry grew. Production of advertising took a hit, but production of corporate films, feature films and television series continued strong, says Sandra Macdonald, president of the Canadian Film and Television Production Association. The CFTPA, representing 300 production companies, estimates the size of the industry at $1 billion in 1993. About $500-million worth of production is corporate, government and educational films.

The rest is feature films and made-for-TV movies and series, of which television production is the lion's share. New opportunities are opening up in television, with nine new cable stations licensed in Canada this year and up to 150 stations to be operating in the U.S. by 2000. But the industry has had to adapt to new distribution channels such as a cable and pay-per-view, Macdonald says. Although the pie is getting bigger, each station may have less money for any one series or film, she says.

More inventive Production companies are having to sell their works to more players. They're also having to be more inventive in pulling together financing from many sources. Raising financing is an area where Canadian producers have long excelled, Macdonald says. They've always had to scrabble for money from several sources for each production, unlike U.S. film-makers who found the new tighter conditions a shock, she says.

Canadian producers will face further tightening of purse strings over the next few years as some traditional sources of financing fade to black. Telefilm Canada, a federal agency with $122.3 million to give away in 1994-95, saw its budget shrink by $20 million in 1993, and government has asked it to look at its budget again for the coming year, says spokesman David Ellis. Federal departments and agencies have been warned they face cuts of 5-8 annually in funding over the next four years. Telefilm Canada finances film festivals, feature films, television production and distribution of films. In its Feb.

22 budget, Ottawa changed the rules on a tax shelter provision that encouraged wealthy individuals and corporations to invest in film productions. Although the Income Tax Act remained the same, new rules governing how leveraged investments could be written off effectively ended the incentive, says Stephen Landau, a tax partner with Ernst Young chartered accountancy firm in Toronto. The film industry managed to get the provisions grandfathered to the end of 1994. The shelter reduced the cost of some productions by 8-10, Landau says. Tax brokers are studying the new rules now to see, whether there is still an incentive to invest in film and TV production.

But new sources of financing are opening 1 1 based producer of children's programming, is tapping venture capital markets now in search of more reliable financing, says John Davidson. Owl is a non-profit foundation, which publishes the children's magazines, Owl and Chickadee. It is considering creating a separate, for profit, unit for its television production, Davidson says. Owl has produced $15-million worth of programs over the past eight years, including educational programs such as F.R.O.G. and long-running OwlTV, a co-production with PBS.

But Owl wants to step up the pace of program production, says president Annabel Slaight. New opportunities are opening in children's television, she says, and the company wants to take advantage of its record as a producer that can play to children without talking down to them. Much of the material developed for OwlTV and the children's magazines might be applied to CD-ROMs for home and school and to interactive games, Slaight says. Owl is now considering how it will enter the games and compact disc market. Changing tastes Changing tastes in the U.S.

have increased the demand for educational television for children. Good quality programs may have such merchandise spinoffs as home videos, books and games, which increase potential revenue, she says. Owl has a co-venture with YTV called Big Comfy Couch and is developing a show with WNET, What's the Big Idea, that will show inventors at work. Its first movie, Spirit Rider, aired this spring. Owl is not alone in considering the video game and CD-ROM market.

Paragon is negotiating a deal with an electronics game company and is considering merchandising spinoffs from a new series about animals, Kratt's Creatures. If such companies as Paragon and Cinar continue to hold their own in the market, a new group of production companies could be ready to list in a few years, says Norm Bacal, tax lawyer with Heenan Blaikie. "Those who have gone public are in an ideal position to expand internationally," he says: If they do will be watching for the next rime thestock hot femew investments. up. The Canadian Radio-television and Telecommunications Commission has asked the cable industry to establish a $25-million fund for television production.

Telefilm has begun a loan guarantee program, to encourage more funding from banks. Like any business that produces intellectual property, the film industry has difficulty getting bank financing, Macdonald says. Even Ottawa understands little about the growth potential of entertainment produc- tion and does little to track the industry's exports, she says. And until recently, the investment community had no chance to become familiar with the business. But in the past year, five production companies have gone public in Toronto and Montreal and met with a good reception from investors.

Paragon Entertainment Corp. of Toronto raised $3.5 million, Cinar Films Inc. of Montreal raised $13.8 million, Alliance Communications Corp. of Toronto, $34 million in a first tranche and $25 million through warrants; Atlantis Communications $36.3 million. Nel-vana Ltd.

of Toronto listed in May. The large amount of capital Alliance reaped in its listing has opened new opportunities for the company, Canada's largest production company, says vice-chairman Jay Firestone. Alliance has been buying film and video libraries that will yield rights income for years to come, he says. It also has made larger budget feature films, such as Johnny Mnemonic, shot recently in Toronto. Tliat film is already profitable, because it has been presold to distributors worldwide.

The capital influx also helped Alliance win one of a handful of new cable channels in February, he says. Making film and television production is capital-intensive, and cash flows are not regular, says Richard Borchiver, president of Paragon. The company was 10 years old and had a track record of making programs that did well in the U.S. market. Paragon also had a hit program on its hands, Shari Lewis and Lamb Chop, which was recognizable to investors and would result in many merchandising spinoffs.

Paragon cameto market at a time when institutional Investors" were flush with cash and wondering 'where to Invest, Borchiver says. But there is still an educational job to Shari Lewis and Lamb Chop: Recognizable to investors. be done in the investment community, he says. "I'm a stockholder in this company and I don't look at the short term," he says. Assets such as the library of titles Paragon is building and the relationships it has now with producers in Britain, Europe and the U.S.

mean nothing to investors, he says. But in the long-term they could lead to higher profits, and a stronger stock price for the company, he says. The stock has hovered at about $2, above the issue price of $1.45. Paragon, Alliance and other listed companies say they rely very little on cash from government sources. Certainly the stock markets represent a wealth of capital that production companies have not had in the past.

The new-found wealth has helped Canadian companies gain more respect in international markets, Alliance's Firestone says. But he sees new areas that have to be developed, including an indigenous feature film industry, before Canada's production industry can be said to be fully mature. Smaller and mid-sized companies are worried they will not be able to compete with the listed firms in funding ions. QwJ.