Vancouver: International Keystone Entertainment of Vancouver has bought 100% of local distributor Red Sky Entertainment for an undisclosed amount.

The deal – in early negotiations and not publicly disclosed at press time – has shareholder approval and will close in early September, confirms Keystone ceo Robert Vince.

The acquisition speeds consolidation of the West Coast entertainment industry while erasing the art house-oriented Red Sky. The transaction also caps a rash of recent developments for the vertically integrated Keystone, including the loss of a major financing deal, the removal of its shares from public trading, the debut of its latest feature, and the establishment of a u.s. distribution arm.

The distribution strategy

Vince says Keystone approached Red Sky in its quest to control more of its product distribution. Previously, in June, Keystone had hired Mark Borde and Gene Irwin away from l.a.-based distributor Independent Artists to create Keystone’s u.s. distribution beachhead in Malibu.

The expansion into u.s. sales means that Keystone can recoup greater revenues from films that would otherwise go to other sales agents. In 1996, for example, Keystone had to sell the lucrative distribution rights of its successful Air Bud family feature to Disney. Sales of new releases such as Most Valuable Primate will stay within company.

Similarly, buying Red Sky means ‘we aren’t selling off our pictures in Canada,’ says Vince. ‘Our library expands in value.’

The Red Sky division will change its name to Keystone and focus on acquiring and distributing larger and more commercial films than Red Sky did.

Mary-Pat Gleeson and Dave Forget, the last of the four principals who created Red Sky in October 1997, declined to discuss the pending deal.

Likewise, there were few details to be had from Working Opportunity Fund, a major investor in both Red Sky and Keystone.

(wof’s $1.5-million investment in Red Sky preceded the ouster of founding partners Tony Cianciotta, president, and Anna Maria Muccilli, vp of publicity, in the spring of 1999. wof, a labor-sponsored venture capital corporation, has $2.5 million in equity in Keystone.)

However, on Aug. 15, Keystone secured a non-convertible loan of $500,000 from wof at an interest rate of 10% per annum, capital that will be used at least in part to facilitate the Red Sky acquisition.

Vince says Gleeson will make the transition to Keystone, but is uncertain of Forget’s next move. Former Red Sky ceo Mike Smallwood left earlier this summer. Also unclear are the fates of Red Sky’s output deals with New York-based distributor Stratosphere Entertainment, PolyGram Filmed Entertainment Canada and l.a.-based distributor Myriad Pictures, which are nearing the end of their two-year terms and will be reviewed, according to Keystone representatives.

The Red Sky acquisition, meanwhile, will not affect Keystone’s feature Most Valuable Primate – at least not as much as the weather. The film, about a hockey-playing chimp, opened Aug. 11 on 100 Canadian screens just as a spate of good weather swept most of the country, prompting movie-goers to stay outside.

‘We should have done $250,000,’ says Vince, referring to the opening weekend grosses. ‘Instead, we did about $150,000.’

Ticket sales were not enough to make the weekend Top 10 box office list, but enough for Vince to claim that MVP opened as ‘Canada’s number-one family movie,’ out-performing Pokemon The Movie 2000 and Thomas and the Magic Railroad.

‘The picture has a lot of legs. Exit polls were excellent and we’ve held onto 100% of our cinemas. There are three weeks until school, so we think there is longevity.’

Made for about $6 million, MVP has a print-and-advertising budget of about $750,000. It opens in the u.s. Oct. 20. Air Bud 3: World Pup, the latest in the Air Bud franchise, should be delivered soon.

The unusual delisting

Lastly, Keystone has soured on the public markets. In June, it withdrew a multi-million-dollar financing announced in March when the markets, already skeptical of film stocks, had to grapple with its floundering tech stocks.

Then on Aug. 9, Keystone announced it would take the unusual step of removing its shares from the Montreal Exchange Aug. 31 because, ‘the costs of maintaining the listing are not justified in light of the relatively illiquid nature’ of its shares.

‘There has been very little following and very little interest in the stock,’ says Ian Fodie, Keystone’s cfo, who stresses the company is still public and bound by securities law.

Transaction fees, financing fees and the cost of regulatory compliance and approvals eliminate the benefits of being listed, he explains, and the company will be repositioned.

After lackluster first and second quarters in fiscal 2000, the third quarter results (ended April 30) for Keystone show improvement in revenue and profit. Net earnings for the period were $47,000 ($0.00 per share) on revenue of $3.8 million compared to a loss of $365,000 ($0.05 per share) on revenue of $3 million in the same period a year ago.

Shares dropped in value from 55 cents to 25 cents on Aug. 11. The company’s stock had traded as high as $1.60 over the previous 52 weeks.

The downtime, says Vince, allows Keystone to re-engineer and evaluate options such as relisting on nasdaq or the tse or taking the company private. *