Vancouver: Almost 24% of the staff at Sextant Entertainment Group in Vancouver was laid off Jan. 31, a delayed reaction to last year’s fears about a Screen Actors Guild strike in the U.S., says the company’s CFO.

‘It took us longer to feel the impact of SAG,’ says Ian Fodie. Fifty-five people remain on the payroll.

The cuts in the animation, production and post-production divisions allow Sextant to focus on television production and distribution, says Sextant president Matthew O’Connor in the company’s official release.

‘The changes…will result in significant cost savings and allow Sextant to concentrate on our core businesses most efficiently,’ says O’Connor. ‘The reduction in staff is an unfortunate but necessary action and we will support the departing personnel however possible.’

Uncertainty about the potential strikes stalled production decisions at Sextant’s U.S. partners such as Hallmark Entertainment, explains Fodie, and efforts to find partners to limit Sextant’s exposure on proprietary animated and live-action productions in development have been slow in yielding results.

Fodie says Sextant doesn’t want to carry the costs of full-time employees and instead will bring workers in on contract when the opportunities exist.

He insists, however, that the layoffs have nothing to do with the public company’s dismal share price, which he says it due to low liquidity and trading volume. At press time, Sextant shares last traded seven days earlier on the Canadian Venture Exchange at $0.10 per share compared to the year high of $1.50 per share and a year low of just under $0.06 per share.

Fodie says the layoffs are also not attributed to financial constraints placed on the company by its major shareholder, Tony Allard of Hearthstone Investments in West Vancouver, who owns 37% of the voting shares outright and controls another 16% through power of attorney.

For the purposes of working capital, Hearthstone secured Sextant $4.5 million in May. That money came in the form of a $3.6-million guarantee on a loan from the Royal Bank and a $900,000 loan directly from Hearthstone that was originally due Sept. 30, 2001, but was extended one year on certain conditions. Those conditions include:

* The promise by Sextant to pay accrued interest monthly, and to repay the principal and all remaining interest on Sept. 30, 2002.

* The agreement by Sextant’s five key management shareholders – producers O’Connor, Tom Rowe, Colleen Nystedt and Chris Brough and distributor Tom Howe – to grant Allard voting control over 1.8 million of their shares. Allard, either directly or indirectly, controls 53% of the voting shares at Sextant.

* The guarantee to secure Allard’s indebtedness with the assets of Sextant’s principal subsidiaries, including Pacific Motion Pictures, Sextant International Distribution, Pan Pacific Productions, Reel Elements, New City Productions and Sextant Digital Media.

* The payment to Allard of a bonus of almost 716,600 common shares in Sextant valued at US$0.08 ($0.127) per share.

Hearthstone, in the loan extension, also reserved the right to convert its indebtedness into units valued as low as US$0.11 ($0.175). Each unit would comprise one common share of Sextant and one common share purchase warrant.

‘We are extremely pleased Hearthstone continues to support the company, and we look forward to working with them on future expansion,’ said O’Connor at the time of the extension announcement Dec. 12. ‘Hearthstone provides significant strategic value to the company, and our growing relationship is extremely positive for Sextant and our shareholders.’

Allard, who actually resigned as a director of Sextant a year ago, did not return calls from Playback.

Originally a partner in Pacific Motion Pictures with Rowe and O’Connor, he joined the Sextant board when PMP and the other partner companies created Sextant in late 1999.

Revenues for the first nine months of fiscal 2001 (ended Sept. 30) were off year-over-year by $22.7 million to only $10.5 million. The downturn has been attributed to a drop in production activity in 2001. Earnings for the first nine months of 2001, meanwhile, were $362,600 ($0.04 per share) as compared to a loss of $90,450 ($0.01 per share) the previous year.

In June last year, before negotiating the loan extension with Hearthstone, Sextant signed a corporate finance services agreement with SP Mergers Limited of New York to secure an equity investment in the company and, as Fodie suggests, replace Hearthstone.

SP was paid a fee of US$50,000 comprising common shares valued at US$0.55 ($0.87). The shares, which can’t trade until this summer, are now worth less than $5,500 at current market rates.

SP also collects a commission on the equity investment, which needs to be in place by the end of September, unless Sextant repays the Hearthstone debt on its own or another load extension is granted.

‘We will be looking for strategic equity investors who want to partner with the talented team at Sextant to expand and grow our world-class family entertainment properties,’ said O’Connor in the release announcing the SP deal June 31. ‘Sextant’s production partners are international so it was important for us to choose a financial advisor with international expertise and experience in our industry.’

Fodie says there have been no changes in the roles of the principals at Sextant because of the downsizing.

-www.sextantentertainment.com