Peace Arch Entertainment Group Inc.
TSX : PAE
AMEX : PAE

Peace Arch Entertainment Group Inc.

July 14, 2005 19:44 ET

Peace Arch Entertainment Group Reports Fiscal 2005 Third Quarter Results

TORONTO, ONTARIO--(CCNMatthews - July 14, 2005) - Peace Arch Entertainment Group Inc. (TSX:PAE)(AMEX:PAE) (www.peacearch.com) today announced results for the three and nine-month periods ended May 31, 2005.

The Company's revenue totalled $4.3 million for the quarter, compared with $6.6 million for the third quarter of fiscal '04. The decrease in revenues compared to the same period of the prior year is due to lower contracted pre-sales of the feature films delivered during the quarter, reflecting Peace Arch's strategy of owning a greater portion of project film rights. Peace Arch reported net earnings of $2.7 million or $0.14 per diluted share for the three months ended May 31, 2005, compared to net earnings $0.5 million, or $0.02 per diluted earnings per share for fiscal '04 comparable period. The earnings for the quarter include a gain of $2.1 million resulting from the settlement of obligations related to the FremantleMedia transaction.

Peace Arch reported net earnings of $2.0 million, or $0.11 per diluted share, for the nine months ended May 31, 2005, compared with net earnings of $2.0 million, or $0.10 per diluted earnings per share, for the prior year's nine-month period.

Fiscal Q3 highlights and recent news include:

- The Company accepted delivery of two feature films - "American Soldiers," a contemporary story of the worst day in the life of a squadron of young American troops fighting in Iraq, and "Shadows in the Sun," a romantic drama set against the sun-drenched Tuscan countryside.

- Peace Arch delivered three episodes of its 13-episode, award-winning series "Campus Vets - Season II", which airs on Life Network in Canada.

- The Company was in production of two television series, a pilot for a new television series for Food Network Canada, and "Homemade Inc." a documentary series that explores food entrepreneurs and food product innovation. Each is scheduled for delivery during the 2005 calendar year.

- Alliance Atlantis Motion Picture Distribution LP and Peace Arch forged a multiple territory feature film distribution agreement covering all media in Canada, the UK and Spain; among the ten Peace Arch titles covered are, "The Keeper," "Hollywood Flies," "The Good Shepherd" and four films currently in development.

- FremantleMedia converted its $8.8 million note plus interest into 2.9 million shares of Peace Arch common stock. Under a January 2003 debt restructuring agreement between Fremantle and the Company, Peace Arch had previously provided for the issuance of these shares in June 2004.

- Acclaimed producer Fred Fuchs joined the Company's senior management team as Executive Vice President. Mr. Fuchs has produced 15 feature films including, "Godfather III," "Bram Stoker's Dracula," and "Don Juan DeMarco." He previously served as President of American Zoetrope, Francis Ford Coppola's production company.

- Peace Arch's Eyes Production Development Corp. was the recipient of six Leo Awards for 'Production Excellence' honouring its work on the popular home makeover television series "Love it or Lose it" and the original and provocative documentary "Prisoners of Age," which was about geriatric inmates in North America.

- Peace Arch acquired worldwide distribution rights to "The Veteran," a dramatic Vietnam War thriller about two veterans who reunite in modern-day Saigon. The feature film stars Ally Sheedy, Michael Ironside and Bobby Hosea. Sidney J. Furie is directing and Curtis J. Petersen is producing. The picture is scheduled for delivery in the first quarter of 2006.

- The Company entered into a joint venture production and distribution agreement with Germany's Global United Entertainment Ltd. and England's Framework Entertainment Ltd. with an initial commitment to produce and distribute a slate of twelve cutting edge horror films and a number of other feature film projects. Peace Arch will handle worldwide distribution of all of the films.

- Peace Arch's subsidiary, Peace Arch Motion Pictures Inc. ("PAMP"), closed a US$2 million revolving credit facility with a private financier that will be used to bridge finance preproduction costs across the company's rapidly expanding slate of feature film productions and acquisitions.

Peace Arch Entertainment Group Inc. (www.peacearch.com) develops, produces and acquires feature films and television programming that it licenses to theatrical, home video and television distributors throughout the world.

This press release 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, availability of capital 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 after the date of this release.

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3) (a), if an auditor has not performed a review of the interim financial statements; they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.



Peace Arch Entertainment Group Inc.
Consolidated Balance Sheets
---------------------------------------------------------------------

(expressed in thousands of Canadian dollars)

May 31 August 31 May 31
2005 2004 2004
$ $ $
(unaudited) (audited) (unaudited)
Assets

Cash and cash equivalents 536 1,484 1,460

Accounts and other receivables 16,095 16,088 17,814

Investment in film and
television programming 17,579 18,349 19,173

Prepaid expenses and deposits 120 119 254

Property and equipment 420 89 77

Restricted term deposits 21,341 21,339 10,199
--------------------------------------

56,091 57,468 48,977
--------------------------------------
--------------------------------------

Liabilities

Production loans 17,804 12,598 14,175

Accounts payable and accrued
liabilities 8,509 12,399 10,505

Deferred revenue 456 3,324 4,291

Distribution obligation (note 4) 90 1,467 2,312

Non-controlling interest - - 425

Obligation to issue shares
(note 3(d)) 486 3,093 3,171

Revenue guarantee obligation 21,341 21,339 10,158
--------------------------------------

48,686 54,220 45,037
--------------------------------------

Shareholders' Equity

Capital stock (note 5) 37,771 35,925 35,917

Contributed surplus 2,333 2,085 337

Other paid-in capital 680 680 680

Deficit (33,379) (35,442) (32,994)
--------------------------------------

7,405 3,248 3,940
--------------------------------------

56,091 57,468 48,977
--------------------------------------
--------------------------------------


Nature of operations and going concern (note 1)

Approved by the Board of Directors

Signed Signed

Gary Howsam Director Mara Di Pasquale Director

The accompanying notes are an integral part of the consolidated financial statements.



Peace Arch Entertainment Group Inc.
Consolidated Statements of Operations
For the Three and Nine Months ended May 31, 2005 and 2004
---------------------------------------------------------------------

(expressed in thousands of Canadian dollars, except per
share amounts)

3 months ended 9 months ended
May May
2005 2004 2005 2004
$ $ $ $
(unaudited) (unaudited) (unaudited) (unaudited)

Revenue 4,291 6,584 15,175 19,461
-----------------------------------------------

Expenses
Amortization of investment
in film and television
programming and other
production costs 3,252 5,389 12,999 15,161
Selling, general and
Administrative 935 839 2,708 1,967
Other amortization 22 5 49 11
-----------------------------------------------

4,209 6,233 15,756 17,139
-----------------------------------------------

Earnings (loss) from
operations before
the undernoted 82 351 (581) 2,322

Interest income 1 - 23 -
Interest expense (11) (187) (229) (182)
Provision for obligation
to issue shares - (95) - (283)
Foreign exchange gain
(loss) 522 (147) 495 (120)
Gain on sale of asset
(note 2) 33 - 65 -
Gain on settlement of
obligations (note 6) 2,139 - 2,139 -
Gain on modification
of debt - 664 - 664
Recovery of selling,
general and administration
expenses (4) - 145 -
Non-controlling interest
(note 2) (33) (79) (47) (425)
-----------------------------------------------

Earnings before income
Taxes 2,729 507 2,010 1,976

Income tax recovery - (12) - (12)
-----------------------------------------------

Net earnings for the
Period 2,729 495 2,010 1,964
-----------------------------------------------
-----------------------------------------------

Net earnings per common
share

Basic 0.14 0.03 0.11 0.11
-----------------------------------------------
-----------------------------------------------

Diluted 0.14 0.02 0.11 0.10
-----------------------------------------------
-----------------------------------------------

The accompanying notes are an integral part of these consolidated
Financial statements.

Peace Arch Entertainment Group Inc.
Consolidated Statements of Deficit
For the Three and Nine Months ended May 31, 2005 and 2004
---------------------------------------------------------------------

(expressed in thousands of Canadian dollars)

3 months ended 9 months ended
May May
2005 2004 2005 2004
$ $ $ $
(unaudited) (unaudited) (unaudited) (unaudited)

Deficit - Beginning of
period
As previously reported (36,108) (33,489) (35,442) (34,958)

Effect of adoption of
Accounting Guideline
-15 (note 2) - - 53 -
-----------------------------------------------

As restated (36,108) (33,489) (35,389) (34,958)

Net earnings for the
Period 2,729 495 2,010 1,964
-----------------------------------------------

Deficit - End of period (33,379) (32,994) (33,379) (32,994)
-----------------------------------------------
-----------------------------------------------

The accompanying notes are an integral part of these consolidated
Financial statements.

Peace Arch Entertainment Group Inc.
Consolidated Statements of Cash Flows
For the Three and Nine Months ended May 31, 2005 and 2004
---------------------------------------------------------------------

(expressed in thousands of Canadian dollars)

3 months ended 9 months ended
May May
2005 2004 2005 2004
$ $ $ $
(unaudited) (unaudited) (unaudited) (unaudited)


Cash flows from
operating activities
Net earnings for
the year 2,729 495 2,010 1,964
Items not affecting cash
Amortization of film and
television programming 1,982 4,856 11,455 14,489
Other amortization 22 5 49 11
Gain on sale of asset (33) - (65) -
Gain on modification
of debt - (664) - (664)
Gain on settlement of
obligations (note 6) (2,139) - (2,139) -
Stock based compensation 28 - 248 -
Provision for share
issuance - 95 - 283
Non-controlling interest 33 79 208 425
Investment in film and
television programming (1,068) (4,376) (12,281) (12,858)
Changes in non-cash
operating working
capital (4,111) 4,773 (5,611) 87
-----------------------------------------------
(2,557) 5,263 (6,126) 3,737
-----------------------------------------------

Cash flows from investing
activities
Increase in restricted
cash - (10,199) - (10,199)
Property and equipment
Purchases (4) (11) (28) (52)
-----------------------------------------------
(4) (10,210) (28) (10,251)
-----------------------------------------------
Cash flows from financing
activities
Issuance of common shares - 29 - 39
Issuance of production
Loans 3,332 - 13,238 -
Repayment of production
loans (2,212) (4,124) (8,032) (3,134)
Issuance of revenue
guarantee obligation - 10,158 - 10,158
-----------------------------------------------
1,120 6,063 5,206 7,063
-----------------------------------------------
(Decrease) increase
in cash and cash
equivalents (1,441) 1,116 (948) 549

Cash and cash equivalents
- Beginning of period 1,977 344 1,484 911
-----------------------------------------------
Cash and cash equivalents
- End of period 536 1,460 536 1,460
-----------------------------------------------
-----------------------------------------------
Supplemental cash flow
information
Interest paid 281 180 594 182

Non-cash transactions
Obligation to issue shares
(note 3(b)) - 95 - 283

The accompanying notes are an integral part of these consolidated
Financial statements.


Peace Arch Entertainment Group Inc.
Notes to Consolidated Financial Statements
May 31, 2005 and 2004
---------------------------------------------------------------------


1 Nature of operations and going concern

Based in Toronto, Vancouver, Los Angeles and London, England, Peace Arch Entertainment Group Inc., together with its subsidiaries, (collectively, the company) is an integrated company that creates, develops, produces and distributes film, television and video programming for worldwide markets.

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. While the company continues to maintain its day-to-day activities and produce films and television programming, its working capital situation is severely constrained. Furthermore, the company operates in an industry that has long operating cycles which require cash injections into new projects significantly ahead of the delivery and exploitation of the final production.

The application of the going concern basis is dependent upon the company achieving sufficient cash flows from operations to fund continuing operations and meet its obligations as they come due. Management has recently closed a US$2 million revolving bridge financing facility that will be used to fund preproduction costs of its feature film projects interim to final financial closings of these films, which costs would otherwise be funded by working capital. Therefore, this interim financing facility is expected to significantly relieve corporate working capital requirements.

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 and the reported revenues and expenses.

2 Significant Accounting Policies

Basis of Presentation

The interim consolidated financial statements of the company have been prepared in accordance with accounting principles generally accepted in Canada for interim financial reporting. Accordingly, they do not include all of the information and footnote disclosures necessary for complete financial statements in conformity with Canadian generally accepted accounting principles. The interim consolidated financial statements include the accounts of the company and its subsidiaries. All material intercompany balances and transactions have been eliminated.

The interim consolidated financial statements have been prepared in a manner which is consistent with the accounting policies described in the company's Annual Report for the year ended August 31, 2004 and should be read in conjunction therewith, except as noted below.

Adoption of AcG-15

Effective December 1, 2004, the company was required to adopt the Canadian Institute of Chartered Accountants' Accounting Guideline ("AcG-15"), "Consolidation of Variable Interest Entities" AcG-15 expands upon and strengthens existing accounting guidance that addresses when a company should consolidate in its financial statements the assets, liabilities and operating results of another entity. Under previous guidance, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interest. AcG-15 requires a variable interest entity ("VIE") to be consolidated by a company if that company is the primary beneficiary of that entity. An entity is a VIE if, among other things, it has equity investors that do not absorb the expected losses or receive the expected returns of the entity. The primary beneficiary is subject to a majority of the risk of loss from the VIE's activities, or is entitled to receive a majority of the VIE's residual returns, or both.

Under the guidelines of AcG-15, the company is required to consolidate the assets, liabilities and operating results of Peace Arch Project Development Corp. ("PAPDC"). As described in note 3(b), PAPDC is the owner of the company's assets and business in existence prior to the reorganization and rationalization of its assets, operations and subsidiaries. Following the sale of PAPDC to a third party as described in note 4, the company continued to have a variable interest in PAPDC, and it has been determined that the company will be required to absorb the majority of the expected losses of PAPDC. Under the rules governing AcG-15, the company is considered the primary beneficiary of PAPDC and consequently the company has consolidated PAPDC on a retroactive basis effective December 1, 2004, without restatement of prior periods.

The impact of consolidating PAPDC under AcG-15 has resulted in an increase in a cumulative effect of the change in accounting policy of $53,000.

The consolidation of PAPDC under AcG-15 has also resulted in an increase in revenue of $28,000 and selling, general and administrative expenses of $9,000, and has resulted in an increase in other amortization, gain on sale of asset, and non-controlling interest of $37,000, $65,000 and $47,000, respectively, relating to operating activity for the nine months ended May 31, 2005 for PAPDC. There was no effect on the net earnings for the nine month period ended May 31, 2005.

Comparative amounts

Certain amounts presented for the three month and nine month periods ending May 31, 2004 have been reclassified to conform to the presentation adopted in the current three month and nine month periods.

3 Business combination, debt restructuring and financing

On January 20, 2003, as approved and ratified by the shareholders of the company at the Annual General Meeting of Shareholders on that date, the company entered into a number of agreements to effect a business combination and certain asset acquisition and financing transactions. Details of the transactions are as follows:

a) Private placement financing

The company issued 5,000,000 Common Shares at an agreed price of $0.30 per share, for total cash proceeds of $1,500,000.

b) Reorganization of a subsidiary, Peace Arch Project Development Corp. (PAPDC)

The company carried out a reorganization and rationalization of its assets, operations and subsidiaries. The reorganization was carried out in conjunction with, and pursuant to, the terms of the Debt Repayment Agreement with Fremantle Enterprises Ltd. (Fremantle) and the Release and Reconstitution Agreement of November 22, 2002 with Comerica Bank - California (Comerica), by which the debts of the company, and its subsidiaries, to Fremantle and Comerica were renegotiated as in (d) below.

Pursuant to the reorganization, the company's wholly owned subsidiary PAPDC became the owner of substantially all of the assets and business (collectively, the pre-existing assets) that the company owned immediately prior to undertaking its business combination through the acquisition of GFT Entertainment Inc. (see (c) below) on January 20, 2003. The pre-existing assets consisted principally of accounts and loans receivable, film and television programming rights, and all shares and other securities (including intercompany loans) held by the company in its subsidiaries existing at January 20, 2003.

At the same time, PAPDC and its subsidiaries directly or indirectly were assigned substantially all of the pre-existing debts and liabilities of the company, including the company's indebtedness to Fremantle and Comerica. However, the company continued to have a conditional obligation to satisfy any remaining indebtedness to Fremantle and Comerica by issuing a variable number of shares to Fremantle and Comerica under Conversion Rights Certificates (the conversion instruments) issued by the company to each of them (see (d) below for additional discussion).

Pursuant to the terms of the Fremantle conversion instrument, the company estimated the fair value of the obligation to issue shares for the interest accrued for the nine month period ended May 31, 2004 and took a charge of $283,000 in the company's consolidated statement of operations.

c) Business combination

On January 20, 2003, the company acquired certain film assets owned and controlled by CPC Communications Inc. ("CPC") for $2.5 million, the consideration being the issuance of 8,333,333 Common Shares of the company at a deemed price of $0.30 per share. The primary asset acquired was a 100% ownership interest in GFT Entertainment Inc., which itself was a 100% shareholder in five special purpose production companies that owned various rights to five films, namely Crime Spree, Partners in Action, Absolon, The Limit and Detention. The underlying assets included films in progress, accounts receivable and tax credit assets.

d) Debt restructuring, issuance of conversion instruments and gain on modification

Debt restructuring

During the year ended August 31, 2002, the company entered into an agreement with Fremantle, an existing trade creditor, whereby Fremantle agreed to exchange its trade payable balance of $7,783,000 for a term loan secured by a charge on the assets of the company and a secured interest in certain copyrights to productions. The term loan note bore interest at 10% per annum and was intended to mature on June 30, 2004. Subsequent to August 31, 2002, the company failed to make scheduled repayments of principal of $500,000 and also interest owing.

Effective January 30, 2003, the company and Fremantle agreed to restructure the remaining $7,580,000 of term loan due to Fremantle. Fremantle agreed that the revised source of debt repayments and security would be restricted to the business, assets, and undertakings of the company as they existed immediately prior to January 30, 2003 (the pre-existing assets), that date being the closing of the acquisition and financing transactions described elsewhere in this note. The new debt had no fixed repayment dates. Interest, which continued to accrue at 10% per annum, and principal were payable from the income streams of the pre-existing assets, subject to priority interests. The revised terms also excluded a previous right of prepayment by the company of all outstanding amounts.

Pursuant to the Debt Repayment Agreement dated January 30, 2003, the company also agreed that if any amount of the Fremantle debt, including unpaid interest, remains outstanding as of December 31, 2004, Fremantle will, for a period of 90 days, have the right to convert such unpaid amount to Common 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 30 days prior to December 31, 2004, provided that in no event shall the conversion price be less than $3.00 per share.

The modification of the debt was treated for accounting purposes as a settlement of the original debt, as the present value of cash flows under the terms of the modified debt instrument was at least 10% different from the carrying amount of the original debt. The fair value of the debt after modification was based on the discounted expected future cash flows of the pre-existing assets. The company recorded a gain on modification of the debt as described below.

Release and reconstitution of a loan guarantee

During the year ended August 31, 2001, the company guaranteed a loan due to Comerica to a maximum of US$2,075,000 on behalf of a co-production partner. During the year ended August 31, 2002, the co-production partner defaulted on its loan payments. As at August 31, 2002, the amount of the outstanding related debt was $1,675,000 (US$1,075,000) and the company recognized its obligation as debt and receivable due from the co-producer. The receivable was written off at August 31, 2002.

During the year ended August 31, 2003, the company entered into a Release and Reconstitution Agreement with Comerica which restructured the terms of the loan guarantee. Repayment of the loan is restricted to the ultimate proceeds of specific exploitation rights secured under the original loan agreement and, subject to priority interests, including repayment to Fremantle, to the pre-existing assets.

If any amount of the Comerica liability remains outstanding as of December 31, 2005, Comerica will, for a period of 90 days, have the right to convert such unpaid amount to Common Shares in the capital of the company at a deemed price of $5.00 per share.

The modification of the Comerica obligations was treated for accounting purposes as a settlement of the original debt, as the present value of cash flows under the terms of the modified debt was at least 10% different from the carrying amount of the original debt. The fair value of the debt after modification was based on the discounted expected future cash flows of the pre-existing assets. The company has recorded a gain on modification as described below.

Conversion instruments

As described, and in conjunction with the above, on January 30, 2003, the company issued a conversion instrument to Fremantle which permitted Fremantle to convert the amount of its outstanding debt including unpaid accrued interest at December 31, 2004, if any, into Common Shares of the company for a period of 90 days commencing on December 31, 2004.

The conversion price was the lower of either (a) $5.00 per share or (b) the average closing price of the Common Shares for the 30 days prior to December 31, 2004, provided that in no event shall the conversion price be less than $3.00 per share. Pursuant to the conversion instrument, 2,527,000 Common Shares, which represent the number of shares that could be issued for the principal amount of debt of $7,580,000, was reserved for issuance.

As described, and in conjunction with the above, on January 30, 2003, the company issued a conversion instrument to Comerica which permits Comerica to convert the amount of its outstanding loan at December 31, 2005, if any, into Common Shares of the company for a period of 90 days commencing on December 31, 2005 at a price of $5.00 per share.

Pursuant to the conversion instrument, 336,000 Common Shares, which represent the number of shares that could be issued for the obligation of US$1,075,000, had previously been reserved for issuance.

For the year ended August 31, 2003, the company estimated that the fair value of the obligation to issue shares to both Fremantle and Comerica was $2,887,000 and charged that amount against the computed gain on modification described above. Since upon exercise of the conversion instruments by Fremantle and Comerica, the company has issued a right to Fremantle and Comerica to receive a variable amount of shares in settlement of their loans, the company reflected the amount as a liability.

On June 25, 2004, the company voluntarily issued 3,489,814 Common Shares of the company to PAPDC in consideration for PAPDC agreeing to assume the obligation to issue the Common Shares of the company to Fremantle and Comerica (collectively, the Lenders) should the Lenders eventually opt to call upon those shares in settlement of the PAPDC obligations. A director, officer and shareholder of the company serves as an escrow agent to hold and direct the shares as appropriate to the Lenders and/or PAPDC upon the Lenders' decision to convert the obligations to Common Shares of the company. Pursuant to these arrangements, the company also eliminated its right to receive the obligation of PAPDC to the Lenders.

Although owned by a third party, for accounting purposes, the company continues to reflect the obligation to issue shares as a liability because of the company's and its related parties' continued involvement with PAPDC. PAPDC's only asset is the right to receive its participation in the films that the company retained. Further, PAPDC continues to be indebted to the company for an amount of $10,252,000. The company has provided a full valuation allowance against this loan. Accordingly, the shares have been considered to be issued in escrow or in trust to settle the company's obligation.

On March 31, 2005 Fremantle agreed to convert its $8,793,000 note plus interest for 2,931,125 shares of the company's common stock. As a result of Fremantle's conversion the company has recognized a gain on settlement of the obligation to issue shares of $762,000 representing the difference between the obligation carrying amount and the settlement price (see note 6).

4 Sale of subsidiary

Subsequent to the reorganization of PAPDC described in note 3(b), on August 1, 2003, the company sold all of its shares in PAPDC for nominal consideration and recognized a loss of $164,000 on the disposal. During the year ended August 31, 2003, the operating results of PAPDC were included in the consolidated financial statements until the date of the disposal.

On the same date, the company entered into a Sales Agency Agreement with PAPDC, its subsidiaries and the purchaser, under which the company retained exclusive 25-year worldwide distribution rights for all of the films and television programming rights owned by PAPDC and its subsidiaries. Under the Sales Agency Agreement, the company has the full right to enter into sales contracts and is subject to the related credit risk and accordingly acts as principal to any sales transactions related to these distribution rights. Under the agreement, the gross receipts of any sale made by the company are distributed in the following priority: a) receipts to cover the company's distribution and marketing costs are retained by the company; b) amounts up to 30% of any gross receipts are retained by the company; c) 10% of the gross receipts are paid to the purchaser of the shares of PAPDC referred to in the first paragraph above; and d) any remaining gross receipts are paid to PAPDC, which in turn is required to pay such proceeds to Fremantle to settle PAPDC's debt obligation to Fremantle.

As these arrangements were entered into in conjunction with the sale of the shares for a nominal amount, the company is considered the primary obligor with respect to the productions and, accordingly, the distribution rights have effectively been retained by the company and accounted for as a related party transaction between the company and its wholly owned subsidiary PAPDC. Accordingly, these financial statements reflect the distribution rights received from PAPDC at the carrying value of the film and television programming at the date of the agreement in the amount of $2,649,000. In addition, these financial statements reflect the estimated amounts payable to PAPDC and the purchaser as a distribution obligation in the amount of $2,312,000. The difference between the distribution rights and the distribution obligation of $337,000 was credited to contributed surplus.



5 Capital stock

a) Shares

Common shares
------------------------------------
Number of shares Amount $

Shares issued - August 31, 2004 20,898,491 39,763
Shares held in escrow (note 3(d)) (3,489,814) (3,838)
------------------------------------

Balance outstanding - August 31,
2004 17,408,677 35,925

Released on Fremantle conversion
(note 3(d)) 2,931,125 1,846
------------------------------------

20,339,802 37,771
------------------------------------
------------------------------------


b) Stock Options

Weighted Average
Number of exercise price
Shares $

Balance - August 31, 2004 40,000 0.70
Granted 825,000 0.65
Exercised - -
Expired - -
Forfeited (20,000) (0.90)
--------------------------------

Balance - May 31, 2005 845,000 0.65
--------------------------------
--------------------------------


c) Warrants

During fiscal 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 was recorded.

6 Business acquisition

On May 31, 2005, the company acquired the shares of PAPDC for a nominal amount. Up to the time of the acquisition, PAPDC was considered a VIE under AcG-15 (see note 2) and as such the company has included the results of PAPDC in its consolidated results of operations.

7 Gain on settlement of obligations

On March 31, 2005 Fremantle agreed to convert its $8,793,000 note plus interest for shares in the company (see note 3(d)). As a result of the conversion the company has recognized a gain on settlement of its obligations related to Fremantle as follows:



Settlement of obligation to issue shares 762
Settlement of distribution obligation 1,377
---------
2,139
---------
---------


8 Segmented information

The company conducts its operations in production and distribution of proprietary programming interests, which is programming the company owns or in which it holds a continuing and long-term financial interest. The company has its head office in Toronto, and maintains offices in Vancouver, Los Angeles and the U.K. The sales office in the U.K distributes the company's property throughout the world. Substantially all of the company's properties and equipment are located in Canada. Selected information for the company's operating segments, net of intercompany amounts, is as follows:



3 months ended 9 months ended
May May
2005 2004 2005 2004
$ $ $ $

Revenue
Proprietary 4,154 5,973 14,957 18,849
Service 4 - 83 -
Other 133 611 135 612
----------------------------------------
4,291 6,584 15,175 19,461
----------------------------------------
----------------------------------------
Gross Profit
Proprietary 1,025 1,397 2,058 4,455
Service (45) - 57 -
Other 59 (202) 61 (155)
----------------------------------------
1,039 1,195 2,176 4,300
----------------------------------------
----------------------------------------


Gross profits is defined as segment revenue less segment amortization of film and television programming, and other production costs. Other activities comprise corporate functions.

Geographical information, based on customer location, is as follows:



3 months ended 9 months ended
May May
2005 2004 2005 2004
$ $ $ $

Revenue
Canada 2,468 1,926 4,039 4,275
United States 61 1,330 9,259 4,253
United Kingdom 123 982 188 1,862
Other foreign 1,639 2,346 1,689 9,071
----------------------------------------

4,291 6,584 15,175 19,461
----------------------------------------
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9 Related party transactions

The company has entered into the following related party transactions. These transactions are measured at the exchange amount, which is the actual amount of consideration given as established and agreed between the related parties.

a) During the nine months ended May 31, 2005, the company paid $137,000 (2004 - $150,000) to a company controlled by a shareholder, director and officer of the company for executive services rendered. These expenditures are reflected in the company's selling, general and administrative expenses.

b) During the nine months ended May 31, 2005, the company paid $32,000 (2004 - $77,000) to a shareholder, director and officer of the company for legal services rendered. These expenditures are reflected in the company's selling, general and administrative expenses.

c) As at May 31, 2005, the company was owed $137,000 (2004 - $519,000) from a company controlled by a shareholder, director and officer of the company which is included in accounts and other receivables. This balance is unsecured, non-interest bearing and has no specified repayment date.

d) As at May 31, 2005, included in accounts receivable was $1,506,000 (US$1,200,000) (2004 - $nil) from a company owned by a member of senior management. This amount is a result of a sale of distribution rights to the related company prior to the individual becoming a member of senior management. The amount is secured by an irrevocable letter of credit.

Other related party transactions and balances have been described elsewhere in these financial statements.

Contact Information

  • Peace Arch Entertainment Group Inc.
    Nicole Spracklin
    (416) 487-0377 (ext. 237)
    nspracklin@peacearch.com
    or
    Jaffoni & Collins Incorporated
    Robert Rinderman or Karin Oloffson
    (212) 835-8500
    PAE@jcir.com