Vancouver: The loss of at least one drama series, a softening international market, the lack of U.S. business partners, a breach of a loan covenant and the continuing malaise of public markets contribute to today’s difficult times at Peace Arch Entertainment, says its CEO Juliet Jones.

At the end of September, Class A and B shares of the Vancouver company traded at, respectively, $2 per share and $2.25 per share – at or pennies above the year lows. The year highs are $5.50 per share and $5.40 per share, respectively.

Investors responded negatively to the third-quarter results that showed earnings off by nearly $1.2 million compared to Q3 in fiscal 2000.

(The company’s fiscal 2001 annual report, which will boast the largest production slate in Peace Arch history, is due early next year.)

‘The markets are very soft for entertainment companies in general,’ says Jones. ‘The loss took people by surprise even though we had planned on it. People still look at the numbers in black and white.’

In the third quarter of fiscal 2001 (ended May 31), Peace Arch reported a loss of $687,000 ($0.18 a share) on revenues of $7.8 million. In the same quarter last year, the company earned $493,000 ($0.12 a share) on revenues of $7.2 million.

‘While it is not unusual for Peace Arch to report a loss in the seasonally slow third fiscal quarter, the actual loss was somewhat greater than anticipated, due to final accounting adjustments,’ says Jones. ‘During last year’s third quarter, programming deliveries were abnormally high, due to an earlier delay in the production of First Wave [that] shifted a significant amount of programming deliveries from the second into the third quarter of fiscal 2000. This year’s third-quarter deliveries reflected the normal seasonal slowdown in programming delivery schedules.’

Over the first nine months of fiscal 2001, meanwhile, Peace Arch revenue increased 164% to approximately $48.8 million compared to $18.5 million recorded in the first nine months of fiscal 2000. Net income, however, declined 14% to $805,000 ($0.20 per share) from $936,000 ($0.23 per share) a year earlier.

In fiscal 2001, Peace Arch produced five television series (such as MTV’s Sausage Factory), five movies (including PAX TV’s three-part Christy series and theatrical feature Now and Forever) and three documentaries – the most ambitious production slate to date.

The downturn in Q3 also created a headache in the company’s contracts with its lenders. Jones says that the security of the loans was not in question, but that other financial covenants such as performance markers had not been met.

Peace Arch signed a ‘forbearance’ agreement with its subordinated lenders on Sept. 13, which means the company has a new loan agreement until the end of November and the end of Q1 for fiscal 2002.

Among the contract’s particulars: Peace Arch will repay about 25% of the principal subordinated debt through the cash outlay of $750,000 and the sale, by Oct. 15, of ‘non-core’ real estate valued at $950,000.

American investment banking firm Gerard Klauer Mattison, which has experience in the entertainment industry, is working on behalf of Peace Arch to identify U.S.-based strategic and financial initiatives that can support the company’s long-term growth objectives, says Jones.

‘We need to see some business deals and strategic alliances [in the U.S.],’ says Jones when asked what will excite investors. ‘We need some clout and we have to align ourselves with U.S. companies [such as producers and broadcasters].’

The lack of U.S. partners has been a drain on the current production slate for fiscal 2002 and puts into question Peace Arch’s ability to meet production volumes set in fiscal 2001.

A second season of Big Sound, the high-profile Global sitcom, will not go ahead, says Jones, despite the government funding and a U.K. coproducer. The softening international market means gap financing is difficult to attain, she says, and interim financiers can’t justify the risk. Also, Big Sound has missed its broadcast windows.

The second season of syndicated series The Immortal, another U.K. coproduction, is also in doubt. Peace Arch is looking at other ways to finance the production, says Jones, to lower costs and enhance production values. ‘The first season was incredibly expensive,’ she says.

Better news is the renewal of Animal Miracles with Alan Thicke, which was renewed in September for a second season of 13 one-hours by Life Network in Canada and PAX in the U.S. Peace Arch owns the international distribution rights and has sales in Australia and Japan.

New production, principally lower-margin reality and fact-based shows, is to be made public soon, says Jones, offering no details.

‘It’s hard to say whether revenues [from production] will match the records from last year,’ she says. ‘We’re definitely not expecting to beat it by a lot. The industry has been challenged by certain external factors including a general economic downturn that has caused a decline in advertising revenues, along with reduced demand for American programming in international markets. By diversifying our television library and utilizing financial incentives and tax treaties, we have continued to provide cost-effective programming.’

In other Peace Arch news, Donald Steele of Mercantile Bancorp has resigned from the board of directors.

-www.peacearch.net