Mainframe Entertainment, Inc.
TSX : MFE

Mainframe Entertainment, Inc.

August 14, 2006 16:00 ET

Mainframe Entertainment Reports First Quarter 2007 Results

Revenues increase 5% to $5.0 million

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Aug. 14, 2006) - Mainframe Entertainment, Inc. ("Mainframe") (TSX:MFE), Canada's leading computer generated (CG) animation production company, today announced its first quarter financial results for the period ended June 30, 2006.

For the three-month period ended June 30, 2006, the Company reported gross profit of $1.2 million, earnings before interest, taxation, depreciation and amortization (EBITDA) of $0.6 million, and a net loss of $0.2 million ($0.00 per share) on revenues of $5.0 million. For the same period in fiscal 2006 the Company reported gross profit of $1.3 million (restated), EBITDA of $0.7 million (restated), and net earnings of $0.2 million (restated) ($0.00 per share) on revenues of $4.8 million.

The decrease in net earnings reported for the three month period was primarily attributable to a lower level of production services work compared to the same period last year.

During the year ended March 31, 2006, the Company identified certain eligible costs that had not been claimed on production projects for the purposes of obtaining tax credits. The additional tax credits receivable by the Company have been recorded on a retroactive basis to the periods where the eligible costs were incurred, resulting in a $0.4 million positive impact to the earnings for the three months ended June 30, 2006.

"These results demonstrate Mainframe's continued commitment to its strategic plan of producing and acquiring proprietary content capable of generating additional sources of revenue," noted Rick Mischel, Chief Executive Officer of Mainframe Entertainment Inc. "During the period we generated revenue from the delivery of our 15th direct-to-video/DVD feature for Mattel as well as from the distribution of our proprietary properties, including Tony Hawk in Boom Boom Sabotage and Arthur's Missing Pal, and the ongoing distribution of our library properties."

Mainframe's total number of common shares outstanding was 70,799,169 at June 30, 2006 and 2005.



Consolidated Balance Sheet

---------------------------------------------------------------------
(in thousands of Canadian dollars)
June 30, March 31,
2006 2006
(unaudited) (audited)

Assets

Current assets
Cash and cash equivalents $ 1,154 $ 529
Restricted cash 2,158 2,158
Accounts receivable 14,584 11,971
Current portion of prepaid expenses 223 182
--------------------------
18,119 14,840

Prepaid expenses 100 166

Investment in film and television 2,092 3,123

Property and equipment 6,073 6,329
--------------------------
$ 26,384 $ 24,458
--------------------------
--------------------------

Liabilities

Current liabilities
Bank indebtedness $ 5,301 $ 2,957
Accounts payable and accrued liabilities 1,784 1,967
Deferred revenue 1,242 1,370
Production advances 677 677
Current portion of capital
lease obligations 744 726
--------------------------
9,748 7,697

Capital lease obligations 485 652

Debentures 5,614 5,422
--------------------------
15,847 13,771
--------------------------

Shareholders' Equity
Capital stock 62,407 62,407

Contributed surplus 2,765 2,761

Debentures 1,047 1,034

Deficit (55,682) (55,515)
--------------------------
10,537 10,687
--------------------------
$ 26,384 $ 24,458
--------------------------
--------------------------



Consolidated Statements of Operations and Deficit
(Unaudited)
---------------------------------------------------------------------
(in thousands of Canadian dollars)
Three Three
Months Months
Ended June Ended June
30, 2006 30, 2005
(Restated)

Revenue $ 4,992 $ 4,752

Production costs 3,828 3,505
--------------------------
Gross profit 1,164 1,247
--------------------------

Expenses

Selling, general and administrative 603 530
Amortization 474 438
Writedown of investment in film
and television 41 14
Interest on bank indebtedness 63 6
Interest on capital leases 20 9
Foreign exchange (gain) loss (57) (33)
--------------------------
1,144 964
--------------------------

Earnings before the undernoted 20 283

Interest income 22 15
Interest and accretion on
convertible debentures (119) (112)
Loss on disposal of property and equipment (90) (5)
--------------------------
Net (loss) income for the period (167) 181
--------------------------
Deficit - Beginning of period
As previously reported (55,515) (57,317)
Accounting changes - 1,561
--------------------------

As restated (55,515) (55,756)
--------------------------

Deficit - End of period $ (55,682) $ (55,575)
--------------------------
--------------------------
Basic and diluted earnings per share
attributable to common shareholders $ 0.00 $ 0.00
--------------------------
--------------------------



Consolidated Statements of Cash Flows
(Unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
(in thousands of Canadian dollars)
Three Three
Months Months
Ended June Ended June
30, 2006 30, 2005
(Restated)

Cash flows from operating activities
Net (loss) income for the period $ (167) $ 181
Items not affecting cash
Amortization 474 438
Amortization of investment in film
and television 812 127
Interest and accretion on
convertible debentures 31 11
Writedown of investment in film
and television 41 14
Stock compensation costs 4 23
Loss on disposal of property and equipment 90 5
-------------------------

1,285 799
Investment in film and television 177 (1,040)
Changes in non-cash working capital (2,730) 541
--------------------------
(1,268) 300
--------------------------
Cash flows from financing activities
Increase in bank indebtedness 2,345 1,606
Net proceeds from exercise of
stock options - 13
Capital lease repayments (150) (169)
--------------------------

2,195 1,450
--------------------------

Cash flows from investing activities
Purchase of property and equipment (302) (253)
--------------------------

(302) (253)
--------------------------
Increase (decrease) in cash and
cash equivalents 625 1,497

Cash and cash equivalents
- Beginning of period 529 -
Cash and cash equivalents
- End of period $ 1,154 $ 1,497
--------------------------
--------------------------

Interest paid $ 90 $ 13
--------------------------
--------------------------

Taxes paid $ - $ -
--------------------------
--------------------------


About Mainframe

Mainframe Entertainment Inc. is the industry leader in computer generated (CG) animation for television and direct-to-video/DVD family entertainment. Mainframe has produced over 269 half hours of CG animated television as well as 20 CG animated direct-to-video/DVD feature films and three one-hour CG animated television specials. Mainframe's CG animation expertise is also being used in the production of theatrical feature films, interactive games and commercials. Established in 1993, Mainframe continues to grow its library of proprietary productions, and has received many prestigious awards for its work on such international brands as "Barbie", "Hot Wheels", "Spider-Man", "Casper" and "Popeye". The Company is recognized as a CG animation pioneer having developed the groundbreaking internationally distributed television series "ReBoot". Mainframe clients include Sony, Mattel, Lions Gate Home Entertainment, Electronic Arts (Canada) and MTV. Mainframe's majority shareholder, IDT Corporation, is a NYSE-listed multinational telecommunications and entertainment company.

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