Rainmaker Income Fund
TSX : RNK.UN

Rainmaker Income Fund

August 14, 2007 17:43 ET

Rainmaker Income Fund Provides an Update of Corporate Developments and Reports Results for the Quarter and Six Months Ended June 30, 2007

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 14, 2007) - Rainmaker Income Fund (the "Fund" or "Rainmaker") (TSX:RNK.UN), a leading provider of services to the entertainment industry, provides an update of corporate developments and reports its results for the quarter and six months ended June 30, 2007.

Corporate Developments

Over the past year and a half we have been working diligently to build a world class animation and visual effects studio capable of competing in the global marketplace. We have undertaken a number of very important steps including:

- Acquiring Rainmaker Animation (formerly Mainframe Entertainment), an industry leader in computer generation animation;

- Announcing the revival of Reboot, the classic animated episodic television series, as a trilogy of feature length films;

- Completing the build out and staffing of our visual effects operation in London, England, which is currently working on several major feature film projects including The Golden Compass (New Line), Inkheart (New Line), Fred Claus (Warner Bros), and Vantage Point (Sony);

- Investing in personnel, infrastructure, equipment and software to enable us to complete complex visual effects sequences for A level feature films including Night at the Museum and Blades of Glory and to produce the feature quality computer animation for our first animated theatrical feature film Escape from Planet Earth;

- Hiring Paul Gertz, formerly of Lucasfilm and Turner Animation, as the executive Vice President of Rainmaker Animation and Ed Jones, executive producer of the academy Award-winning film Happy Feet, as the Producer for Escape from Planet Earth; and

- Adding Dennis Hoffman, formerly of Digital Domain and Dreamquest Images, as Head of production for Rainmaker Visual Effects.

Message to Unitholders

Business Strategy

It has now been just over a year since I was appointed CEO of Rainmaker. During this year we have initiated a number of very significant changes that have had a major impact on the business of Rainmaker. I thought it would be useful to discuss some of these changes to help you understand our strategy moving forward. When I first came to Vancouver in late 2004 I had developed a business plan to build a world class computer animation studio producing family oriented entertainment projects, which historically have been the strongest performing segment of the entertainment business. To date only a handful of companies worldwide are capable of producing animated feature films. With the acquisition of Rainmaker Animation (formerly Mainframe Entertainment) in July 2006 we took the first step in building Rainmaker's animation platform. We have since added a number of very experienced and well respected executives to our animation team and commenced production on Escape From Planet Earth, our first animated theatrical feature film for The Weinstein Company. We are also in the process of developing Reboot, Rainmaker's classic television series (which was the first computer generated TV show in the world), as a trilogy of feature length films in stereo 3D.

We are focusing our resources on animation for a number of reasons, principally as it is an area with strong growth potential. There are a limited number of qualified computer animation studios worldwide and a growing demand for animated content throughout the world. Vancouver has a good talent pool, excellent training facilities and strong industry incentives. Further, Rainmaker Animation has been able to build its infrastructure on a work-for-hire basis to the point where it can now develop and own its own content, thereby reducing our reliance on third party production decisions and stabilizing our production work flow.

To pursue this growth strategy in the animation business requires that we re-invest cash generated by operations and the sale of non-core assets back into the business. We believe this strategy will build long-term value and will be very rewarding to our unitholders.

Special Committee

A Special Committee of independent trustees has been formed to work with management with the mandate to consider: the appropriateness of the income trust structure; the Fund's capital structure; the distribution policy; and various strategic alternatives as deemed appropriate.

On May 14, 2007 the Fund announced the suspension of distributions. The Board of Trustees will review the distribution policy again after the Special Committee has completed its mandate. Factors to be taken into consideration at that time will include business prospects, opportunities for re-investment and the uneven cash flow nature of our core businesses.

The Special Committee has engaged advisors to assist with the sale of certain non-core assets.

Results of Operations for the second quarter

The second quarter ended June 30, 2007 saw a significant improvement in overall operations over the first quarter. Revenue was down $0.2 million to $13.3 million, while net operating costs decreased significantly to produce EBITDA of $0.7 million compared with first quarter which had negative EBITDA of $1.3 million.

Rainmaker Animation operated near capacity with 4 direct to DVD projects, a television series and our first animated feature film, Escape From Planet Earth all in production. We are building out the facility and infrastructure for the feature film which should continue throughout the balance of the year. We are also looking at a number of opportunities to expand the animation business. We are reviving Reboot, the classic animated episodic television series, as a trilogy of feature length films in stereo 3D. During the remainder of the year, Rainmaker Animation will continue to aggressively pursue its growth strategy through further investments in systems, processes, infrastructure, personnel and projects.

Rainmaker Visual Effects in Vancouver experienced a significant slow down felt throughout the North American industry as a number of large visual effects dominated projects were completed in the first quarter and fewer projects than expected were started in the second quarter. In addition a significant project was delayed four months.

Rainmaker Post Production and EP Canada, as expected, were slow in the second quarter as production activity through the end of June has been down significantly due in part to the labour dispute involving the Canadian actors and performers in the first quarter. Historically, the second half of the year is stronger for these businesses then the first half and current indications are that this will be the case in 2007.

Results of Operations

Highlights

- Total revenue for the second quarter of 2007 of $13.3 million, an increase of $3.3 million or 34% from the $9.9 million in the second quarter of 2006;

- Rainmaker Animation revenue increased to $6.2 million in the second quarter from $4.8 million in the first quarter of 2007 as it operated at near capacity with a record 6 productions in progress; and

- Increased EBITDA for the second quarter to $0.7 million as compared to negative EBITDA of $1.3 million for the first quarter of 2007.

Selected financial results



All amounts are in 000's of dollars, except per unit figures

Three months Six months
ended June 30, ended June 30,
2007 2006 2007 2006
-------- -------- --------- ---------

Revenue
Rainmaker Entertainment
Visual effects $ 2,768 $ 3,752 $ 7,798 $ 8,235
Animation 6,178 - 10,981 -
Post producion 1,693 3,023 3,607 5,517
EP Canada 1,961 2,344 3,136 3,693
Canada Film Capital 658 810 1,184 1,632
Other 3 - 77 105
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13,261 9,929 26,783 19,182
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Expenses
Operating 11,915 7,453 26,052 14,477
General and administration 655 536 1,367 1,118
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12,570 7,989 27,419 15,595
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Earnings (loss) before undernoted
items (EBITDA) 691 1,940 (636) 3,587

Depreciation and amortization of
proprerty, plant and equipment 1,809 1,166 3,483 2,277
Amortization of intangible assets 817 294 1,905 588
Interest expense 399 57 739 95
Other (247) (132) (169) (155)
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(Loss) earnings before income tax (2,087) 555 (6,594) 782

Income tax expense - (20) - -
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(Loss) earnings before
non-controlling interest (2,087) 575 (6,594) 782

Non-controlling interest 38 (10) 113 (14)
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Net (loss) earnings for the period $ (2,049) $ 565 $ (6,481) $ 768
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EBITDA is not a term defined under generally accepted accounting
principles. The Fund defines EBITDA as earnings from operations before
interest expense, interest income, income taxes, depreciation and
amortization on property, plant and equipment, amortization of intangible
assets, loss on sale of property, plant and equipment, restructuring costs
and compensation costs related to unit options.


Results of Operations

Three months ended June 30, 2007 compared to 2006

Revenue

Revenue increased $3.3 million to $13.3 million in 2007 from $9.9 million in 2006. The increase in 2007 was due to Rainmaker Animation which was acquired in July 2006 and accounted for $6.2 million in revenue. Offsetting this increase, Rainmaker Visual Effects reported a decrease in revenue of $1.0 million to $2.8 million in 2007 from $3.8 million in 2006, with the Vancouver operation decreasing by $1.9 million and the London operation reporting an increase in revenue $0.9 million. Visual effects is a very project based business and during the second quarter the Vancouver office had a significant project delayed four months and experienced the slowdown in the industry following the release of a large number of visual effects laden films in the second quarter. Both Rainmaker Post Production and EP Canada reported slower second quarter revenues as compared to 2006 as they were impacted by the lingering effects of the strike and contract negotiations of Canadian actors and performers which resulted in lower production activity throughout Canada. Revenue from Rainmaker Post Production decreased $1.3 million to $1.7 million in 2007 from $3.0 million in 2006 while EP Canada decreased $0.3 million to $2.0 million in 2007 from $2.3 million in 2006.

Operating and general and administration expenses

Operating costs increased $4.4 million to $11.9 million in 2007 from $7.5 million in 2006 with the acquisition of Rainmaker Animation accounting for $3.2 million of the increase. Rainmaker Visual Effects had operating costs of $2.4 million in Vancouver, a decrease of $0.2 million over 2006 as revenue was down in part to the delay of a significant project. Rainmaker Visual Effects in London had operating costs of $1.2 million, an increase of $0.9 million over 2006 reflecting the growth in revenue as the build out and staffing of the London facility was complete . The London visual effects operation now has a full compliment of staff capable of taking on significant high quality projects in the second largest visual effects market in the world. Operating costs in Rainmaker Post Production, EP Canada and Canada Film Capital have each decreased in aggregate by $0.4 million from 2006 reflecting the lower level of revenue. Operating expenses which do not relate directly to the operating segments increased $1.0 million to $2.3 million in 2007 compared to $1.3 million in 2006, due mainly to the acquisition of Rainmaker Animation.

General and administration expenses have increased $0.1 million to $0.6 million in 2007 from $0.5 million in 2006 due to the acquisition of Rainmaker Animation in 2006.

Depreciation and Amortization of property, plant and equipment

Depreciation and amortization of property, plant and equipment increased $0.7 million in 2007 to $1.8 million as compared to $1.1 million in 2006. The increase is principally due to the acquisition of Rainmaker Animation in 2006.

Amortization of intangible assets

Amortization of intangible assets increased $0.5 million in 2007 to $0.8 million as compared to $0.3 million in 2006. The increase is from the acquisition of Rainmaker Animation in 2006.

Interest expense

Interest expense increased $0.3 million in 2007 to $0.4 million as compared to $0.1 million in 2006. The increase relates to interest on the debentures which were acquired as part of the acquisition of Rainmaker Animation and the interest on the term loan arising from the acquisition.

Net earnings for the period

Net earnings for the three months ended June 30, 2007 decreased $2.6 million to a net loss of $2.0 million from net earnings of $0.6 million in 2006.

Six months ended June 30, 2007 compared to 2006

Revenue

Revenue increased $7.6 million to $26.8 million in 2007 from $19.2 million in 2006. The increase in 2007 was due to Rainmaker Animation which was acquired in July 2006 and accounted for $11.0 million in revenue. Offsetting this increase, Rainmaker Visual Effects reported a decrease in revenue of $0.4 million to $7.8 million in 2007 from $8.2 million in 2006, with the Vancouver operation decreasing by $1.6 million and the London operation reporting an increase in revenue $1.2 million. Visual effects is a very project based business and during the second quarter the Vancouver office was without a significant anchor project. Both Rainmaker Post Production and EP Canada reported lower second quarter revenues as compared to 2006 as they were impacted by the lingering effects of the strike and contract negotiations of Canadian actors and performers which resulted in lower production activity throughout Canada. Revenue from Rainmaker Post Production decreased $1.9 million to $3.6 million in 2007 from $5.5 million in 2006 while EP Canada decreased $0.6 million to $3.1 million in 2007 from $3.7 million in 2006.

Operating and general and administration expenses

Operating costs increased $11.5 million to $26.0 million in 2007 from $14.5 million in 2006 with the acquisition of Rainmaker Animation accounting for $7.3 million of the increase. Rainmaker Visual Effects had operating costs of $8.2 million, an increase of $3.0 million over the $5.2 million in 2006, with the Vancouver operation having operating costs of $5.7 million an increase of $1.2 million and the London operation having $2.5 million, an increase of $1.8 million. The increase in costs incurred by the Vancouver visual effects operation was due in part to the decision to take on increasingly complex projects in order to build our reputation and project portfolio and in part to take on projects at favourable rates to clients in order to demonstrate our capabilities and build our reputation and relationships. Rainmaker Visual Effects in London had operating costs of $2.5 million, an increase of $1.8 million over 2006 as we have now completed the build out and staffing of the London facility. The London visual effects operation now has a full compliment of staff capable of taking on significant high quality projects in the second largest visual effects market in the world. Operating costs in Rainmaker Post Production, EP Canada and Canada Film Capital have decreased in aggregate $0.7 million from 2006 reflecting the lower revenue in each segment. Operating expenses which do not relate directly to the operating segments increased $2.0 million to $4.7 million in 2007 compared to $2.7 million in 2006 due mainly to the growth from the acquisition of Rainmaker Animation.

General and administration expenses have increased $0.3 million to $1.4 million in 2007 from $1.1 million in 2006 due to the acquisition of Rainmaker Animation in 2006.

Depreciation and Amortization of property, plant and equipment

Depreciation and amortization of property, plant and equipment increased $1.2 million in 2007 to $3.5 million as compared to $2.3 million in 2006. The increase is principally due to the acquisition of Rainmaker Animation, which accounted for $1.0 million.

Amortization of intangible assets

Amortization of intangible assets increased $1.3 million in 2007 to $1.9 million as compared to $0.6 million in 2006. The increase is from the acquisition of Rainmaker Animation in 2006.

Interest expense

Interest expense increased $0.6 million in 2007 to $0.7 million as compared to $0.1 million in 2006. The increase relates to interest on the debentures which were acquired as part of the acquisition of Rainmaker Animation in 2006 and the interest on the term loan arising from the acquisition.

Net earnings for the period

Net earnings for the six months ended June 30, 2007 decreased $7.3 million to a loss of $6.5 million from net earnings of $0.8 million in 2006.

Other

Additional information and other publicly filed documents relating to the Fund, including the interim financial statements and management discussion and analysis are available through the internet on the Canadian Securities Administrators' System for Electronic Document Analysis and Retrieval ("SEDAR"), which can be accessed at www.sedar.com.

The Fund is an unincorporated open-ended limited purpose trust located in Vancouver, British Columbia. The Fund indirectly owns 100% of Rainmaker Entertainment Inc. ("REI"), EP Canada Limited Partnership ("EP") and Canada Film Capital Limited Partnership ("CFC"). REI is an award-winning computer generated animation, visual effects and post production company with a 27 year history providing superior service, innovative technology and world-class talent to design, build and shape content for feature films, television, direct to DVD, games and commercials. EP is a leading provider of payroll services for the film and television industry across Canada. CFC provides tax credit administration services and financing of tax credits through factoring for film and television productions across Canada.

This press release and any related attachments may contain forward-looking statements that involve a number of risks and uncertainty. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are market and general economic conditions and the risk factors detailed from time to time in the periodic reports and documents filed by the Fund with The Toronto Stock Exchange and other regulatory authorities. Forward-looking statements are based on the estimates and opinions of management on the date the statements are made, and the Fund undertakes no obligation to update the forward-looking statements should there be a change in conditions, or in management's estimates or opinions.

The contents of this press release have neither been approved nor disapproved by any regulatory authority.

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