Rainmaker Income Fund (the "Fund") (TSX:RNK.UN) completes its restructuring and
strategic review and reports its results for the fourth quarter and year ended
December 31, 2007.
Highlights of Fiscal 2007
- Executed an agreement to sell certain net assets of the post production and
visual effects operations to Deluxe. The sale transaction will result in a gain
to the Fund in the first quarter of approximately $9.0 million. Consideration
payable to the Fund is as follows:
- $14.0 million in cash received in January, 2008;
- $2.5 million by way of a promissory note due in January 2009;
- $6.0 million contingent cash payment to be earned based on revenue targets;
- $3.5 million assumption of capital leases; and
- $5.0 million Deluxe service credits available to Rainmaker Animation operations.
- Commenced production of "Escape from Planet Earth", our first animated feature
film with a budget of $42 million, which is scheduled for release by The
Weinstein Company in late 2009.
- Hired Paul Gertz, formerly of Lucasfilm and Turner Animation, as the Executive
Vice President of Animation and Ed Jones, Executive Producer of the Academy
Award-winning film "Happy Feet", as the Producer for "Escape from Planet Earth".
- Commenced the revival of "Reboot", the classic animated episodic television
series, as a series of feature length films.
Corporate Developments
Business Strategy
During the past year and a half we have been busy transforming the operations of
Rainmaker Income Fund (the "Fund"). Having completed the acquisition of
Rainmaker Entertainment Inc. ("Rainmaker") (formerly Mainframe Entertainment) in
2006, management and a special committee of the Board of Trustees undertook a
strategic review of the Fund. The result of this review was that we decided to
focus Rainmaker's 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 studios worldwide capable of delivering high quality computer
generated ("CG") animation at our price point and there is a growing demand for
CG animated content throughout the world. Vancouver has a good talent pool,
excellent training facilities and strong industry incentives to support this
growth.
Rainmaker has been producing computer generated animated products for 15 years
during which it has completed 27 CG animated films and over 280 half hour
television shows for some of the most successful companies in the world.
Rainmaker has been able to develop its production pipeline and build its
infrastructure to the point where it can consistently deliver high quality
animated productions on time and on budget.
Going forward, Rainmaker is looking at transitioning its work for hire business
into the development of its own proprietary productions. This strategy will
benefit Rainmaker in a number of ways, the first being that it will allow
Rainmaker to control production timing to increase utilization of its work
force, thereby decreasing down time, staff turnover, and recruiting costs. It
will also decrease Rainmaker's exposure to currency fluctuations and customer
concentration risks. In the long run Rainmaker expects that these proprietary
productions will build a library of significant value capable of generating
revenue from a number of sources well into the future. The development and
retention of a significant entertainment library is not possible operating a
strictly work for hire business.
Rainmaker is planning to acquire and develop properties into 3D stereoscopic
feature films for which it can build franchise brands that will allow for
ancillary revenue streams from DVD / Home Video, interactive video games, online
and mobile viewing, merchandising, toys, music and publishing. Rainmaker will
establish both financial and distribution partners that allow Rainmaker to
control the underlying assets created and to share in all streams of revenue.
The projects chosen will not only target the traditional family market for
animation but also a wide range of genres and demographics. We are in the
process of developing "Reboot", Rainmaker's classic television series (which was
the first CG television show in the world), as a feature length film and have
acquired the film rights to "AT-43", one of the largest role playing games in
Europe.
The Fund is also continuing to pursue the growth of EP Canada's payroll
processing business having recently gained a number of new clients following the
cessation of the operations of a competitor in January 2008.
Deluxe Sale Transaction
As part of our strategy to focus on animation, Rainmaker completed the sale of
the certain net assets of Rainmaker's post production and visual effects
operations to Deluxe Vancouver Ltd. and Deluxe Entertainment Services Group Inc.
(collectively "Deluxe") for a cash payment of $14.0 million paid on the closing
on January 8, 2008, a promissory note for $2.5 million due on January 8, 2009, a
further contingent cash payment of up to $6.0 million to be earned-out based on
revenue targets, and up to $5.0 million in service credits for Deluxe services
available to Rainmaker for its ongoing animation projects. The proceeds from the
sale were used to retire bank debt and to provide working capital for the
continued growth and expansion of Rainmaker's animation platform.
Distributions
The Fund paid distributions totalling $0.16 per unit in 2007, of which 97% was
taxable income and the balance was a return of capital. The Fund ceased paying
distributions on May 14, 2007, following the payment of the distribution for
April 2007. Currently there are no plans to resume the payment of distributions.
Results of Operations
Summary
- Revenue was $33.5 million for 2007, an increase of $13.9 million or 71% from
the $19.6 million in 2006 due to a full year of operations for Rainmaker, which
was acquired July 31, 2006.
- EBITDA from continuing operations was $2.7 million for 2007, an increase of
$0.5 million or 22% from the $2.2 million in 2006.
- The net loss from continuing operations was $10.5 million for 2007 compared
with a loss of $4.2 million in 2006, the increase being principally the result
of the non-cash write-down of an intangible asset of $5.7 million.
Selected Financial Information
The following information is derived from the consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles.
All amounts are in 000's of
dollars, except per unit figures Three months Year
ended December 31, ended December 31,
2007 2006 2007 2006
-------- -------- --------- ---------
Revenue
Rainmaker Entertainment -
Animation $ 5,386 $ 4,050 $ 20,782 $ 5,741
EP Canada - Payroll processing 3,938 3,840 10,562 11,028
Canada Film Capital - Tax credit
services 499 530 2,152 2,808
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9,823 8,420 33,496 19,577
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Expenses
Operating 8,541 6,391 28,538 15,533
General and administration 438 393 2,285 1,855
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8,979 6,784 30,823 17,388
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EBITDA 844 1,636 2,673 2,189
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Depreciation and amortization 1,033 790 3,342 1,732
Amortization of intangible
assets 654 2,027 3,213 2,908
Write-down of intangible assets 5,750 - 5,750 -
Interest expense 285 266 1,237 484
Restructuring costs - 1,315 - 2,110
Other (22) (204) (166) (591)
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7,700 4,194 13,376 6,643
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Loss before non-controlling
interest (6,856) (2,558) (10,703) (4,454)
Non-controlling interest 64 (11) 182 233
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Loss from continuing operations (6,792) (2,569) (10,521) (4,221)
(Loss) earnings from
discontinued operations (880) (1,068) (3,946) 1,650
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Net loss for the period $ (7,672) $ (3,637) $ (14,467) $ (2,571)
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Loss from continuing operations
per unit - basic and diluted $ (0.39) $ (0.15) $ (0.62) $ (0.25)
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Net loss per unit - basic and
diluted $ (0.45) $ (0.21) $ (0.85) $ (0.15)
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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 and write-down
of intangible assets, loss on sale of property, plant and equipment,
restructuring costs and non-cash compensation costs.
Subsequent to December 31, 2007, Rainmaker sold certain net assets of its
post production and visual effects operations and as such they are
disclosed as discontinued operations in the selected financial information
above.
Results of Operations
Three months ended December 31, 2007 compared to 2006
Revenue
Revenue increased $1.4 million to $9.8 million in the fourth quarter of 2007
from $8.4 million in the fourth quarter of 2006. Rainmaker reported an increase
in revenue of $1.3 million to $5.4 million in 2007 from $4.1 million in 2006 as
in 2007 we were working on 5 animation productions compared with 4 in 2006. EP
Canada reported an increase in revenue of $0.1 million to $3.9 million in 2007
from $3.8 million in 2006.
Operating and general and administration expenses
Operating expenses increased $2.1 million to $8.5 million in the fourth quarter
of 2007 from $6.4 million in the fourth quarter of 2006. Rainmaker reported an
increase in operating expenses of $1.7 million resulting from the increased
production activity in 2007, EP Canada had an increase in operating expenses of
$0.4 million principally due to severance of $0.3 million.
General and administration expenses increased slightly.
Depreciation and Amortization of property, plant and equipment
Depreciation and amortization of property, plant and equipment increased $0.2
million to $1.0 million in the fourth quarter of 2007 from $0.8 million in 2006.
The increase is due to more property, plant and equipment in Rainmaker,
reflecting the increased production activity.
Amortization and write-down of intangible assets
Amortization of intangible assets decreased $1.3 million to $0.7 million in the
fourth quarter of 2007 from $2.0 million in 2006. The decrease is due to the
amortization of project backlogs which were recorded in 2006 as part of the
acquisition of Rainmaker and amortized over the terms of the related projects.
Following the acquisition of Rainmaker in July 2006, an intangible asset
representing existing customer relationships was recorded at the estimated fair
value based on independent third party valuation work. At December 31, 2007, an
assessment of the carrying value determined that the remaining balance of $5.7
million should be written off as it will not be recovered through future cash
flows, as it is the intention of Rainmaker to move towards proprietary
production work.
Restructuring costs
Restructuring costs in the fourth quarter of 2006 are comprised of severance
costs associated with the acquisition and integration of Rainmaker and are not
expected to be of a recurring nature.
Loss from continuing operations
The loss from continuing operations increased $4.2 million to $6.8 million in
the fourth quarter of 2007 from $2.6 million in 2006. Rainmaker reported an
increased loss of $4.0 million due principally to the write down of intangible
assets of $5.7 million offset by the fact there was no restructuring severance
costs in 2007 but $1.3 million in 2006. EP Canada reported an increased loss
from continuing operations of $0.2 million due to severance costs of $0.3
million.
Loss from discontinued operations
The loss from discontinued operations was lower by $0.2 million as operations
were improved but were offset by severance charges of $0.9 million.
Net earnings for the year
The net loss increased $4.1 million to $7.7 million in the fourth quarter of
2007 from a loss of $3.6 million in 2006.
Year ended December 31, 2007 compared with December 31, 2006
Revenue
Revenue increased $13.9 million to $33.5 million in 2007 from $19.6 million in
2006. Rainmaker reported an increase in revenue of $15.0 million to $20.8
million in 2007 from $5.8 million in 2006. The increase in revenue was mainly
due to the fact that Rainmaker was acquired on July 31, 2006 and therefore only
five months of operations are included in the results for 2006 and in part
because we were doing more production work in 2007. Offsetting this increase, EP
Canada reported a decrease in revenue of $0.4 million to $10.6 million in 2007
as compared to $11.0 million in 2006 as they were impacted by the effects of the
Canadian actors strike and related contract negotiations for the first six
months of 2007. Revenue from Canada Film Capital decreased $0.7 million to $2.1
million in 2007 from $2.8 million in 2006 as 2006 had higher revenue due to a
few large financing projects.
Operating and general and administration expenses
Operating expenses increased $13.0 million to $28.5 million in 2007 from $15.5
million in 2006. Rainmaker reported an increase in operating expenses of $13.3
million to $19.2 million in 2007 from $5.9 million in 2006 reflecting both a
full year of operations as compared with only five months in 2006 and the
increased production activity in 2007. Operating expenses in EP Canada have
remained unchanged even though 2007 included severance compensation costs of
$0.3 million. Operating expenses in Canada Film Capital decreased $0.8 million
to $1.4 million in 2007 from $2.2 million in 2006 reflecting the lower level of
revenues, especially the financing of tax credits. Operating expenses, which do
not relate directly to the operating segments increased $0.4 million to $1.2
million in 2007 compared to $0.8 million in 2006 due mainly to higher
compensation costs.
General and administration expenses have increased $0.4 million to $2.3 million
in 2007 from $1.9 million in 2006 due to the acquisition of Rainmaker
Entertainment, which had a full year of operations in 2007 compared to only five
months of operations in 2006 following its acquisition on July 31, 2006.
Depreciation and Amortization of property, plant and equipment
Depreciation and amortization of property, plant and equipment increased $1.6
million in 2007 to $3.3 million as compared to $1.7 million in 2006. The
increase is attributable to the acquisition of Rainmaker in 2006.
Amortization and write-down of intangible assets
Amortization of intangible assets increased $0.3 million in 2007 to $3.2 million
as compared to $2.9 million in 2006. The increase is attributable to the
acquisition of Rainmaker in 2006.
Following the acquisition of Rainmaker in July 2006, an intangible asset
representing existing customer relationships was recorded at the estimated fair
value based on independent third party valuation work. At December 31, 2007, the
Fund completed an assessment of the carrying value and determined that the
remaining balance of $5.7 million should be written off as it will not be
recovered through future cash flows as it is the intention of Rainmaker to move
towards proprietary production work.
Interest expense
Interest expense increased $0.8 million in 2007 to $1.2 million as compared to
$0.4 million in 2006. The increase relates to interest on the debentures of $0.2
million, which were acquired as part of the acquisition of Rainmaker in 2006,
the interest on the term loan of $0.4 million which financed a portion of the
acquisition Rainmaker entertainment and $0.2 million increase on working capital
and capital lease interest.
Loss from continuing operations
The loss from continuing operations increased $6.2 million in 2007 to $10.7
million from $4.5 million in 2006. Rainmaker reported an increased loss of $9.3
million in 2007 compared to $2.7 million in 2006, which was due principally to
the write down of intangible assets of $5.7 million. In addition, while
Rainmaker had increased EBITDA of $1.3 million in 2007 it was offset by higher
non-cash depreciation and amortization expenses of $1.9 million and higher
interest expenses of $0.2 million. The balance of the increase in the loss from
continuing operations of $0.6 million was due to the lower earnings of EP Canada
resulting from a decrease in revenue from a slow first six months and severance
costs. Corporate costs not attributable to an operating segment decreased $0.8
million as restructuring costs of $2.1 million were not incurred in 2007 but
higher interest costs of $0.6 million and higher compensation costs of $0.4
million were incurred and general and administrative costs were higher by $0.1
million.
Earnings from discontinued operations
Results from discontinued operations decreased by $5.6 million to a loss of $4.0
million in 2007 from earnings of $1.6 million in 2006. The decrease was due to a
lower revenue in post production resulting in a decrease in earnings of $2.5
million and higher operating costs in visual effects resulting in a decrease in
earnings of $2.5 million. Other expenses were up $0.6 million due to severance
costs relating to the sale.
Net earnings for the year
Net earnings for 2007 decreased $11.7 million to a loss of $14.3 million from a
loss of $2.6 million in 2006.
Other
Additional information and other publicly filed documents relating to the Fund,
including the annual audited consolidated financial statements and related
management discussion and analysis plus the Annual Information Form 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 company producing
computer generated animated feature films, television, direct to DVD films,
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.
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