Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

November 13, 2007 15:07 ET

Somerset Entertainment Income Fund Reports Results for Third Quarter of 2007

TORONTO, ONTARIO--(Marketwire - Nov. 13, 2007) -

NOT FOR DISSEMINATION IN THE UNITED STATES OR FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES

Somerset Entertainment Income Fund (TSX:SOM.UN)(the "Fund") today announced financial and operating results for the three months ended September 30, 2007.

Third Quarter Financial Highlights

- Sales increased 6.5% to $24.4 million

- Gross profit increased 19.9% to $10.0 million

- EBITDA increased 32.9% to $5.8 million

- Income before non-controlling interest increased 10.8% to $3.1 million

- Distributable cash increased 33.2% to $5.1 million, or $0.29 per unit
(including the non-controlling interest share)

EBITDA and distributable cash are non-GAAP measures. See "Definition of EBITDA, Distributable Cash and Non-GAAP Measures" below.

Sales for the third quarter increased by $1.5 million to $24.4 million, an increase of 6.5% from $22.9 million in the previous year. Sales in the U.S. were $19.8 million, an increase of 7.5% compared with the previous year. The Compass business contributed $5.3 million to total U.S. sales, compared with $5.1 million for the same quarter in the prior year due to increased replenishment sales to a major customer. Excluding Compass, Somerset's U.S. business generated sales of $14.5 million, up 8.8% in the quarter, compared with $13.3 million in the prior year. International sales increased 20.9% year over year to $2.6 million as a result of replenishment sales to new mass merchant retailers in the U.K., France and Italy, sales to a new distributor in Spain and from increased replenishment sales in the U.K., France and Mexico. Sales in Canada declined 14.1% to $2.1 million as a result of lower replenishment sales to a mass merchant customer. Replenishment sales represented 91.4% of total sales for the quarter.

Gross profit increased 19.9% to $10.0 million, compared with $8.3 million for the three months ended September 30, 2006. Gross profit as a percentage of sales was 40.9%, compared with 36.4% during the same period last year.

EBITDA increased to $5.8 million in the first quarter, a 32.9% increase over the same period in the previous year. The Compass business generated EBITDA of $1.1 million in the quarter compared with $(.2) million in the prior year, while the Somerset business generated EBITDA of $4.7 million, compared with $4.6 million in the prior year.

Income before non-controlling interest was $3.1 million, an increase of 10.8%, compared with $2.8 million in the prior year.

The Fund generated $5.1 million in distributable cash (including the non-controlling interest share) for the period, or $0.29 per unit. Three cash distributions (including the non-controlling interest share) were made during the quarter, for a payout ratio of 52.0% compared with 84.6% in the previous year. The increase in distributable cash compared with the prior year was due primarily to higher earnings generated in the quarter.

"We're pleased to report stronger sales and significantly higher earnings than last year", said Andy Burgess, Chief Executive Officer, Somerset Entertainment. "By creating unique products and programs for both new and existing retail partners, Somerset can continue to deliver positive results even when the rest of the music industry is declining. Securing two major new customers demonstrates our team's ability to create and deliver relevant programs for retailers today" said Burgess.

Operational Highlights

During the quarter, Somerset shipped its 3-CD box set program to 380 doors of a leading U.S. club retailer. Strong sell-through at retail has led to sizable replenishment sales on the program for the quarter. This club retailer has now launched the program in five markets including Canada, the U.S., Mexico, Japan and the U.K.

Somerset strengthened its seasonal distribution throughout the U.S. and Canada with the shipment of Christmas programs to 2,800 locations of a major U.S. mass merchant in the quarter and the planned shipment to 1,350 locations of a major U.S. drug chain in the fourth quarter. In addition, a specialty retailer added 580 Christmas displays as a second location in all stores, while in Canada, a major grocery chain committed to a seasonal corrugate program for the fourth quarter.

Internationally, Somerset expanded its Reflections program to an additional 33 locations of a major hypermarket in Italy. In Spain, Somerset is experiencing a resurgence with its new distributor and has secured commitments to re-launch Reflections programs from 3 of its 4 former Spanish customers, including 70 locations of the largest retailer in Spain, 90 locations of a major hypermarket and 47 locations of another major hypermarket.

Through its Compass division, Somerset will ship an exclusive 12-title Rolling Stone compilation line to all locations of the leading U.S.-based consumer electronics retailer in the fourth quarter. Approximately 80% of the stores will feature the program on an interactive display located on a main aisle end-cap. The product features 16 tracks and the consumer can receive a free 12-issue subscription to Rolling Stone magazine with purchase.

Conference Call

Andy Burgess, Chief Executive Officer, and Rob Meier, Chief Financial Officer, will hold a conference call to discuss results for the Fund on Wednesday, November 14, 2007, at 11:00 a.m. (EST). To access the call, dial toll free 1-888-300-0097 or 647-427-3422 and indicate the Conference ID # 23636077. A replay of the conference call will be available as of 1:00 p.m. the same day, until midnight on November 21, 2007. To access the replay, dial toll-free 1-800-365-8354 or 402-220-2881, followed by the passcode 23636077.

Forward-Looking Statements

Certain statements in this press release contain "forward-looking" statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Fund or Somerset to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this management's discussion and analysis, such statements use such words as "may," "will," "intend," "should," "expect," "believe," "plan," "anticipate," "estimate," "predict," "potential," "continue," the negative of these terms or other similar terminology. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this management's discussion and analysis. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, customer concentration, integration of the Compass business, lack of written customer contracts, reliance on suppliers and other risks described in the Fund's Annual Information Form, which can be found at www.sedar.com. These forward-looking statements are made as of the date of release of this press release, and the Fund does not assume any obligation to update or revise them to reflect new events or circumstances.

Definition of EBITDA, Distributable Cash and Non-GAAP Measures

References to "EBITDA" are to earnings before interest, income taxes, amortization, write-down of intangibles and goodwill and non-controlling interest.

Management calculates distributable cash as cash provided by operating activities less unrealized foreign exchange losses, changes in non-cash operating working capital balances, the full amount of the LTIP funding requirements relating to the period under review and capital expenditures in the period.

Management views distributable cash as an operating performance measure, as it is a measure generally used by Canadian income funds as an indicator of financial performance.

EBITDA and distributable cash are not earnings measures recognized under GAAP and do not have standardized meanings prescribed by GAAP. Therefore, EBITDA and distributable cash may not be comparable with similar measures presented by other entities. Investors are cautioned that EBITDA should not be construed as an alternative to net income determined in accordance with GAAP as indicators of the Fund's performance, or to cash flows from operating, investing and financing activities as measures of liquidity and cash flows. For a reconciliation of EBITDA to net income before income taxes and non-controlling interest, and distributable cash to cash provided by operating activities, see the Fund's management's discussion and analysis available on www.sedar.com.

About Somerset Entertainment

Somerset Entertainment Ltd. is the leading North American producer and distributor of specialty music sold through non-traditional retailers using proprietary interactive displays. The Company has 19 diverse product lines targeted at consumers over the age of 30, which represents a variety of music genres, including world, relaxation, jazz, classical, children's and hit compilations. The company's extensive distribution network includes mass merchants, specialty chains and independent gift stores in more than 20 countries. Based in Toronto, Canada, the Company employs over 180 people at offices in Toronto, Ontario (Canada); Buffalo Grove, Illinois, and Minneapolis, Minnesota, (U.S.A.); and Essex, England (U.K.).

Units of the Somerset Entertainment Income Fund are traded on the Toronto Stock Exchange under the symbol SOM.UN. Additional information relating to the Somerset Entertainment Income Fund, including unaudited financial information as of September 30, 2007, is available at www.somersetent.com and www.sedar.com.

Attachments:

Q3 2007 - Exhibit 1 (Consolidated Statements of Income and Deficit)

Q3-2007 - Exhibit 2 (Consolidated Statements of Cash Flows)

Q3-2007 - Exhibit 3 (Distributable Cash)



EXHIBIT 1

Somerset Entertainment Income Fund

CONSOLIDATED STATEMENTS OF
INCOME AND DEFICIT
Unaudited


(in thousands of Canadian dollars, except for units and per-unit amounts)


Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
---------------------------------------------------------------------------

Sales $24,385 $22,903 $68,047 $66,802
Cost of goods sold 14,401 14,573 43,274 44,111
---------------------------------------------------------------------------
Gross profit 9,984 8,330 24,773 22,691
---------------------------------------------------------------------------

Expenses
Selling, general and
administrative 4,764 4,488 14,980 14,087
Provincial sound tax credits (152) (123) (621) (705)
Foreign exchange gain (435) (403) (1,071) (1,583)
---------------------------------------------------------------------------
Income before amortization,
interest, income taxes and
non-controlling interest 5,807 4,368 11,485 10,892
---------------------------------------------------------------------------

Amortization of property,
plant and equipment 196 111 484 327
Amortization of deferred
financing costs - 56 - 168
Amortization of intangible
assets 1,515 2,422 4,575 7,303
Interest 353 313 1,120 725
---------------------------------------------------------------------------
Income before income taxes
and non-controlling interest 3,743 1,466 5,306 2,369
---------------------------------------------------------------------------
Provision for (recovery of)
income taxes
Current 275 168 1,308 558
Future 330 (1,534) (2,394) (5,022)
---------------------------------------------------------------------------
605 (1,366) (1,086) (4,464)
---------------------------------------------------------------------------

Income before
non-controlling interest 3,138 2,832 6,392 6,833
Non-controlling interest (585) (528) (1,191) (1,273)
---------------------------------------------------------------------------
Net income for the period 2,553 2,304 5,201 5,560

Deficit, beginning of period (91,349) (4,780) (89,649) (792)
Distributions declared (2,174) (2,656) (6,522) (9,900)
---------------------------------------------------------------------------
Deficit, end of period $(90,970) $(5,132) $(90,970) $(5,132)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic and diluted net income
per unit $0.18 $0.16 $0.36 $0.38
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic weighted average
number of units
outstanding 14,493,300 14,493,300 14,493,300 14,493,300
---------------------------------------------------------------------------
---------------------------------------------------------------------------


EXHIBIT 2

Somerset Entertainment Income Fund

CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited

(in thousands of Canadian dollars)


Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
---------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income for the period $ 2,553 $ 2,304 $ 5,201 $ 5,560
Add (deduct) items not
involving cash
Non-controlling interest share
of income 585 528 1,191 1,273
Amortization of property, plant
and equipment 196 111 484 327
Amortization of deferred
financing costs - 56 - 168
Amortization of finance costs
included in interest 55 - 167 -
Amortization of intangible
assets 1,515 2,422 4,575 7,303
Unrealized foreign exchange loss 4 29 69 17
Unit-based compensation expense 19 19 58 44
Purchase of fund units by
Long-Term Incentive Plan - - - (231)
Future income taxes expense
(recovery) 330 (1,534) (2,394) (5,022)
---------------------------------------------------------------------------
5,257 3,935 9,351 9,439

Net change in non-cash working
capital balances related to
operations
Accounts receivable (1,978) (1,786) 881 6,141
Inventory (578) (3,248) (100) (2,376)
Provincial sound tax credits
receivable (152) (123) (621) (267)
Prepaid expenses and sundry
deposits 94 (409) 304 457
Accounts payable and accrued
liabilities 2,307 5,538 1,008 103
Income taxes payable - - - (672)
Income taxes recoverable (11) (178) 155 (738)
---------------------------------------------------------------------------
Cash provided by operating
activities 4,939 3,729 10,978 12,087
---------------------------------------------------------------------------

INVESTING ACTIVITIES
Acquisition of Compass
Productions, Inc. assets,
including transaction costs paid - - - (12,940)
Purchase of property, plant and
equipment (112) (47) (313) (197)
---------------------------------------------------------------------------
Cash used in investing
activities (112) (47) (313) (13,137)
---------------------------------------------------------------------------

FINANCING ACTIVITIES
Expenses paid related to
December 13, 2005 public
offering - - - (1,297)
Financing costs paid - - - (284)
Issuance (repayment) of debt - - (5,000) 8,200
Distributions paid on trust
units (2,174) (3,139) (6,522) (10,323)
Distributions paid on
Exchangeable Class B LP units (498) (719) (1,493) (2,364)
---------------------------------------------------------------------------
Cash used in financing
activities (2,672) (3,858) (13,015) (6,068)
---------------------------------------------------------------------------

Foreign exchange loss on cash
held in foreign currencies (71) (51) (144) (215)
---------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 2,084 (227) (2,494) (7,333)
Cash and cash equivalents,
beginning of period 2,088 2,020 6,666 9,126
---------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 4,172 $ 1,793 $ 4,172 $ 1,793
---------------------------------------------------------------------------
---------------------------------------------------------------------------



EXHIBIT 3

Somerset Entertainment Income Fund

DISTRIBUTABLE CASH
Unaudited

(in thousands of Canadian dollars)

Distributable cash for the three and nine months ended September 30, 2007
and September 30, 2006 is calculated as follows:


Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
---------------------------------------------------------------------------

Cash provided by operating
activities $ 4,939 $3,729 $10,978 $12,087

Unrealized foreign exchange loss (4) (29) (69) (17)
Changes in non-cash
operating working capital
balances(1) 318 206 (1,627) (2,648)
Purchase of fund units for
Long-Term Incentive Plan(2) - - - 231

Capital expenditures(3) (112) (47) (313) (197)
---------------------------------------------------------------------------
Distributable cash(4) $ 5,141 $3,859 $8,969 $9,456
Less: Non-controlling
interest share (958) (719) (1,671) (1,762)
---------------------------------------------------------------------------
Distributable cash to trust
units $ 4,183 $3,140 $7,298 $7,694
---------------------------------------------------------------------------

Alternatively, the calculation of distributable cash using the income
statement as a reference point would be:


Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
---------------------------------------------------------------------------

Income before
non-controlling interest $ 3,138 $2,832 $6,392 $6,833

Non-cash items:
Amortization 1,711 2,589 5,059 7,798
Amortization of finance
expenses included in interest 55 - 167 -
Long-Term Incentive Plan
expense included in income
above(2) 19 19 58 44
Future income tax provision
(recovery) 330 (1,534) (2,394) (5,022)

Adjust for:
Capital expenditures (112) (47) (313) (197)
---------------------------------------------------------------------------
Distributable cash(4) $ 5,141 $3,859 $8,969 $9,456
Less: Non-controlling
interest share (958) (719) (1,671) (1,762)
---------------------------------------------------------------------------

Distributable cash to
trust units $ 4,183 $3,140 $7,298 $7,694

Distributions declared $ 2,174 $2,657 $6,522 $9,900

Weighted average number of
trust units 14,493,300 14,493,300 14,493,300 14,493,300

Distributable cash per unit $ 0.289 $0.216 $0.504 $0.531
Distributions declared per
unit $ 0.150 $0.183 $0.450 $0.683

Payout ratio 52.0% 84.6% 89.4% 128.6%
---------------------------------------------------------------------------

1. Changes in non-cash operating working capital balances have been
excluded from this calculation as working capital fluctuates throughout
the year. Management believes that, over the long term, working capital
will remain relatively constant.
2. The Long-Term Incentive Plan non-cash compensation expense has been
added back and the full amount of the LTIP funding requirements relating
to the current period, if any, have been deducted.
3. Capital expenditures have been deducted in determining distributable
cash.
4. See "Non-GAAP measures".


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