Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

November 11, 2009 15:04 ET

Somerset Entertainment Income Fund Reports Results for Third Quarter of 2009

TORONTO, ONTARIO--(Marketwire - Nov. 11, 2009) -

NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICE.

Somerset Entertainment Income Fund (TSX:SOM.UN) (the "Fund") today announced financial and operating results for the three months ended September 30, 2009.



Third Quarter Financial Highlights

- Sales increased 4.7% to $21.7 million
- Gross profit increased 1.8% to $9.0 million
- EBITDA decreased 10.3% to $4.1 million
- Income before non-controlling interest decreased to $1.7 million
- Distributable cash for the period was $3.8 million, or $0.216 per unit
(including the non-controlling interest share)
- Payout ratio of 23.2%

Year-to-Date Financial Highlights

- Sales increased 4.2% to $58.5 million
- Gross profit increased 13.8% to $23.7 million
- EBITDA decreased 17.0% to $8.0 million
- Income before non-controlling interest decreased to $2.0 million
- Distributable cash for the period was $7.7 million, or $0.433 per unit
(including the non-controlling interest share)
- Payout ratio of 34.7%


Sales for the third quarter grew $0.9 million to $21.7 million, an increase of 4.7% from $20.8 million in the previous year. Sales in the U.S. were $16.4 million, comparable with sales in the previous year. Sales in the United States denominated in U.S. dollars decreased by 6.3% as a result of reduced replenishment orders from gift and mass merchant customers. International sales decreased 3.3% year-over-year to $2.3 million due to the bankruptcy of a mass merchant customer in the U.K. Sales in Canada increased 53.0% to $3.0 million due to the shipment of new Halloween and Christmas music programs and the inclusion of sales from the newly acquired Puretracks business.

Gross profit for the third quarter increased 1.8% to $9.0 million, compared with $8.8 million in the previous year. Gross profit as a percentage of sales for the quarter was 41.2%, compared with 42.4% during the same period last year, as a result of higher product and royalty costs related to the mix of products sold in the quarter.

EBITDA decreased to $4.1 million in the third quarter, a 10.3% decline over the same period in the previous year. The decrease was primarily due to a loss in the newly acquired Puretracks business and marginally higher selling, general and administrative expenses. These decreases were partially offset by increased gross margins as a result of higher sales.

Income before non-controlling interest for the period was $1.7 million, compared with $2.6 million for the three months ended September 30, 2008. For the year to date, income before non-controlling interest was $2.0 million, compared with $5.3 million in the prior year.

The Fund generated $3.8 million in distributable cash (including the non-controlling interest share) for the quarter, or $0.216 per unit. Three cash distributions (including the non-controlling interest share) were made, totalling $0.9 million, or $0.050 per unit, for a payout ratio of 23.2%, compared with 61.1% in the previous year. For the year to date, the Fund generated distributable cash of $0.433 per unit, resulting in a payout ratio of 34.7%, compared with 90.7% in the previous year.

"For the third quarter, Somerset reported slightly higher sales than the previous year. The Company has also made excellent progress integrating Puretracks, a digital music distributor it acquired in July 2009, and has received commitments for a number of new initiatives," said Andy Burgess, Chief Executive Officer, Somerset Entertainment. "We are pleased with the proposed acquisition of Somerset by Fluid Music and look forward to continued growth and success in the music business as part of a larger, integrated music company," said Burgess.

Fluid Music Acquisition of Somerset Entertainment Income Fund

On October 13, 2009, Fluid Music Canada, Inc. ("Fluid") and the Fund announced that they had entered into an agreement contemplating the acquisition by Fluid of all of the issued and outstanding units of the Fund, on a fully diluted basis.

Fluid is offering to acquire all of the outstanding units of the Fund for: (a) $2.12 in cash per unit; (b) 1.1 common shares of Fluid per unit; or (c) 0.003 of a $1,000 principal amount 8.0% convertible unsecured subordinated debenture of Fluid per unit, due three years following the date that such debentures are first issued.

Unitholders holding approximately 66% of the issued and outstanding units, on a fully diluted basis, have entered into lock-up agreements in which they have agreed to tender their units to the offer, including Andy Burgess (President and Chief Executive Officer of Somerset) and Gordon Gibson (Chief Creative Officer of Somerset), who collectively own or control approximately 20% of the issued and outstanding units on a fully diluted basis.

The Fund's Board of Trustees (the "Board"), after consultation with its financial and legal advisors, has determined that the cash offer is fair and in the best interests of the Fund and its Unitholders and, accordingly, unanimously recommends that Unitholders accept the cash offer and tender their units to the offer.

TD Securities Inc., the Fund's financial advisor, has provided an opinion to the Board that the cash consideration is fair, from a financial point of view, to the Fund's Unitholders.

On October 20, 2009, Fluid and Somerset announced they had mailed the takeover bid and trustees' circular in respect of Fluid's bid, which expires at 6:00 p.m. (Toronto time) on November 25, 2009.

Acquisition of Puretracks Inc.

On July 3, 2009, Somerset acquired 100% of the outstanding common shares of Puretracks Inc. ("Puretracks"). Puretracks is a North American digital music provider with a library of 3.4 million songs licensed from all four major music labels and several independent companies, which focuses on the development and delivery of customized music solutions for large companies.

The purchase consideration was $2.5 million cash and the assumption of a shareholder loan in the amount of $0.4 million. The purchase consideration was paid, and the shareholder loan was repaid, in full on closing from existing cash reserves. The Puretracks acquisition was accounted for by the purchase method with the results of Puretracks' operations included in the Fund's income from the date of acquisition.

Operational Highlights

In Canada, Somerset shipped new Halloween and Christmas programs to two mass merchant retailers. As well, the Company commenced a five-store test with a major grocer that has generated attractive results. In the U.S., new seasonal programs representing in excess of $1.5 million were shipped to an office supply, club and craft retailer and mass merchant. A major club retailer confirmed expansion of a new program to an additional 225 stores beginning the fourth quarter of 2009. A regional mass merchant confirmed a five-store test whereby Somerset will supply all music titles beginning early 2010. Internationally, Somerset shipped a Halloween program to over 600 stores of a leading mass merchant in the U.K.

With the acquisition of Puretracks, Somerset became a unique player in the music industry with both niche physical and digital strategies. With a digital store offering 3.4 million songs, Somerset is able to provide retailers with a complete music solution that bridges the physical and digital space. During the third quarter, Somerset made considerable progress integrating the accounting, finance and human resource functions of Puretracks into its head office. An increased focus on business development at Puretracks has laid the foundation for increased revenue and improved financial performance in the future.

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 Thursday, November 12, 2009, at 11:00 a.m. (EST). To access the call, dial (647) 427-3422 or 1-888-300-0097, and provide the Conference ID# 39652324. A replay of the conference call will be available as of 2:00 p.m. the same day, until midnight on November 19, 2009. To access the replay, call (706) 645-9291 or toll-free at 1-800-642-1687, followed by the pass code 39652324.

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," "expect to," "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 press release. 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, 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, Standardized Distributable Cash and Non-GAAP Measures

References to "EBITDA" are to earnings before interest, income taxes, amortization and non-controlling interest.

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. 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. Standardized distributable cash is defined as cash from operating activities as reported in the GAAP financial statements, less total capital expenditures and any restrictions on distributions arising from compliance with financial covenants and limitations arising from the existence of a minority interest of a subsidiary.

EBITDA, distributable cash and standardized distributable cash are not earnings measures recognized under GAAP and do not have standardized meanings prescribed by GAAP. Therefore, EBITDA, distributable cash and standardized 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.

About Somerset Entertainment

Somerset is the leading North American producer and distributor of specialty music and DVDs sold internationally through non-traditional music retailers using interactive displays, and is a distributor of music in digital format. Somerset's extensive distribution network includes mass merchants, specialty chains and independent gift stores in more than 20 countries, including the United States and Canada. Based in Toronto, Canada, Somerset 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 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, 2009, is available at www.somersetent.com and www.sedar.com.



Attachments:

Exhibit 1 - Q3 2009 Consolidated Statements of Income and Deficit
Exhibit 2 - Q3 2009 Selected Financial Information
Exhibit 3 - Q3 2009 Consolidated Statements of Cash Flows
Exhibit 4 - Q3 2009 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,
2009 2008 2009 2008
----------------------------------------------------------------------------

Sales $21,740 $20,761 $58,576 $56,225
Cost of goods sold 12,782 11,962 34,918 35,444
----------------------------------------------------------------------------
Gross profit 8,958 8,799 23,658 20,781
----------------------------------------------------------------------------

Expenses
Selling, general and
administrative 5,343 4,695 14,948 13,917
Provincial sound tax credits (128) (259) (808) (640)
Foreign exchange loss (gain) (307) (150) 1,566 (2,081)
----------------------------------------------------------------------------
Income before amortization,
interest, income taxes and
non-controlling interest 4,050 4,513 7,952 9,585
----------------------------------------------------------------------------

Amortization of property,
plant and equipment 205 153 498 447
Amortization of intangible
assets 1,511 1,510 4,219 4,518
Interest 86 211 263 613
----------------------------------------------------------------------------
Income before income taxes
and non-controlling interest 2,248 2,639 2,972 4,007
----------------------------------------------------------------------------
Provision for (recovery of)
income taxes
Current 309 96 265 444
Future 210 (33) 756 (1,722)
----------------------------------------------------------------------------
519 63 1,021 (1,278)
----------------------------------------------------------------------------
Income before
non-controlling interest 1,729 2,576 1,951 5,285
Non-controlling interest (323) (480) (364) (985)
----------------------------------------------------------------------------
Net income for the period 1,406 2,096 1,587 4,300

Deficit, beginning of period (109,548) (90,803) (108,277) (88,659)
Distributions declared (726) (2,174) (2,178) (6,522)
----------------------------------------------------------------------------
Deficit, end of period $(108,868) $(90,881) $(108,868) $(90,881)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic net income per unit $0.10 $0.15 $0.11 $0.30
Diluted net income per unit $0.10 $0.14 $0.10 $0.30
----------------------------------------------------------------------------

Basic weighted average
number of units
outstanding 14,183,051 14,297,468 14,258,125 14,399,968

Diluted weighted average
number of units
outstanding 17,811,531 17,811,531 17,811,531 17,811,531
----------------------------------------------------------------------------



EXHIBIT 2

Somerset Entertainment Income Fund

SELECTED FINANCIAL INFORMATION
Unaudited
(in thousands of Canadian dollars)


Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Sales $21,740 $20,761 $58,576 $56,225
Cost of goods sold 12,782 11,962 34,918 35,444
----------------------------------------------------------------------------
Gross profit 8,958 8,799 23,658 20,781
Gross profit % 41.2% 42.4% 40.4% 37.0%

Selling, general and
administrative expenses 5,343 4,695 14,948 13,917
Provincial sound tax credit (128) (259) (808) (640)
Foreign exchange loss (gain) (307) (150) 1,566 (2,081)
----------------------------------------------------------------------------

EBITDA(1) $4,050 $4,513 $7,952 $9,585
----------------------------------------------------------------------------
EBITDA % 18.6% 21.7% 13.6% 17.1%
----------------------------------------------------------------------------

Amortization 1,716 1,663 4,717 4,965
Interest 86 211 263 613
----------------------------------------------------------------------------

Income before income taxes and
non-controlling interest $2,248 $2,639 $2,972 $4,007
----------------------------------------------------------------------------

Provision for (recovery of)
income taxes 519 63 1,021 (1,278)
----------------------------------------------------------------------------

Income before non-controlling
interest 1,729 2,576 1,951 5,285
----------------------------------------------------------------------------

Non-controlling interest (323) (480) (364) (985)
----------------------------------------------------------------------------

Net income $1,406 $2,096 $1,587 $4,300
----------------------------------------------------------------------------

Total assets $58,918 $78,361 $58,918 $78,361
Long-term liabilities 4,880 454 4,880 454
----------------------------------------------------------------------------

1. See "Definition of EBITDA, Distributable Cash, Standardized Distributable
Cash and Non-GAAP Measures."



EXHIBIT 3

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,
2009 2008 2009 2008
----------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income for the period $1,406 $2,096 $1,587 $4,300
Add (deduct) items not
involving cash
Non-controlling interest 323 480 364 985
Amortization of property, plant
and equipment 205 153 498 447
Amortization of finance costs
included in interest 14 53 40 156
Amortization of intangible assets 1,511 1,510 4,219 4,518
Unrealized foreign exchange loss
(gain) (82) (1) (50) 1
Unit-based compensation expense 362 227 605 428
Future income tax provision
(recovery) 210 (33) 756 (1,722)
Funding of Long-Term Incentive
Plan (72) - (568) (1,097)
----------------------------------------------------------------------------
3,877 4,485 7,451 8,016
Net changes in non-cash
working capital balances
related to operations
Accounts receivable (3,117) (1,408) 984 513
Inventory (2,709) (2,384) (2,563) (2,188)
Provincial sound tax credits
receivable (129) (259) 10 494
Prepaid expenses and sundry
deposits (176) 421 (402) 514
Accounts payable and accrued
liabilities 5,083 2,589 (444) 2,001
Deferred revenue (194) - (194) -
Income taxes payable - (471) - (1,415)
Income taxes recoverable 211 (540) (258) (540)
----------------------------------------------------------------------------
Cash provided by operating
activities 2,846 2,433 4,584 7,395
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Acquisition of Puretracks Inc.,
including transaction costs paid
(note 2) (2,513) - (2,513) -
Purchase of property, plant and
equipment (191) (115) (363) (274)
----------------------------------------------------------------------------
Cash used in investing activities (2,704) (115) (2,876) (274)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Repayment of debt (934) 800 (2,840) (4,200)
Repayment of loan due to former
Puretracks shareholder (432) - (432) -
Distributions paid on trust units (726) (2,174) (2,661) (6,522)
Distributions paid on Exchangeable
Class B LP units (166) (498) (609) (1,493)
----------------------------------------------------------------------------
Cash used in financing activities (2,258) (1,872) (6,542) (12,215)
----------------------------------------------------------------------------
Foreign exchange gain (loss) on
cash and cash equivalents held in
foreign currencies 26 (27) 60 (19)
----------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents
during the period (2,090) 419 (4,774) (5,113)
Cash and cash equivalents,
beginning of period 3,150 1,190 5,834 6,722
----------------------------------------------------------------------------
Cash and cash equivalents, end of
period $1,060 $1,609 $1,060 $1,609
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $78 $117 $286 $389
Interest received - (7) (42) (101)
Income taxes paid 83 520 436 2,521
----------------------------------------------------------------------------



EXHIBIT 4

Somerset Entertainment Income Fund

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

Distributable cash for the three and nine months ended September 30, 2009
and September 30, 2008 is calculated as follows:


Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
----------------------------------------------------------------------------

Cash provided by operating
activities $2,846 $2,433 $4,584 $7,395
Capital expenditures(1) (191) (115) (363) (274)
----------------------------------------------------------------------------
Standardized distributable
cash 2,655 2,318 4,221 7,121

Unrealized foreign
exchange gain (loss) 82 1 50 (1)
Funding of Long-Term
Incentive Plan(3) 72 - 568 1,097
Changes in non-cash
operating working
capital balances(2) 1,031 2,052 2,867 621
----------------------------------------------------------------------------
Distributable cash(4) $3,840 $4,371 $7,706 $8,838
Less: Non-controlling
interest share (715) (814) (1,435) (1,646)
----------------------------------------------------------------------------
Distributable cash to Fund
units $3,125 $3,557 $6,271 $7,192
----------------------------------------------------------------------------

Distributions declared $726 $2,174 $2,178 $6,522

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

Distributable cash per
Fund unit $0.216 $0.245 $0.433 $0.496
Distributions declared per
Fund unit $0.050 $0.150 $0.150 $0.450
Payout ratio 23.2% 61.1% 34.7% 90.7%
----------------------------------------------------------------------------

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,
2009 2008 2009 2008
----------------------------------------------------------------------------

Income before
non-controlling interest $1,729 $2,576 $1,951 $5,285

Non-cash items:
Amortization 1,716 1,663 4,717 4,965
Amortization of finance
expenses included in
interest 14 53 40 156
Long-Term Incentive Plan
expense included in income
above(3) 362 227 605 428
Future income tax expense
(recovery) 210 (33) 756 (1,722)

Adjust for:
Capital expenditures (191) (115) (363) (274)
----------------------------------------------------------------------------
Distributable cash(4) $3,840 $4,371 $7,706 $8,838
Less: Non-controlling
interest share (715) (814) (1,435) (1,646)
----------------------------------------------------------------------------

Distributable cash to Fund
units $3,125 $3,557 $6,271 $7,192
----------------------------------------------------------------------------

1. Capital expenditures have been deducted in determining distributable
cash.

2. 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.

3. 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, has been deducted.

4. See "Definition of EBITDA, Distributable Cash, Standardized
Distributable Cash and Non-GAAP Measures."


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