Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

October 26, 2005 17:20 ET

Somerset Entertainment Income Fund Announces 20% Increase in EBITDA in the Third Quarter of 2005

TORONTO, ONTARIO--(CCNMatthews - Oct. 26, 2005) - Somerset Entertainment Income Fund (TSX:SOM.UN) :

Financial Highlights of the Quarter:

- Sales increased 9.9% to $19.9 million

- Gross profit rose 15.4% to $9.0 million

- Adjusted EBITDA grew 20.0% to $6.0 million

- Distributable cash for the period was $5.6 million or $0.417 per unit

Somerset Entertainment Income Fund (TSX:SOM.UN) ("the Fund") today announced financial and operating results for the period from July 1 to September 30, 2005. The Fund commenced business operations on March 18, 2005, when it completed an initial public offering (IPO) and indirectly purchased all of the outstanding common shares of Somerset Entertainment Holdings Inc. ("Holdings"), which was amalgamated with its new parent company to form Somerset Entertainment Ltd., referred to below as Somerset.

Total sales increased 9.9% to $19.9 million in the quarter ended September 30, 2005 compared to $18.1 million last year. Sales in the United States increased 13.5% to USD$12.1 million. However, the appreciation of the Canadian currency resulted in an increase of 3.4% when converted to Canadian dollars. Sales in Canada grew 8.0% for the quarter while International sales were up 69.6%.

Gross profit grew 15.4% to $9.0 million in the third quarter, compared to $7.8 million for the prior year. Gross profit as a percentage of sales was 45.1% compared to 43.1% previously. With a 7.3% increase in replenishment sales in the quarter, Somerset generated significantly higher gross profits. "As we continue to build our network of interactive displays, we generate larger replenishment orders which drive increased profits," said Andy Burgess, Chief Executive Officer.

Adjusted EBITDA rose 20.0% to $6.0 million for the quarter, up from $5.0 million in the previous year. The higher gross profit from replenishment sales had a very positive impact on profitability as Somerset maintained fixed costs at relatively constant levels across the business.

The Fund generated $5.6 million in distributable cash (including the non-controlling interest share) and declared three cash distributions totaling $3.2 million for a payout ratio of 57.0%. Year to date, the Fund has generated $8.9 million of distributable cash since March 18, 2005 and has distributed $6.8 million in cash representing a payout ratio of 76.7%.

"We're pleased to report stronger sales and significantly higher earnings than last year. From March 18 to September 30, 2005, Somerset has generated $8.9 million in distributable cash representing 70% of the annualized target of $12.7 million for the year," said Andy Burgess.

Five-Point Growth Strategy:

Somerset made considerable progress in executing its five-point growth strategy of increasing penetration of existing customers, securing new customers in existing distribution channels, developing new distribution channels, new product lines and expanding international sales.

During the third quarter, Somerset increased penetration of existing customers on several fronts, including the expansion from 85 stores to all 122 locations of a major department store within Canada. With the launch of a new display and 75,000 units of a Halloween promotional release, Somerset saw additional growth within the Hallmark gift store network.

Somerset also made progress securing new customers in existing distribution channels. During the quarter, Somerset shipped a Fisher-Price® interactive program to over 700 locations of a major US department store chain.

Somerset worked particularly hard during the quarter to develop new distribution channels. Somerset shipped 465 stores of a major US grocer, secured a seasonal program with a major Canadian home improvement retailer and shipped a premium program to a leading outdoor specialty retailer.

Somerset is beginning to see a favorable response to the new Richard Simmons fitness line and is pleased to report that it has secured an order from a leading drugstore chain in Canada. Production for the line continues to be on target for a 2006 launch.

During the quarter, Somerset also made considerable strides to expand international sales. It completed an 813-store rollout to a major British retailer with the addition of 413 locations. In Germany, Somerset shipped to 45 additional doors of a major self-service department store. In France, Somerset initiated a 16-store test at the leading French hypermarket retailer.

"For the fourth quarter, Somerset has already confirmed a number of key initiatives to support our five-point growth strategy and drive sales in the remainder of the year," said Andy Burgess. Specifically, Somerset will ship significant seasonal business in Canada, the United States and Japan. It will also expand its mass merchant base with the shipment of 2 separate programs to all 171 locations of a leading US retailer. In Canada, Somerset will launch Reflections at 125 stores of a major mass merchant.

Distributable Cash:

The Fund makes monthly distributions of its available cash to unitholders of record on the last business day of each month, payable on or about the 15th day of the following month. Distributable Cash to Fund unit holders for the period of March 18, 2005 to September 30, 2005 was $6.7 million, or $0.666/unit. Cash distributions were declared totaling $5.1 million, or $0.511/unit, resulting in a payout ratio of 76.7%.

Nine months ended September 30, 2005 compared to the nine months ended September 30, 2004:

The Fund was inactive prior to its acquisition of Somerset on March 18, 2005. As a result, the attached unaudited interim consolidated financial statements cover the period from March 18, 2005 to September 30, 2005 and do not have comparative figures (see Exhibit 1). To provide meaningful disclosure to the reader, this release covers the three and nine months ended September 30, 2005 compared to the three and nine months ended September 30, 2004 (see Exhibit 2). As the periods compared are prior to the Fund's acquisition of Somerset, this information is not based on the Fund's results and is provided for reference purposes only.

Sales rose 6.5% to $52.7 million in the nine months ended September 30, 2005, compared to $49.5 million, reflecting a 8.4% increase year-to-date in replenishment re-orders.

Gross profit grew 14.2% to $21.7 million in the nine month period, compared to $19.0 million for the same period last year. Gross profit as a percentage of sales was 41.1% compared to 38.4%, respectively.

Adjusted EBITDA increased 15.5% to $11.9 million in the nine months, from $10.3 million in the same period last year. Results were positively influenced by increased overall sales and margin volumes and positive profit contribution from replenishment business across all product lines, and from maintaining selling, general and administrative expenses at the same level as the prior year. These positive influences were partially offset by higher foreign exchange losses of $0.6 million and lower adjusted EBITDA in the U.S. operations of $1.7 million as a result of the strengthening Canadian dollar relative to the U.S. dollar and lower provincial sound tax credits of $0.4 million.

Non-GAAP Measures

References to "EBITDA" are to earnings before other income, interest, income taxes and amortization. References to "adjusted EBITDA" are to EBITDA adjusted for the effects of non-recurring items. Non-recurring items are transactions or events which management believes are unusual in the context of a publicly traded issuer in the business of producing and distributing specialty music primarily through interactive displays and are not expected to re-occur within the foreseeable future, and include non-recurring management and consulting fees historically paid by Somerset and non-recurring stock compensation costs associated with the purchase for cancellation of employee stock options outstanding under the former corporate structure and the issuance of preferred shares and cash to employees prior to the Fund's acquisition of Somerset.

EBITDA, and adjusted EBITDA are not earnings measures recognized under GAAP and do not have standardized meanings prescribed by GAAP. Therefore, EBITDA, and adjusted EBITDA may not be comparable to similar measures presented by other entities. Investors are cautioned that EBITDA and adjusted EBITDA should not be construed as an alternative to net income or loss 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.

Forward-Looking Statements

Certain statements in this news release are "forward-looking statements," which reflect management's current beliefs and expectations regarding the Fund and Somerset's future growth, proposed acquisitions, results of operations, performance and business prospects and opportunities and the amount and timing of the payment of distributions. Forward-looking statements involve risks and uncertainties related to factors that could cause actual results to differ materially from anticipated results.

About Somerset Entertainment Income Fund

Somerset is the leading North American producer and distributor of specialty music sold internationally through non-traditional retailers using interactive displays. The company'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, the company employs over 125 people at offices in Toronto, Buffalo Grove, Illinois, U.S.A., and Essex, England.

Additional information relating to Somerset Entertainment Income Fund, including unaudited financial information as at September, 2005 is available at www.somersetent.com and www.sedar.com.



Attachments:
Q3 2005 - Exhibit 1
Q3 2005 - Exhibit 2


Exhibit 1

Somerset Entertainment Income Fund

CONSOLIDATED STATEMENT OF INCOME AND
DEFICIT FOR THE PERIOD
Unaudited


For the period
Three months March 18, 2005
ended to
September 30, September 30,
2005 2005
$ $
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Sales 19,870,730 39,985,267
Cost of goods sold 10,901,707 23,702,501
---------------------------------------------------------------------
Gross profit 8,969,023 16,282,766
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Expenses
Selling, general and administrative 3,443,043 7,413,163
Provincial sound tax credits (388,892) (753,629)
Foreign exchange loss (gain) (62,226) 263,157
---------------------------------------------------------------------
Income before amortization,
interest, taxes and non-controlling
interest 5,977,098 9,360,075
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Amortization of property, plant
and equipment 126,809 226,590
Amortization of deferred
financing costs 22,617 47,747
Amortization of intangible assets 1,393,750 3,001,336
Interest 112,458 233,325
---------------------------------------------------------------------
Income before income taxes and
non-controlling interest 4,321,464 5,851,077
---------------------------------------------------------------------
Provision for (recovery of)
income taxes (note 10)
Current 226,077 149,066
Future 526,696 (474,670)
---------------------------------------------------------------------
752,773 (325,604)
---------------------------------------------------------------------
Income before non-controlling
interest 3,568,691 6,176,681
Non-controlling interest (note 11) (884,198) (1,530,368)
---------------------------------------------------------------------
Net income for the period 2,684,493 4,646,313

Deficit, beginning of period (791,514) -
Distributions declared (2,393,677) (5,147,011)
---------------------------------------------------------------------
Deficit, end of period (500,698) (500,698)
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Basic and diluted net income per unit $0.266 $0.461
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Weighted average number of units
outstanding (note 11) 10,074,400 10,074,400
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Exhibit 2

Somerset Entertainment Income Fund

Selected Financial Information
For the three and nine months ended September 30, 2005

($000's)
Three months Nine months
July 1 to January 1 to
September 30,(1) September 30,(1)
----------------------------------------
2005 2004 2005 2004
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Sales 19,871 18,088 52,671 49,480
Cost of goods sold 10,902 10,299 31,019 30,468
---------------------------------------------------------------------
Gross profit 8,969 7,789 21,652 19,012
45.1% 43.1% 41.1% 38.4%

Selling, general and
administrative 3,444 3,367 10,299 10,297
Provincial sound tax credit (389) (356) (815) (1,244)
Foreign exchange loss (gain) (63) (221) 263 (286)
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Adjusted EBITDA(2) 5,977 4,999 11,905 10,245
---------------------------------------------------------------------
30.1% 27.6% 22.6% 20.7%
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Non-recurring items:
Management and
consulting fees(3) - 6,375 - 7,424
Employee compensation(4) - 0 6,281 -
Financing costs(5) - 421 - 421
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EBITDA(2) 5,977 (1,797) 5,624 2,400
---------------------------------------------------------------------

Amortization 1,545 128 3,367 352
Interest 111 (18) 290 (65)
---------------------------------------------------------------------

Income (loss) before
income taxes and
non-controlling interest 4,321 (1,907) 1,967 2,113
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(1) Derived from the consolidated results of Holdings for the three
and nine months ended September 30, 2004 and for the period from
January 1, 2005 to March 17, 2005.
(2) See Definition of EBITDA, Adjusted EBITDA, Distributable Cash and
Non-GAAP Measures.
(3) Management and consulting fees are non-recurring costs that were
paid prior to the Fund's acquisition of Holdings. The related
agreements terminated prior to the Fund's acquisition of
Holdings.
(4) Employee compensation costs are non-recurring costs associated
with the purchase for cancellation of employee stock options
outstanding under the former corporate structure and the issuance
of preferred shares and cash to employees prior to the Fund's
acquisition of Holdings.
(5) Financing costs are non-recurring costs associated with an
incomplete financing transaction in 2004.


Income taxes and net income have not been presented as they are not comparable due to the changes to the capital structure of Somerset and the Fund in connection with the initial public offering completed on March 18, 2005.

Contact Information

  • Somerset Entertainment Income Fund
    Andy Burgess, Chief Executive Officer
    (416) 510-0505
    (416) 510-6915 (FAX)
    investorrelations@somersetent.com
    20 York Mills Road, Suite 600 Toronto, ON M3C 3G8