Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

August 22, 2006 10:22 ET

Somerset Entertainment Income Fund Announces a 40% Reduction in Distributions

TORONTO, ONTARIO--(CCNMatthews - Aug. 22, 2006) - Somerset Entertainment Income Fund (the "Fund") (TSX:SOM.UN) announced today that its Board of Trustees has approved a 40% reduction in monthly distributions to $0.05 per unit (which equates to $0.60 on an annual basis). The Board also announced a cash distribution of $0.05 per unit for the period from August 1, 2006 to August 31, 2006, to be paid September 15, 2006 to holders of record of units of the Fund at the close of business on August 31, 2006.

As reported in the Fund's second quarter results, there are a number of factors that are negatively impacting Somerset's performance. The increased strength of the Canadian dollar over the past year has reduced Somerset's sales and gross margins. While Somerset has maintained a program of hedging its expected net US/CDN foreign exchange exposure two years out on a rolling quarterly basis, these forward contracts provide only temporal relief from the negative impact of lower exchange rates. Furthermore, the forward contracts that have matured during the past few quarters were at significantly higher rates than what Somerset has contracted for in the future. Therefore, based on the contracts that have been booked, Somerset will continue to experience declining exchange rates over the next eight quarters.

As discussed in both the Fund's first and second quarter reports, Somerset's Compass business, which was acquired December 16, 2005, has performed below expectations and below last year's results. In particular, retail sales of several key lines have been lower than last year. In response, Compass has made a number of key changes to the product lines which are anticipated to stabilize sales. Although two key product lines have received listing commitments for one year from launch from a major customer, there remains some uncertainty regarding the future of these and other major product lines. Furthermore, the changes implemented will result in lower gross margins for Compass and, in turn, the Fund.

The core Somerset business experienced weakness during the second quarter. Lower sales for the period were attributed to weaker shipments in the US gift market, fewer rollouts compared to the previous year and decreased replenishment sales to some key customers.

As a result of the above factors, the Fund reported lower EBITDA and less distributable cash than the previous year during the second quarter. While the Fund is in compliance with its bank covenants, the Board of Trustees believes it is prudent to reduce distributions to increase flexibility in the coming quarters. The Board of Trustees may declare special distributions or increase distributions to previous levels depending on Somerset's performance in the future.

"As we move into our seasonally strong second half of the year, Somerset is positioned to produce positive results for the remainder of the year while bringing the payout ratio to a more conservative level," said Andy Burgess, CEO, Somerset Entertainment.

Forward-Looking Statements

Certain statements in this news 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 appearing in this news release, these 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 news 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, integration of the Compass business, the exchange rate between Canadian and US dollars, lack of written customer contracts, reliance on suppliers and other risks described in the Fund's Annual Information Form dated March 18, 2006 (which can be found at www.sedar.com). The forward-looking statements contained in this news release are made as of the release date of this document, and the Fund does not assume any obligation to update or revise such statements to reflect new events or circumstances.

About Somerset Entertainment Income Fund

Somerset Entertainment 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 150 people at offices in Toronto, Ontario (Canada); Buffalo Grove, Illinois, and Minneapolis, Minnesota, (U.S.A.); and Essex, England (UK).

Additional information relating to the Somerset Entertainment Income Fund, including unaudited financial statements as of June 30, 2006 is available at www.somersetent.com and www.sedar.com.

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