Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

August 09, 2005 07:00 ET

Somerset Entertainment Income Fund Announces Excellent Results for Second Quarter of 2005

TORONTO, ONTARIO--(CCNMatthews - Aug. 9, 2005) - Somerset Entertainment Income Fund (TSX:SOM.UN) -



Highlights:

- Sales increased 3.8% to $18.0 million
- Gross profit rose 22.2% to $6.6 million
- Adjusted EBITDA grew 33.3% to $3.2 million
- Rollout to 1,500 locations at a major US drug retailer
- Replenishment sales (re-orders) rose 14%


Somerset Entertainment Income Fund (TSX:SOM.UN)("the Fund") today announced financial and operating results for its first full quarter as a public issuer for the period from April 1, 2005 to June 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 3.8% to $18.0 million in the quarter ended June 30, 2005 compared to $17.4 million last year, reflecting a 14% increase in replenishment sales (re-orders). Although sales in the United States increased 4.5% to USD$10.8 million, the appreciation of the Canadian currency resulted in a slight decline when converted to Canadian dollars. Sales in Canada grew 16.5% for the quarter while International sales were up 64.3%.

Gross profit grew 22.2% to $6.6 million in the second quarter, compared to $5.4 million for the prior year. Gross profit as a percentage of sales was 36.7% compared to 31.4% previously. With increased replenishment sales, Somerset generates significantly higher gross profit.

Adjusted EBITDA rose 33.3% to $3.2 million for the quarter, up from $2.4 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.

"We're pleased to report excellent earnings in the quarter due to robust international and domestic replenishment (re-order) sales," said Andy Burgess, Chief Executive Officer. "As we expand our network of interactive displays, our replenishment sales will continue to grow. In turn, this should contribute to increased profitability in the future".

Somerset made significant 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 expanded international sales. During the quarter, Somerset increased distribution to its largest customer by expanding programs to 400 more stores. As well, Somerset developed new distribution when it launched the Fisher-Price Music series at 1,500 locations of a major U.S. drug retailer. Internationally, Somerset expanded its business with a rollout to 400 stores of a major British department store retailer. Additional rollouts occurred in Mexico and Germany.

"For the third quarter, Somerset has already confirmed a number of key initiatives to support our five-point growth strategy which will have a positive impact on the remainder of the year," said Andy Burgess.

Specifically, Somerset expects to increase distribution and sales within the Hallmark Gold Crown network with the launch of a new display and a major seasonal promotion. In addition, Somerset has secured new distribution in the grocery channel. Through a distributor, Somerset plans to launch interactive displays in 450 grocery stores across the United States at a major retailer. Somerset also intends to expand Fisher-Price Music to over 700 stores of a major specialty department store retailer by the end of the third quarter. Internationally, Somerset will complete its rollout at a major British retailer with the addition of 413 more stores. In terms of new product development, Somerset will complete the recording of two Richard Simmons videos for a 2006 launch of a new fitness line.

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 for the period ending June 30, 2005 was $2.5 million, or $0.2490/unit. Three cash distributions were declared totaling $2.7 million, or $0.2733/unit.

The payout ratio described above is partly due to the seasonality of Somerset's business, which typically records its highest sales from August to November. Somerset attempts to limit the effects of seasonality on its business by planning and implementing interactive display changes throughout the year as well as diversifying its customer base into distribution channels and product lines which are less seasonal.

Six months ended June 30, 2005 compared to the six months ended June 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 June 30, 2005 and do not have comparative figures. To provide meaningful disclosure to the reader, this release covers the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004. As the periods compared are, except with respect to the period from March 18, 2005 to June 30, 2005, 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. All financial information included for the period from January 1, 2005 to March 17, 2005 and for the three and six month periods ended June 30, 2004 is derived from the consolidated results of Holdings.

Sales rose 4.5% to $32.8 million in the six months ended June 30, 2005, compared to $31.4 million, reflecting a 10% increase year-to-date in replenishment re-orders.

Gross profit grew 12.5% to $12.6 million in the six month period, compared to $11.2 million for the same period last year. Gross profit as a percentage of sales was 38.5% compared to 35.8%, respectively.

Adjusted EBITDA increased 13.5% to $5.9 million in the six months, from $5.2 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. These positive influences were partially offset by higher foreign exchange losses of $0.4 million and lower adjusted EBITDA in the U.S. operations of $0.9 million as a result of the strengthening Canadian dollar relative to the U.S. dollar and lower provincial sound tax credits of $0.5 million.

"As we continue to expand our interactive network in all of our markets, Somerset expects to generate ongoing increased replenishment sales. This will begin to contribute positively to sales and profit growth in the second half of 2005," said Burgess.


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

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 June 30, 2005 is available at www.somersetent.com and www.sedar.com.



Exhibit 1

Somerset Entertainment Income Fund

CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
FOR THE PERIOD
Unaudited


Three months For the period
Ended March 18, 2005 to
June 30, June 30,
2005 2005
$ $
---------------------------------------------------------------------
Sales 18,020,227 20,114,537
Cost of goods sold 11,404,124 12,800,794
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Gross profit 6,616,103 7,313,743
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Expenses
Selling, general and
Administrative 3,498,323 3,970,120
Provincial sound tax credits (354,737) (364,737)
Foreign exchange loss 252,650 325,383
---------------------------------------------------------------------
Income before amortization,
interest and taxes 3,219,867 3,382,977
Amortization of property,
plant and equipment 88,126 99,781
Amortization of deferred
financing costs 21,834 25,130
Amortization of intangible assets 1,393,750 1,607,586
Interest on debt 101,519 120,867
---------------------------------------------------------------------
Income before income taxes and
non-controlling interest 1,614,638 1,529,613
---------------------------------------------------------------------
Provision for (recovery of)
income taxes
Current 109,098 (77,011)
Future (942,985) (1,001,366)
---------------------------------------------------------------------
(833,887) (1,078,377)
---------------------------------------------------------------------
Income before non-controlling
Interest 2,448,525 2,607,990
Non-controlling interest (606,655) (646,170)
---------------------------------------------------------------------
Net income for the period 1,841,870 1,961,820

Retained earnings,
beginning of period 119,950 -
Distributions declared (2,753,334) (2,753,334)
---------------------------------------------------------------------
Deficit, end of period (791,514) (791,514)
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic and diluted net
income per Unit $0.183 $0.195
---------------------------------------------------------------------
---------------------------------------------------------------------

Weighted average number
of Units outstanding 10,074,400 10,074,400
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Exhibit 2

Somerset Entertainment Income Fund

Selected Financial Information
For the three and six months ended June 30, 2005


($000's)
Three months Six months
April 1 to January 1 to
June 30 , (1) June 30 , (1)
--------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------

Sales $18,020 $17,356 $32,800 $31,392
Cost of goods sold 11,404 11,909 20,162 20,169
---------------------------------------------------------------------
Gross profit 6,616 5,447 12,638 11,223

36.7% 31.4% 38.5% 35.8%

Selling, general
and administrative 3,498 3,458 6,810 6,930

Provincial sound
tax credit (355) (459) (426) (888)

Foreign exchange loss (gain) 253 13 326 (65)
---------------------------------------------------------------------

Adjusted EBITDA (2) $3,220 $2,435 $5,928 $5,246
---------------------------------------------------------------------
17.9% 14.0% 18.1% 16.7%
---------------------------------------------------------------------

Non-recurring items:
Management and
consulting fees (3) 0 386 0 1,049

Employee compensation (4) 0 0 6,281 0
---------------------------------------------------------------------

EBITDA (2) 3,220 2,049 (353) 4,197
---------------------------------------------------------------------

Amortization 1,503 153 1,822 224
Interest 102 (19) 179 (47)
---------------------------------------------------------------------
Income (loss) before
income taxes and
non-controlling interest $1,615 $1,915 ($2,354) $4,020
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(1) Derived from the consolidated results of Holdings for the three and six months ended June 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 Somerset. The related agreements terminated prior to the Fund's acquisition of Somerset.
(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 Somerset.

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.


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