Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

November 15, 2005 11:30 ET

Somerset Entertainment Income Fund Announces the Acquisition of Compass Productions

TORONTO, ONTARIO--(CCNMatthews - Nov. 15, 2005) -

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

Somerset Solidifies its Position as North America's Leading Producer and Distributor of Specialty Music Sold Through Non-Traditional Retailers Using Interactive Displays

Acquisition Expected to be Immediately 16.3% Accretive to Somerset's Distributable Cash per Unit

Somerset Expected to Increase Annual Cash Distribution by 5.3% to $1.00 per Unit

Conference Call to be Held at 4:00 p.m. Eastern Standard Time on Tuesday, November 15, 2005

Somerset Entertainment Income Fund ("Somerset" or the "Fund")(TSX:SOM.UN) announced today that it has entered into a definitive agreement to indirectly acquire the assets (the "Acquisition") of Compass Productions Inc. ("Compass"). Compass is a leading U.S. based producer and distributor of specialty music and compilations of hit recordings sold through non-traditional retailers using interactive displays.

The Acquisition, which has been approved by the Boards of both Somerset and Compass, solidifies Somerset's market position by combining North America's two leading producers and distributors of specialty music sold through non-traditional retailers using interactive displays. Following the Acquisition, Somerset will have an active network of over 28,000 interactive displays, representing an increase of approximately 40% from current levels, installed in approximately 9,500 mass merchant store locations, 2,500 specialty chain store locations and 6,500 gift stores in North America.

The Acquisition is expected to be immediately accretive to Somerset's distributable cash per unit. On a pro forma basis, distributable cash per fully diluted unit for the 12 months ended September 30, 2005, would have increased from $1.04 to $1.21 per unit, or 16.3%. Somerset anticipates that it will increase its annual cash distribution by 5.3% to $1.00 per fully diluted unit from $0.95 commencing on the first distribution date following the first full month of operations of the combined business. The combined business would have had pro forma revenues and Adjusted EBITDA of $119.5 million and $29.6 million, respectively, for the 12 months ended September 30, 2005. These pro forma results exclude any potential synergies arising from the combination of the Somerset and Compass businesses.

Somerset is acquiring the Compass business for total consideration consisting of the following:

- US$28.5 million payable in cash at closing of the Acquisition, subject to certain adjustments;

- US$8.4 million, payable in cash in 2006, contingent on the 2005 cash flow of Compass;

- US$1.7 million in Somerset units at closing of the Acquisition ("Initial Equity Amount"). The number of units to be delivered will be equal to the Canadian dollar equivalent of US$1.7 million divided by the price at which the Subscription Receipts are offered in the offering (described below) plus $1.25, to a maximum of $10.00 (the "Unit Price");

- up to US$13.2 million in Somerset units ("Additional Equity") will be delivered to Compass in 2009, provided certain cash flow targets for Compass for 2006, 2007 and 2008 are met. The maximum number of units to be delivered will be equal to the Canadian dollar equivalent of US$13.2 million divided by the Unit Price, as defined above. The entire amount of the Additional Equity (the "Original Additional Equity Amount") will be delivered to Compass if Compass' average annual cash flow for the three fiscal years ending on December 31, 2008 (the "Average Cash Flow") is equal to or exceeds the 2005 cash flow target. If the Average Cash Flow is less than the 2005 cash flow target, then the Original Additional Equity Amount will be reduced in accordance with a pre-determined schedule.

"Somerset and Compass' businesses are highly complementary. Like Somerset, Compass has demonstrated strong free cash flow growth over time due to excellent customer relationships and strong product lines and brands. We are excited to have this opportunity to leverage Compass' strengths to broaden the number of Somerset's customer relationships and to take advantage of significant cross-selling opportunities. We expect this acquisition to be immediately accretive to distributable cash per unit which will provide for increased distributions to unitholders and an improved payout ratio," said Andy Burgess, CEO of Somerset.

On closing of the Acquisition, Keith Harrison, one of Compass' major shareholders, will join the board of trustees of the Fund.

Keith Harrison stated, "We are delighted to be combining our business with Somerset and I look forward to capitalizing on growth opportunities together."

ACQUISITION HIGHLIGHTS

The acquisition provides the following benefits to unitholders:

- Immediately 16.3% accretive to the Fund's cash available for distribution per fully diluted unit on a pro forma basis for the 12 months ended September 30, 2005

- The board of trustees of the Fund has approved a 5.3% increase in distributions commencing on the first distribution date following the first full month of operations of the combined business which is expected to increase annual cash distributions from $0.95 to $1.00

- Decrease in payout ratio from 91% to 82% on a pro forma basis for the 12 months ended September 30, 2005

- Significant organic growth potential through cross-selling opportunities

- Combination of leading industry participants creates the scale to take advantage of operational efficiencies

- Substantially similar business models minimize risk of acquisition

- Addition of highly skilled and experienced management talent

- Terms of acquisition are designed to protect the Fund's current level of distributable cash per unit

- Enhanced capital markets profile with increased liquidity of units

FINANCIAL HIGHLIGHTS

Unaudited pro forma financial results for the 12 months ended September 30, 2005 (C$ millions, except as noted)



Somerset Pro Forma
-------- ---------
Revenue $70.4 $119.5
Adjusted EBITDA(1) $15.8 $29.6
Distributable Cash $14.0 $23.6
Distributable Cash Per Fully Diluted
Unit(2)(3)(4) $1.04 $1.21
---------------------------------------------------------------------
Accretion to Distributable Cash Per
Fully Diluted Unit 16.3%
---------------------------------------------------------------------
Cash Distribution Per Fully Diluted
Unit $0.95 $1.00
Payout Ratio 91% 82%


(1) EBITDA adjusted for non-recurring management and consulting fees paid by Somerset, non-recurring employee compensation expenses paid by Somerset and Compass, the application of Somerset's accounting policies to Compass' financial results and non-recurring financing costs paid by Somerset.

(2) For the purposes of calculating pro forma distributable cash in Canadian dollars, it has been assumed the Fund would have had new foreign exchange forward contracts at an average rate of 1.1609.

(3) Assumes the exchange of all Class B L.P. units into units, the completion of the Acquisition and related financing arrangements described below, and that all units comprising the Additional Equity described above have been issued.

(4) Assumes Subscription receipts issued at Somerset's closing price on November 11, 2005 of $8.10 and units issued to Compass at $9.35.

ACQUISITION FINANCING

The Acquisition will be funded, in part, from the proceeds of a marketed offering of Subscription Receipts by the Fund. A preliminary prospectus will be filed with Canadian securities regulatory authorities today. The underwriting syndicate for the offering is being co-led by BMO Nesbitt Burns Inc., RBC Capital Markets and TD Securities Inc.

All pro forma per unit information in this news release is based on an offering price of $8.10 per Subscription Receipt (the closing price of the Fund's units on the TSX on Friday, November 11, 2005). The actual offering price may vary and will affect the accretion per unit on a pro forma basis.

In addition, Somerset has entered into a fully committed credit facility to finance the remainder of the purchase price and re-finance existing indebtedness.

In addition to Somerset's existing currency hedge arrangements, the Fund expects to enter into certain additional currency hedge contracts. These arrangements would ensure that through the end of 2007 the Fund's anticipated increased annual distribution rate of $1.00 per unit would be protected from currency fluctuations.

BMO Nesbitt Burns Inc. is acting as financial advisor to Somerset on the acquisition of Compass. Bethlenfalvy & Associates is acting as strategic advisor to Somerset.

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.

ABOUT COMPASS PRODUCTIONS

Compass is a leading U.S. based producer and distributor of specialty music and compilations of original hit recordings sold through non-traditional retailers using interactive displays. It currently has over 8,000 interactive displays installed in approximately 4,500 predominantly mass merchant store locations. Compass' customers are among the largest retailers in the U.S. Compass is based in Minneapolis, Minnesota, and employs 25 people.

CONFERENCE CALL

A conference call to discuss the acquisition will be held on Tuesday November 15, 2005, at 4:00 p.m. Eastern Standard Time. To participate, please dial 1-800-814-4853 or 416-644-3432. A replay of the call will be available until midnight on November 22 and can be accessed by dialling 1-877-289-8525 or 416-640-1917 and entering passcode 21163693.

NON-GAAP MEASURES

Certain financial information contained in this news release, including references to distributable cash and EBITDA, are not standard measures under Generally Accepted Accounting Principles ("GAAP") in Canada and may not be comparable to similar measures presented by other entities. These measures are considered to be important measures used by the investment community to assess the source and sustainability of Somerset's cash distributions and should be used to supplement other performance measures prepared in accordance with GAAP in Canada. For further information on non-GAAP financial measures used by Somerset and a reconciliation of such measures to GAAP financial measures, see Somerset's public disclosure available on www.sedar.com.

FORWARD LOOKING STATEMENTS

Certain statements in this news release may constitute "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 news release, such statements use such words as "may", "will", "intend", "should", "expect", "believe", "plan", "anticipate", "estimate", "predict", "potential", "continue" or 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 following closing, lack of written customer contracts, reliance on suppliers and other risks described in the Fund's most recent management's discussion and analysis (which can be found at www.sedar.com). These forward looking statements contained in this news release are made as of the date of this news release, and neither the Fund nor Somerset assume any obligation to update or revise them to reflect new events or circumstances.

This news release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the securities described herein in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to qualification or registration under applicable securities laws of any such jurisdiction. The securities described herein have not been, and will not be, registered under the United States Securities Act of 1933 (the "Securities Act") and may not be offered or sold in the United States except pursuant to an exemption from the registration requirements of Securities Act.



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