Somerset Entertainment Income Fund

Somerset Entertainment Income Fund

March 26, 2007 16:51 ET

Somerset Entertainment Income Fund Reports Fourth Quarter and Year-end Results for 2006

TORONTO, ONTARIO--(CCNMatthews - March 26, 2007) - Somerset Entertainment Income Fund (TSX:SOM.UN) (the "Fund") today announced financial and operating results for the fourth quarter and year ended December 31, 2006.



Fourth Quarter Financial Results:

- Sales increased 40.8% to $33.1 million
- Gross profit rose 31.9% to $12.0 million
- Adjusted EBITDA grew 48.1% to $7.7 million
- $6.5 million in distributable cash
- Payout ratio of 40.9%

Full Year Results (twelve months ended December 31, 2006):

- Sales increased 31.1% to $99.9 million
- Gross profit rose 13.0% to $34.7 million
- Adjusted EBITDA grew 8.8% to $18.6 million
- $16.0 million in distributable cash
- Payout ratio of 92.8%


"2006 has been a challenging year for Somerset. The acquisition of Compass Productions did not generate the revenue and earnings as expected," said Andy Burgess, Chief Executive Officer, Somerset Entertainment Income Fund.

Fourth Quarter Results:

Sales for the three months ended December 31, 2006 increased $9.6 million to $33.1 million, up 40.8% from $23.5 million in the previous year. Sales in Canada increased 21.1% to $4.6 million, International sales were up 49.7% to $3.2 million and U.S. sales increased 44.0% to $25.3 million. Compass generated sales of $11.9 million in the quarter compared with $2.6 million in the prior year. Although prior year sales only included sales from December 13, 2005 (date of acquisition) to December 31, 2005, Compass sales for the full quarter in U.S. dollars decreased from US$14.0 million for the prior period to US$10.6 million for the current quarter. Excluding Compass, consolidated sales increased by 1.4% compared to the prior year (a 4.1% increase if the foreign exchange impact of the strengthening Canadian dollar is excluded).

Gross profit rose 31.9% to $12.0 million compared to $9.1 million for the same period in the previous year. Gross profit as a percentage of sales was 36.4% compared to 38.9% previously.

Adjusted EBITDA increased to $7.7 million, a 48.1% increase over the previous year. Compass contributed $2.6 million of these earnings during the quarter.

During the fourth quarter, the Fund recorded non-cash write-downs of intangible assets and goodwill of $25.0 million and $94.0 million respectively. The write-downs were primarily as a result of lower than expected sales in the Compass business, lower than expected U.S. sales and margins related to the strengthening Canadian dollar relative to the U.S. dollar, announced changes to the taxation of publicly traded trusts and the current market value of the Fund. The charges were non-cash in nature and accordingly did not affect distributable cash and cash provided by operating activities.

Full Year Results (twelve months ended December 31, 2006):

Sales increased 31.1% to $99.9 million for the year ended December 31, 2006 compared to $76.2 million last year. Sales in Canada increased 6.2% to $11.9 million, International sales decreased 2.2% to $9.1 million and U.S. sales increased 41.7% to $78.9 million. Compass generated sales of $31.8 million in the current year compared with $2.6 million in the prior year. Although prior year sales only included sales from December 13, 2005 (date of acquisition) to December 31, 2005, Compass sales for the full year in U.S. dollars decreased from US$38.9 million for the prior year to US$28.2 million for the current year. Excluding Compass, consolidated sales decreased by 7.5% compared to the prior year primarily as a result of lower rollout sales and a stronger Canadian dollar compared with the prior year.

Gross profit grew 13.0% to $34.7 million in the year, compared to $30.7 million for the prior year. Gross profit as a percentage of sales was 34.8% compared to 40.4% previously.

Adjusted EBITDA rose 8.8% to $18.6 million for the year, up from $17.1 million in the previous year. Compass delivered $4.9 million of these earnings in 2006 compared with $0.6 million in the prior year.

Beginning in the month of August, monthly distributions were reduced 40% to $0.05 per unit (from $1.00 to $0.60 per unit on an annualized basis) to increase the financial flexibility of the Fund. For the period from January 1, 2006 to December 31, 2006 the Fund generated $16.0 million in distributable cash (including the non-controlling interest share) and declared twelve cash distributions (including the non-controlling interest share) totaling $14.8 million for a payout ratio of 92.8%.

Compass Acquisition

In December 2005, Somerset acquired the assets of Compass Productions. Based in Minneapolis, Minnesota, Compass generated $31.8 million in sales in 2006 and represented a significant addition to Somerset. The combined business totals over 25,000 interactive displays in more than 18,000 retail locations.

The Compass team has faced a number of considerable challenges in 2006. In July, a major customer made a strategic decision to replace the Compass compilation product with new releases from other labels. This contributed to declining sales in 2006 and will continue to reduce shipments to this customer in 2007. Another major Compass customer required a new design for its compilation product line leading to significant markdown and production costs during the third quarter of 2006.

"The Compass team has confronted these challenges with perseverance and determination, and has made significant strides to maintain the current business and identify new opportunities for 2007" Burgess said.

Five-Point Growth Strategy:

During the fiscal year under review, Somerset continued to make considerable progress with executing its five-point growth strategy:

Increase penetration of existing customers: Somerset shipped its Reflections line to an additional 389 doors of a major mass merchant in the U.S. Somerset has also confirmed an order to ship a sidewing display to an additional 500 doors at a major mass merchant customer expected to ship in Q1 of 2007. Compass had its karaoke music line renewed at one of its largest U.S. customers for the fourth consecutive year. There was considerable growth in the Hallmark program this year with the development of an 8-title Say It With Sound program that shipped to 2,300 doors in Q3 of 2006. Furthermore, Somerset expanded its 32-title premium line to an additional 140 stores of a U.S. specialty retailer.

Secure new customers in existing distribution channels: In 2006, Somerset rolled out programs to new retailers in the grocery, gift and mass merchant channels. A major U.S. based baby retailer launched a new end cap in October in 260 stores featuring the Fisher-Price® music line.

Develop new distribution channels: Somerset listed 2 product lines at the online retailer amazon.com and listed Fisher Price® and Solitudes® titles on iTunes. Somerset confirmed a test with a major Craft retailer and the roll-out with another scheduled for the second quarter of 2007.

Launch new product lines: After securing the exclusive license for the Precious Moments™ brand, Somerset will be launching the program in early 2007. As well, Somerset negotiated the license for a Barbie® CD to accompany the launch of the Princess Fairytopia™ video, titled Magic of the Rainbow™. An exclusive agreement with a major artist was marketed at a major mass merchant during the fourth quarter with sales exceeding 100,000 units.

Increasing international sales: A major retailer in the United Kingdom listed both Reflections and Fisher-Price® in all stores during 2006. In France, the Reflections line was rolled out to an additional 75 stores of a major hypermarket retailer, resulting in record sales in that territory. Somerset also rolled out Reflections to 170 stores of a mass merchant in Australia.

"In 2007, our major focus will be supporting the existing business and exploiting new opportunities. A key priority will be to diversify the fund's revenue streams by actively investing in incremental product opportunities including digital music, live performances and video." Burgess said.

Assessment of Going Private Transaction

In late December 2006, Andy Burgess and Gordon Gibson (the "Founders") disclosed to the Board of Trustees (the "Board") of the Fund that they were interested in exploring taking Somerset private. The Board determined that it would be in the interest of Unitholders to permit the Founders to do so. The board created a special committee composed entirely of independent trustees to monitor the process. The committee retained an independent financial advisor to provide financial and market advice. The committee also retained independent legal counsel. During January 2007, the Founders retained their own financial advisor and explored various methods of financing the transaction. The Founders subsequently notified the committee that they were not interested in pursuing a going private transaction at this time. The Fund will continue to focus on Somerset's core business, paying down debt and building long-term value for its Unitholders.

Conference Call

Andy Burgess, Chief Executive Officer and Rob Meier, Chief Financial Officer will hold a conference call to discuss the Somerset Entertainment Income Fund results, Tuesday, March 27, 2007 at 11:00 am (ET). To access the call, please dial 416-644-3415 or 1-800-733-7571. A replay of the conference call will be available as of 1:00 p.m. the same day, until midnight April 3, 2007. To access the replay dial 416-640-1917, or toll free at 1-877-289-8525, followed by the passcode 21221480#.

Annual General Meeting

The Annual General Meeting for the Fund will be held Wednesday, May 16, 2007 at the Design Exchange (Patty Watt Room), 234 Bay St., Toronto at 9:00 am (ET).

Twelve months ended December 31, 2006 compared to twelve months ended December 31, 2005

The Fund completed its IPO on March 18, 2005, and accordingly, the attached consolidated statements of income and deficit provide comparative information only for the period from March 18, 2005 to December 31, 2005 (see Exhibit 1). To provide meaningful disclosure to the reader, this release covers the twelve months ended December 31, 2006, compared with the twelve months ended December 31, 2005 (see Exhibit 2). As the comparative twelve month period is, except with respect to the period from March 18, 2005 to December 31, 2005, prior to the Fund's acquisition of Holdings, 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, is derived from the unaudited consolidated results of Holdings.

Non-GAAP Measures

References to "EBITDA" are to earnings before interest, income taxes, amortization, write-down of intangibles and goodwill and non-controlling interest. References to "Adjusted EBITDA" are to EBITDA adjusted for the effects of non-recurring items. Non-recurring items are transactions or events that 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 reoccur within the foreseeable future. These include 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 Holdings and the non cash write-down of intangibles and goodwill.

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. Distributable cash is defined as EBITDA, less interest, capital expenditures and current tax expense. The LTIP non-cash compensation expense has been added back and the full amount of the LTIP funding requirements relating to the current fiscal year have been deducted in determining distributable cash. Distributable cash is important as it summarizes the funds available for distribution to Unitholders. As the Fund will distribute a significant portion of its cash on an ongoing basis, and since EBITDA and Adjusted EBITDA are metrics used by many investors to compare issuers on the basis of the ability to generate cash from operations, management believes that, in addition to net income or loss, EBITDA and Adjusted EBITDA are useful supplementary measures from which to make adjustments to determine distributable cash.

EBITDA, Adjusted EBITDA and distributable cash are not earnings measures recognized under GAAP and do not have standardized meanings prescribed by GAAP. Therefore, EBITDA, Adjusted EBITDA and distributable cash may not be comparable with 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 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 press release, such 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 management's discussion and analysis. 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, lack of written customer contracts, reliance on suppliers, pending tax changes 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.

About Somerset Entertainment Income Fund

Somerset Entertainment is the leading North American producer and distributor of specialty music sold through non-traditional retailers using proprietary interactive displays. The Company has 19 diverse product lines targeted at consumers over the age of 30, which represents a variety of music genres, including world, relaxation, jazz, classical, children's and hit compilations. 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).

Units of the Fund are traded on the Toronto Stock Exchange under the symbol SOM.UN. Additional information relating to the Somerset Entertainment Income Fund, including audited financial information as of December 31, 2006 is available at www.somersetent.com and www.sedar.com.



EXHIBIT 1

Somerset Entertainment Income Fund

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT
(in thousands of Canadian dollars, except for units and per-unit amounts)
(Unaudited)

For the period from
March 18, 2005
For the year ended to
December 31, 2006 December 31, 2005
---------------------------------------------------------------------------

Sales $ 99,856 $ 63,463
Cost of goods sold 65,135 38,049
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Gross profit 34,721 25,414
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Expenses
Selling, general and
administrative 19,325 11,890
Provincial sound tax credits (1,008) (970)
Foreign exchange gain (2,227) (53)
---------------------------------------------------------------------------
Income before amortization,
interest, taxes and
non-controlling interest 18,631 14,547
---------------------------------------------------------------------------

Write-down of intangibles 25,000 -
Write-down of goodwill 94,000 -
Amortization of property,
plant and equipment 461 293
Amortization of deferred
financing costs 225 77
Amortization of intangible
assets 9,734 4,619
Interest 978 383
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Income (loss) before income
taxes and non-controlling
interest (111,767) 9,175
---------------------------------------------------------------------------
Provision for (recovery of)
income taxes
Current 1,357 980
Future (18,761) (1,188)
---------------------------------------------------------------------------
(17,404) (208)
---------------------------------------------------------------------------
Income (loss) before
non-controlling interest (94,363) 9,383
Non-controlling interest 17,580 (2,284)
---------------------------------------------------------------------------
Net income (loss) for the period (76,783) 7,099

Deficit, beginning of period (792) -
Distributions declared (12,074) (7,891)
---------------------------------------------------------------------------
Deficit, end of period $ (89,649) $ (792)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic and diluted net income
(loss) per unit $ (5.30) $ 0.69
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Basic weighted average number
of units outstanding (note 13) 14,493,300 10,364,916
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---------------------------------------------------------------------------


EXHIBIT 2

Somerset Entertainment Income Fund

Selected Financial Information for the
three and twelve months ended December 31, 2006
(Unaudited)

Three months
October 1 to Twelve months
December 31 January 1 to December 31
---------------------------------------------------------------------------
2006 2005 2006 2005(1) 2004(1)
---------------------------------------------------------------------------
Sales $ 33,054 $ 23,478 $ 99,856 $ 76,149 $ 67,264
Cost of goods
sold 21,024 14,348 65,135 45,400 41,951
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Gross profit 12,030 9,130 34,721 30,749 25,313
36.4% 38.9% 34.8% 40.4% 37.6%

Selling, general
and
administrative
expenses 5,238 4,476 19,325 14,775 13,438
Provincial
sound tax
credit (303) (217) (1,008) (1,032) (1,383)
Foreign exchange
gain (644) (316) (2,227) (53) (747)
---------------------------------------------------------------------------

Adjusted EBITDA(2) $ 7,739 $ 5,187 $ 18,631 $ 17,059 $ 14,005
---------------------------------------------------------------------------
23.4% 22.1% 18.7% 22.4% 20.8%
---------------------------------------------------------------------------
Non-recurring
items:
Employee
compensation(3) - - - 6,281 -
Management
consulting
fees(4) - - - - 7,398
Financing costs
(5) - - - - 421
---------------------------------------------------------------------------
EBITDA(2) 7,739 5,187 18,631 10,778 6,189
---------------------------------------------------------------------------

Write-down of
intangibles
and goodwill 119,000 - 119,000 - -
Amortization 2,622 1,714 10,420 5,081 447
Interest 253 150 978 440 3,723
---------------------------------------------------------------------------

Income (loss)
before income
taxes and
non-controlling
interest $ (114,136) $ 3,323 $ (111,767) $ 5,257 $ 2,019
---------------------------------------------------------------------------

(1) Derived from the annual consolidated results of the Fund for the period
from March 18, 2005 to December 31,2005 and from the unaudited consolidated
results of Holdings for the twelve months ended December 31, 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) 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.
(4) 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.
(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 Holdings and the Fund in connection with the IPO completed on March 18, 2005.

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