Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

March 27, 2008 07:30 ET

Somerset Entertainment Income Fund Reports Fourth Quarter and Year-End Results for 2007

TORONTO, ONTARIO--(Marketwire - March 27, 2008) -

NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICE

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

Fourth Quarter Financial Results:

- Sales decreased 9.9% to $29.4 million

- Gross profit rose 0.9% to $12.0 million

- EBITDA grew 16.5% to $9.0 million

- Income before non-controlling interest increased to $5.5 million

- Distributable cash for the period was $6.4 million, or $0.36 per unit (including the non-controlling interest share).

- Payout ratio of 41.6%

Full Year Results (twelve months ended December 31, 2007):

- Sales decreased 2.4% to $96.3 million

- Gross profit rose 6.1% to $36.5 million

- EBITDA grew 10.0% to $20.5 million

- Income before non-controlling interest increased to $11.9 million compared with $(94.4) million in the prior year

- Distributable cash for the period was $15.4 million, or $0.86 per unit (including the non-controlling interest share)

- Payout ratio of 69.4%

"Despite the strong Canadian dollar and the challenging environment for the music industry in 2007, Somerset grew EBITDA by 10% and maintained sales across the business," said Andy Burgess, Chief Executive Officer, Somerset Entertainment Income Fund.

Fourth Quarter Results:

Sales for the three months ended December 31, 2007 decreased $3.2 million to $29.4 million, down 9.9% from $32.6 million in the previous year. The strengthening Canadian dollar relative to the U.S. dollar in the quarter compared with the previous year reduced sales by $3.3 million. Sales in Canada decreased 2.0% to $4.3 million, International sales decreased 4.4% to $2.9 million and U.S. sales decreased 11.9% to $22.2 million. Sales in the United States in U.S. dollars actually increased by 1.3%, however, because of the stronger Canadian dollar during the period compared with the prior year, the sales showed an 11.9% decrease when converted to Canadian dollars. Compass generated sales of $8.9 million in the quarter compared with $11.9 million in the prior year. Excluding Compass, consolidated sales increased 0.4% compared to the prior year.

Gross profit rose 0.9% to $12.1 million compared to $12.0 million for the same period in the previous year. Gross profit as a percentage of sales was 40.9% compared to 36.5% previously.

EBITDA increased to $9.0 million, a 16.5% increase over the previous year. Compass contributed $2.1 million of these earnings during the quarter.

Income before non-controlling interest increased to $5.5 million compared with $(101.2) million in the prior period. Write-down of intangibles and goodwill for the quarter was nil, compared with $119,000 for the same quarter in the prior year.

Full Year Results (twelve months ended December 31, 2007):

Sales decreased 2.4% to $96.3 million for the year ended December 31, 2007 compared with $98.6 million last year. The strengthening Canadian dollar relative to the U.S. dollar in 2007 compared with the previous year reduced sales by $4.2 million. Sales in Canada decreased 12.6% to $10.1 million, international sales increased 14.6% to $10.1 million and U.S. sales decreased 2.8% to $76.1 million. Compass generated sales of $25.3 million in the current year compared with $31.8 million in the prior year. Excluding Compass, U.S. sales increased by 9.4% compared with the prior year.

Gross profit grew 6.1% to $36.5 million in the year, compared with $34.4 million for the prior year. Gross profit as a percentage of sales was 37.9% compared with 34.9% previously.

EBITDA rose 10.0% to $20.5 million for the year, up from $18.6 million in the previous year. Compass delivered $4.0 million of these earnings in 2007 compared with $4.9 million in the prior year.

Income before non-controlling interest increased to $11.9 million compared with $(94.4) million in the prior period. Write-down of intangibles and goodwill for the year was nil, compared with $119,000 in the prior year.

For the period from January 1, 2007 to December 31, 2007 the Fund generated $15.4 million in distributable cash (including the non-controlling interest share) and declared twelve cash distributions (including the non-controlling interest share) totaling $10.7 million for a payout ratio of 69.4%.

The Fund repaid $10.0 million of its debt during the year with available cash balances.

Five-Point Growth Strategy:

During 2007, Somerset focused on its five-point growth strategy:

Increase penetration of existing customers: Somerset shipped its Reflections sidewing display to an additional 500 doors of a major mass merchant in the U.S. Somerset strengthened its seasonal distribution with the shipment of Christmas programs to 2,800 locations of a major U.S. mass merchant and to 1,350 locations of a major U.S. drug chain.

Secure new customers in existing distribution channels: In 2007, Somerset shipped its 3-CD box set program to 380 doors of a leading U.S. club retailer. Somerset also secured an order with a major mass merchant to ship a promotional Fisher-Price display to 1,300 stores.

Develop new distribution channels: In the second quarter, Somerset shipped its Avalon 32-title program to 198 doors of a major U.S.-based craft chain. Also, Somerset established new distribution channels with the shipment of Precious Moments™ to 96 stores of a U.S. regional book chain.

Launch new product lines: Somerset developed an exclusive 12-title Rolling Stone compilation line which was shipped to all locations of the leading U.S.-based consumer electronics retailer in the fourth quarter. Through its Compass division, Somerset launched a licensed Parents® line on an existing display at a major U.S. mass merchant consisting of both music and DVD titles.

Increased international sales: A major club retailer expanded the box set program to its stores in the U.K. and Mexico during 2007. Somerset launched Reflections at new hypermarkets in both Italy and France which contributed to record sales in those territories. In Spain, Somerset secured a new distributor and resumed shipments to three of its former customers in the market.

"Looking ahead to 2008, our major focus will be to improve the performance of our existing product lines, establish incremental revenue streams with current customers and develop additional sales through digital and video opportunities," Burgess said.

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, Thursday, March 27, 2008 at 11:00 am (ET). To access the call, please dial 647-427-3422 or 1-888-300-0097 and provide the Conference ID# 38600671. A replay of the conference call will be available as of 1:00 p.m. the same day, until midnight April 3, 2008. To access the replay dial 402-220-4280, or toll free at 1-8800-839-9816-, followed by the passcode 38600671.

Annual General Meeting

The Annual General Meeting for the Fund will be held Tuesday, May 13, 2008 at the Design Exchange (Patty Watt Room), 234 Bay St., Toronto at 9:00 am (ET).

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 management's discussion and analysis, such statements use such words as "may," "will," "intend," "should," "expect," "expect to," "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 press 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, lack of written customer contracts, reliance on suppliers 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.

Definition of EBITDA, Adjusted EBITDA, Distributable Cash, Standardized Distributable Cash and 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.

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. Management calculates distributable cash as cash provided by operating activities less unrealized foreign exchange losses, changes in non-cash operating working capital balances, the full amount of the LTIP funding requirements relating to the period under review and capital expenditures in the period. Standardized distributable cash is defined as cash from operating activities as reported in the GAAP financial statements, less total capital expenditures and any restrictions on distributions arising from compliance with financial covenants and limitations arising from the existence of a minority interest of a subsidiary.

EBITDA, Adjusted EBITDA, distributable cash and standardized distributable cash are not earnings measures recognized under GAAP and do not have standardized meanings prescribed by GAAP. Therefore, EBITDA, Adjusted EBITDA, distributable cash and standardized 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 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.

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 170 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, 2007 is available at www.somersetent.com and www.sedar.com.

Attachments:

Exhibit 1 - 2007 consolidated statements of income (loss) and deficit

Exhibit 2 - 2007 selected financial information

Exhibit 3 - 2007 consolidated statements of cash flows

Exhibit 4 - 2007 distributable cash



EXHIBIT 1

Somerset Entertainment Income Fund

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



For the year ended For the year ended
December 31, 2007 December 31, 2006
----------------------------------------------------------------------------
Sales $96,304 $98,641
Cost of goods sold 59,767 64,197
----------------------------------------------------------------------------
Gross profit 36,537 34,444
----------------------------------------------------------------------------

Expenses
Selling, general and administrative 19,410 19,048
Provincial sound tax credits (871) (1,008)
Foreign exchange gain (2,502) (2,227)
----------------------------------------------------------------------------
Income before amortization, interest,
taxes and non-controlling interest 20,500 18,631
Write-down of intangible assets - 25,000
Write-down of goodwill - 94,000
Amortization of deferred financing
costs - 225
Amortization of property, plant
and equipment 701 461
Amortization of intangible assets 6,076 9,734
Interest 1,438 978
----------------------------------------------------------------------------
Income (loss) before income taxes
and non-controlling interest 12,285 (111,767)
----------------------------------------------------------------------------
Provision for (recovery of) income
taxes
Current 2,802 1,357
Future (2,421) (18,761)
----------------------------------------------------------------------------
381 (17,404)
----------------------------------------------------------------------------
Income (loss) before non-controlling
interest 11,904 (94,363)
Non-controlling interest (2,218) 17,580
----------------------------------------------------------------------------
Net income (loss) 9,686 (76,783)

Deficit, beginning of year (89,649) (792)
Distributions declared (8,696) (12,074)
----------------------------------------------------------------------------
Deficit, end of year (88,659) $(89,649)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic and diluted net income (loss)
per unit $0.67 $(5.30)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic weighted average number of
units outstanding 14,493,300 14,493,300
----------------------------------------------------------------------------
----------------------------------------------------------------------------



EXHIBIT 2

Somerset Entertainment Income Fund

SELECTED FINANCIAL INFORMATION
Unaudited
(in thousands of Canadian dollars, except for units and per unit amounts)



Three months ended Twelve months ended
December 31, December 31,
2007 2006 2007 2006 2005(1)
----------------------------------------------------------------------------
Sales $29,351 $32,567 $96,304 $98,641 $75,069
Cost of goods sold 17,353 20,673 59,767 64,197 44,629
----------------------------------------------------------------------------
Gross profit 11,998 11,894 36,537 34,444 30,440
Gross profit % 40.9% 36.5% 37.9% 34.9% 40.6%

Selling, general
and administrative
expenses 4,664 5,102 19,410 19,048 14,466
Provincial sound
tax credit (250) (303) (871) (1,008) (1,032)
Foreign exchange
gain (1,431) (644) (2,502) (2,227) (53)
----------------------------------------------------------------------------

Adjusted EBITDA(2) $9,015 $7,739 $20,500 $18,631 $17,059
----------------------------------------------------------------------------
Adjusted EBITDA % 30.7% 23.8% 21.3% 18.9% 22.7%
----------------------------------------------------------------------------

Non-recurring items:
Employee
compensation(3) - - - - 6,281
----------------------------------------------------------------------------
EBITDA(2) $9,015 $7,739 $20,500 $18,631 $10,778
----------------------------------------------------------------------------

Write-down of
intangibles
and goodwill - 119,000 - 119,000 -
Amortization 1,718 2,622 6,777 10,420 5,081
Interest 318 253 1,438 978 440
----------------------------------------------------------------------------

Income (loss)
before income
taxes and
non-controlling
interest $6,979 $(114,136) $12,285 $(111,767) $5,257
----------------------------------------------------------------------------

Provision for
(recovery of)
income taxes 1,467 (12,940) 381 (17,404) n/a(4)
----------------------------------------------------------------------------

Income (loss)
before
non-controlling
interest 5,512 (101,196) 11,904 (94,363) n/a(4)
----------------------------------------------------------------------------

Non-controlling
interest (1,027) 18,853 (2,218) 17,580 n/a(4)
----------------------------------------------------------------------------

Net income (loss) $4,485 $(82,343) $9,686 $(76,783) n/a(4)
----------------------------------------------------------------------------

Total assets $86,283 $92,529 $86,283 $92,529 $225,049
Long-term
liabilities - 26,200 - 26,200 34,095
----------------------------------------------------------------------------
1. Derived from the audited 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 period from January 1, 2005 to
March 17, 2005.
2. See "Definition of EBITDA, Adjusted EBITDA, Distributable Cash,
Standardized 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. Income taxes, non-controlling interest 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.


EXHIBIT 3

Somerset Entertainment Income Fund

CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(in thousands of Canadian dollars)


For the year ended For the year ended
December 31, 2007 December 31, 2006
----------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income (loss) $9,686 $(76,783)
Add (deduct) items not
involving cash
Non-controlling interest share
of income (loss) 2,218 (17,580)
Write-down of intangibles - 25,000
Write-down of goodwill - 94,000
Amortization of property,
plant and equipment 701 461
Amortization of deferred
financing costs 218 225
Amortization of intangible assets 6,076 9,734
Unrealized foreign exchange
loss (gain) 10 (6)
Unit-based compensation expense 545 64
Future income tax recovery (2,421) (18,761)
Purchase of Fund units by
Long-Term Incentive Plan - (231)
----------------------------------------------------------------------------
17,033 16,123
Net changes in non-cash working
capital balances related
to operations
Accounts receivable 1,155 4,255
Inventory 646 922
Provincial sound tax credits
receivable (871) 513
Prepaid expenses and sundry
deposits 371 1,060
Accounts payable and accrued
liabilities 1,317 (2,348)
Income taxes payable 1,737 (532)
Income taxes recoverable - (241)
----------------------------------------------------------------------------
Cash provided by operating activities 21,388 19,752
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Acquisition of Compass Productions,
Inc. assets, including transaction
costs paid - (12,940)
Purchase of property, plant and
equipment (533) (369)
----------------------------------------------------------------------------
Cash used in investing activities (533) (13,309)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Expenses paid related to December 13,
2005 public offering - (1,296)
Financing costs paid - (284)
Issuance (repayment) of debt (10,000) 8,200
Distributions paid on trust units (8,696) (12,497)
Distributions paid on Exchangeable
Class B LP units (1,991) (2,861)
----------------------------------------------------------------------------
Cash used in financing activities (20,687) (8,738)
----------------------------------------------------------------------------

Foreign exchange loss on cash held
in foreign currencies (112) (165)
----------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 56 (2,460)
Cash and cash equivalents,
beginning of year 6,666 9,126
----------------------------------------------------------------------------
Cash and cash equivalents,
end of year $6,722 $6,666
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $1,336 $1,301
Interest received (196) (186)
Income taxes paid 1,176 2,100
----------------------------------------------------------------------------



EXHIBIT 4

Somerset Entertainment Income Fund

DISTRIBUTABLE CASH
Unaudited
(in thousands of Canadian dollars, except for units and per unit amounts)

Distributable cash for the three and twelve months ended December 31, 2007
and December 31, 2006 is calculated as follows:

Three months ended Twelve months ended
December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------

Cash provided by operating
activities $10,410 $7,665 $21,388 $19,754
Capital expenditures(1) (220) (172) (533) (369)
----------------------------------------------------------------------------
Standardized distributable
cash 10,190 7,493 20,855 19,385

Unrealized foreign exchange
loss (gain) 59 23 (10) 6
Changes in non-cash operating
working capital balances(2) (2,728) (981) (4,355) (3,631)
Purchase of fund units for
Long-Term Incentive Plan(3) - - - 231
LTIP pool for the current
period(3) (1,097) - (1,097) -
----------------------------------------------------------------------------
Distributable cash(4) $6,424 $6,535 $15,393 $15,991
Less: Non-controlling
interest share (1,197) (1,217) (2,868) (2,979)
----------------------------------------------------------------------------
Distributable cash to
trust units $5,227 $5,318 $12,525 $13,012
----------------------------------------------------------------------------

Distributions declared $2,174 $2,174 $8,696 $12,074

Weighted average number
of trust units 14,493,300 14,493,300 14,493,300 14,493,300

Distributable cash per unit $0.361 $0.367 $0.864 $0.898
Distributions declared per
unit $0.150 $0.150 $0.600 $0.833
Payout ratio 41.6% 40.9% 69.4% 92.8%
----------------------------------------------------------------------------

Alternatively, the calculation of distributable cash using the income
statement as a reference point would be:

Three months ended Twelve months ended
December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------

Income (loss) before
non-controlling interest $5,512 $(101,196) $11,904 $(94,363)

Non-cash items:
Write-down of intangibles
and goodwill - 119,000 - 119,000
Amortization 1,718 2,622 6,777 10,420
Amortization of finance
expenses included in interest 51 - 218 -
Long-Term Incentive Plan
expense included in
income above(3) 487 20 545 64
LTIP pool for the current
period(3) (1,097) - (1,097) -
Future income tax provision
(recovery) (27) (13,739) (2,421) (18,761)

Adjust for:
Capital expenditures (220) (172) (533) (369)
----------------------------------------------------------------------------
Distributable cash(4) $6,424 $6,535 $15,393 $15,991
Less: Non-controlling
interest share (1,197) (1,217) (2,868) (2,979)
----------------------------------------------------------------------------
Distributable cash to
trust units $5,227 $5,318 $12,525 $13,012
----------------------------------------------------------------------------
1. Capital expenditures have been deducted in determining distributable
cash.
2. Changes in non-cash operating working capital balances have been excluded
from this calculation as working capital fluctuates throughout the year.
Management believes that, over the long term, working capital will remain
relatively constant.
3. The Long-Term Incentive Plan non-cash compensation expense has been added
back and the full amount of the LTIP funding requirements relating to the
current period, if any, have been deducted.
4. See "Definition of EBITDA, Adjusted EBITDA, Distributable Cash,
Standardized Distributable Cash and Non-GAAP Measures."

Contact Information