Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

March 11, 2009 22:02 ET

Somerset Entertainment Income Fund Reports Fourth Quarter and Year-End Results for 2008

TORONTO, ONTARIO--(Marketwire - March 11, 2009) -

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, 2008.



Fourth Quarter Financial Results:

- Sales decreased 0.1% to $29.3 million
- Gross profit decreased 3.9% to $11.5 million
- EBITDA declined 39.3% to $5.5 million
- Income (loss) before non-controlling interest decreased to $(18.7) million
- Distributable cash for the period was $5.4 million, or $0.31 per unit
(including the non-controlling interest share)
- Payout ratio of 49.1%

Full Year Results (twelve months ended December 31, 2008):

- Sales decreased 11.2% to $85.6 million
- Gross profit decreased 11.6% to $32.3 million
- EBITDA declined 26.5% to $15.1 million
- Income (loss) before non-controlling interest decreased to $(13.4) million
- Distributable cash for the period was $14.3 million, or $0.80 per unit
(including the non-controlling interest share)
- Payout ratio of 74.9%


"Despite the challenging market for music, Somerset continues to generate recurring revenue from its network of displays in a profitable manner, resulting in solid operating earnings and an attractive payout ratio of 74.9%." said Andy Burgess, Chief Executive Officer.

Fourth Quarter Results

Sales for the three months ended December 31, 2008 decreased $0.1 million to $29.3 million, down 0.1% from $29.4 million in the previous year. The weakening Canadian dollar relative to the U.S. dollar in the quarter compared with the previous year increased sales by $3.5 million.

Sales in Canada decreased 25.4% to $3.2 million compared with the prior period. Sales decreased due to lower shipments to a grocery store customer, which decided not to proceed with a Christmas program, and lower sales to a club store retailer.

International sales increased 8.2% to $3.1 million compared with the prior year. Sales increased due to shipments to a new mass merchant customer and the expansion to additional stores of an existing mass merchant customer in France. These increases were partially offset by reduced sales related to the bankruptcy of a mass merchant customer in the U.K., and by lower retail sales at two mass merchant retailers in the U.K. and Australia. Also, a mass merchant U.K. retailer terminated its Reflections program towards the end of the quarter.

In the U.S., sales increased 3.8% to $23.0 million compared with the prior year. Sales in the United States in U.S. dollars actually decreased by 11.9%, however, because of the weaker Canadian dollar during the period compared with the prior year, sales increased 3.8% when converted to Canadian dollars. Revenue grew due to shipments of five new titles to an existing mass merchant customer for a non-Somerset end cap and new titles featured in the best-seller section. This increase was offset by lower replenishment sales to gift accounts and two specialty chain customers as a result of lower retail sales and lower shipments to a specialty chain customer that filed for bankruptcy protection during the quarter. In addition, sales to a club store customer decreased due to lower store traffic and the expected reduction in retail sales as the program entered its second year.

Gross profit decreased 3.9% to $11.5 million compared with $12.0 million for the same period in the previous year. Gross profit as a percentage of sales was 39.3% compared with 40.9% previously.

EBITDA decreased to $5.5 million, a 39.3% decrease over the previous year. During the quarter, EBITDA was significantly impacted by foreign exchange losses on forward foreign exchange contracts. The foreign exchange loss in the quarter was $1.2 million compared with a gain of $1.4 million in the prior year, resulting in a net decrease in EBITDA of $2.6 million in the quarter compared with the prior year.

Income (loss) before non-controlling interest decreased to $(18.7) million compared with income of $5.5 million in the prior period. During the quarter, the Fund recorded non-cash write-downs of intangible assets and goodwill of $3.2 million and $15.5 million, respectively. These write-downs were primarily a result of lower-than-expected sales to certain customers, the market capitalization of the Fund, and a revised forecast of its operating cash flows compared with its original expectations. In addition, the Fund record a $4.3 million non-cash write-down of future tax assets related to the recoverability of future income tax assets on intangible assets. These charges were non-cash in nature and, accordingly, did not affect distributable cash, cash provided by operating activities or bank covenants.

Full Year Results (twelve months ended December 31, 2008):

Sales decreased 11.2% to $85.5 million for the year ended December 31, 2008 compared with $96.3 million last year. The strengthening Canadian dollar relative to the U.S. dollar in 2008 compared with the previous year reduced sales by $0.6 million.

Sales in Canada decreased 9.7% to $9.1 million compared with the prior period. The decrease is due to reduced sales to a mass merchant customer, a club store retailer, a grocery customer and gift accounts as a result of lower retail sales.

International sales increased 0.6% to $10.1 million compared to the previous year. Sales increased due to shipments to a new mass merchant customer in France, the expansion to additional stores of two existing mass merchant customers in France and increased sales to a distributor in Spain.

U.S. sales decreased 12.9% to $66.3 million compared with the prior year. Sales for the period were lower as the prior period included the sale of two promotional CDs in the Hallmark product line, the shipment of a promotional Fisher-Price program to a mass merchant customer and increased shipments from an upgrade in the size of the displays at an existing mass merchant retailer, none of which reoccurred in the current year. Sales were also affected by reduced orders on the Compass 5 Star Collection product line at a mass merchant customer, as a result of the move of the program from the end cap fixture to an in-line location in the later part of the prior year.

Gross profit decreased 11.6% to $32.3 million in the year, compared with $36.6 million for the prior year. Gross profit as a percentage of sales was 37.8% compared with 37.9% previously.

EBITDA decreased 26.5% to $15.1 million for the year, down from $20.5 million in the previous year. During the year, EBITDA was significantly impacted by lower foreign exchange gains on forward foreign exchange contracts. The foreign exchange gain was $0.9 million compared with a gain of $2.5 million in the prior year, resulting in a net decrease in EBITDA of $1.6 million compared with the prior year.

Income (loss) before non-controlling interest decreased to $(13.4) million compared with income of $11.9. million in the prior period. During the year, the Fund recorded non-cash write-downs of intangible assets and goodwill of $3.2 million and $15.5 million, respectively. These write-downs were primarily a result of lower-than-expected sales to certain customers, the market capitalization of the Fund, and a revised forecast of its operating cash flows compared with its original expectations. In addition, the Fund record a $4.3 million non-cash write-down of future tax assets related to the recoverability of future income tax assets on intangible assets. These charges were non-cash in nature and, accordingly, did not affect distributable cash, cash provided by operating activities or bank covenants.

For the period from January 1, 2008 to December 31, 2008 the Fund generated $14.3 million in distributable cash (including the non-controlling interest share) and declared cash distributions (including the non-controlling interest share) of $10.7 million, resulting in a payout ratio of 74.9%.

Operational Highlights:

While 2008 presented several challenges, there were also some notable achievements:

In the first quarter, Somerset was named "Music Vendor of the Month" for March at a major mass merchant for its success in driving sales and managing inventory. In Canada, the Rolling Stone program shipped to an electronics mass merchant supported by a national flyer. Internationally, purchase orders for the seasonal program were secured in Australia and France.

In the second quarter, a leading U.S. mass merchant commenced a 200-store test for a new program while another mass merchant listed five new titles on a non-Somerset end cap in the music department.

In the third quarter, Somerset shipped seasonal programs to over 1,000 stores of a large specialty retailer and 2,300 stores of a major U.S. mass merchant. At another U.S. mass merchant, Somerset shipped a Halloween program for the first time. In Canada, Somerset shipped the Reflections program to more than 50 stores at a major Canadian grocer.

In the fourth quarter, Somerset tested the Reflections program in 20 stores of a leading US office products retailer and received commitment from a major U.S. craft chain to roll out 780 additional 12-title Avalon displays in 2009. Internationally, shipments to France were up 54% due to growth with various hypermarkets.

"Looking ahead to 2009, our major focus will be to aggressively pursue new opportunities for sales of physical music while exploring related opportunities in the music business," Andy Burgess said. "With our debt facility renewed and reduced overall debt, Somerset now has a strong balance sheet and is well-positioned to invest in appropriate opportunities to grow the business over the long term."

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 on Thursday, March 12, 2009, at 11:00 a.m. (ET). To access the call, please dial 647-427-3422 or toll-free at 1-888-300-0097 and provide the Conference ID# 88504476. A replay of the conference call will be available as of 1:00 p.m. the same day, until midnight on March 19, 2009. To access the replay, dial 402-220-2881, or toll free at 1-800-365-8354-, followed by the pass code 88504476.

Annual General Meeting

The Annual General Meeting for the Fund will be held on Tuesday, May 12, 2009, at the Design Exchange (Patty Watt Room), 234 Bay St., Toronto, at 9:00 a.m. (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 represent a variety of music genres, including world, relaxation, jazz, classical, children's and hit compilations. Based in Toronto, Canada, the Company employs over 180 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, 2008, is available at www.somersetent.com and www.sedar.com.

Attachments:

Exhibit 1 - 2008 consolidated statements of income (loss) and deficit

Exhibit 2 - 2008 selected financial information

Exhibit 3 - 2008 consolidated statements of cash flows

Exhibit 4 - 2008 distributable cash



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)


For the For the
year ended year ended
December 31, December 31,
2008 2007
---------------------------------------------------------------------------

Sales $85,566 $96,304
Cost of goods sold 53,250 59,767
---------------------------------------------------------------------------
Gross profit 32,316 36,537
---------------------------------------------------------------------------

Expenses
Selling, general and administrative 19,204 19,410
Provincial sound tax credits (1,044) (871)
Foreign exchange gain (903) (2,502)
---------------------------------------------------------------------------
Income before amortization, interest,
write-down, taxes and
non-controlling interest 15,059 20,500

Write-down of intangible assets 3,200 -
Write-down of goodwill 15,529 -
Amortization of property, plant and equipment 649 701
Amortization of intangible assets 6,053 6,076
Interest 819 1,438
---------------------------------------------------------------------------
Income (loss) before income taxes
and non-controlling interest (11,191) 12,285
---------------------------------------------------------------------------
Provision for (recovery of) income taxes
Current (266) 2,802
Future 2,498 (2,421)
---------------------------------------------------------------------------
2,232 381
---------------------------------------------------------------------------
Income (loss) before non-controlling interest (13,423) 11,904
Non-controlling interest 2,501 (2,218)
---------------------------------------------------------------------------
Net income (loss) (10,922) 9,686

Deficit, beginning of year (88,659) (89,649)
Distributions declared (8,696) (8,696)
---------------------------------------------------------------------------
Deficit, end of year (108,277) $(88,659)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic net income (loss) per unit $(0.76) $0.67
Diluted net income (loss) per unit (0.76) $0.67
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic weighted average number of units
outstanding 14,374,343 14,462,766
Diluted weighted average number of units
outstanding 14,374,343 17,811,531
---------------------------------------------------------------------------
---------------------------------------------------------------------------



EXHIBIT 2

Somerset Entertainment Income Fund

SELECTED FINANCIAL INFORMATION
(in thousands of Canadian dollars,)


Three months ended Twelve months ended
December 31, December 31,
2008 2007 2008 2007 2006
----------------------------------------------------------------------------
Sales $29,341 $29,351 $85,566 $96,304 $98,641
Cost of goods sold 17,806 17,353 53,250 59,767 64,197
----------------------------------------------------------------------------
Gross profit 11,535 11,998 32,316 36,537 34,444
Gross profit % 39.3% 40.9% 37.8% 37.9% 34.9%

Selling, general and
administrative expenses 5,287 4,664 19,204 19,410 19,048
Provincial sound tax
credit (404) (250) (1,044) (871) (1,008)
Foreign exchange loss
(gain) 1,178 (1,431) (903) (2,502) (2,227)
----------------------------------------------------------------------------

EBITDA(1) $5,474 $9,015 $15,059 $20,500 $18,631
----------------------------------------------------------------------------
EBITDA % 18.7% 30.7% 17.6% 21.3% 18.9%
----------------------------------------------------------------------------

Write-down of intangibles
and goodwill 18,729 - 18,729 - 119,000
Amortization 1,737 1,718 6,702 6,777 10,420
Interest 206 318 819 1,438 978
----------------------------------------------------------------------------

Income (loss) before
income taxes and
non-controlling interest $(15,198) $6,979 $(11,191) $12,285 $(111,767)
----------------------------------------------------------------------------

Provision for (recovery
of) income taxes 3,510 1,467 2,232 381 (17,404)
----------------------------------------------------------------------------

Income (loss) before
non-controlling interest (18,708) 5,512 (13,423) 11,904 (94,363)
----------------------------------------------------------------------------

Non-controlling interest 3,486 (1,027) 2,501 (2,218) 17,580
----------------------------------------------------------------------------

Net income (loss) $(15,222) $4,485 $(10,922) $9,686 $(76,783)
----------------------------------------------------------------------------

Total assets $62,667 $86,283 $62,667 $86,283 $92,529
Long-term liabilities 8,532 - 8,532 - 26,200
----------------------------------------------------------------------------

(1) See "Definition of EBITDA, Distributable Cash, Standardized
Distributable Cash and Non-GAAP Measures."



EXHIBIT 3

Somerset Entertainment Income Fund

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


For the For the
year ended year ended
December 31, December 31,
2008 2007
---------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income (loss) $(10,922) $9,686
Add (deduct) items not involving cash
Non-controlling interest share of income (loss) (2,501) 2,218
Write-down of intangible assets 3,200 -
Write-down of goodwill 15,529 -
Amortization of property, plant and equipment 649 701
Amortization of deferred financing costs 212 218
Amortization of intangible assets 6,053 6,076
Unrealized foreign exchange loss (gain) (12) 10
Unit-based compensation expense 573 545
Future income tax expense (recovery) 2,498 (2,421)
Funding of Long-Term Incentive Plan (1,097) -
---------------------------------------------------------------------------
14,182 17,033
Net changes in non-cash working capital balances
related to operations
Accounts receivable (12) 1,155
Inventory (1,419) 646
Provincial sound tax credits receivable 90 (871)
Prepaid expenses and sundry deposits 555 371
Accounts payable and accrued liabilities 4,484 1,317
Income taxes payable (3,189) 1,737
Income taxes recoverable 766 -
---------------------------------------------------------------------------
Cash provided by operating activities 15,457 21,388
---------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property, plant and equipment (426) (533)
---------------------------------------------------------------------------
Cash used in investing activities (426) (533)
---------------------------------------------------------------------------

FINANCING ACTIVITIES
Financing costs paid (151) -
Repayment of debt (4,960) (10,000)
Distributions paid on trust units (8,696) (8,696)
Distributions paid on Exchangeable Class B LP
units (1,991) (1,991)
---------------------------------------------------------------------------
Cash used in financing activities (15,798) (20,687)
---------------------------------------------------------------------------

Foreign exchange loss on cash held in foreign
currencies (121) (112)
---------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (888) 56
Cash and cash equivalents, beginning of year 6,722 6,666
---------------------------------------------------------------------------
Cash and cash equivalents, end of year $5,834 $6,722
---------------------------------------------------------------------------
---------------------------------------------------------------------------



EXHIBIT 4
Somerset Entertainment Income Fund

DISTRIBUTABLE CASH
(in thousands of Canadian dollars,)

Distributable cash for the three and twelve months ended December 31, 2008
and December 31, 2007 is calculated as follows:


Three months ended Twelve months ended
December 31, December 31,
2008 2007 2008 2007
---------------------------------------------------------------------------

Cash provided by operating
activities $8,062 $10,410 $15,457 $21,388
Capital expenditures(1) (152) (220) (426) (533)
---------------------------------------------------------------------------
Standardized distributable
cash 7,910 10,190 15,031 20,855
Unrealized foreign
exchange loss (gain) 13 59 12 (10)
Funding of Long-Term
Incentive Plan(3) - - 1,097 -
Long-Term Incentive Plan pool
for current year(3) (588) (1,097) (588) (1,097)
Changes in non-cash operating
working capital balances(2) (1,896) (2,728) (1,275) (4,355)
---------------------------------------------------------------------------
Distributable cash(4) $5,439 $6,424 $14,277 $15,393
Less: Non-controlling
interest share (1,013) (1,197) (2,660) (2,868)
---------------------------------------------------------------------------
Distributable cash to Fund
units $4,426 $5,227 $11,617 $12,525
---------------------------------------------------------------------------

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

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

Distributable cash per
Fund unit $0.305 $0.361 $0.802 $0.864
Distributions declared per
Fund unit $0.150 $0.150 $0.600 $0.600
Payout ratio 49.1% 41.6% 74.9% 69.4%
---------------------------------------------------------------------------

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,
2008 2007 2008 2007
---------------------------------------------------------------------------

Income (loss) before
non-controlling interest $(18,708) $5,512 $(13,423) $11,904

Non-cash items:
Write-down of intangibles
and goodwill 18,729 - 18,729 -
Amortization 1,737 1,718 6,702 6,777
Amortization of finance
expenses included in
interest 56 51 212 218
Long-Term Incentive Plan
expense included in income
above(3) 145 487 573 545
Long-Term Incentive Plan
pool for current year(3) (588) (1,097) (588) (1,097)
Future income tax expense
(recovery) 4,220 (27) 2,498 (2,421)
Adjust for:
Capital expenditures(1) (152) (220) (426) (533)
---------------------------------------------------------------------------
Distributable cash(4) $5,439 $6,424 $14,277 $15,393
Less: Non-controlling
interest share (1,013) (1,197) (2,660) (2,868)
---------------------------------------------------------------------------
Distributable cash to Fund
units $4,426 $5,227 $11,617 $12,525
---------------------------------------------------------------------------

(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, has been deducted.
(4) See "Definition of EBITDA, Distributable Cash, Standardized
Distributable Cash and Non-GAAP Measures."


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