Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

May 06, 2008 14:03 ET

Somerset Entertainment Income Fund Reports Results for First Quarter of 2008

TORONTO, ONTARIO--(Marketwire - May 6, 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 three months ended March 31, 2008.

First Quarter Financial Highlights

- Sales decreased 15.6% to $18.7 million

- Gross profit decreased 9.0% to $6.5 million

- EBITDA increased 31.6% to $3.2 million

- Income before non-controlling interest increased to $1.7 million

- Distributable cash for the period was $3.0 million, or $0.166 per unit (including the non-controlling interest share)

- Payout ratio of 90.2%

Sales for the first quarter declined $3.5 million to $18.7 million, a decrease of 15.6% from $22.2 million in the previous year. Sales in the U.S. were $14.8 million, a decrease of 18.1% compared with the previous year. Sales in the United States denominated in U.S. dollars decreased by 3.5%. Sales decreased as the prior period included the sale of a promotional Hallmark release that did not recur in the current period, reduced sales to a mass merchant and two specialty retailers as a result of lower retail sales, reduced replenishment sales to gift accounts and reduced orders on the 5 Star Collection product line. International sales decreased 10.5% year over year to $2.0 million as a result of reduced rollout sales as the prior period included rollout sales to additional stores of an existing mass merchant customer in France. Sales in Canada increased 1.4% to $2.0 million due to increased replenishment sales to a club store retailer and sales to a new electronics mass merchant customer obtained in the quarter. Replenishment sales represented 98.5% of total sales for the quarter.

Gross profit decreased 9.0% to $6.5 million, compared with $7.1 million for the three months ended March 31, 2007. Gross profit as a percentage of sales was 34.6%, compared with 32.0% during the same period last year.

EBITDA increased to $3.2 million in the first quarter, a 31.6% increase over the same period in the previous year. The increase was primarily due to lower selling, general and administrative expenses and higher foreign exchange gains on forward foreign exchange contracts. These increases were partially offset by lower sales and gross profit.

Income before non-controlling interest increased 41.3% to $1.7 million, compared with $1.2 million in the prior period.

The Fund generated $3.0 million in distributable cash (including the non-controlling interest share) for the period, or $0.166 per unit. Three cash distributions (including the non-controlling interest share) were made, totalling $2.7 million, or $0.150 per unit, for a payout ratio of 90.2% compared with 232.0% in the previous year.

"Despite disappointing sales during the quarter and the negative impact of the strengthening Canadian dollar, Somerset managed to generate higher earnings than last year," said Andy Burgess, Chief Executive Officer, Somerset Entertainment. "A major highlight of the quarter was being named "Music Vendor of the Month" for March at one of the leading mass merchants in the United States," said Burgess. He added that this testifies to "Somerset's ability to create commercially viable product and drive positive sales increases in a challenging music environment."

Operational Highlights

Somerset made several strides in each of its territories during the quarter. In the U.S., a leading mass merchant confirmed a 200-store test for a new program in the home department. A major club retailer confirmed a test for 20 locations for this summer. As well, 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 over 50 stores of an electronics mass merchant supported by a national flyer. Sales to a major club retailer continue to perform well with sales up significantly over the prior period.

Internationally, the Reflections program was set up in 15 new highway locations of a Japanese retailer and generated strong initial sales. Reflections was also set up in an additional 7 stores of a Spanish hypermarket, while the Fisher-Price® program was set up in 13 stores of an Italian hypermarket. Significant orders for the seasonal program were also secured during the quarter, with purchase orders received for 170 stores in Australia and 54 stores in France.

Conference Call

Andy Burgess, Chief Executive Officer, and Rob Meier, Chief Financial Officer, will hold a conference call to discuss results for the Fund on Wednesday, May 7, 2008, at 11:00 a.m. (EST). To access the call, dial (647) 427-3422 or 1-888-300-0097, and provide the Conference ID# 45889045. A replay of the conference call will be available as of 2:00 p.m. the same day, until midnight on May 14, 2008. To access the replay, call (402) 220-7739, or toll-free at 1-888-562-2824, followed by the pass code 45889045.

Annual General Meeting

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

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, Distributable Cash, Standardized Distributable Cash and Non-GAAP Measures

References to "EBITDA" are to earnings before interest, income taxes, amortization and non-controlling interest.

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, distributable cash and standardized distributable cash are not earnings measures recognized under GAAP and do not have standardized meanings prescribed by GAAP. Therefore, EBITDA, distributable cash and standardized distributable cash may not be comparable with similar measures presented by other entities. Investors are cautioned that 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

Somerset Entertainment Ltd. 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. The Company's extensive distribution network includes mass merchants, specialty chains and independent gift stores in more than 20 countries. 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 (U.K.).

Units of the Somerset Entertainment Income Fund are traded on the Toronto Stock Exchange under the symbol SOM.UN. Additional information relating to the Somerset Entertainment Income Fund, including unaudited financial information as of March 31, 2008, is available at www.somersetent.com and www.sedar.com.

Attachments:

Exhibit 1 -- Q1 2008 Consolidated Statements of Income and Deficit

Exhibit 2 -- Q1 2008 Selected Financial Information

Exhibit 3 -- Q1 2008 Consolidated Statements of Cash Flows

Exhibit 4 -- Q1 2008 Distributable Cash



EXHIBIT 1

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


Three months Three months
ended ended
March 31, 2008 March 31, 2007
--------------------------------------------------------------------------

Sales $18,743 $22,214
Cost of goods sold 12,265 15,098
--------------------------------------------------------------------------
Gross profit 6,478 7,116
--------------------------------------------------------------------------

Expenses
Selling, general and administrative 4,597 5,040
Provincial sound tax credits (161) (225)
Foreign exchange gain (1,166) (136)
--------------------------------------------------------------------------
Income before amortization, interest,
income taxes and non-controlling interest 3,208 2,437
--------------------------------------------------------------------------

Amortization of property, plant and equipment 146 162
Amortization of intangible assets 1,503 1,536
Interest 232 361
--------------------------------------------------------------------------
Income before income taxes
and non-controlling interest 1,327 378
--------------------------------------------------------------------------
Provision for (recovery of) income taxes
Current 174 846
Future (561) (1,681)
--------------------------------------------------------------------------
(387) (835)
--------------------------------------------------------------------------
Income before non-controlling interest 1,714 1,213
Non-controlling interest (319) (226)
--------------------------------------------------------------------------
Net income for the period 1,395 987

Deficit, beginning of period (88,659) (89,649)
Distributions declared (2,174) (2,174)
--------------------------------------------------------------------------
Deficit, end of period $(89,438) $(90,836)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Basic and diluted net income per unit $0.10 $0.07
--------------------------------------------------------------------------
--------------------------------------------------------------------------

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)


Three months Three months
ended ended
March 31, 2008 March 31, 2007
--------------------------------------------------------------------------

Sales $18,743 $22,214
Cost of goods sold 12,265 15,098
--------------------------------------------------------------------------
Gross profit 6,478 7,116
Gross profit % 34.6% 32.0%

Selling, general and administrative expenses 4,597 5,040
Provincial sound tax credit (161) (225)
Foreign exchange gain (1,166) (136)
--------------------------------------------------------------------------

EBITDA (1) $3,208 $2,437
--------------------------------------------------------------------------
EBITDA % 17.1% 11.0%
--------------------------------------------------------------------------

Amortization 1,649 1,698
Interest 232 361
--------------------------------------------------------------------------

Income before income taxes and
non-controlling interest $1,327 $378
--------------------------------------------------------------------------

Recovery of income taxes (387) (835)
--------------------------------------------------------------------------

Income before non-controlling interest 1,714 1,213
--------------------------------------------------------------------------

Non-controlling interest (319) (226)
--------------------------------------------------------------------------

Net income $1,395 987
--------------------------------------------------------------------------

Total assets $76,925 $89,733
Long-term liabilities - 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
Unaudited
(in thousands of Canadian dollars)


Three months Three months
ended ended
March 31, 2008 March 31, 2007
--------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income for the period $1,395 $987
Add (deduct) items not involving cash
Non-controlling interest share of income 319 226
Amortization of property, plant and equipment 146 162
Amortization of finance costs included in interest 51 57
Amortization of intangible assets 1,503 1,536
Unrealized foreign exchange loss (gain) (24) 40
Unit-based compensation expense 154 19
Future income tax recovery (561) (1,681)
--------------------------------------------------------------------------
2,983 1,346

Net change in non-cash working capital
balances related to operations
Accounts receivable 1,476 2,606
Inventory (167) 783
Provincial sound tax credits receivable 973 (225)
Prepaid expenses and sundry deposits (86) (251)
Accounts payable and accrued liabilities (1,348) (1,130)
Income taxes payable (708) -
Income taxes recoverable - 114
--------------------------------------------------------------------------
Cash provided by operating activities 3,123 3,243
--------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property, plant and equipment (45) (155)
--------------------------------------------------------------------------
Cash used in investing activities (45) (155)
--------------------------------------------------------------------------

FINANCING ACTIVITIES
Repayment of debt (5,000) -
Distributions paid on trust units (2,174) (2,174)
Distributions paid on Exchangeable Class B
LP units (498) (498)
--------------------------------------------------------------------------
Cash used in financing activities (7,672) (2,672)
--------------------------------------------------------------------------

Foreign exchange gain (loss) on cash and
cash equivalents held in foreign currencies 43 (17)
--------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents during the period (4,551) 399
Cash and cash equivalents, beginning of period 6,722 6,666
--------------------------------------------------------------------------
Cash and cash equivalents, end of period $2,171 $7,065
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $167 $381
Interest received (76) (54)
Income taxes paid 1,068 803
--------------------------------------------------------------------------



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 months ended March 31, 2008 and March 31,
2007 is calculated as follows:


Three months Three months
ended ended
March 31, 2008 March 31, 2007
------------------------------------------------------------------------

Cash provided by operating activities $3,123 $3,243
Capital expenditures (1) (45) (155)
------------------------------------------------------------------------
Standardized distributable cash 3,078 3,088

Unrealized foreign exchange loss (gain) 24 (40)
Changes in non-cash operating working
capital balances (2) (140) (1,897)
------------------------------------------------------------------------
Distributable cash (4) $2,962 $1,151
Less: Non-controlling interest share (552) (214)
------------------------------------------------------------------------
Distributable cash to trust units $2,410 $937
------------------------------------------------------------------------

Distributions declared $2,174 $2,174

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

Distributable cash per unit $0.166 $0.065
Distributions declared per unit $0.150 $0.150
Payout ratio 90.2% 232.0%
------------------------------------------------------------------------

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



Three months Three months
ended ended
March 31, 2008 March 31, 2007
------------------------------------------------------------------------

Income before non-controlling interest $1,714 $1,213

Non-cash items:
Amortization 1,649 1,698
Amortization of finance expenses
included in interest 51 57
Long-Term Incentive Plan expense
included in income above (3) 154 19
Future income tax provision (recovery) (561) (1,681)

Adjust for:
Capital expenditures (45) (155)
------------------------------------------------------------------------
Distributable cash (4) $2,962 $1,151
Less: Non-controlling interest share (552) (214)
------------------------------------------------------------------------

Distributable cash to trust units $2,410 $937
------------------------------------------------------------------------

(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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