Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

May 07, 2009 15:13 ET

Somerset Entertainment Income Fund Reports Results for First Quarter of 2009

TORONTO, ONTARIO--(Marketwire - May 7, 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 three months ended March 31, 2009.

First Quarter Financial Highlights

- Sales decreased 1.9% to $18.4 million

- Gross profit increased 14.7% to $7.4 million

- EBITDA decreased to $1.6 million

- Loss before non-controlling interest increased to $0.5 million

- Distributable cash for the period was $1.5 million, or $0.085 per unit (including the non-controlling interest share)

- Payout ratio of 58.8%

Sales for the first quarter declined $0.3 million to $18.4 million, a decrease of 1.9% from $18.7 million in the previous year. Sales in the U.S. were $15.0 million, an increase of 1.6% compared with the previous year. Sales in the United States denominated in U.S. dollars decreased by 19.2%. Sales decreased as a result of reduced replenishment orders from gift and mass merchant customers. International sales decreased 19.2% year over year to $1.6 million due to the bankruptcy of a mass merchant customer in the U.K. and the discontinuation of a program at a mass merchant customer in the U.K. Sales in Canada decreased 11.2% to $1.8 million due to decreased replenishment orders from lower retail sales and the discontinuation of a product line at a major chain customer. Replenishment sales represented 98.7% of total sales for the quarter.

Gross profit increased 14.7% to $7.4 million, compared with $6.5 million for the three months ended March 31, 2008. Gross profit as a percentage of sales was 40.4%, compared with 34.6% during the same period last year.

EBITDA decreased to $1.6 million in the first quarter, a 49.7% decrease over the same period in the previous year. The decrease was primarily due to a $2.5 million increase in foreign exchange losses on forward foreign exchange contracts and higher selling, general and administrative expenses. These increases were partially offset by higher gross profit on sales in the quarter.

Loss before non-controlling interest for the period was $0.5 million compared with income of $1.7 million for the three months ended March 31, 2008.

The Fund generated $1.5 million in distributable cash (including the non-controlling interest share) for the period, or $0.085 per unit. Three cash distributions (including the non-controlling interest share) were made, totalling $0.7 million, or $0.050 per unit, for a payout ratio of 58.8% compared with 90.2% in the previous year.

"The decline in earnings for the quarter was primarily driven by a $1.3 million foreign exchange loss," said Andy Burgess, Chief Executive Officer, Somerset Entertainment. "Despite the challenges in the music industry, Somerset continues to explore new ways to sell music. A major highlight of the quarter was securing confirmation from two major grocery retailers to test a new music program," said Burgess.

Operational Highlights

In the U.S., comparative same-store sales at a leading mass merchant increased 5.2% over the prior period. Somerset also confirmed seasonal programs at a major U.S. mass merchant and a major specialty retailer. A major club retailer approved a 75-store test, expected to ship in the second quarter.

In Canada and the U.S., Somerset confirmed tests with two national grocery retailers for an innovative program that will ship during the second quarter. Of note, Somerset is partnering with a major label in order to supply a diverse offering of titles. As well, Somerset has developed a new seasonal interactive display that will be featured at a number of mass merchants during the fourth quarter this year.

Internationally, shipments to France were up 34% for the quarter compared with the previous year, primarily due to 69 additional hypermarket locations set with the Fisher-Price™ program. Somerset also secured a roll-out order for Reflections in 200 grocery stores to ship during the second quarter. Shipments to Italy increased 39% due to additional stores at a major hypermarket set with both Reflections and Fisher-Price™ programs.

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 Friday, May 8, 2009, at 11:00 a.m. (EST). To access the call, dial (647) 427-3422 or 1-888-300-0097, and provide the Conference ID# 98363030. A replay of the conference call will be available as of 2:00 p.m. the same day, until midnight on May 15, 2009. To access the replay, call (402) 220-4280, or toll-free at 1-800-839-9816, followed by the pass code 98363030.

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. (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, 2009, is available at www.somersetent.com and www.sedar.com.



Attachments:
Exhibit 1 - Q1 2009 Consolidated Statements of Income (Loss) and Deficit
Exhibit 2 - Q1 2009 Selected Financial Information
Exhibit 3 - Q1 2009 Consolidated Statements of Cash Flows
Exhibit 4 - Q1 2009 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)


Three months Three months
ended ended
March 31, March 31,
2009 2008
----------------------------------------------------------------------------

Sales $18,380 $18,743
Cost of goods sold 10,951 12,265
----------------------------------------------------------------------------
Gross profit 7,429 6,478
----------------------------------------------------------------------------

Expenses
Selling, general and administrative 4,833 4,597
Provincial sound tax credits (358) (161)
Foreign exchange loss (gain) 1,340 (1,166)
----------------------------------------------------------------------------
Income before amortization, interest, write-downs,
taxes and non-controlling interest 1,614 3,208
----------------------------------------------------------------------------

Amortization of property, plant and equipment 142 146
Amortization of intangible asset 1,359 1,503
Interest 75 232
----------------------------------------------------------------------------
Income before income taxes
and non-controlling interest 38 1,327
----------------------------------------------------------------------------
Provision for (recovery of) income taxes
Current 96 174
Future 387 (561)
----------------------------------------------------------------------------
483 (387)
----------------------------------------------------------------------------
Income (loss) before non-controlling interest (445) 1,714
Non-controlling interest 83 (319)
----------------------------------------------------------------------------
Net income (loss) (362) 1,395

Deficit, beginning of year (108,277) (88,659)
Distributions declared (726) (2,174)
----------------------------------------------------------------------------
Deficit, end of year $(109,365) $(89,438)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic net income (loss) per unit $(0.03) $0.10
Diluted net income (loss) per unit (0.03) $0.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic weighted average number of units
outstanding 14,297,468 14,481,968
Diluted weighted average number of units
outstanding 14,297,468 17,811,531
----------------------------------------------------------------------------
----------------------------------------------------------------------------



EXHIBIT 2

Somerset Entertainment Income Fund

SELECTED FINANCIAL INFORMATION
Unaudited
(in thousands of Canadian dollars)


Three months ended
March 31, March 31,
2009 2008
----------------------------------------------------------------------------
Sales $18,380 $18,743
Cost of goods sold 10,951 12,265
----------------------------------------------------------------------------
Gross profit 7,429 6,478
Gross profit % 40.4% 34.6%

Selling, general and administrative expenses 4,833 4,597
Provincial sound tax credit (358) (161)
Foreign exchange loss (gain) 1,340 (1,166)
----------------------------------------------------------------------------

EBITDA(1) $1,614 $3,208
----------------------------------------------------------------------------
EBITDA % 8.8% 17.1%
----------------------------------------------------------------------------

Amortization 1,501 1,649
Interest 75 232
----------------------------------------------------------------------------

Income before income taxes and
non-controlling interest $38 $1,327
----------------------------------------------------------------------------

Provision for (recovery of) income taxes 483 (387)
----------------------------------------------------------------------------

Income (loss) before non-controlling interest (445) 1,714
----------------------------------------------------------------------------

Non-controlling interest 83 (319)
----------------------------------------------------------------------------

Net income $(362) $1,395
----------------------------------------------------------------------------

Total assets $55,818 $76,925
Long-term liabilities 7,933 -
----------------------------------------------------------------------------

(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, March 31,
2009 2008
----------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income (loss) $(362) $1,395
Add (deduct) items not involving cash
Non-controlling interest share of income (loss) (83) 319
Amortization of property, plant and equipment 142 146
Amortization of deferred financing costs 12 51
Amortization of intangible assets 1,359 1,503
Unrealized foreign exchange loss (gain) 132 (24)
Unit-based compensation expense 122 154
Future income tax expense (recovery) 387 (561)
----------------------------------------------------------------------------
1,709 2,983
Net changes in non-cash working capital balances
related to operations
Accounts receivable 2,459 1,476
Inventory 68 (167)
Provincial sound tax credits receivable 461 973
Prepaid expenses and sundry deposits (51) (86)
Income taxes recoverable (271) (708)
Accounts payable and accrued liabilities (4,694) (1,348)
----------------------------------------------------------------------------
Cash provided by (used in) operating activities (319) 3,123
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property, plant and equipment (61) (45)
----------------------------------------------------------------------------
Cash used in investing activities (61) (45)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Repayment of debt (973) (5,000)
Distributions paid on trust units (1,209) (2,174)
Distributions paid on Exchangeable
Class B LP units (277) (498)
----------------------------------------------------------------------------
Cash used in financing activities (2,459) (7,672)
----------------------------------------------------------------------------

Foreign exchange gain (loss) on cash held
in foreign currencies (63) 43

----------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,902) (4,551)
Cash and cash equivalents, beginning of period 5,834 6,722
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $2,932 $2,171
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $113 $167
Interest received (41) (76)
Income taxes paid 373 1,068
----------------------------------------------------------------------------
----------------------------------------------------------------------------



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, 2009 and
March 31, 2008 is calculated as follows:

Three months ended
March 31,
2009 2008
----------------------------------------------------------------------------

Cash provided by (used in) operating activities $(319) $3,123

Capital expenditures(1) (61) (45)
----------------------------------------------------------------------------
Standardized distributable cash (380) 3,078

Unrealized foreign exchange gain (loss) (132) 24
Changes in non-cash operating working
capital balances(2) 2,028 (140)
----------------------------------------------------------------------------
Distributable cash(4) $1,516 $2,962
Less: Non-controlling interest share (282) (552)
----------------------------------------------------------------------------
Distributable cash to Fund units $1,234 $2,410
----------------------------------------------------------------------------

Distributions declared $726 $2,174

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

Distributable cash per Fund unit $0.085 $0.166
Distributions declared per Fund unit $0.050 $0.150
Payout ratio 58.8% 90.2%
----------------------------------------------------------------------------


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

Three months ended
March 31,
2009 2008
----------------------------------------------------------------------------

Income before non-controlling interest $(445) $1,714

Non-cash items:
Amortization 1,501 1,649
Amortization of finance expenses included in
interest 12 51
Long-Term Incentive Plan expense included in
income above(3) 122 154
Future income tax recovery 387 (561)

Adjust for:
Capital expenditures (61) (45)
----------------------------------------------------------------------------
Distributable cash(4) $1,516 $2,962
Less: Non-controlling interest share (282) (552)
----------------------------------------------------------------------------
Distributable cash to Fund units $1,234 $2,410
----------------------------------------------------------------------------

(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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