Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

August 09, 2006 06:00 ET

Somerset Entertainment Income Fund Reports Results for Second Quarter of 2006

TORONTO, ONTARIO--(CCNMatthews - Aug. 9, 2006) - Somerset Entertainment Income Fund (TSX:SOM.UN) ("the Fund") announced today financial and operating results for the three-month and six-month period ending June 30, 2006.

Second Quarter Financial Highlights

- Sales increased 15.9% to $20.9 million

- Gross profit decreased 7.6% to $6.1 million

- Adjusted EBITDA decreased $0.8 million to $2.4 million. The results included a write-down of Richard Simmons production costs and advances of $0.9 million.

- Distributable cash (including the non-controlling interest share) for the period was $1.9 million, or $0.106 per unit

Six Months Ended 2006

- Sales increased to $43.9 million

- Gross profit grew 14.3% to $14.4 million

- Adjusted EBITDA increased 10.2% to $6.5 million

- Year-to-date distributable cash (including the non-controlling interest share) is $5.6 million and payout ratio is 159.1%

"Despite the challenges of the second quarter, Somerset has secured a number of commitments for additional business that will be realized during the seasonally strong third and fourth quarters," said Andy Burgess, Chief Executive Officer, Somerset Entertainment Income Fund.

Second Quarter Results

Total sales during the second quarter increased 15.9% to $20.9 million over the previous year. Sales increased in the U.S. to $16.7 million. The addition of the Compass business contributed to an increase of $7.2 million in U.S. sales. Excluding Compass, U.S. sales decreased by $3.9 million as a result of lower rollout sales, the strong Canadian dollar and lower sales to gift customers. In Canada, sales decreased 1.6% over the same period last year to $2.4 million. International sales declined $0.4 million over last year to $1.8 million because of lost business in Spain and lower rollout sales to a major U.K. customer. Replenishment sales accounted for 96% of total sales.

Gross profit decreased to $6.1 million in the three months ended June 30, 2006, a decrease of 7.6%. Gross profit as a percentage of sales was 29.3% compared with 36.7% in the prior year.

Adjusted EBITDA decreased to $2.4 million compared with $3.2 million over the same period in the previous year. The addition of the Compass business contributed $1.2 million to EBITDA and the results included a write-down of Richard Simmons production costs and advances of $0.9 million.

The Fund generated $1.9 million in distributable cash (including the non-controlling interest share) for the period, or $0.106 per unit. Three cash distributions (including the non-controlling interest share) were made, totalling $4.5 million or 0.250 per unit. Payout ratio for the period was 235.5% in part reflecting the seasonality of the business.

Six Months Ended June 30, 2006

During the first half of 2006 total sales increased to $43.9 million a 33.8% increase compared with $32.8 million in the previous year. U.S. sales grew to $35.2 million. Excluding the Compass business, U.S. sales decreased by $3.2 million compared with the prior year as a result of the stronger Canadian dollar, lower rollout sales and lower replenishment sales. Sales in Canada experienced a slight increase to $4.9 million. International sales were $3.8 million and were affected by suspended shipments to Spain and reduced sales in Australia where the prior period included rollout sales to a new customer.

Gross profit increased to $14.4 million or 14.3% compared with $12.6 million in the previous year. Gross profit as a percentage of sales was 32.7% compared with 38.5% year over year.

Adjusted EBITDA for the six months ended June 30, 2006 increased 10.2% to $6.5 million. The Compass business contributed $2.5 million during the period.

Year-to-date, distributable cash (including the non-controlling interest share) is $5.6 million or 0.314 per unit, resulting in a payout ratio of 159.1%.

Compass Acquisition Update

Compass sales decreased 15.9% compared to the previous year due to lower retail sales at two mass merchant customers. Compass has addressed the decreasing retail sales on two of its major lines by securing commitments from a major customer to launch new programs in fourth quarter 2006 and first quarter 2007. Since both product lines will be overhauled with new design and new recordings, the customer has committed to keeping the programs for at least one year following each launch. However, the customer has also indicated that it will test alternative programs in up to 200 stores during that period.

Operational Highlights

After failing to secure a significant ongoing retail partner for the Richard Simmons initiative, Somerset has incurred a charge for the production costs of the two remaining videos and other advances totalling $870,000 CDN during the quarter.

Somerset has continued its focus on achieving results through our five-point strategy: (1) increase penetration of our current customers, (2) secure new accounts, (3) develop new distribution channels, (4) launch new product lines and (5) increase international sales.

This quarter, Somerset increased penetration of our current customers with new commitments for their seasonal program from two existing mass merchants in Canada. In the United States, a major mass merchant has expanded its Christmas offering of Somerset music for fourth quarter from 2,300 stores to 2,800 stores. For the gift market, Somerset partnered with Hallmark to create eight new titles to be launched with their Say it with Sound program. We have received orders from 2,600 stores that will ship during the third quarter.

Somerset has secured new accounts in the international market, with confirmation of full rollouts of Reflections to 250 stores at a major UK mass merchant, 172 stores of an Australian mass merchant and the remaining 57 stores of a French mass merchant. In the United States, Somerset expects to launch an interactive music program in 250 stores of a major baby retailer. These initiatives are expected to ship in the fourth quarter.

In the Company's effort to develop new distribution channels, Somerset has confirmed a test of the Lifescapes series in Canada with a major book retailer and in the U.K. with a major mass merchant. Somerset confirmed two additional test programs with a TV retailer for the third quarter. Also, a major craft retailer has indicated it will test Reflections.

During the second quarter, Somerset launched a new product line with the shipment of new video interactive displays featuring the Fisher-Price videos. Retail sales however, have been lower than expected. Somerset will be releasing Jim Brickman's new Christmas CD, Christmas Romance in the third quarter. Somerset has negotiated exclusive distribution for this title with major retailers in the United States and Canada. As well, the marketing team is developing new titles for the Precious Moments Music Series scheduled for release in early 2007.

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, August 9, 2006, at 11:00 a.m. (EST). To access the call, please dial 416-644-3422 or 800-814-4859. A replay of the conference call will be available as of 1:00 p.m. the same day, until midnight Wednesday, August 16, 2006. To access the replay dial, 416-640-1917or toll free at 877-289-8525, followed by the passcode 21195749#.

Six months ended June 30, 2006 compared with six months ended June 30, 2005

The Fund completed its initial public offering on March 18, 2005. As a result, the attached unaudited consolidated statement of income and deficit provides comparative information only for the period from March 18, 2005 to June 30, 2005 (see Exhibit 1). To provide meaningful disclosure to the reader, this release covers the six months ended June 30, 2006, compared with the six months ended June 30, 2005 (see Exhibit 2). As the comparative periods are, except with respect to the period from March 18, 2005 to March 31, 2005, prior to the Fund's acquisition of Holdings, this information is not based on the Fund's results and is provided for reference purposes only. All financial information included for the period from January 1, 2005 to March 17, 2005, is derived from the unaudited consolidated results of Holdings.

Non-GAAP Measures

References to "EBITDA" are to earnings before interest, income taxes, amortization 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 Somerset Entertainment Holdings Inc.

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

EBITDA, Adjusted EBITDA and distributable cash are not earnings measures recognized under generally accepted accounting principles ("GAAP") and do not have standardized meanings prescribed by GAAP. Therefore, EBITDA, Adjusted EBITDA and distributable cash may not be comparable with similar measures presented by other entities. Investors are cautioned that EBITDA and Adjusted EBITDA should not be construed as alternatives to net income or loss determined in accordance with GAAP as indicators of the Fund's performance, or to cash flows from operating, investing and financing activities as measures of liquidity and cash flow.

Forward-Looking Statements

Certain statements in this news 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 appearing in this news release, these statements use such words as "may," "will," "intend," "should," "expect," "believe," "plan," "anticipate," "estimate," "predict," "potential," "continue," the negative of these terms or other similar terminology. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this news 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, integration of the Compass business, lack of written customer contracts, reliance on suppliers and other risks described in the Fund's Annual Information Form dated March 18, 2006 (which can be found at www.sedar.com). The forward-looking statements contained in this news release are made as of the release date of this document, and the Fund does not assume any obligation to update or revise such statements to reflect new events or circumstances.

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 extensive network includes over 28,000 interactive displays in 18,500 locations in more than 20 countries. Based in Toronto, Canada, the Company employs over 150 people at offices in Toronto, Ontario (Canada); Buffalo Grove, Illinois, and Minneapolis, Minnesota, (U.S.A.); and Essex, England (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 June 30, 2006, is available at www.somersetent.com and www. sedar.com.

Attachments:

Q2 2006 - Exhibit 1

Q2 2006 - Exhibit 2

EXHIBIT 1

Somerset Entertainment Income Fund

CONSOLIDATED STATEMENT OF
INCOME AND DEFICIT
Unaudited

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




Period from
Three months Six month March 18, 2005
ended June 30, ended to
2006 2005 June 30, June 30, 2005
2006
($) ($) ($) ($)
----------------------------------------------------------------------
Sales $20,880 $18,020 $43,899 $20,114
Cost of goods sold 14,771 11,404 29,538 12,800
----------------------------------------------------------------------
Gross profit 6,109 6,616 14,361 7,314
----------------------------------------------------------------------
Expenses
Selling, general and
administrative 4,732 3,498 9,599 3,970
Provincial sound tax
credits (346) (354) (582) (364)
Foreign exchange
loss (gain) (720) 252 (1,180) 325
----------------------------------------------------------------------
Income before
amortization,
interest, taxes and
non-controlling
interest 2,443 3,220 6,524 3,383
Amortization of
property, plant and
equipment 93 88 216 100
Amortization of
deferred financing
costs 56 22 112 25
Amortization of
intangible assets 2,433 1,394 4,881 1,608
Interest 256 102 412 121
----------------------------------------------------------------------
Income (loss) before
income taxes
and non-controlling
interest (395) 1,614 903 1,529
----------------------------------------------------------------------
Provision for
(recovery of) income
taxes (note 7)
Current 250 109 390 (77)
Future (2,078) (942) (3,488) (1,001)
----------------------------------------------------------------------
(1,828) (833) (3,098) (1,078)
----------------------------------------------------------------------
Income before
non-controlling
interest 1,433 2,447 4,001 2,607
Non-controlling
interest (267) (606) (745) (646)
----------------------------------------------------------------------
Net income for the
period 1,166 1,841 3,256 1,961
Retained earnings
(deficit), beginning
of period (2,324) 120 (792) -
Distributions
declared (3,622) (2,753) (7,244) (2,753)
----------------------------------------------------------------------
Deficit, end of
period $(4,780) $(792) $(4,780) $(792)
----------------------------------------------------------------------
----------------------------------------------------------------------
Basic and diluted net
income per unit $0.081 $0.183 $0.225 $0.195
----------------------------------------------------------------------
----------------------------------------------------------------------
Weighted average
Number of units
outstanding,
Basic (note 8) 14,493,300 10,074,400 14,493,300 10,074,400
----------------------------------------------------------------------
----------------------------------------------------------------------

EXHIBIT 2

Somerset Entertainment Income Fund

Selected Financial Information for the
three and six months ended June 30, 2006


Three months Six months
April 1 to June 30 January 1 to June 30
-----------------------------------------------------------------------
-----------------------------------------------------------------------
2006 2005 2006 2005 (1)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Sales $20,880 $18,020 $43,899 $32,800
Cost of goods sold 14,771 11,404 29,538 20,162
-----------------------------------------------------------------------
Gross profit 6,109 6,616 14,361 12,638
29.3% 36.7% 32.7% 38.5%

Selling, general and
administrative expenses 4,732 3,498 9,599 6,810
Provincial sound tax credit (346) (354) (582) (426)
Foreign exchange loss (gain) (720) 252 (1,180) 326
-----------------------------------------------------------------------

Adjusted EBITDA (2) 2,443 $3,220 $6,524 $5,928
-----------------------------------------------------------------------
11.7% 17.9% 14.9% 18.1%
-----------------------------------------------------------------------

Non-recurring items:
Employee compensation (3) - - - 6,281
-----------------------------------------------------------------------

EBITDA (2) 2,443 3,220 6,524 (353)
-----------------------------------------------------------------------

Amortization 2,582 1,504 5,209 1,822
Interest 256 102 412 179
-----------------------------------------------------------------------

Income (loss) before income
taxes and
non-controlling interest $(395) $1,614 $903 $(2,354)
-----------------------------------------------------------------------


(1) Derived from the unaudited consolidated results of Holdings for the period from January 1, 2005 to March 17, 2005, and from the unaudited consolidated results of the Fund for the period from March 18, 2005 to June 30, 2005.

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

(3) Employee compensation costs are non-recurring costs associated with the purchase for cancellation of


employee stock options outstanding under the former corporate structure and the issuance of preferred shares and cash to employees prior to the Fund's acquisition of Holdings.

Income taxes and net income have not been presented as they are not comparable, due to the changes to the capital structure of Somerset Holdings and the Fund in connection with the IPO completed on March 18, 2005.

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