Somerset Entertainment Income Fund

Somerset Entertainment Income Fund

August 14, 2007 16:19 ET

Somerset Entertainment Income Fund Reports Results for Second Quarter of 2007

TORONTO, ONTARIO--(Marketwire - Aug. 14, 2007) -


Somerset Entertainment Income Fund (TSX:SOM.UN) (the "Fund") today announced financial and operating results for the three months ended June 30, 2007.

Second Quarter Financial Highlights

- Sales increased 1.2% to $21.1 million

- Gross profit increased 24% to $7.6 million

- EBITDA increased 33% to $3.2 million

- Distributable cash for the period was $2.7 million, or $0.15 per unit (including the non- controlling interest share)

Sales for the second quarter increased by $0.2 million to $21.1 million, an increase of 1.2% from $20.9 million in the previous year. Sales in the U.S. were $16.5 million, a decrease of 1.2% compared with the previous year. The Compass business contributed $6.4 million to total U.S. sales, compared with $7.2 million for the same quarter in the prior year due to lower shipments to one of its mass merchant customers. Excluding Compass, Somerset's U.S. business generated sales of $10.1 million, up 6.7% in the quarter, compared with $9.5 million in the prior year. International sales increased 41.1% year over year to $2.6 million as a result of replenishment sales to new mass merchant retailers in Mexico and France obtained as new customers in the prior periods, and from increased replenishment sales in France and Australia. Sales in Canada declined 12.7% to $2.1 million as a result of lower replenishment sales to a club store retailer. Replenishment sales represented 96.9% of total sales for the quarter.

Gross profit increased 24.3% to $7.6 million, compared with $6.1 million for the three months ended June 30, 2006. Gross profit as a percentage of sales was 35.9%, compared with 29.3% during the same period last year. The gains can largely be attributed to the write-down of Richard Simmons production costs and royalty advances in the second quarter of 2006.

EBITDA increased to $3.2 million in the first quarter, a 32.7% increase over the same period in the previous year. The Compass business generated EBITDA of $1.2 million, consistent with the prior year, while the Somerset business generated EBITDA of $2.1 million, compared with $1.3 million in the prior year.

The Fund generated $2.7 million in distributable cash (including the non-controlling interest share) for the period, or $0.15 per unit. Three cash distributions (including the non-controlling interest share) were made during the quarter, for a payout ratio of 99.8% compared with 235.5% in the previous year. The increase in distributable cash compared with the prior year was due primarily to higher EBITDA generated in the quarter.

Somerset repaid $5 million of its term bank debt during the quarter from its cash reserves, which is expected to reduce interest costs for the balance of the year.

"After experiencing losses in the Compass business in the first quarter, the Compass team has worked hard to improve the performance of key lines. Improved sell-through on one main line in particular at a major mass merchant has helped to make the business profitable again," said Andy Burgess, Chief Executive Officer, Somerset Entertainment. "Furthermore, Somerset was able to repay $5 million in bank debt while maintaining a healthy payout ratio in a typically slower quarter," said Burgess.

Operational Highlights

While Somerset's children's line was discontinued from 1,100 doors of a major U.S. drug chain in the quarter, Somerset continues to place the program in retailers around the world. During the period, a promotional program was shipped to 1,400 doors of a major U.S. mass merchant. Approval for the line was also received for an additional 30 doors of a French hypermarket for a total of 100 locations. Commitment was also secured to test a new French version of the children's line in the Quebec locations of a Canadian department store.

Somerset continued to expand its business to new distribution channels in the second quarter with the shipment of a premium 32-title program to 198 doors of a major U.S.-based craft chain. Also during the period, Somerset tested an interactive box set program at a major club retailer in the United States. The test was successful and the retailer has confirmed a full roll-out to over 300 locations towards the end of the third quarter. This interactive box set program was also rolled out to 30 locations of the same club retailer in Mexico during the quarter.

Through its Compass division, Somerset confirmed the launch of a Rolling Stone compilation line at a major mass merchant in the third quarter. Retail sales on other re-launched programs continue to show improvement and are leading to significant re-orders. However, a large customer has decided not to renew its private-label Karaoke business with Compass for the upcoming fall season. This line represented approximately 2% of 2006 sales and has been in decline for the past two seasons. The customer will instead purchase four distributed titles from Compass for the third quarter. During the current quarter, Compass released a second video on a children's line and the title is performing well.

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 15, 2007, at 11:00 a.m. (EST). To access the call, dial 416-644-3424 or 1-800-732-6179. A replay of the conference call will be available as of 1:00 p.m. the same day, until midnight on August 22, 2007. To access the replay, dial 416-640-1917, or toll-free at 1-877-289-8525, followed by the pass code 21243254#.

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. 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 period, if any, are deducted in determining distributable cash. Distributable cash is important, 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 is a metric 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, EBITDA is a useful supplementary measure from which to make adjustments to determine distributable cash.

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 and distributable cash may not be comparable with similar measures presented by other entities. Investors are cautioned that EBITDA should not be construed as alternatives 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 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 (which can be found at 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 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 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, 2007, is available at and


Somerset Entertainment Income Fund

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

Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006

Sales $21,121 $20,880 $43,662 $43,899
Cost of goods sold 13,530 14,771 28,873 29,538
Gross profit 7,591 6,109 14,789 14,361

Selling, general and
administrative 5,094 4,732 10,216 9,599
Provincial sound tax credits (244) (346) (469) (582)
Foreign exchange gain (500) (720) (636) (1,180)
Income before amortization,
interest, income taxes and
non-controlling interest 3,241 2,443 5,678 6,524

Amortization of property,
plant and equipment 126 93 288 216
Amortization of deferred
financing costs - 56 - 112
Amortization of
intangible assets 1,524 2,433 3,060 4,881
Interest 406 256 767 412
Income (loss) before
income taxes and
non-controlling interest 1,185 (395) 1,563 903
Provision for (recovery of)
income taxes
Current 187 250 1,033 390
Future (1,043) (2,078) (2,724) (3,488)
(856) (1,828) (1,691) (3,098)
Income before non-
controlling interest 2,041 1,433 3,254 4,001
Non-controlling interest (380) (267) (606) (745)
Net income for the period 1,661 1,166 2,648 3,256

Deficit, beginning of period (90,836) (2,324) (89,649) (792)
Distributions declared (2,174) (3,622) (4,348) (7,244)
Deficit, end of period $(91,349) $(4,780) $(91,349) $(4,780)

Basic and diluted net
income per unit $0.12 $0.08 $0.18 $0.23

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

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