Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

August 07, 2008 13:42 ET

Somerset Entertainment Income Fund Reports Results for Second Quarter of 2008

TORONTO, ONTARIO--(Marketwire - Aug. 7, 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 and six months ended June 30, 2008.



Second Quarter Financial Highlights

- Sales decreased 19.4% to $16.7 million
- Gross profit decreased 26.8% to $5.5 million
- EBITDA decreased 42.5% to $1.9 million
- Income before non-controlling interest decreased to $0.01 million
- Distributable cash for the period was $1.5 million, or $0.085 per unit
(including the non-controlling interest share)
- Payout ratio of 177.5%

Year to Date Financial Highlights

- Sales decreased 17.5% to $35.5 million
- Gross profit decreased 18.1% to $12.0 million
- EBITDA decreased 10.7% to $5.1 million
- Income before non-controlling interest decreased 12.5% to $1.4 million
- Distributable cash for the period was $4.5 million, or $0.251 per unit
(including the non-controlling interest share)
- Payout ratio of 119.6%


Sales for the second quarter declined $4.0 million to $16.7 million, a decrease of 19.4% from $20.8 million in the previous year. Sales in the U.S. were $12.1 million, a decrease of 26.1% compared with the previous year. Sales in the United States denominated in U.S. dollars decreased by 18.6%. Sales decreased primarily because lower retail sales at several accounts generated reduced replenishment sales and because the prior year period included several rollouts. International sales increased 7.7% year over year to $2.6 million as a result of the timing of shipments to customers in France and the U.K. Sales in Canada increased 2.5% to $2.0 million due to a new electronics mass merchant customer obtained in the first quarter and increased replenishment sales to an existing club store customer. For the year to date, sales decreased 17.5% to $35.5 million.

Gross profit decreased 26.8% to $5.5 million, compared with $7.5 million for the three months ended June 30, 2007. Gross profit as a percentage of sales was 32.9%, compared with 36.2% during the same period last year. Gross profit in the quarter was impacted by the one-time $0.9 million cost of upgrading displays at an existing mass merchant customer to incorporate video monitors. For the year to date, gross profit decreased 18.1% to $12.0 million.

EBITDA decreased to $1.9 million in the second quarter, a 42.5% decrease over the same period in the previous year. The decrease was primarily due to lower sales and the investment in retail displays. For the year to date, EBITDA decreased to $5.1 million, a 10.7% decrease compared with the prior year.

Income before non-controlling interest decreased to $0.01 million, compared with $1.2 million in the prior period. For the year to date, income before non-controlling interest decreased to $1.4 million, a 12.5% decrease compared with the prior year.

The Fund generated $1.5 million in distributable cash (including the non-controlling interest share) for the period, or $0.085 per unit, resulting in a payout ratio of 177.5% compared with 99.8% in the previous year. For the year to date, the Fund generated distributable cash of $0.251 per unit, resulting in a payout ratio of 119.6% compared with 139.6% in the previous year.

"Somerset's performance during the second quarter declined because of lower sales and a major investment in upgrading displays at an important customer," said Andy Burgess, Chief Executive Officer, Somerset Entertainment. "However, we are excited about the planned acquisition of Somerset by Fluid Music Canada," Burgess said. "Fluid's access to capital and experience in developing online subscription businesses will enable Somerset to compete more effectively in the evolving music industry."

Operational Highlights

Somerset made strides in each of is territories during the second quarter. In the U.S., a large specialty chain retailer committed to a seasonal program for 1,000 locations and a leading mass merchant agreed to an increased seasonal program for 2,800 stores. At another mass merchant, five new titles were developed and merchandised on a non-Somerset end cap in the music department. The success of this initiative has led to a commitment from this customer for several additional titles that will ship during the second half, representing over $2 million in incremental sales.

In Canada, sales rose to a distributor as a result of retail sales increases at a major mass merchant with both the Reflections and Fisher-Price® programs. Somerset also secured an agreement from a major Canadian grocer to expand the Reflections program to more than 50 locations in the third quarter.

Internationally, the Reflections program is performing well in France, leading to rollouts to an additional 41 doors of various hypermarkets and mass merchants for a current total of 377 locations in that market. Somerset has also initiated tests at mass merchants in both Australia and Italy.

Proposal to Acquire Somerset Entertainment Income Fund

On July 15, 2008, Fluid Music Canada, Inc. ("Fluid")(TSX:FMN) and the Fund announced that Fluid and the Fund had reached an agreement in principle, pursuant to which Fluid expects to make an offer to purchase all of the outstanding units of the Fund at a price of $4.00 per unit, subject to certain conditions. The Fund has agreed to negotiate exclusively with Fluid with respect to the proposed transaction until September 10, 2008. The offer from Fluid represents a premium of approximately 33% to the closing price of the Fund's units on July 14, 2008. Given the conditions that must be satisfied for the proposed transaction to proceed, there can be no assurance that the transaction will proceed on the terms described, or at all.

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, August 8, 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# 58506386. A replay of the conference call will be available as of 2:00 p.m. the same day, until midnight on August 15, 2008. To access the replay, call (402) 220-7736, or toll-free at 1-888-562-2818, followed by the pass code 58506386.

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 press release, 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 an indicator 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 Ltd.

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 June 30, 2008, is available at www.somersetent.com and www.sedar.com.

Attachments:

Exhibit 1 - Q2 2008 Consolidated Statements of Income and Deficit

Exhibit 2 - Q2 2008 Selected Financial Information

Exhibit 3 - Q2 2008 Consolidated Statements of Cash Flows

Exhibit 4 - Q2 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 ended Six months ended
June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------------------------------

Sales $16,721 $20,755 $35,464 $42,969
Cost of goods sold 11,217 13,237 23,482 28,335
---------------------------------------------------------------------------
Gross profit 5,504 7,518 11,982 14,634
---------------------------------------------------------------------------

Expenses
Selling, general and
administrative 4,625 5,021 9,222 10,061
Provincial sound tax credits (220) (244) (381) (469)
Foreign exchange gain (765) (500) (1,931) (636)
---------------------------------------------------------------------------
Income before amortization,
interest, income taxes and
non-controlling interest 1,864 3,241 5,072 5,678
---------------------------------------------------------------------------

Amortization of property,
plant and equipment 148 126 294 288
Amortization of intangible
assets 1,505 1,524 3,008 3,060
Interest 170 406 402 767
---------------------------------------------------------------------------
Income before income taxes
and non-controlling interest 41 1,185 1,368 1,563
---------------------------------------------------------------------------
Provision for (recovery of)
income taxes
Current 174 187 348 1,033
Future (1,128) (1,043) (1,689) (2,724)
---------------------------------------------------------------------------
(954) (856) (1,341) (1,691)
---------------------------------------------------------------------------
Income before
non-controlling interest 995 2,041 2,709 3,254
Non-controlling interest (186) (380) (505) (606)
---------------------------------------------------------------------------
Net income for the period 809 1,661 2,204 2,648

Deficit, beginning of period (89,438) (90,836) (88,659) (89,649)
Distributions declared (2,174) (2,174) (4,348) (4,348)
---------------------------------------------------------------------------
Deficit, end of period $(90,803) $(91,349) $(90,803) $(91,349)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic and diluted net
income per unit $0.06 $0.12 $0.15 $0.18
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


EXHIBIT 2

Somerset Entertainment Income Fund

SELECTED FINANCIAL INFORMATION
Unaudited
(in thousands of Canadian dollars)


Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------------------------------
Sales $16,721 $20,755 $35,464 $42,969
Cost of goods sold 11,217 13,237 23,482 28,335
---------------------------------------------------------------------------
Gross profit 5,504 7,518 11,982 14,634
Gross profit % 32.9% 36.2% 33.8% 34.1%

Selling, general and
administrative expenses 4,625 5,021 9,222 10,061
Provincial sound tax credit (220) (244) (381) (469)
Foreign exchange gain (765) (500) (1,931) (636)
---------------------------------------------------------------------------

EBITDA(1) $1,864 $3,241 $5,072 $5,678
---------------------------------------------------------------------------
EBITDA % 11.2% 15.6% 14.3% 13.2%
---------------------------------------------------------------------------

Amortization 1,653 1,650 3,302 3,348
Interest 170 406 402 767
---------------------------------------------------------------------------
Income before income taxes and
non-controlling interest $41 $1,185 $1,368 $1,563
---------------------------------------------------------------------------

Recovery of income taxes (954) (856) (1,341) (1,691)
---------------------------------------------------------------------------

Income before non-controlling
interest 995 2,041 2,709 3,254
---------------------------------------------------------------------------

Non-controlling interest (186) (380) (505) (606)
---------------------------------------------------------------------------

Net income $809 $1,661 $2,204 2,648
---------------------------------------------------------------------------

Total assets $73,052 $84,172 $73,052 $84,172
Long-term liabilities - 21,761 - 21,761
---------------------------------------------------------------------------

(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 ended Six months ended
June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income for the period $809 $1,661 $2,204 $2,648
Add (deduct) items not involving cash
Non-controlling interest share of
income 186 380 505 606
Amortization of property, plant and
equipment 148 126 294 288
Amortization of finance costs
included in interest 52 55 103 112
Amortization of intangible assets 1,505 1,524 3,008 3,060
Unrealized foreign exchange loss 26 25 2 65
Unit-based compensation expense 47 20 201 39
Future income tax recovery (1,128) (1,043) (1,689) (2,724)
Funding of Long-Term Incentive Plan (1,097) - (1,097) -
---------------------------------------------------------------------------
548 2,748 3,531 4,094

Net change in non-cash working
capital balances related to operations
Accounts receivable 445 253 1,921 2,859
Inventory 363 (305) 196 478
Provincial sound tax credits
receivable (220) (244) 753 (469)
Prepaid expenses and sundry
deposits 179 461 93 210
Accounts payable and accrued
liabilities 760 (169) (588) (1,299)
Income taxes payable (236) - (944) -
Income taxes recoverable - 52 - 166
---------------------------------------------------------------------------
Cash provided by operating
activities 1,839 2,796 4,962 6,039
---------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property, plant and
equipment (114) (46) (159) (201)
---------------------------------------------------------------------------
Cash used in investing activities (114) (46) (159) (201)
---------------------------------------------------------------------------

FINANCING ACTIVITIES
Repayment of debt - (5,000) (5,000) (5,000)
Distributions paid on trust units (2,174) (2,174) (4,348) (4,348)
Distributions paid on Exchangeable
Class B LP units (497) (497) (995) (995)
---------------------------------------------------------------------------
Cash used in financing activities (2,671) (7,671) (10,343) (10,343)
---------------------------------------------------------------------------

Foreign exchange gain (loss) on cash
and cash equivalents held in foreign
currencies (35) (56) 8 (73)
---------------------------------------------------------------------------
Net decrease in cash and cash
equivalents during the period (981) (4,977) (5,532) (4,578)
Cash and cash equivalents, beginning
of period 2,171 7,065 6,722 6,666
---------------------------------------------------------------------------
Cash and cash equivalents, end of
period $1,190 $2,088 $1,190 $2,088
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $105 $273 $272 $654
Interest received (18) (58) (94) (112)
Income taxes paid 933 127 2,001 930
---------------------------------------------------------------------------
---------------------------------------------------------------------------


EXHIBIT 4

Somerset Entertainment Income Fund

DISTRIBUTABLE CASH
Unaudited
(in thousands of Canadian dollars)

Distributable cash for the three and six months ended June 30, 2008 and
June 30, 2007 is calculated as follows:


Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------------------------------

Cash provided by
operating activities $1,839 $2,796 $4,962 $6,039
Capital expenditures(1) (114) (46) (159) (201)
---------------------------------------------------------------------------
Standardized
distributable cash 1,725 2,750 4,803 5,838

Unrealized foreign
exchange loss (26) (25) (2) (65)
Funding of Long-Term
Incentive Plan(3) 1,097 - 1,097 -
Changes in non-cash
operating working
capital balances(2) (1,291) (48) (1,431) (1,945)
---------------------------------------------------------------------------
Distributable cash(4) $1,505 $2,677 $4,467 $3,828
Less: Non-controlling
interest share (280) (499) (832) (713)
---------------------------------------------------------------------------
Distributable cash to
Fund units $1,225 $2,178 $3,635 $3,115
---------------------------------------------------------------------------

Distributions declared $2,174 $2,174 $4,348 $4,348

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

Distributable cash per
Fund unit $0.085 $0.150 $0.251 $0.215
Distributions declared
per Fund unit $0.150 $0.150 $0.300 $0.300
Payout ratio 177.5% 99.8% 119.6% 139.6%
---------------------------------------------------------------------------

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


Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------------------------------

Income before
non-controlling interest $995 $2,041 $2,709 $3,254
Non-cash items:
Amortization 1,653 1,650 3,302 3,348
Amortization of finance
expenses included in
interest 52 55 103 112
Long-Term Incentive Plan
expense included in
income above(3) 47 20 201 39
Future income tax recovery (1,128) (1,043) (1,689) (2,724)

Adjust for:
Capital expenditures (114) (46) (159) (201)
---------------------------------------------------------------------------
Distributable cash(4) $1,505 $2,677 $4,467 $3,828
Less: Non-controlling
interest share (280) (499) (832) (713)
---------------------------------------------------------------------------
Distributable cash to
Fund units $1,225 $2,178 $3,635 $3,115
---------------------------------------------------------------------------

(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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