Somerset Entertainment Income Fund
TSX : SOM.UN

Somerset Entertainment Income Fund

November 11, 2008 16:02 ET

Somerset Entertainment Income Fund Reports Results for Third Quarter of 2008

TORONTO, ONTARIO--(Marketwire - Nov. 11, 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 September 30, 2008.

Third Quarter Financial Highlights

- Sales decreased 13.4% to $20.8 million

- Gross profit decreased 11.2% to $8.8 million

- EBITDA decreased 22.3% to $4.5 million

- Income before non-controlling interest decreased to $2.6 million

- Distributable cash for the period was $4.4 million, or $0.245 per unit (including the non-controlling interest share)

- Payout ratio of 61.1%

Year-to-Date Financial Highlights

- Sales decreased 16.0% to $56.2 million

- Gross profit decreased 15.3% to $20.8 million

- EBITDA decreased 16.5% to $9.6 million

- Income before non-controlling interest decreased to $5.3 million

- Distributable cash for the period was $8.8 million or $0.496 per unit (including the non-controlling interest share)

- Payout ratio of 90.7%

Sales for the third quarter declined $3.2 million to $20.8 million, a decrease of 13.4% from $24.0 million in the prior year. Sales in the U.S. were $16.4 million, a decrease of 16.0% compared with the previous year. Sales in the United States denominated in U.S. dollars decreased by 14.1%. The sales decline was primarily due to lower replenishment sales at certain accounts as a result of lower retail sales and because the prior year included roll-out sales to a new club store customer. International sales decreased 5.4% year over year to $2.4 million, primarily due to lower replenishment sales to two mass merchant customers in the U.K. as a result of lower retail sales. Sales in Canada increased 1.4% to $2.0 million, primarily due to sales to a new electronics mass merchant customer. For the year to date, sales decreased 16.0% to $56.2 million.

Gross profit for the quarter decreased 11.2% to $8.8 million, compared with $9.9 million for the prior period. Gross profit as a percentage of sales was 42.4% for the quarter, compared with 41.3% in the prior period. Gross profit as a percentage of sales improved as the sales mix in the quarter was weighted towards lower cost products and the prior year included costs associated with roll-out sales to a new club store customer. For the year to date, gross profit decreased 15.3% to $20.8 million.

EBITDA decreased to $4.5 million in the third quarter, a 22.3% decrease compared with the prior year. The decrease was primarily due to lower sales and lower foreign exchange gains on forward foreign exchange contracts. For the year to date, EBITDA decreased to $9.6 million, a 16.5% decrease compared with the prior year.

Income before non-controlling interest decreased to $2.6 million, compared with $3.1 million in the prior period. For the year to date, income before non-controlling interest decreased to $5.3 million, a 17.3% decrease compared with the prior year.

The Fund generated $4.4 million in distributable cash (including the non-controlling interest share) for the period, or $0.245 per unit, resulting in a payout ratio of 61.1% compared with 52.0% in the previous year. For the year to date, the Fund generated distributable cash of $0.496 per unit, resulting in a payout ratio of 90.7% compared with 89.4% in the previous year.

"Somerset's performance during the third quarter declined primarily because of reduced roll-out and replenishment sales during the period," said Andy Burgess, Chief Executive Officer, Somerset Entertainment. "Despite the difficult retail environment, Somerset was able to maintain a healthy payout ratio of 61.1% in the quarter," Burgess said.

Operational Highlights

Somerset continued to add new business in each of its territories during the third quarter. In the U.S., Somerset shipped a seasonal program to over 1,000 stores of a large specialty chain retailer and 2,300 stores of a major mass merchant. At another mass merchant, Somerset shipped a Halloween program for the first time and created five new titles for a non-Somerset end cap in the music department. Also, Somerset developed new titles to be featured in the bestseller section. This product will ship in the fourth quarter and will represent approximately $2 million in incremental sales.

In Canada, Somerset shipped the Reflections program to more than 50 stores at a major Canadian grocer. A major electronics retailer has ordered a seasonal program for end cap placement at over 100 locations. Another major retailer has successfully tested a compilation program and is considering expansion in early 2009.

Internationally, the Reflections program has been approved for store ordering at one of France's major hypermarkets. A successful test in Australia has led to negotiations over terms of expansion for the 3-CD set program. In the U.K., a major juvenile products retailer has approved a test for the Fisher-Price line.

Proposal by Fluid Music to Acquire Somerset Entertainment Income Fund

On September 25, 2008, Somerset's Board of Trustees declined an offer by Fluid Music Canada, Inc. ("Fluid") to purchase all of the outstanding units of the Fund. Fluid had revised its prior expression of interest to acquire units at $4.00 in cash, and proposed to acquire Somerset at an amount equal to $3.35 per unit, payable as $2.00 in cash and the remainder in Fluid common shares.

After considering the revised Fluid offer, Somerset's Board of Trustees determined not to proceed having regard to, among other things, the lower overall price offered and the significantly lower cash component thereof. "Somerset will continue to focus on growing its business and is also actively exploring various strategic options at this time," said Burgess.

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, November 12, 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# 69337579. A replay of the conference call will be available as of 2:00 p.m. the same day, until midnight on November 19, 2008. To access the replay, call (402) 220-1454, or toll-free at 1-800-677-8849, followed by the pass code 69337579.

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

Attachments:

Exhibit 1 - Q3 2008 Consolidated Statements of Income and Deficit

Exhibit 2 - Q3 2008 Selected Financial Information

Exhibit 3 - Q3 2008 Consolidated Statements of Cash Flows

Exhibit 4 - Q3 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 Nine months ended
September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------

Sales $20,761 $23,984 $56,225 $66,953
Cost of goods sold 11,962 14,079 35,444 42,414
-------------------------------------------------------------------------
Gross profit 8,799 9,905 20,781 24,539
-------------------------------------------------------------------------

Expenses
Selling, general and
administrative 4,695 4,685 13,917 14,746
Provincial sound tax
credits (259) (152) (640) (621)
Foreign exchange gain (150) (435) (2,081) (1,071)
-------------------------------------------------------------------------
Income before
amortization,
interest, income taxes and
non-controlling interest 4,513 5,807 9,585 11,485
-------------------------------------------------------------------------

Amortization of property,
plant and equipment 153 196 447 484
Amortization of
intangible assets 1,510 1,515 4,518 4,575
Interest 211 353 613 1,120
-------------------------------------------------------------------------
Income before income taxes
and non-controlling
interest 2,639 3,743 4,007 5,306
-------------------------------------------------------------------------
Provision for (recovery of)
income taxes
Current 96 275 444 1,308
Future (33) 330 (1,722) (2,394)
-------------------------------------------------------------------------
63 605 (1,278) (1,086)
-------------------------------------------------------------------------
Income before
non-controlling interest 2,576 3,138 5,285 6,392
Non-controlling interest (480) (585) (985) (1,191)
-------------------------------------------------------------------------
Net income for the period 2,096 2,553 4,300 5,201

Deficit, beginning of
period (90,803) (91,349) (88,659) (89,649)
Distributions declared (2,174) (2,174) (6,522) (6,522)
-------------------------------------------------------------------------
Deficit, end of period $(90,881) $(90,970) $(90,881) $(90,970)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic and diluted net income
per unit $0.15 $0.18 $0.30 $0.36
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic and diluted 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, except for units and per-unit amounts)


Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
--------------------------------------------------------------------------

Sales $20,761 $ 23,984 $ 56,225 $ 66,953
Cost of goods sold 11,962 14,079 35,444 42,414
--------------------------------------------------------------------------
Gross profit 8,799 9,905 20,781 24,539
Gross profit % 42.4% 41.3% 37.0% 36.7%

Selling, general and
administrative expenses 4,695 4,685 13,917 14,746
Provincial sound tax credit (259) (152) (640) (621)
Foreign exchange gain (150) (435) (2,081) (1,071)
--------------------------------------------------------------------------

EBITDA(1) $4,513 $5,807 $9,585 $ 11,485
--------------------------------------------------------------------------
EBITDA % 21.7% 24.2% 17.1% 17.2%
--------------------------------------------------------------------------

Amortization 1,663 1,711 4,965 5,059
Interest 211 353 613 1,120
--------------------------------------------------------------------------
Income before income taxes and
non-controlling interest $2,639 $3,743 $4,007 $5,306
--------------------------------------------------------------------------

Provision for (recovery of)
income taxes 63 605 (1,278) (1,086)
--------------------------------------------------------------------------

Income before non-controlling
interest 2,576 3,138 5,285 6,392
--------------------------------------------------------------------------

Non-controlling interest (480) (585) (985) (1,191)
--------------------------------------------------------------------------

Net income $2,096 $2,553 $4,300 $5,201
--------------------------------------------------------------------------

Total assets $78,361 $ 87,156 $ 78,361 $ 87,156
Long-term liabilities 801 17,369 801 17,369
--------------------------------------------------------------------------

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 Nine months ended
September 30, September 30,
2008 2007 2008 2007
---------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income for the period $2,096 $ 2,553 $ 4,300 $ 5,201
Add (deduct) items not involving
cash
Non-controlling interest share
of income 480 585 985 1,191
Amortization of property, plant
and equipment 153 196 447 484
Amortization of financing costs
included in interest 53 55 156 167
Amortization of intangible assets 1,510 1,515 4,518 4,575
Unrealized foreign exchange
loss (gain) (1) 4 1 69
Unit-based compensation expense 227 19 428 58
Future income tax expense
(recovery) (33) 330 (1,722) (2,394)
Funding of Long-Term Incentive
Plan - - (1,097) -
---------------------------------------------------------------------------
4,485 5,257 8,016 9,351

Net change in non-cash working
capital balances
related to operations
Accounts receivable (1,408) (1,978) 513 881
Inventory (2,384) (578) (2,188) (100)
Provincial sound tax credits
receivable (259) (152) 494 (621)
Prepaid expenses and sundry
deposits 421 94 514 304
Accounts payable and accrued
liabilities 2,589 2,307 2,001 1,008
Income taxes payable (471) - (1,415) -
Income taxes recoverable (540) (11) (540) 155
---------------------------------------------------------------------------
Cash provided by operating
activities 2,433 4,939 7,395 10,978
---------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property, plant and
equipment (115) (112) (274) (313)
---------------------------------------------------------------------------
Cash used in investing activities (115) (112) (274) (313)
---------------------------------------------------------------------------

FINANCING ACTIVITIES
Repayment of debt 800 - (4,200) (5,000)
Distributions paid on trust units (2,174) (2,174) (6,522) (6,522)
Distributions paid on
Exchangeable Class B LP units (498) (498) (1,493) (1,493)
---------------------------------------------------------------------------
Cash used in financing activities (1,872) (2,672) (12,215) (13,015)
---------------------------------------------------------------------------

Foreign exchange loss on cash
and cash equivalents held in
foreign currencies (27) (71) (19) (144)
---------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents
during the period 419 2,084 (5,113) (2,494)
Cash and cash equivalents,
beginning of period 1,190 2,088 6,722 6,666
---------------------------------------------------------------------------
Cash and cash equivalents, end of
period $1,609 $ 4,172 $ 1,609 $ 4,172
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $117 $411 $389 $ 1,065
Interest received (7) (22) (101) (145)
Income taxes paid 520 253 2,521 1,183
---------------------------------------------------------------------------



EXHIBIT 4

Somerset Entertainment Income Fund

DISTRIBUTABLE CASH
Unaudited
(in thousands of Canadian dollars)

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



Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------

Cash provided by operating
activities $2,433 $4,939 $7,395 $10,978
Capital expenditures(1) (115) (112) (274) (313)
-------------------------------------------------------------------------
Standardized
distributable cash 2,318 4,827 7,121 10,665

Unrealized foreign exchange
loss 1 (4) (1) (69)
Funding of Long-Term
Incentive Plan(3) - - 1,097 -
Changes in non-cash operating
working capital balances(2) 2,052 318 621 (1,627)
-------------------------------------------------------------------------
Distributable cash(4) $4,371 $5,141 $8,838 $8,969
Less: Non-controlling
interest share (814) (958) (1,646) (1,671)
-------------------------------------------------------------------------
Distributable cash to Fund
units $3,557 $4,183 $7,192 $7,298
-------------------------------------------------------------------------

Distributions declared $2,174 $2,174 $6,522 $6,522

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

Distributable cash per
Fund unit $0.245 $0.289 $0.496 $0.505
Distributions declared
per Fund unit $0.150 $0.150 $0.450 $0.450
Payout ratio 61.1% 52.0% 90.7% 89.4%
-------------------------------------------------------------------------


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


Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------

Income before
non-controlling interest $2,576 $3,138 $5,285 $6,392

Non-cash items:
Amortization 1,663 1,711 4,965 5,059
Amortization of finance
expenses included in interest 53 55 156 167
Long-Term Incentive Plan
expense included in income
above(3) 227 19 428 58
Future income tax recovery (33) 330 (1,722) (2,394)

Adjust for:
Capital expenditures (115) (112) (274) (313)
-------------------------------------------------------------------------
Distributable cash(4) $4,371 $5,141 $8,838 $8,969
Less: Non-controlling
interest share (814) (958) (1,646) (1,671)
-------------------------------------------------------------------------

Distributable cash to
Fund units $3,557 $4,183 $7,192 $7,298
-------------------------------------------------------------------------

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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