Somerset Entertainment Income Fund Reports Results for Second Quarter of 2009

TORONTO, ONTARIO--(Marketwire - Aug. 12, 2009) - NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICE Somerset Entertainment Income Fund SOM (the "Fund") today announced financial and operating results for the three months ended June 30, 2009. Second Quarter Financial Highlights - Sales increased 10.4% to $18.5 million - Gross profit increased 32.1% to $7.3 million - EBITDA increased 22.8% to $2.3 million - Income before non-controlling interest decreased to $0.7 million - Distributable cash for the period was $2.4 million, or $0.132 per unit (including the non-controlling interest share) - Payout ratio of 38.0% Year-to-Date Financial Highlights - Sales increased 3.9% to $36.8 million - Gross profit increased 22.7% to $14.7 million - EBITDA decreased 23.1% to $3.9 million - Income before non-controlling interest decreased to $0.2 million - Distributable cash for the period was $3.9 million, or $0.217 per unit (including the non-controlling interest share) - Payout ratio of 46.2% "We are pleased to report stronger sales and significantly higher earnings in the quarter compared with the prior year," said Andy Burgess, Chief Executive Officer, Somerset Entertainment. "The increase in earnings is particularly satisfying, given the considerably larger foreign exchange losses on forward foreign exchange contracts in the current quarter," said Burgess. "In early July, Somerset completed the acquisition of Puretracks Inc., a leading provider of digital music services in Canada and the United States. With the addition of Puretracks' robust digital music platform, Somerset has solidified its ability to sell music in physical and digital formats into the future." Sales for the second quarter grew $1.7 million to $18.5 million, an increase of 10.4% from $16.7 million in the previous year. Sales in the U.S. were $14.9 million, an increase of 23.3% compared with the previous year. Sales in the United States denominated in U.S. dollars increased by 4.2% as a result of greater replenishment orders from two mass merchant customers and sales related to a test at a new club store customer. International sales decreased 29.9% year over year to $1.8 million due to the bankruptcy of a mass merchant customer in the U.K. Sales in Canada decreased 14.9% to $1.7 million due to a decline in replenishment orders from lower retail sales and the discontinuation of a product line at a major chain customer during the first quarter. Gross profit for the second quarter increased 32.1% to $7.3 million compared with $5.5 million in the previous year. Gross profit as a percentage of sales for the quarter was 39.4% compared with 32.9% during the same period last year, as 2008 included the cost of upgrading displays at an existing mass merchant customer. EBITDA increased to $2.3 million in the second quarter, a 22.8% gain over the same period in the previous year. The increase was primarily due to an increase in gross margins resulting from higher sales and gross margin percent. These increases were partially offset by a $1.3 million increase in foreign exchange losses on forward foreign exchange contracts and marginally higher selling, general and administrative expenses. Income before non-controlling interest for the period was $0.7 million compared with $1.0 million for the three months ended June 30, 2008. For the year to date, income before non-controlling interest was $0.2 million compared with $2.7 million in the prior year. The Fund generated $2.4 million in distributable cash (including the non-controlling interest share) for the quarter, or $0.132 per unit. Three cash distributions (including the non-controlling interest share) were made, totalling $0.9 million, or $0.050 per unit, for a payout ratio of 38.0% compared with 177.5% in the previous year. For the year to date, the Fund generated distributable cash of $0.217 per unit, resulting in a payout ratio of 46.2% compared with 119.6% in the previous year. Operational Highlights In Canada, Somerset confirmed new Halloween and Christmas programs at two mass merchant retailers. As well, a major grocer confirmed a five-store test. In the U.S., new seasonal programs were secured at an office supply, mass merchant and craft retailer. Incremental sales from these programs are expected to exceed $1.5 million compared with the previous year. A leading grocer initiated a 20-store test for a new Somerset program. Internationally, Somerset began a Fisher-Price test at a major retailer and secured a Halloween program in 600 stores of a leading mass merchant in the U.K. In July 2009, Somerset completed the acquisition of Puretracks Inc. and became a unique player in the music industry with both a niche physical and digital strategy. Puretracks' carrier-grade technology platform and digital music services expertise enables Somerset to offer an entirely new suite of programs to its existing customer base. With a digital store offering 3.4 million songs, Somerset is able to provide retailers with a complete music solution that bridges the physical and digital space. 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 Thursday, August 13, 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# 23026288. A replay of the conference call will be available as of 2:00 p.m. the same day, until midnight on August 20, 2009. To access the replay, call (402) 220-2906, or toll-free at 1-800-839-4235, followed by the pass code 23026288. 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 is the leading North American producer and distributor of specialty music and DVDs sold internationally through non-traditional music retailers using interactive displays and a distributor of music in digital format. Somerset's extensive distribution network includes mass merchants, specialty chains and independent gift stores in more than 20 countries, including the United States and Canada. Based in Toronto, Canada, Somerset 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, 2009, is available at www.somersetent.com and www.sedar.com. Attachments: Exhibit 1 - Q2 2009 Consolidated Statements of Income and Deficit Exhibit 2 - Q2 2009 Selected Financial Information Exhibit 3 - Q2 2009 Consolidated Statements of Cash Flows Exhibit 4 - Q2 2009 Distributable Cash /T/ 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, 2009 2008 2009 2008 ---------------------------------------------------------------------------- Sales $18,456 $16,721 $36,836 $35,464 Cost of goods sold 11,185 11,217 22,136 23,482 ---------------------------------------------------------------------------- Gross profit 7,271 5,504 14,700 11,982 ---------------------------------------------------------------------------- Expenses Selling, general and administrative 4,772 4,625 9,605 9,222 Provincial sound tax credits (322) (220) (680) (381) Foreign exchange gain 533 (765) 1,873 (1,931) ---------------------------------------------------------------------------- Income before amortization, interest, income taxes and non-controlling interest 2,288 1,864 3,902 5,072 ---------------------------------------------------------------------------- Amortization of property, plant and equipment 151 148 293 294 Amortization of intangible assets 1,349 1,505 2,708 3,008 Interest 102 170 177 402 ---------------------------------------------------------------------------- Income before income taxes and non-controlling interest 686 41 724 1,368 ---------------------------------------------------------------------------- Provision for (recovery of) income taxes Current (140) 174 (44) 348 Future 159 (1,128) 546 (1,689) ---------------------------------------------------------------------------- 19 (954) 502 (1,341) ---------------------------------------------------------------------------- Income before non-controlling interest 667 995 222 2,709 Non-controlling interest (124) (186) (41) (505) ---------------------------------------------------------------------------- Net income for the period 543 809 181 2,204 Deficit, beginning of period (109,365) (89,438) (108,277) (88,659) Distributions declared (726) (2,174) (1,452) (4,348) ---------------------------------------------------------------------------- Deficit, end of period $ (109,548) $ (90,803) $ (109,548) $ (90,803) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Basic net income per unit $0.04 $0.06 $0.01 $0.15 Diluted net income per unit $0.04 $0.06 $0.01 $0.15 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Basic weighted average number of units outstanding 14,297,468 14,481,968 14,295,662 14,451,218 Diluted weighted average number of units outstanding 17,811,531 17,811,531 17,811,531 17,811,531 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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, 2009 2008 2009 2008 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Sales $ 18,456 $ 16,721 $ 36,836 $ 35,464 Cost of goods sold 11,185 11,217 22,136 23,482 --------------------------------------------------------------------------- Gross profit 7,271 5,504 14,700 11,982 Gross profit % 39.4% 32.9% 39.9% 33.8% Selling, general and administrative expenses 4,772 4,625 9,605 9,222 Provincial sound tax credit (322) (220) (680) (381) Foreign exchange loss (gain) 533 (765) 1,873 (1,931) --------------------------------------------------------------------------- EBITDA(1) $ 2,288 $ 1,864 $ 3,902 $ 5,072 --------------------------------------------------------------------------- EBITDA % 12.4% 11.2% 10.6% 14.3% --------------------------------------------------------------------------- Amortization 1,500 1,653 3,001 3,302 Interest 102 170 177 402 --------------------------------------------------------------------------- Income before income taxes and non-controlling interest $ 686 $ 41 $ 724 $ 1,368 --------------------------------------------------------------------------- Provision for (recovery of) income taxes 19 (954) 502 (1,341) --------------------------------------------------------------------------- Income before non-controlling interest 667 995 222 2,709 --------------------------------------------------------------------------- Non-controlling interest (124) (186) (41) (505) --------------------------------------------------------------------------- Net income $ 543 $ 809 $ 181 $ 2,204 --------------------------------------------------------------------------- Total assets $ 51,306 $ 73,052 $ 51,306 $ 73,052 Long-term liabilities 5,555 - 5,555 - --------------------------------------------------------------------------- 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, 2009 2008 2009 2008 --------------------------------------------------------------------------- OPERATING ACTIVITIES Net income for the period $ 543 $ 809 $ 181 $ 2,204 Add (deduct) items not involving cash Non-controlling interest share of income 124 186 41 505 Amortization of property, plant and equipment 151 148 293 294 Amortization of finance costs included in interest 14 52 26 103 Amortization of intangible assets 1,349 1,505 2,708 3,008 Unrealized foreign exchange loss (gain) (100) 26 32 2 Unit-based compensation expense 121 47 243 201 Future income tax provision (recovery) 159 (1,128) 546 (1,689) Funding of Long-Term Incentive Plan (496) (1,097) (496) (1,097) --------------------------------------------------------------------------- 1,865 548 3,574 3,531 Net changes in non-cash working capital balances related to operations Accounts receivable 1,642 445 4,101 1,921 Inventory 78 363 146 196 Provincial sound tax credits receivable (322) (220) 139 753 Prepaid expenses and sundry deposits (175) 179 (226) 93 Income taxes recoverable (198) (236) (469) (944) Accounts payable and accrued liabilities (833) 760 (5,527) (588) --------------------------------------------------------------------------- Cash provided by operating activities 2,057 1,839 1,738 4,962 --------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property, plant and equipment (111) (114) (172) (159) --------------------------------------------------------------------------- Cash used in investing activities (111) (114) (172) (159) --------------------------------------------------------------------------- FINANCING ACTIVITIES Repayment of debt (933) - (1,906) (5,000) Distributions paid on trust units (726) (2,174) (1,935) (4,348) Distributions paid on Exchangeable Class B LP units (166) (497) (443) (995) --------------------------------------------------------------------------- Cash used in financing activities (1,825) (2,671) (4,284) (10,343) --------------------------------------------------------------------------- Foreign exchange gain (loss) on cash and cash equivalents held in foreign currencies 97 (35) 34 8 --------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period 218 (981) (2,684) (5,532) Cash and cash equivalents, beginning of period 2,932 2,171 5,834 6,722 --------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 3,150 $ 1,190 $ 3,150 $ 1,190 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Supplemental cash flow information Interest paid $ 95 $ 105 $ 208 $ 272 Interest received (1) (18) (42) (94) Income taxes paid (20) 933 353 2,001 --------------------------------------------------------------------------- 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 and six months ended June 30, 2009 and June 30, 2008 is calculated as follows: Three months ended Six months ended June 30, June 30, 2009 2008 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash provided by operating activities $ 2,057 $ 1,839 $ 1,738 $ 4,962 Capital expenditures(1) (111) (114) (172) (159) ---------------------------------------------------------------------------- Standardized distributable cash 1,946 1,725 1,566 4,803 Unrealized foreign exchange gain (loss) 100 (26) (32) (2) Funding of Long-Term Incentive Plan(3) 496 1,097 496 1,097 Changes in non-cash operating working capital balances(2) (192) (1,291) 1,836 (1,431) ---------------------------------------------------------------------------- Distributable cash(4) $ 2,350 $ 1,505 $ 3,866 $ 4,467 Less: Non-controlling interest share (438) (280) (720) (832) ---------------------------------------------------------------------------- Distributable cash to Fund units $ 1,912 $ 1,225 $ 3,146 $ 3,635 ---------------------------------------------------------------------------- Distributions declared $ 726 $ 2,174 $ 1,452 $ 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 $ 0.132 $ 0.085 $ 0.217 $ 0.251 Distributions declared per Fund unit $ 0.050 $ 0.150 $ 0.100 $ 0.300 Payout ratio 38.0% 177.5% 46.2% 119.6% ---------------------------------------------------------------------------- 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, 2009 2008 2009 2008 ---------------------------------------------------------------------------- Income before non-controlling interest $ 667 $ 995 $ 222 $ 2,709 Non-cash items: Amortization 1,500 1,653 3,001 3,302 Amortization of finance expenses included in interest 14 52 26 103 Long-Term Incentive Plan expense included in income above(3) 121 47 243 201 Future income tax expense (recovery) 159 (1,128) 546 (1,689) Adjust for: Capital expenditures (111) (114) (172) (159) ---------------------------------------------------------------------------- Distributable cash(4) $ 2,350 $ 1,505 $ 3,866 $ 4,467 Less: Non-controlling interest share (438) (280) (720) (832) ---------------------------------------------------------------------------- Distributable cash to Fund units $ 1,912 $ 1,225 $ 3,146 $ 3,635 ---------------------------------------------------------------------------- 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." /T/