Madacy Entertainment Income Fund Reports Fourth Quarter and 2006 Year-End Results



    /NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR
    DISSEMINATION IN THE UNITED STATES/

    MONTREAL, March 14 /CNW Telbec/ - Madacy Entertainment Income Fund (TSX:
MEG.UN) (the "Fund" or "Madacy") today announced financial and operating
results for its fourth quarter ("Fourth Quarter") and its fiscal year ended
December 31, 2006 ("Fiscal 2006 Year").

    
    - Reported net sales of $77.1 million in the Fiscal 2006 Year, a decrease
      of 11.0% compared to the prior year (Fourth Quarter: $25.3 million, a
      decrease of 15.2%)
    - Reported EBITDA of $5.4 million in the Fiscal 2006 Year, a decrease of
      38.8% compared to the prior year (Fourth Quarter:  $2.8 million, a
      decrease of 32.8%)
    - Took a non-cash charge in the amount of $23.0 million (net of
      Exchangeable Unit Interest share) relating to the write-down of
      goodwill
    

    "This has been a challenging year for Madacy, a year during which the
retail environment for recorded music witnessed a decline and retailers
realigned their store inventory to deal with their overall sales objectives"
said Hillel Frankel, President of Madacy. "During the second quarter, certain
retailers executed on their plans to reduce their overall inventory levels
and, at the same time, realigned their entertainment departments. As a
consequence, Madacy experienced a lower than normal level of product orders
and a significantly higher level of returns resulting in operating results
well below our expectations. In the second half of the year, a seasonally
strong period, business returned to more normal levels despite customers'
intention to maintain more moderate inventory levels. This was due, in large
part, to the continued strong retail performance of Madacy's products. As a
consequence, Madacy was able to increase its overall unit sales market share
and further entrench itself as the dominant supplier of "value" music products
to virtually all of the major retailers of recorded music. However, Madacy's
overall product mix, and consequently its gross margin, continued to be
challenged during the year as lower margin product sourced from the Major
Labels continued to be a significant part of Madacy's overall business. Madacy
is currently working with a number of financial institutions to refinance its
existing bank indebtedness. Management expects to be able to complete the
refinancing on or prior to the April 20th maturity of the existing banking
facilities" said Mr. Frankel.
    "2006 was a year of give-and-take for Madacy" said Amos Alter, CEO and
founder of Madacy. "On the financial side, the unexpectedly high level of
returns as certain customers realigned their overall store inventory created a
difficult cash flow situation and forced us to suspend distributions to
Unitholders. On the business side, Madacy continued to increase its market
share and, in the second half of 2006, introduced two new product lines that
have experienced levels of retail sell-through that are truly exciting.
Finally, we have increased our focus and energy on our licensing business and
have achieved significant growth in this high margin area of business. We
remain committed to executing on our numerous opportunities and creating value
for our Unitholders" said Mr. Alter.

    Review of Operations for the Fourth Quarter and Fiscal 2006 Year

    Madacy recorded net sales of $77.109 million in the Fiscal 2006 Year, a
decrease of $9.565 million or 11.0% from the prior year. In the Fourth
Quarter, Madacy had net sales of $25.329 million, a 15.2% decrease from the
comparative period of the prior year.
    At the end of the Fiscal 2006 Year, the current valuation of the Fund was
determined to be lower than its carrying value and required a write-down of
goodwill in the amount of $35.336 million. The net impact of this non-cash
write-down, after allocating a portion to the Exchangeable Unit Interest, was
$22.968 million.
    EBITDA was $5.435 million in the Fiscal 2006 Year, a 38.8% decrease from
the prior year. In the Fourth Quarter, EBITDA was $2.779 million, a 32.8%
decrease from the comparative period of the prior year.
    Distributable Cash was $2.585 million in the Fiscal 2006 Year, a 57.8%
decrease from the prior year. In the Fourth Quarter, Distributable Cash was
$2.225 million, a decrease of $1.472 million or 39.8% from the comparative
period of the prior year.

    Tax information

    For the Fiscal 2006 Year, the Fund has determined that approximately
23.90% of distributions paid to Unitholders will be an allocation of income
for Canadian residents with the remaining 76.10% being treated as a return of
capital.
    References to "EBITDA" are to earnings before interest, income taxes,
amortization, mark-to-market (unrealized) gains or losses on foreign exchange
and interest rate swap contracts, realized foreign exchange gains or losses on
foreign exchange contracts entered into to eliminate exposure to foreign
exchange fluctuations on the Fund's distributions to Unitholders and the share
of net earnings of the Exchangeable Units interest. EBITDA is not an earnings
measure recognized by GAAP and does not have a standardized meaning prescribed
by GAAP. Investors are cautioned that EBITDA should not replace net earnings
or loss (as determined in accordance with GAAP) as an indicator of the Fund's
performance, or cash flows from operating, investing and financing activities
as a measure of the Fund's liquidity and cash flows. Our method of calculating
EBITDA may differ from the methods used by other issuers. Therefore, our
EBITDA may not be comparable to similar measures presented by other issuers.
    EBITDA of the predecessor company presented for comparative purposes has
been adjusted on a pro forma basis to reflect the Fund's capital structure and
the acquisition of the Business by the Fund. Pro forma adjustments relate to
changes in capital tax expense, public company expenses, certain pension plan
expenses incurred by the predecessor company, foreign exchange and
Exchangeable Units interest.

    Forward-Looking Statements

    Certain statements in this news release may contain forward-looking
statements, which reflect management's expectations regarding the future
growth, results of operations, performance and business prospects, and
opportunities of the Fund. Such forward-looking statements reflect
management's current beliefs and are based on information currently available
to us. Forward-looking statements involve significant risks and uncertainties.
A number of factors could cause actual results to differ materially from
results discussed in the forward-looking statements.

    About Madacy Entertainment Income Fund

    Madacy operates in the business of recorded music and home video products
with a primary focus on the development and marketing of budget and mid-priced
recorded music products. Madacy is also involved in the distribution of
mid-priced and full price products of other music labels and the licensing of
its proprietary recordings. According to industry data, Madacy is the largest
independent budget and mid-priced music label in North America by number of
units sold. Madacy also develops and markets budget and mid-priced home video
products.
    Additional information relating to Madacy Entertainment Income Fund,
including Audited Financial Statements and the Management Discussion and
Analysis of the Fund as at December 31, 2006, is available at www.sedar.com
and on Madacy's website at www.madacy.com.
    The financial statements of the Fund are expressed in United States
dollars and are in accordance with Canadian GAAP.

    Attachments:
    Selected Financial Information
    Consolidated Statements of Earnings
    Consolidated Balance Sheets
    Consolidated Statements of Cash Flows

    The foregoing unaudited attachments contain extracts from the Audited
Financial Statements.

    Exhibit 1
    
    MADACY ENTERTAINMENT INCOME FUND

    Selected Consolidated Financial Information
    (in thousands of U.S. dollars except where indicated)

                                    For the
                        For the       three               For the
                   three months      months              Combined   For the
                          ended       ended    For the       2005  Calendar
                       December    December     Fiscal       Year      2004
                             31,         31,      2006  (combined-   Period
                           2006        2005       Year  pro forma)(pro forma)
                       (91 days)   (91 days) (365 days) (365 days)(365 days)

    Statement of
     Earnings Data:
    Net Sales          $ 25,329    $ 29,855   $ 77,109   $ 86,674   $75,906
    Cost of Sales        17,248      19,578     52,721     57,755    47,203
    Gross Margin          8,081      10,277     24,388     28,919    28,703
      Gross Margin %       31.9%       34.4%      31.6%      33.4%     37.8%
    Selling, General
      and
     Administrative
     expenses             5,300       6,236     19,468     20,214    17,230
    Net
     Earnings (Loss)    (23,036)      1,954    (23,899)     3,903     5,187
    EBITDA             $  2,779    $  4,138   $  5,435   $  8,880   $11,620


    Distributable Cash
     and Distributions:

    Distributable
      Cash             $  2,225    $  3,697   $  2,585   $  6,130   $ 8,587
    Cash Distributions
     on Fund Units     $      -    $  1,815   $  4,374   $  4,942   $     -
    Cash Distributions
     on Exchangeable
      Units            $      -    $    982   $    212   $  1,720   $     -

    Balance Sheet Data:
    Total Assets       $ 78,994    $117,822   $ 78,994   $117,822   $     -
    Current Portion of
     Long-term Debt
     Outstanding       $ 10,000    $      -   $ 10,000   $      -   $     -
    Long-term Debt
     Outstanding       $      -    $ 10,000   $      -   $ 10,000   $     -

    Per Unit information:
    Fund Units
    ----------

    Basic Net
     Earnings (Loss)   $ (3.055)    $ 0.259   $ (3.170)  $  0.518   $     -
    Diluted Net
     Earnings (Loss)   $ (3.055)    $ 0.202   $ (3.170)  $  0.467   $     -
    Distributable Cash
     per Fund Unit(1)  $  0.295     $ 0.383   $  0.343   $  0.529   $     -
    Cash Distributions
     on Fund Units     $      -     $ 0.241   $  0.580   $  0.655   $     -
    Distributable Cash
     per Fund Unit(2) C$  0.358    C$ 0.464  C$  0.416  C$  0.641  C$     -
    Cash Distributions
    on Fund Units     C$      -    C$ 0.281  C$  0.656  C$  0.784  C$     -

    Exchangeable Units
    ------------------
    Distributable
     Cash per
     Exchangeable
      Unit(1),(2)     C$      -    C$ 0.244  C$      -  C$  0.496  C$     -
    Cash Distributions
     on Exchangeable
     Units            C$      -    C$ 0.060  C$      -  C$  0.563  C$     -

    -------------------------------------------
    (1) Distributable Cash per Fund Unit and per Exchangeable Unit is derived
        by dividing the portion of Distributable Cash allocable to the Fund
        Units and to the Exchangeable Units by the aggregate number of issued
        Fund Units and Exchangeable Units, respectively. On an annual basis,
        Distributable Cash is allocated between the Fund Units and the
        Exchangeable Units based on distributions effected with respect to
        the year in accordance with the terms of the subordination agreement.
        For the Fiscal 2006 Year, Distributable Cash has been allocated in
        its entirety to the Fund Units as a result of the suspension
        throughout 2006 of distributions to holders of the Exchangeable
        Units. For the Fiscal 2005 Period, 65% of Distributable Cash was
        allocated to the Fund Units. See "Distributable Cash and
        Distributions" below for discussion of the Fund's policy regarding
        distributions to holders of Fund Units and Exchangeable Units.
    (2) Distributable Cash per Fund Unit and per Exchangeable Unit is
        presented in Canadian dollars for purposes of comparison to the
        Canadian dollar denominated cash distributions. For this purpose,
        United States dollar denominated Distributable Cash is converted into
        Canadian dollars applying the exchange rate of the Fund's foreign
        exchange contracts relating to the period, which is C$1.2122/US$1.00.



    Exhibit 2
    MADACY ENTERTAINMENT INCOME FUND
     Consolidated Statements of Earnings
     (in thousands of U.S. dollars except per unit amounts)

                                                                    For the
                                                                     period
                                                     For the     From April
                                                  year ended          20 to
                                                 December 31,   December 31,
                                                        2006           2005
                                                   (365 days)     (256 days)
                                                  ------------  -------------

    Net Sales                                     $   77,109    $    69,524
    Cost of Sales                                     52,721         46,572
                                                  ------------  -------------
    Gross Margin                                      24,388         22,952
                                                  ------------  -------------

    Expenses
      Selling, general & administrative               19,468         14,787
      Interest on bank indebtedness                      976            363
      Interest on long-term debt                         658            411
      Gain on derivative financial instruments
       and foreign currency translation                 (436)        (2,103)
      Amortization of property and equipment             533            324
      Amortization of master recordings                1,259            806
      Amortization of deferred financing charges         142             88
      Amortization of intangible assets                3,051          2,146
      Write-down of goodwill                          35,336              -
                                                  ------------  -------------
                                                      60,987         16,822
                                                  ------------  -------------

    Earnings (Loss) Before Income Taxes
      and Exchangeable Units Interest                (36,599)         6,130
    Income taxes                                         169             41
                                                  ------------  -------------
    Earnings (Loss) Before Exchangeable
      Units Interest                                 (36,768)         6,089
    Exchangeable Units interest                      (12,869)         1,697
                                                  ------------  -------------
    Net Earnings (Loss)                           $  (23,899)   $     4,392
                                                  ------------  -------------
                                                  ------------  -------------

    Basic Net Earnings (Loss) per Fund Unit       $  (3.1696)   $    0.5825
                                                  ------------  -------------
                                                  ------------  -------------
    Diluted Net Earnings (Loss) per Unit          $  (3.1696)   $    0.5249
                                                  ------------  -------------
                                                  ------------  -------------

    Basic Weighted Average Number of
      Fund Units Outstanding                       7,540,000      7,540,000
                                                  ------------  -------------
                                                  ------------  -------------
    Diluted Weighted Average Number of
     Units Outstanding                             7,540,000     11,599,111
                                                  ------------  -------------
                                                  ------------  -------------


    Exhibit 3

    MADACY ENTERTAINMENT INCOME FUND
    Consolidated Balance Sheets

    (in thousands of U.S. dollars)
                                                 December 31,   December 31,
                                                        2006           2005
                                                  ------------  -------------

    ASSETS

    Current
    Cash                                          $      224    $       800
    Accounts receivable                               29,243         29,357
    Inventories                                       14,769         12,440
    Prepaid expenses                                     627            421
    Unrealized gain on foreign exchange contracts        197            767
                                                  ------------  -------------

                                                      45,060         43,785

    Supplier Advances                                  1,249          1,249
    Royalty Advances                                   2,126          2,147
    Property and Equipment                               901          1,222
    Master Recordings,
    net of accumulated amortization
     of $2,065 (2005: $806)                            8,477          8,975
    Deferred Financing Charges,
    net of accumulated amortization
     of $230 (2005: $88)                                  43            162
    Intangible Assets                                 20,836         23,887
    Goodwill                                               -         35,336
    Unrealized Gain on Foreign Exchange Contracts        302          1,059
                                                  ------------  -------------
                                                  $   78,994    $   117,822
                                                  ------------  -------------
                                                  ------------  -------------


    LIABILITIES
    Current
    Bank indebtedness                             $    9,049    $     7,500
    Accounts payable and accrued liabilities          17,987         17,157
    Distribution payable on Fund Units                   611            607
    Income taxes payable                                  79             43
    Current portion of the long-term debt             10,000              -
                                                  ------------  -------------
                                                      37,726         25,307
    Long-Term Debt                                         -         10,000
    Accrued Pension Liability                            351            323
                                                  ------------  -------------
                                                      38,077         35,630
                                                  ------------  -------------
    Exchangeable Units Interest                       14,694         27,775
                                                  ------------  -------------

    Commitments and Contingencies
    UNITHOLDERS' EQUITY
    Fund Units                                        54,990         54,990
    Translation adjustment                                56            (23)
    Deficit                                          (28,823)          (550)
                                                  ------------  -------------
                                                      26,223         54,417
                                                  ------------  -------------
                                                  $   78,994    $   117,822
                                                  ------------  -------------
                                                  ------------  -------------


    Exhibit 4
    MADACY ENTERTAINMENT INCOME FUND
    Consolidated Statements of Cash Flows
    (in thousands of U.S. dollars)
                                                                    For the
                                                     For the    period from
                                                  year ended    April 20 to
                                                 December 31,   December 31,
                                                        2006,          2005
                                                   (365 days)     (256 days)
                                                  ------------  -------------
    Funds Provided (Used) -
    Operating Activities

    Net earnings (loss)                           $  (23,899)   $     4,392
    Add (deduct) items not involving cash:
      Amortization of property and equipment             533            324
      Amortization of master recordings                1,259            806
      Amortization of deferred financing charges         142             88
      Amortization of intangible assets                3,051          2,146
      Write-down of goodwill                          35,336              -
      Recovery of royalty advances                       738            655
      Write-off of royalty advances                       95             60
      Employee future benefits                            28             45
      Unrealized loss (gain) on derivative
       financial instruments and foreign
       currency translation                            1,393         (1,849)
      Exchangeable Units interest                    (12,869)         1,697
                                                  ------------  -------------
                                                       5,807          8,364


    Changes in non-cash operating elements
     of working capital                               (1,555)        (2,743)
                                                  ------------  -------------
                                                       4,252          5,621
                                                  ------------  -------------
    Investing Activities
    Acquisition of the net assets of
     Madacy Entertainment Group, Limited,
     net of cash acquired                                  -        (69,685)
    Royalty advances                                    (812)          (834)
    Additions to property and equipment                 (212)           (98)
    Additions to master recordings                      (761)          (389)
                                                  ------------  -------------
                                                      (1,785)       (71,006)
                                                  ------------  -------------
    Financing Activities
    Initial issuance of Fund Units, net of expenses        -         54,990
    Increase in bank indebtedness                      1,549          7,500
    Increase in long-term debt                             -         10,000
    Deferred financing charges                           (23)          (250)
    Distributions paid on Exchangeable Units            (212)        (1,720)
    Distributions paid on Fund Units                  (4,357)        (4,335)
                                                  ------------  -------------
                                                      (3,043)        66,185
                                                  ------------  -------------
    Increase (Decrease) in Cash                         (576)           800
    Cash - Beginning of Period                           800              -
                                                  ------------  -------------
    Cash - End of Period                          $      224    $       800
                                                  ------------  -------------
                                                  ------------  -------------
    




For further information:

For further information: Hillel Frankel, President, Madacy Entertainment
Income Fund, (514) 341-5600, x333

Organization Profile

MADACY ENTERTAINMENT INCOME FUND

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