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Sleep Country Reports Strong Fourth Quarter Results and Completes The Acquisition of Sleep America

16:23 EST Tuesday, March 07, 2006

TSX: Z.UN

TORONTO, March 7 /CNW/ - Sleep Country Income Fund today reported a 21.4% increase in revenue to $61.2 million in the fourth quarter of 2005, compared to the same period in the previous year. EBITDA* increased 51.4% to $8.9 million.

Comparable store sales rose 9.6% in the fourth quarter compared to the same period a year earlier, while new infill stores increased total sales by 8.8%.

For the year ended December 31, sales rose 14.5% to $223.7 million while EBITDA* increased 19.3% to $33.9 million compared to the same period a year earlier. Comparable store sales were up 5.6%.

Sleep Country also announced today that it has completed the acquisition of Sleep America Inc. Sleep America is the leading mattress retailer in Arizona with 32 stores in Phoenix and Tucson with sales in 2005 of US $37.5 million and EBITDA* of US $3.4 million. "Joining forces with Sleep America represents a low-risk opportunity to assume a leading position in one of the most attractive markets in the United States," said Stephen Gunn, Sleep Country's Chief Executive Officer. "Len and Debbie Gaby, the owner/founders, and their existing management team will continue to drive the success of their business model that is virtually identical to ours. Sleep America enjoys the same competitive advantages that we do in our markets including strong brand recognition, superior in-store and home delivery service and strong relationships with leading suppliers." The acquisition was concluded at a price that makes it immediately accretive to Sleep Country. It was funded from cash on hand and new long-term debt of US $10 million. The debt is non-amortizing, at a fixed interest rate of 6.83% with a seven year maturity. Even with this new debt, Sleep Country's debt to EBITDA* ratio will still be at a conservative level of 1.5 times.

"The past year was an exceptionally strong one for Sleep Country," said Christine Magee, President. "Coming off a very strong 2004, we established new standards in sales and EBITDA* in 2005 and improved our market share. We delivered two distribution increases during the year, totalling 8%, while increasing our cash position for expansion. Sleep Country ended the year with $28.7 million in cash and cash equivalents compared to $19.5 million at December 31, 2004. We've used some of that cash so far in 2006 to add two new promising platforms for growth in Quebec and Arizona."

"Despite additional competition in our markets, our sales and EBITDA* performance gained momentum as the year went on," continued Ms Magee. "While industry numbers are imprecise, we estimate our comparable store sales growth doubled that of the industry in 2005. We exceeded our own plans by opening 10 infill stores in 2005 as well as five locations in our new regional market in Winnipeg. Our Winnipeg expansion continues to run ahead of plan."

"We expect 2006 to be another good year for the Sleep Country Income Fund," said Stephen Gunn. "We anticipate that the continued performance of our existing Sleep Country stores, as well as the positive contribution from Sleep America will more than offset the negative effect on EBITDA* caused by the accelerated growth plans for Dormez-vous in Quebec. Starting from an existing five-store base, Dormez-vous is planning to open an additional 20 stores in the greater Montreal area within the next 18 months, supported by a substantial advertising program. With this aggressive growth schedule, Dormez-vous is budgeting for an EBITDA* loss of approximately $4 million in Quebec in 2006, followed by a breakeven year in 2007". "This pattern of requiring 12 to 24 months to achieve breakeven EBITDA* is familiar to us," said Christine Magee. "It is the same pattern that we have experienced with Sleep Country stores in past regional expansions in other parts of the country."

"For the year 2006 as a whole, we expect to at least maintain Sleep Country's current levels of EBITDA*, cash generation and unit holder distributions," said Stephen Gunn. "However, we are budgeting a significant rise in our payout ratio in the first two quarters of 2006 as a majority of the expenditures related to the Quebec expansion are front-end loaded and come at the seasonal low earning period of the year. We have maintained a strong cash balance which ensures that our growth plans are well funded while being able to comfortably fund all unitholder distributions," said Stephen Gunn.

The Board of Trustees has approved a regular cash distribution of $0.1125 per unit for the month of February, to be paid on March 20, 2006 to unitholders of record at the close of business on February 28, 2006.

    * EBITDA refers to earnings before interest, taxes, depreciation and
        amortization and other items. EBITDA is not a recognized measure
        under Canadian generally accepted accounting principles (GAAP) and
        may not be comparable to similar measures used by other companies.
        The Fund believes that EBITDA is a useful financial metric as it
        represents a starting point in the determination of free cash flow
        available for distribution to unitholders. Investors should be
        cautioned, however, that EBITDA should not be construed as an
        alternative to net earnings as determined in accordance with GAAP.
        -----------------------------

Sleep Country Canada is the largest retailer of mattresses in Canada with 116 corporate owned stores in nine regional markets, including five Dormez-vous stores in Quebec. The company also owns Sleep America, the largest mattress retailer in Arizona with 32 stores in Phoenix and Tucson. Sleep Country was again recognized as one of Canada's 50 Best Employers in 2006. Sleep Country Canada Income Fund is an open-ended limited purpose trust that owns 100% of the voting securities of Sleep Country Canada Inc. The Fund's units are listed on the Toronto Stock Exchange under the symbol Z.UN.

    <<

    Sleep Country Canada Income Fund
    Consolidated Balance Sheets
    (expressed in thousands of Canadian dollars)
    -------------------------------------------------------------------------

                                                         December   December
                                                         31, 2005   31, 2004
                                                            $           $
                                                        ---------------------
                                                        (audited) (unaudited)

    Assets

    Current assets
    Cash and cash equivalents                              28,690     19,488
    Accounts receivable                                     4,499      3,771
    Inventories                                            11,751      8,815
    Prepaid expenses and deposits                           1,524        525
                                                        ---------------------
                                                           46,464     32,599

    Property and equipment                                 12,456      9,888
    Other assets                                            1,139      1,293
    Intangible assets                                      57,447     58,981
    Goodwill                                              117,968    117,968
                                                        ---------------------
                                                          235,474    220,729
                                                        ---------------------
                                                        ---------------------

    Liabilities and Unitholders' Equity

    Current liabilities
    Accounts payable and accrued liabilities               26,193     20,636
    Customer deposits                                       6,477      5,134
    Distribution payable to unitholders                     1,526      1,409
    Current portion of long-term debt                         129        199
                                                        ---------------------
                                                           34,325     27,378

    Long-term debt                                         40,122     35,851
    Other liabilities                                       4,546      3,299
    Future income taxes                                    16,922     18,331
                                                        ---------------------
                                                           95,915     84,859
                                                        ---------------------

    Unitholders' Equity

    Capital contributions                                 132,767    133,262
    Cumulative earnings                                    52,038     29,595
    Cumulative distributions                              (43,586)   (25,975)
    Cumulative dividends on Class A shares                 (1,660)    (1,012)
                                                        ---------------------
                                                          139,559    135,870
                                                        ---------------------
                                                          235,474    220,729
                                                        ---------------------
                                                        ---------------------



    Sleep Country Canada Income Fund
    Consolidated Statements of Earnings and Cumulative Earnings
    (expressed in thousands of Canadian dollars, except per unit amounts)
    -------------------------------------------------------------------------

                                   Three months ended    Twelve months ended
                                   ------------------    -------------------
                                   December   December   December   December
                                   31, 2005   31, 2004   31, 2005   31, 2004
                                       $          $          $          $
                                 --------------------------------------------
                                 (unaudited)(unaudited)(unaudited) (audited)


    Sales                            61,204     50,401    223,717    195,351

    Cost of sales                    44,105     35,745    159,674    136,998
                                 --------------------------------------------

    Contribution margin              17,099     14,656     64,043     58,353
                                 --------------------------------------------


    General and administrative
     expenses                         8,169      8,758     30,146     29,929
                                 --------------------------------------------

    Earnings before the
     under-noted:                     8,930      5,898     33,897     28,424
                                 --------------------------------------------

    Interest expense                    565        587      2,284      2,458
    Loss on early repayment of
     long-term debt                       -          -        706          -
    Depreciation and amortization     1,528      1,037      5,722      3,947
    Other                               (60)      (130)      (149)        30
                                 --------------------------------------------

    Earnings before income taxes      6,897      4,404     25,334     21,989
                                 --------------------------------------------

    Provision for (recovery of)
     income taxes
      Current                         1,065       (160)     4,300      2,584
      Future                           (715)       217     (1,409)       369
                                 --------------------------------------------
                                        350         57      2,891      2,953
    Net earnings for the period       6,547      4,347     22,443     19,036
    Cumulative earnings, beginning
     of period                       45,491     25,248     29,595     10,559
                                 --------------------------------------------
                                 --------------------------------------------
    Cumulative earnings, end of
     period                          52,038     29,595     52,038     29,595
                                 --------------------------------------------
                                 --------------------------------------------
    Basic earnings per unit for
     the period                       $0.47      $0.32      $1.60      $1.36
                                 --------------------------------------------
                                 --------------------------------------------



    Sleep Country Canada Income Fund
    Consolidated Statements of Cash Flows
    (expressed in thousands of Canadian dollars)
    -------------------------------------------------------------------------

                                    Three months ended   Twelve months ended
                                    ------------------   -------------------
                                   December   December   December   December
                                   31, 2005   31, 2004   31, 2005   31, 2004
                                       $          $          $         $
                                 --------------------------------------------
                                 (unaudited)(unaudited)(unaudited) (audited)

    Cash provided by (used in)
    Operating activities
    Net earnings for the period       6,547      4,347     22,443     19,036
    Items not affecting cash
      Depreciation of property and
       equipment                      1,144        654      4,188      2,414
      Amortization of intangible
       assets                           384        383      1,534      1,533
      Amortization of deferred
       financing costs                   33         49        162        198
      Amortization of deferred
       lease inducements               (165)      (155)      (638)      (546)
      Write off deferred
       financing costs                    -          -        168          -
      Other non-cash expenses           (22)       144        551        144
      Future income taxes              (715)       217     (1,409)       369
                                 --------------------------------------------

                                      7,206      5,639     26,999     23,148
    Changes in non-cash items
     related to operating
     activities                      (3,139)    (4,386)     3,420      2,043
                                 --------------------------------------------

                                      4,067      1,253     30,419     25,191
                                 --------------------------------------------

    Investing activities
    Purchase of property
     and equipment                   (2,823)      (987)    (6,615)    (3,155)
                                 --------------------------------------------
                                     (2,823)      (987)    (6,615)    (3,155)
                                 --------------------------------------------

    Financing activities
    Issuance of senior notes              -          -     40,000          -
    Financing costs on senior notes       -          -       (660)         -
    Repayment of term bank loan           -          -    (35,600)         -
    Decrease in capital lease
     obligations                        (38)       (64)      (199)      (236)
    Dividends paid on class A shares   (162)      (164)      (649)      (601)
    Distributions paid to
     unitholders                     (4,578)    (4,228)   (17,494)   (15,441)
                                 --------------------------------------------
                                     (4,778)    (4,456)   (14,602)   (16,278)
                                 --------------------------------------------

    Increase in cash and cash
     equivalents                     (3,534)    (4,190)     9,202      5,758
    Cash and cash equivalents,
     beginning of period             32,224     23,678     19,488     13,730
                                 --------------------------------------------
                                 --------------------------------------------
    Cash and cash equivalents,
     end of period                   28,690     19,488     28,690     19,488
                                 --------------------------------------------
                                 --------------------------------------------


    Management's Discussion and Analysis of Results and
    Financial Condition

    Results for the three months and year ended December 31, 2005

Presented below are operating results for the three month periods and years ended December 31, 2005 and December 31, 2004.

                                 --------------------------------------------
    in thousands                       Fourth Quarter         Year to Date
                                 --------------------------------------------
                                       2005       2004       2005       2004
                                 --------------------------------------------
    Sales                         $  61,204  $  50,401  $ 223,717  $ 195,351
    Cost of Sales                    44,105     35,745    159,674    136,998
    Contribution Margin              17,099     14,656     64,043     58,353
                                      27.9%      29.1%      28.6%      29.9%
    General and
    Administrative
    Expenses                          8,169      8,758     30,146     29,929
    EBITDA(1)                         8,930      5,898     33,897     28,424
    Net earnings                  $   6,547  $   4,347  $  22,443  $  19,036
    Number of stores at
     period end                         110         95        110         95
    Total Sales Growth                21.4%      14.1%      14.5%      18.1%
    Same Store Sales
    Growth(2)                          9.6%       8.5%       5.6%      12.3%
                                 --------------------------------------------
    (1) EBITDA refers to earnings before interest, taxes, depreciation and
        amortization and other items. EBITDA is not a recognized measure
        under Canadian generally accepted accounting principles (GAAP) and
        may not be comparable to similar measures used by other companies.
        (See "Non-GAAP Measures")
    (2) Same Store Sales Growth represents only those stores with at least 13
        months of sales and excludes the impact of relocated stores for the
        13 month period.

    Sales

Sales in the fourth quarter of 2005 grew 21.4% to $61.2 million from $50.4 million in the fourth quarter of 2004. Of the 21.4% sales increase, 9.6% was due to increases in comparable store sales, 3.0% was attributable to our regional expansion into Winnipeg in the third quarter of 2005 and 8.8% was attributable to the incremental sales generated by ten in-fill stores opened during the previous 12 months. We continued to gain market share. We are particularly pleased by this performance because it builds on the record results achieved in last year's fourth quarter. Total sales grew in the fourth quarter of 2004 by 14.1% while sales on a same store basis grew by 8.5%.

For the year ended December 31, 2005, sales grew by 14.5% to $223.7 million from $195.4 million in 2004. This was the result of an increase in comparable store sales, opening a new market in Winnipeg and the contribution from ten in-fill stores opened over the past twelve months. Comparable store sales increased 5.6% in 2005 over 2004. This increase is a strong indication that Sleep Country is increasing its share of market in the regions in which it operates. During 2005, ten in-fill stores were opened and one store relocated compared to eight in-fill stores opened in 2004 and no relocations. In-fill stores contributed 7.7% to the increase in our sales in 2005. The opening of the new market in Winnipeg contributed 1.2% to total sales in 2005.

Overall, in the fourth quarter of 2005, revenue from the sale of mattress sets grew by 19.7% and the number of mattress sets delivered increased by 15.0% compared with the same period in 2004. Overall, for the year ended December 31, 2005, revenue from the sale of mattress sets grew by 12.9% and the number of mattress sets delivered increased by 11.9% compared with the same period in 2004.

Cost of sales and contribution margin

Cost of sales includes product-related costs and the costs of our sales and distribution operations, net of volume rebates received from vendors. Cost of sales for the fourth quarter of 2005 increased 23.4% to $44.1 million, compared with $35.7 million for the fourth quarter of 2004. This increase is a result of higher sales volumes at lower product margins and increased direct variable costs in our distribution and sales operations partially offset by leveraging of fixed costs on higher sales volumes. In the fourth quarter of 2005, contribution margin increased by $2.4 million to 27.9% of sales compared to 29.1% of sales for the same period in 2004. This change in contribution margin as a percentage of sales is due to the following factors in the fourth quarter of 2005 compared with the same period in 2004:

    -   Product gross margins decreased by 0.6% due to continued strong
        purchasing power offset by changes in product mix (related to both
        size and quality) and a more aggressive pricing strategy by the
        Company.
    -   Volume rebates remained consistent as a percentage of sales.
    -   Sales department costs decreased contribution margin by 0.5% in the
        fourth quarter of 2005 compared with 2004 due to higher supplies and
        training costs due to the opening of Winnipeg in the later half of
        2005.
    -   Distribution department costs, as a percentage of sales, increased
        slightly in 2005 compared with 2004. This is attributable to higher
        direct distribution costs due to the opening of Winnipeg and higher
        volumes offset by leveraging of fixed distribution costs.

Cost of sales in 2005 increased 16.6% to $159.7 million as a result of higher variable costs associated with higher sales volumes offset by leveraging of fixed costs in our distribution and sales operations on the higher sales volumes. In 2005, contribution margin increased by $5.7 million or 28.6% of sales compared to 29.9% of sales in 2004. This change of 1.3% of sales was due to lower product margins as a result of changes in product mix and market-place pricing pressures and higher store occupancy costs coupled with leveraging of store-related occupancy costs and fixed distribution costs.

General and Administrative Expenses

General and administrative (G&A) expenses include advertising costs (net of co-op advertising rebates), general management and administrative costs, occupancy-related costs associated with distribution centers, professional fees (including public company-related costs), information technology-related costs and other administrative expenses. G&A expenses for the fourth quarter of 2005 decreased $0.6 million to $8.2 million from $8.8 million for the same period in 2004. As a percentage of sales, G&A expenses were 13.3% for the fourth quarter of 2005 compared with 17.4% for the fourth quarter of 2004. Notable changes in G&A expenses in the fourth quarter were as follows:

    -   At the end of the fourth quarter of 2004, the Board approved a
        special one-time bonus to all Sleep Country employees of
        $1.3 million. No such bonus was approved in fiscal 2005.
    -   Management and administrative costs, after taking into account the
        special one-time bonus paid in 2004, increased by 12.6%. This was due
        to the 2005 annual salary increase of 4.0% and an increase in
        administrative headcount from the same period in 2004 to support
        growth. In the fourth quarter of 2005, management bonus accruals
        increased as stretch targets were achieved for 2005 in the fourth
        quarter.
    -   Overall, net advertising costs increased 4.3% from the same period in
        the prior year while advertising spending increased 11.8%. This
        increase in spending is due to spending on TV and radio advertising
        for our new Winnipeg market and the timing of advertising TV and
        radio spending and production-related expenses in our other markets.
        This spending can vary each quarter depending on the timing of events
        and production requirements. These increases in advertising spending
        were offset by increases in co-op advertising rebates as a result of
        achieving a higher level of purchases. The Company continues to
        maintain a steady level of advertising expenditures in existing
        markets, leveraging these costs over a larger sales base.
    -   Professional fees increased $0.3 million from the same period in the
        prior year. This was due to higher audit, tax and legal expenses
        experienced by the Fund during this period. During 2005, the Company
        also engaged a public relations firm.

G&A expenses in 2005 increased 0.7% to $30.1 million from $29.9 million in 2004. As a percentage of sales, G&A expenses fell to 13.5% in 2005 compared with 15.3% in 2004. This decline is the result of changes in bonus levels in 2005 compared with 2004 and the leveraging of administrative costs against higher sales.

    EBITDA (see "Non-GAAP measures")

    -------------------------------------------------------------------------
                                      Three      Three
                                     months     months       Year       Year
                                      ended      ended      ended      ended
                                   December   December   December   December
    (in thousands of dollars)      31, 2005   31, 2004   31, 2005   31, 2004
    -------------------------------------------------------------------------
    Sales                           $61,204    $50,401   $223,717   $195,351
    -------------------------------------------------------------------------
    EBITDA                           $8,930     $5,898    $33,897    $28,424
    -------------------------------------------------------------------------
    EBITDA margin                     14.6%      11.7%      15.2%      14.6%
    -------------------------------------------------------------------------

In the fourth quarter of 2005, earnings before interest, taxes, depreciation, amortization and other expenses (EBITDA) increased $3.0 million or 51.4% to $8.9 million from $5.9 million in the fourth quarter of 2004. This increase is due to stronger sales performance during the period, the maintenance of direct cost levels in all departments as sales increased, increased leveraging of fixed costs and the accrual of the special one-time bonus in the fourth quarter of 2004 which was not accrued in 2005.

For the year ended December 31, 2005, EBITDA increased $5.5 million or 19.3% to $33.9 million from $28.4 million in 2004. This was due to higher levels of sales and strong cost performance in departments as sales increased, coupled with the leveraging of fixed expenses.

Interest

Interest expense was $0.6 million for the fourth quarter of 2005 and $2.3 million for the year. For 2004, interest expense was $0.6 million in the fourth quarter and $2.5 million for the year. In 2005, long-term debt includes both the term bank loan and senior secured notes. In June 2005, the Company repaid its term bank loan, which carried a fixed interest rate of 5.77%, through the issuance of $40.0 million of five-year senior secured notes at a fixed interest rate of 5.191%. The decrease in interest expense for the year is attributable to the lower interest rate on higher long-term debt balances.

In 2006, interest expense is expected to increase due to the issuance of US $10.0 million of additional senior secured notes in March 2006. These notes will bear interest at 6.83% over their seven year term.

Loss on early repayment of long-term debt

There was a loss of $0.7 million on early repayment of long-term debt in the second quarter of 2005, comprised of cash payments associated with early settlement of interest rate hedges and the write-off of the unamortized deferred financing costs associated with the repaid term bank loan. The term bank loan was repaid through the issuance of senior secured notes.

Depreciation and amortization

Sleep Country's capital expenditure requirements are modest as all real estate and the majority of operating assets are leased. For the fourth quarter of 2005, total depreciation and amortization expense was $1.5 million with depreciation on property and equipment accounting for $1.1 million, compared with $0.7 million in the same period in 2004. In 2005, total depreciation and amortization expense was $5.7 million, with depreciation on property and equipment accounting for $4.2 million. This compares with depreciation and amortization expense of $3.9 million for 2004, with depreciation on property and equipment accounting for $2.4 million. This increase is due to the 15 new stores opened in 2005 coupled with accelerated depreciation on stores due to our store refurbishment program as the useful life of the leasehold improvements has, in some cases, been reduced.

Income taxes

The Fund is a mutual fund trust as defined under the Income Tax Act (Canada), and as a result, is not subject to taxation on its income to the extent that it is distributed to unitholders.

The income tax expense relates to Sleep Country. In the fourth quarter of 2005, income tax expense was $0.4 million compared with minimal income tax expense in the fourth quarter of 2004. There was minimal income tax expense in the fourth quarter of 2004 as taxable income was offset by the future income tax effect of certain timing differences. Income tax expense in 2005 was $2.9 million compared with $3.0 million for 2004. This was comprised of $3.1 million of income tax on earnings from the operations of the Company and $0.2 million related to large corporation tax, a recovery of $0.6 million related to the future income tax effect of changes in future provincial income tax rates, and a provision of $0.2 million on certain non-deductible expenses.

Net earnings

For the fourth quarter of 2005, net earnings were $6.5 million, or 10.7% of sales, compared with $4.3 million or 8.6% for the fourth quarter of 2004. In 2005, net earnings were $22.4 million or 10.0% of sales compared with $19.0 million, or 9.7% of sales for the same period in 2004. Basic earnings per unit was $0.47 for the fourth quarter of 2005 and $1.60 for the year compared with $0.32 for the fourth quarter of 2004 and $1.36 for the year.

Liquidity and Capital Resources

At December 31, 2005, cash and cash equivalents increased by $9.2 million to $28.7 million from $19.5 million at December 31, 2004. This is a reflection of the strong financial performance of the Company and includes two distribution increases and $3.3 million of net funds received on the issuance of senior notes in the second quarter of 2005.

Cash flow from operations, together with cash and cash equivalents on hand and the issuance of US $10.0 million senior secured notes in March 2006 and, is expected to be sufficient to meet operating requirements, investments in Dormez-vous in Quebec and Sleep America in the US, capital expenditures and anticipated distributions. At December 31, 2005, the Fund was in compliance with all covenants contained in its note indenture and revolving credit facility.

Operating activities

Cash flow from operations was $4.1 million for the fourth quarter of 2005 as the Company experienced strong operating performance offset by seasonal decreases in working capital of $3.1 million. The change in working capital for the quarter was primarily the result of decreases in accounts payable and accrued liability balances due to payments to suppliers in the fourth quarter of 2005 related to higher levels of sales in the third quarter of 2005 along with the payment of year-end income tax instalments. The Company believes it has sufficient working capital reserves to satisfy all cash requirements, including distributions, for the next 12 months.

Investing activities

Capital expenditures were $2.8 million for the three months and $6.6 million for the year. This increase was due to the initiation of the store refurbishment program and a number of IT projects started in the fourth quarter. In the fourth quarter of 2005, about 62% of capital expenditures funded the maintenance and upgrading of existing facilities and information systems, with the remaining 38% funding growth (such as the opening of new stores and distribution centres in existing or new regional markets). In 2005, about 47% of capital spending was devoted to maintenance and 53% on growth. On an annualized basis, it is expected that about half of all capital spending will fund maintenance activities and half will fund growth. The ratio of capital spending varies each quarter depending on the timing of store openings and maintenance activities.

Financing activities

The Fund paid distributions to unitholders totalling $4.6 million for the three months ending December 31, 2005 and $17.5 million for the entire year. The December 2005 distribution of $1.5 million was accrued and paid to unitholders on January 20, 2006. Dividends paid to the Company's Class A shareholders for the fourth quarter of 2005 totalled $0.2 million, with $0.6 million paid for the year.

    Distributable Cash (see "Non-GAAP measures")

    -------------------------------------------------------------------------
                                                       For the       For the
    Distributable cash per unit                   three months  three months
     (see "Non-GAAP measures")                           ended         ended
    (in thousands of dollars except                December 31,  December 31,
     unit and per unit amounts)                           2005          2004
    -------------------------------------------------------------------------
                                                             $             $
    -------------------------------------------------------------------------
    Cash flow from operating activities
     before changes in non-cash items
     related to operating activities                     7,206         5,639
    -------------------------------------------------------------------------
    Deferred leasehold inducements received                  -            45
    -------------------------------------------------------------------------
    Maintenance capital expenditures                    (1,750)         (513)
    -------------------------------------------------------------------------
    Decrease in capital lease obligations                  (38)          (64)
    -------------------------------------------------------------------------
    Distributable cash                                   5,418         5,107
    -------------------------------------------------------------------------
    Number of units and Class A shares
     outstanding                                    14,045,577    14,045,577
    -------------------------------------------------------------------------
    Distributable cash per unit and
     Class A share                                     $0.3857       $0.3636
    -------------------------------------------------------------------------
    Distributions declared per unit and
     Class A share                                     $0.3375       $0.3126
    -------------------------------------------------------------------------
    Payout ratio                                         87.5%         86.0%
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    Distributable cash per unit                        For the       For the
     (see "Non-GAAP measures")                      year ended    year ended
    (in thousands of dollars except                December 31,  December 31,
     unit and per unit amounts)                           2005          2004
    -------------------------------------------------------------------------
                                                             $             $
    -------------------------------------------------------------------------
    Cash flow from operating activities
     before changes in non-cash items
     related to operating activities                    26,999        23,148
    -------------------------------------------------------------------------
    Deferred leasehold inducements received                646           614
    -------------------------------------------------------------------------
    Maintenance capital expenditures                    (3,109)       (1,704)
    -------------------------------------------------------------------------
    Decrease in capital lease obligations                 (199)         (236)
    -------------------------------------------------------------------------
    Distributable cash                                  24,337        21,822
    -------------------------------------------------------------------------
    Number of units and Class A shares
     outstanding                                    14,045,577    14,045,577
    -------------------------------------------------------------------------
    Distributable cash per unit and
     Class A share                                     $1.7327       $1.5537
    -------------------------------------------------------------------------
    Distributions declared per unit and
     Class A share                                       $1.30       $1.1566
    -------------------------------------------------------------------------
    Payout ratio                                         75.0%         74.4%
    -------------------------------------------------------------------------

Assuming the current distribution rate had been paid for the full year in 2005, the payout ratio would have been 77.9%.

In the first quarter of 2005, the Fund made a change to the calculation of distributable cash per unit to be more consistent with general practice among a number of Canadian unit trusts and with feedback from the investment community. Prior to the first quarter of 2005, the Fund deducted both growth and maintenance capital expenditures in its calculation of distributable cash per unit. This calculation has been changed so that only maintenance capital expenditures are deducted. The distributable cash per unit calculation was adjusted for the fourth quarter and year ended 2004 for comparability.

    Non-GAAP measures

    Distributable cash and distributable cash per unit

Distributable cash per unit is defined by management as cash flow from operating activities before changes in non-cash items related to operating activities (from the unaudited interim consolidated financial statements) adjusted for deferred leasehold inducements received (if any), maintenance capital expenditures, and repayment of capital lease obligations.

Distributable cash per unit is not a recognized measure under Canadian GAAP and may not be comparable to similar measures used by other companies. The Fund believes that distributable cash per unit is a useful financial measure as it represents a starting point for investors to determine cash available for distributions. Investors should be cautioned, however, that distributable cash per unit should not be construed as an alternative to net earnings as determined in accordance with GAAP. Please see the table under "Distributable cash per unit" for a reconciliation of distributable cash to the comparable GAAP measure in the Fund's unaudited interim consolidated financial statements for the fourth quarter of 2005.

EBITDA


    EBITDA is defined by management as earnings before interest, taxes,
depreciation and amortization and other items. EBITDA is not a recognized
measure under Canadian GAAP and may not be comparable to similar measures used
by other companies. The Fund believes that EBITDA is a useful financial metric
as it represents a starting point in the determination of free cash flow
available for distribution to unitholders. Investors should be cautioned
however, that EBITDA should not be construed as an alternative to net earnings
as determined in accordance with GAAP. The following table reconciles EBITDA
to net earnings in the unaudited interim consolidated financial statements for
the fourth quarter of 2005:

                                      Three      Three
                                     months     months       Year       Year
                                      ended      ended      ended      ended
                                   December   December   December   December
    (in thousands of dollars)      31, 2005   31, 2004   31, 2005   31, 2004
                                ---------------------------------------------
                                          $          $          $

    EBITDA                            8,930      5,898     33,897     28,424

    Interest expense                   (565)      (587)    (2,284)    (2,458)
    Loss on early repayment
     of long-term debt                    -          -       (706)         -
    Depreciation and amortization    (1,528)    (1,037)    (5,722)    (3,947)
    Other                                60        130        149        (30)
    Provision for income taxes         (350)       (57)    (2,891)    (2,953)
                                ---------------------------------------------
    Net earnings for the period       6,547      4,347     22,443     19,036
                                ---------------------------------------------

    Outstanding Unit and Share Data

At December 31, 2005, the Fund had 13,565,771 trust units outstanding and Sleep Country had 479,806 Class A shares outstanding.

Forward-looking statements

This quarterly report includes statements that may be considered "forward-looking statements". These forward-looking statements reflect the current internal projections, expectations or beliefs, future growth, performance and business prospects and opportunities of the Fund and are based on information currently available to the Fund such as statements regarding management's views with respect to future events and financial performance. Actual results and developments may differ materially from results and developments discussed in the forward-looking statements as they are subject to a number of risks and uncertainties. Particular risks and uncertainties include but are not limited to the ability of the Fund to continue with monthly distributions at the current level while being able to satisfy other cash requirements, the impact of any increases in product or advertising costs, and any increases in the costs associated with maintenance capital expenditures. Management cannot provide assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Fund. These forward-looking statements are made as of the date of this quarterly report.

March 6, 2006

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%SEDAR: 00019107E

For further information: Investor inquiries: Stephen Gunn, Chairman and Chief Executive Officer; Vicki Jones, Chief Financial Officer and Corporate Secretary; Tel: (416) 242-4774, Fax: (416) 242-9644, www.sleepcountry.ca/investor; Media inquiries: Daniel Tisch or Erin O'Keefe at Argyle Rowland Communications, Tel: (416) 968-7311




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