Spinrite Reports Fourth Quarter and Year-End Results for 2005, Expects Distribution Reduction.

LISTOWEL, Ontario -- Spinrite Income Fund (TSX:SNF.UN) ("the Fund"), today announced its financial results for the 13 weeks ended December 31, 2005, and for the combined 52 weeks ended December 31, 2005.

"During the fourth quarter, we encountered significant challenges related to lower consumer spending and high retail inventories primarily in the fancy yarn segment," said Dario Margve, President and Chief Executive Officer. "In the first half of 2005, growth in the craft yarn category was very strong, particularly in the fancy yarn segment, and the Fund's financial performance reflected this growth. Retailers responded by building inventory positions, however, consumer spending in the fancy yarn category declined sharply late in the year. As a result, retailers found themselves with unusually high inventory levels and significantly reduced their orders; this adversely impacted our sales and inventory levels."

"Promotions have been implemented to help reduce inventories which we expect will adversely impact margins," said Mr. Margve. "While declining fancy yarn sales may lead to a contraction of the yarn category in 2006, we believe that Spinrite is well-positioned to increase market share, particularly in the U.S., on the strength of our diverse product offerings and multi-brand strategy."

The Fund began operations on February 8, 2005 when it indirectly purchased approximately 80% of the securities of Spinrite Limited Partnership. The combined operating results for the 52 weeks ended December 31, 2005 is comprised of the Fund's active operations for the 327-day period from February 8 through December 31, 2005, and Spinrite Limited Partnership's results of operations from January 1 to February 7, 2005. The combined annual results will be compared to Spinrite Limited Partnership's results of operations for the 52 weeks ended December 31, 2004.

Fourth Quarter Results

Revenue for the fourth quarter was $25.8 million, a decrease of $9.7 million, or 27.3%, compared to the same period in 2004. Sales in the quarter were negatively impacted by a decline in consumer spending on fancy yarns and high retail inventory positions. Demand for fancy yarns in the second half of 2005 was much lower than in the first two quarters of the year. This created an inventory backlog which negatively affected the Fund's fourth quarter revenue and will continue to affect revenue in 2006.

Gross profit percentage for the fourth quarter was 17.2% compared to 30.5% for the same quarter in 2004. The decline in gross profit percentage was due primarily to an inventory write-down of approximately $2.5 million recorded at December 31, 2005 and production inefficiencies associated with sales declines.

Adjusted EBITDA(i) for the fourth quarter was $1.6 million, a decrease of $5.9 million from the comparable quarter in 2004. This was negatively impacted by the inventory write-down, production inefficiencies, and provisions for uncollectible customer accounts.

Despite lower profits, the Fund generated $6.2 million of cash flow from operations in the fourth quarter. The Fund and its subsidiaries paid distributions to public and subordinated unitholders of $6.6 million in the quarter.

Combined Full Year Results

Annual revenues increased 10.7% to $131.8 million, from $119.1 million last year. For the full year, sales of value-added fancy yarns increased 16.7%, sales of classic yarns increased 10.6%, and sales of cotton yarns remained constant.

Gross profit for 2005 increased 3.2% to $45.4 million, up from $44 million last year. Gross profit percentage was 34.5% compared to 37.0% in 2004. This decrease is attributed to the inventory write-down recorded in the fourth quarter; overhead costs and labour inefficiencies associated with sales declines in the fourth quarter; higher outsourcing costs; and higher labour costs associated with production downtime due to extreme hot weather during the second and third quarters.

"Due to lower fancy yarn sales and high factory and retail inventory levels, it was necessary to take an inventory write-down," said Ryan Newell, Chief Financial Officer. "We also took other proactive steps to address current business conditions, including an 8% reduction in our work force in January. In addition, we removed six production days from the work schedule in the fourth quarter of 2005 and will be removing a total of 16 production days in the first and second quarters in 2006."

The Fund reported Adjusted EBITDA(i) of $31.6 million for 2005, a decrease of 4.5% from 2004. Adjusted EBITDA margin decreased to 24.0% from 27.7% because of the decrease in gross profit and higher selling, general and administrative expenses.

"We are working closely with our retail partners to resolve inventory issues in 2006," said Mr. Margve. "Our product development efforts for 2006 are focused on classic yarns with unique characteristics, a developing segment that saw increased demand in the latter half of 2005. These yarns carry higher margins than traditional classic yarns and have been well-received by our retailers."

Distributions

Declining fancy yarn sales and high inventory levels are projected to continue to negatively impact sales and profitability in 2006. Sales in the first quarter are expected to be $19 million to $21 million, significantly lower than the first quarter of 2005. Therefore, the Fund expects to reduce monthly distributions by 55% from $0.08833 per unit to $0.04 per unit commencing with the April distribution payable in May.

The March 2006 distribution payable on April 13, 2006 of $0.08833 per unit will be paid as previously announced.

Spinrite Holding LP, a subsidiary of the Fund, has suspended distributions on its subordinated units which are held by members of management and previous owners of Spinrite. The first quarter distribution for 2006 will not be paid to the subordinated unitholders.

Due to lower profitability in the second half of 2005 and weaker than expected sales in the first quarter of 2006, the Fund may not meet certain financial covenants under its bank credit facilities at the end of the second quarter. Under those facilities, the Fund must maintain a total funded debt to EBITDA ratio, calculated on a rolling four-quarter basis, of less than or equal to 2.5 to 1. Accordingly, the Fund is in discussions with its banks regarding the covenant.

Conference Call and Webcast

Management will host a conference call at 2 p.m. ET on Thursday, March 30, 2006 to discuss its annual and fourth quarter results. The call can be accessed by calling 1-800-814-4860 or 416-644-3428. A replay of the call will be available until midnight on April 6, 2006. It can be accessed by dialing 1-877-289-8525 or 416-640-1917 and entering the passcode 21182155#. The webcast can be accessed at the Fund's web site at www.spinriteincomefund.com.

The Fund's year end financial statements, notes to financial statements and management's discussion and analysis are available at www.sedar.com or at www.spinriteincomefund.com.

Spinrite is the largest marketer of craft yarn in Canada and one of the largest and fastest growing in the United States. Established in 1952, Spinrite researches, develops, manufactures and markets a broad variety of consumer craft yarns. The company also supports its market with patterns that provide customers with creative ideas for knitted products. Spinrite has approximately 530 employees at its fully integrated manufacturing and distribution centre in Listowel, Ontario.

(i) While not a Canadian GAAP measure, the Company believes that in addition to net income or loss, EBITDA is a useful supplemental measure of cash available for distribution prior to debt service, changes in working capital, capital expenditures and taxes.

Adjusted EBITDA refers to earnings before interest, taxes, depreciation and amortization after making adjustments for certain non-recurring items. These adjustments include non-recurring management fees, foreign exchange translation gains or losses on debt and other instruments, and pre-funded management arrangements.

Forward-Looking Statements 

This press release may contain forward-looking statements relating to expected future events and financial and operating results of the Fund that involve risks and uncertainties. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including market and general economic conditions and the risks and uncertainties detailed from time to time in the Fund's prospectus filed with the Canadian securities regulatory authorities. Due to the potential impact of these factors, the Fund disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law.

Spinrite Income Fund (TSX:SNF.UN)