2015 Annual Report
Canada’s Leading
Specialty Mattress Retailer
Management’s Discussion and Analysis of Financial Condition and Results of Operation
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Basis of Presentation
Forward-Looking Information
Overview
Corporate Highlights for Fiscal 2015
Factors Affecting our Results of Operations
Q4 and Full Year Operational Highlights
Fourth Quarter 2015 versus Fourth Quarter 2014
Annual Financial Results 2015 versus 2014
Summary of Quarterly Results
10 Segment Performance
11 Liquidity and Capital Resources
12 Transactions with Key Management Personnel
13 Risk Factors
14 Critical Accounting Estimates
15 Financial Instruments
16 Disclosure Controls and Procedures
17 Internal Control over Financial Reporting
18 Future Accounting Standards
19 Outstanding Share Data
20 Non-IFRS Measures
21 Additional Information
Independent Auditor’s Report
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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Organization
Basis of Presentation
Significant Accounting Policies
Critical Accounting Estimates and Judgments
Cash and Cash Equivalents
Trade and Other Receivables
Inventories
Property and Equipment
Intangible Assets
10 Accounts Payable and Accrued Liabilities
11 Other Liabilities
12 Long-term Debt
13 Income Tax
14 Expenses by Nature
15 Share Capital and Other
16 Earnings (Loss) per Share (EPS)
17 Contingent Liabilities and Unrecognized Contractual Commitments
18 Changes in Non-Cash Items Relating to Operating Activities
19 Related Party Transactions and Balances
20 Share-Based Compensation
21 Financial Instruments and Risk Management
22 Assets Held for Sale and Discontinued Operations
23 Issuance of Shares and Reorganization
24 Subsequent Events
Shareholder Information
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IBC
Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
The following Management’s Discussion and Analysis (“MD&A”) is prepared as of February 24, 2016 and is intended to assist readers
in understanding the financial performance and financial condition of Sleep Country Canada Holdings Inc. (“SCC” or “Sleep Country”
or the “Company”) for the year ended December 31, 2015 and should be read in conjunction with the audited consolidated financial
statements and the accompanying notes of SCC for the years ended December 31, 2015 and December 31, 2014.
1 Basi s o f Prese ntation
The Company’s annual 2015 audited consolidated financial statements and accompanying notes have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board using the accounting
policies described therein. All amounts are presented in thousands of Canadian dollars, except number of stores, per share amounts
or unless otherwise indicated.
All references in this MD&A to “2015” are to SCC’s year ended December 31, 2015, to “2014” are to Sleep Country Canada Inc.’s
(“SCCI”) year ended December 31, 2014, to “Q4 2015” are to SCC’s quarter ended December 31, 2015 and to “Q4 2014” are to SCCI’s
quarter ended December 31, 2014. This MD&A includes financial information for periods prior to the acquisition of SCCI by SCC
on July 16, 2015, including the comparative periods. This information is based on the historical financial information as previously
reported by SCCI.
The audited consolidated financial statements and the accompanying notes of SCC for the year ended December 31, 2015 and this
MD&A were reviewed by the Company’s audit committee and were approved by its Board of Directors on February 24, 2016.
2 For ward- Looking Inform at i o n
This MD&A, including, in particular, the sections below entitled “Factors Affecting our Results of Operations”, “Liquidity and Capital
Resources”, “Outlook” and “Risk Factors”, contains forward-looking information and forward-looking statements which reflect
the current view of management with respect to the Company’s objectives, plans, goals, strategies, outlook, results of operations,
financial and operating performance, prospects and opportunities. Wherever used, the words “may”, “will”, “anticipate”, “intend”,
“estimate”, “expect”, “plan”, “believe” and similar expressions identify forward-looking information and forward-looking statements.
Forward-looking information and forward-looking statements should not be read as guarantees of future events, performance or
results, and will not necessarily be accurate indications of whether, or the times at which, such events, performance or results will be
achieved. All of the information in this MD&A containing forward-looking information or forward-looking statements is qualified by
these cautionary statements.
Forward-looking information and forward-looking statements are based on information available to management at the time they
are made, underlying estimates, opinions and assumptions made by management and management’s current good faith belief
with respect to future strategies, prospects, events, performance and results, and are subject to inherent risks and uncertainties
surrounding future expectations generally. Such risks and uncertainties include, but are not limited to, those described below under
the heading “Risk Factors” and in the Company’s 2015 annual information form (the “AIF”) filed on February 24, 2016. A copy of
the AIF can be accessed under the Company’s profile on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at
www.sedar.com. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be
less significant may also adversely affect the Company.
SCC cautions that the list of risk factors and uncertainties described in this MD&A and the AIF is not exhaustive and that should certain
risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual strategies, prospects, events, performance
and results may vary significantly from those expected. There can be no assurance that the actual strategies, prospects, results,
performance, events or activities anticipated by the Company will be realized or, even if substantially realized, that they will have
the expected consequences to, or effects on, the Company. Readers are urged to consider the risks, uncertainties and assumptions
carefully in evaluating the forward-looking information and forward-looking statements and are cautioned not to place undue reliance
on such information and statements. SCC does not undertake to update any such forward-looking information or forward-looking
statements, whether as a result of new information, future events or otherwise, except as required by applicable laws.
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Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
3 Overview
Sleep Country is Canada’s leading mattress retailer and the only specialty mattress retailer with a national footprint. Sleep Country
operates under two mattress retail banners (the “Banners”): “Dormez-vous?”, the largest retailer of mattresses in Québec; and “Sleep
Country Canada” the largest mattress retailer in the rest of Canada. Sleep Country continues to expand its presence coast to coast.
As at December 31, 2015, Sleep Country had 224 stores and 17 distribution centres across Canada. Sleep Country’s stores average
approximately 5,000 square feet and offer a large selection of mattresses and a wide assortment of complementary sleep related
products and accessories, which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. Sleep
Country’s stores are all corporate-owned, enabling it to develop and maintain a strong culture of customer service, resulting in a
consistent and superior in-store and home delivery customer experience. Between March 2006 and December 2014, SCCI operated
in Arizona, U.S.A. under the “Sleep America” banner. The Sleep America business was sold on January 6, 2015 and is presented as
“Discontinued Operations” in the financial statements.
SL EE P C OuNtR y CANADA
Sleep Country launched its concept in the Vancouver market with four stores in 1994 and has since expanded across Canada with 174
corporately owned stores and 15 distribution centres in British Columbia, Alberta, Manitoba, Saskatchewan, Ontario, Nova Scotia and
New Brunswick as at December 31, 2015. SCC’s regional footprint includes the following distribution centres: Victoria, BC; Richmond,
BC; Langley, BC; Kelowna, BC; Calgary, AB; Edmonton, AB; Winnipeg, MB; Regina, SK; Toronto, ON; London, ON; Ancaster, ON;
Cobourg, ON; Ottawa, ON; Moncton, NB and Halifax, NS.
DO RMEz-v OuS ?
In January 2006, Sleep Country acquired Dormez-vous?, a Québec based mattress retailer with five stores and one distribution
centre in the Montreal area. As of December 31, 2015, the Dormez-vous? Banner has expanded to 50 stores with two distribution
centres in Montreal and Québec City.
4 Co rpo rate Hig hlights for Fi s c a l 201 5
INItIAL PuBLIC OFFERINg
On July 16, 2015, SCC successfully completed an initial public offering (the “IPO”) of its common shares at a price of $17.00 per share.
SCC issued 17,650,000 shares for total gross proceeds of $300,050,000. The shares commenced trading on July 16, 2015 on the
Toronto Stock Exchange under the symbol “ZZZ”.
In connection with the IPO, SCC completed the acquisition (the “Acquisition”) of SCCI, SC Management Holdings Inc. (“SC Management”)
and Sleep Country US Holdco Canada Inc. (“SC uS Holdco” and, together with SCCI and SC Management, the “Acquired Entities”).
The net proceeds of the IPO were used by SCC to satisfy a portion of the purchase price, with the balance being satisfied by the
issuance of common shares of SCC.
Immediately prior to closing of the IPO, SCC, certain of its subsidiaries, certain of the existing shareholders of SCC, SC US Holdco, SC
Management and their respective affiliates undertook steps to simplify the share structure of the Acquired Entities (the “Pre-Closing
transactions”). In connection with the Pre-Closing Transactions, the Series A and B promissory notes of SCCI were settled for Class
A common shares and the Class A convertible shares were converted into Class D common shares based on the relative fair values at
the conversion date. Subsequent to the conversion of the foregoing instruments, SCCI declared and paid a pre-IPO capital dividend in
the aggregate amount of $13,000 on its Class A common shares, Class B common shares and Class D common shares. Upon closing
of the IPO, the unvested options under SCCI’s legacy stock option plan vested and the options were settled for a combination of cash
and Class E special shares, with loans in the aggregate amount of approximately $2.36 million from SCCI to satisfy the exercise price
of such options. These loans were repaid as part of the Acquisition. SCCI’s shares were then sold to SCC for a combination of cash,
common shares of SCC and convertible notes based on the economic value of the Company’s shares as determined on July 10, 2015.
SC Management and SC US Holdco were subsequently dissolved into Sleep Country Canada LP (“SCCLP”) immediately following
the completion of the IPO on July 16, 2015. On January 1, 2016, SCCLP was wound up and its general partner was dissolved, in each
case into SCCI.
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NEw SENIOR SECuRED CRED It F ACILIty
On July 16, 2015, in connection with the IPO, SCCI negotiated a new revolving credit facility with a limit of $175 million which matures
on July 16, 2020. As at December 31, 2015, $124 million was drawn against this new credit facility. The credit facility is guaranteed
by SCC.
SECO N DAR y OFFERINg
On December 17, 2015, Birch Hill Feather LP, Birch Hill Feather (US) Holdings LP and Panzer Limited (collectively, the “Selling
Shareholders”) completed a secondary offering (the “Secondary Offering”) of common shares of SCC at a price of $18.50 per share.
The Selling Shareholders sold an aggregate of 10,000,000 common shares of SCC to a syndicate of underwriters for total gross
proceeds of $185 million. The Company did not receive any proceeds from the Secondary Offering.
DIvI DENDS
On November 3, 2015, the Board of Directors of the Company declared a dividend on the Company’s common shares in the amount
of $0.13 per share, payable on November 26, 2015 to shareholders of record at the close of business on November 16, 2015. This was
the Company’s first dividend since the completion of the IPO. The dividend was designated as an “eligible dividend” for Canadian
tax purposes.
On January 29, 2016, the Board of Directors of the Company declared a dividend on the Company’s common shares in the amount of
$0.13 per share, payable on February 26, 2016 to shareholders of record at the close of business on February 16, 2016. The dividend is
designated as an “eligible dividend” for Canadian tax purposes.
On February 24, 2016 the Board announced the suspension of the Dividend Reinvestment Program (“DRIP”), effective after Sleep
Country’s dividend payable on February 26, 2016. Shareholders who had elected to participate in the DRIP will in the future receive
cash dividends on the next payment date. At such time as the Company elects to reinstate the DRIP, shareholders that were enrolled
at suspension and remain enrolled at reinstatement will automatically resume participation in the DRIP.
DISCONtI NuED OPERA tIONS
SCCI entered into an agreement to sell the Sleep America business on November 5, 2014 for total proceeds of US$12.4 million (net of
working capital adjustment of US$0.1 million). The assets and liabilities of Sleep America have been presented as held for sale in 2014
and its operations as “Discontinued Operations” in Q4 2015, 2015, 2014 and all comparative periods. The sale of the Sleep America
business was completed on January 6, 2015.
5 Factor s Affecting our Resu l t s of Op erati on s
REvENuES
Revenues are derived primarily from the retail sales of mattress sets, accessories (including bed frames, pillows, mattress pads,
sheets, duvets, headboards and footboards), third party warranty products and delivery fees. Revenue is recognized upon either
delivery or customer pick-up.
SCC’s goal is to build on the market position of its Banners and to grow its revenue by driving Same Store Sales Growth (or “SSSg”),
continuing to add stores in both new and existing markets and expanding its merchandising opportunities in accessories. SCC’s
revenue is impacted by competition from other retailers that sell similar products and by seasonal patterns.
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Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
SAM E St ORE S A LES gRO wtH
SSSG is a non-IFRS measure used in the retail industry to compare sales derived from established stores over a certain period
compared to the same period in prior year. SSSG helps to explain what portion of sales growth can be attributed to growth in
established stores and what portion can be attributed to the opening of the stores. SCC calculates SSSG as the percentage increase
or decrease in sales of stores opened for at least 12 complete months relative to the same period in the prior year.
SSSG is primarily driven by:
• Increases in customer traffic through marketing and advertising;
• Increases in the conversion rate of turning shoppers into purchasers; and
• Increases in the average transaction size.
ExPAN SION OPPOR tuNItIES
SCC has the ability to add new stores in existing markets (in-fill stores), add new stores in satellite markets and pursue expansion
opportunities into new markets. An existing market or in-fill opportunity is a pre-existing built out region in which SCC already
has an established store presence serviced by one or more existing distribution centres. A satellite market is a new region/store
which is adjacent or close to a pre-existing built out region which benefits from advertising spill and is serviced logistically from the
nearby distribution centre. A new market is a brand new territory, such as the Company’s recent entry into New Brunswick, requiring
incremental advertising and distribution logistics.
Sleep Country has successfully expanded every year since its founding in 1994. This capability to expand depends on SCC’s ability
to choose new locations and new markets, to hire and train new employees for its stores and distribution centres and, in the case of
expansion into new markets, create top-of-mind brand awareness of its Banners.
SCC’s site selection strategy is focused on maximizing sales per store and per region throughout its store network. Prior to
identifying and ultimately selecting locations for new stores, management conducts extensive analysis utilizing the following factors:
(i) demographics such as population density, household income and population growth rates; (ii) store visibility and accessibility;
(iii) lease and advertising economics; (iv) competitive dynamics; (v) overlap with existing stores and distribution footprint; and
(vi) potential cannibalization of existing stores. In terms of regional expansion, once a target area has been determined, management
focuses on ensuring that SCC can successfully incorporate its culture (vision and mission) into the new region. To help accomplish
this, SCC has traditionally started by ensuring that the core of its new regional team is comprised of existing employees in leadership
roles who are willing to relocate. The team is then supplemented with local hires, who received three to four weeks of training and
have to spend a few weeks in existing stores and distribution centres learning SCC’s service model and learning the culture.
The following table summarizes SCC’s store count from continuing operations for each of the three and twelve-month periods ended
December 31, 2014 and December 31, 2015:
Number of stores, beginning of period
Stores newly opened
Stores closed
Number of stores, end of period
Stores relocated
Stores renovated
Q4 2015
Q4 2014
224
1
1
224
1
5
212
1
1
212
3
1
2015
212
13
1
224
3
10
2014
208
5
1
212
3
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The one new store opened in Q4 2015 was an in-fill store. Of the 13 new stores opened in 2015, seven were in-fill stores, three were
satellite stores and three were in the new market of New Brunswick.
EN HANC ED St ORE DESIgN
An enhanced store design was implemented in certain existing stores during the second half of 2014. During 2015, 10 existing stores
were renovated to this design. In addition, all new stores opened during 2015 feature this enhanced store design. Over time, SCC
intends to strategically select additional stores to renovate to this new design, which will continue to be featured by all new stores
that it opens.
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COM PEtItI ON
The retail mattress industry is highly competitive. The seven leading retailers in the industry include Sleep Country/Dormez-vous?,
Sears Canada Inc., Leon’s Furniture Limited/The Brick Ltd., Hudson’s Bay Company, BMTC Group Inc., IKEA and Costco Wholesale
Canada Inc. Of these leading seven retailers, Sleep Country is the only specialty mattress retailer. Management believes it can maintain
a leading position through its highly differentiated service model that has been unrivalled in execution over the last 21 years and serves
as a significant barrier to entry.
SEASO NAL Ity
The mattress retail industry is affected by seasonal conditions. SCC typically experiences higher sales and a greater proportion of
income during the third and fourth quarters due to a concentration of summer season holidays in the third quarter and other seasonal
factors. Sales have historically trended lower in the first quarter as consumers tighten their budgets after the holiday season. The cold
winter weather in many parts of the country during the first quarter also tends to lower customers’ desire to shop. SCC expects these
trends to continue for the foreseeable future. Average quarterly share of annual sales over the last three fiscal years is as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
Yearly total
21%
23%
31%
25%
100%
COSt O F S A LES AND gROSS PROFIt
Cost of sales includes product-related costs and the costs of SCC’s sales and distribution operations net of volume rebates received
from suppliers. Cost of sales is impacted by the number of stores, fluctuations in the volume of inventories sold, average unit selling
prices and SCC’s ability to manage store level occupancy costs.
Product gross margin is affected by changes in sales product mix, suppliers’ term discount and inventory management.
The largest component of SCC’s sales operational costs are the sales associates’ compensation and store occupancy costs. The
largest component of SCC’s distribution operations are labour costs and delivery expenses.
Volume rebates are driven by the purchase volume of inventory from suppliers. Some suppliers also offer step-ups on higher volume
achieved as additional incentives. The rebates are pro-rated between products sold and those still in inventory. Only rebates on
products sold are recorded as a reduction to cost of sales.
6 Q4 and Full Ye a r Op eration a l H i ghl igh ts
(C$ millions unless otherwise stated; other than store count)
Revenues
SSSG
Stores opened
Stores closed
Stores renovated
Gross profit margin
Operating EBITDA
Operating EBITDA margin %
Q4
Year ended
2015
Change
%
2014
Change
2015
2014 %
$
119.1 $
12.9%
1
1
5
100.6
10.2%
1
1
1
18.4% $ 456.2 $ 396.1
15.2%
11.3%
13
1
10
8.3%
5
1
9
27.3%
26.6%
27.8%
26.1%
16.3
13.7%
13.6
13.5%
19.9%
69.1
15.2%
50.6
12.8%
36.6%
Net income (loss) from continuing operations
Adjusted net income from continuing operations
Adjusted earnings per share from continuing operations
8.6
8.5
$ 0.23 $
3.3
7.2
0.19
160.6%
19.4%
19.4% $
(17.1) 202.3%
(51.7)
55.6%
39.3
25.3
55.5%
1.05 $ 0.67
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Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
HIgH LIgHt S O F RESuL tS FROM CONtINuINg OPERA tIONS IN Q4 2015
Total revenues increased by 18.4% driven by strong same store sales growth of 12.9% on top of 10.2% in Q4 2014. The Company
continued to execute on its store expansion strategy and opened one new store in Q4 2015 (Q4 2014 – one). Gross profit margins and
EBITDA margins improved in Q4 2015 compared to Q4 2014 which translated into higher Adjusted Net Income of $8.5 million (Q4
2014 – $7.2 million) and a growth of 19.4% in Adjusted Earnings Per Share from $0.19 in Q4 2014 to $0.23 in Q4 2015. See “Non-IFRS
Measures”.
HIgH LIgHt S O F RESuL tS FROM CONtINuINg OPERA tIONS IN 2015
Total revenues increased by 15.2% driven by strong same store sales growth of 11.3% on top of 8.3% in 2014. The Company continued
to execute on its store expansion strategy and opened 13 new stores in 2015 (2014 – five).
Revenue was also positively impacted by the enhanced store design which was implemented in certain existing stores during the
second half of 2014. To date, 13 of SCC’s existing stores have been renovated to this enhanced design. Early results have reported
that the 13 renovated stores have achieved higher SSSG than other stores in their regions since their respective reopening dates. Over
time, Sleep Country intends to strategically select stores to renovate to this enhanced design and all new stores that it opens will
feature this enhanced design.
Gross profit margins and EBITDA margins improved in 2015 compared to 2014 which translated into a growth in Adjusted Net Income
of 55.6% from $25.3 million in 2014 to $39.3 million in 2015. Adjusted Earnings Per Share increased by 55.5% to $1.05 in 2015 from
$0.67 in 2014. See “Non-IFRS Measures”.
During 2015, the Company incurred a number of one-time, non-cash transactions related to the capital structure that existed prior
to the IPO as well as other non-recurring items at the time of the IPO. Including these items, which are not indicative of strong
core business performance achieved in the period, net loss for 2015 was $51.7 million ($1.90 loss per share) compared to a loss of
$17.1 million ($1.52 loss per share) for 2014.
In January 2015, the Company also completed the sale of the Sleep America business for US$12.4 million (net of a working capital
adjustment of US$0.1 million). The assets and liabilities of Sleep America have been presented as held for sale in 2014 and its
operations as “Discontinued Operations” in Q4 2015, 2015, 2014 and all comparative periods.
O u tLOOk
Since its inception, Sleep Country has developed a leading regional market strategy, a strong brand with top-of-mind unaided
brand awareness, a reputation for excellence in customer service and strong supplier relationships. Now that this platform has been
established, the Company believes it has a low-risk path to growth and expansion within its existing markets.
Management believes that Sleep Country is well-positioned to continue to grow revenue, profitability and cash flows by:
• continuing to add 8 to 12 new stores per year in both existing and new markets;
• driving SSSG by continuing to invest in advertising and sales training;
• renovating 15 to 20 stores per year to feature the enhanced store design; and
• expanding its merchandising opportunities in accessories.
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SELE CtED FINANCIAL INFORMA tION
The following table sets out selected IFRS and certain non-IFRS financial measures of SCC and should be read in conjunction with the
audited consolidated financial statements for 2015.
(C$ thousands unless otherwise stated)
Q4 2015
Q4 2014
2015
2014
2013
Consolidated Income Statement
Revenues
Cost of sales
Gross profit
General and administrative expenses
Depreciation and amortization
Income before finance, interest and other
(income) expenses and income taxes
Finance related expenses
Interest income and other (income) expenses – net
Net loss before income taxes
Income taxes
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Operating EBItDA(1)
Operating EBItDA Margin(1)
Adjusted net income from continuing operations(1)
Earnings per share from continuing
operations – Basic
Earnings per share from continuing
operations – Diluted
Earnings per share from discontinued
operations – Basic
Earnings per share from discontinued
operations – Diluted
Adjusted earnings per share from
continuing operations(1)
Dividends declared per share
total assets
Long-term debt
Note:
$ 119,106
86,548
32,558
16,487
2,774
$ 100,649
73,855
26,794
13,846
2,459
$ 456,185
329,370
126,815
67,805
10,346
$ 396,085
292,665
103,420
54,898
9,897
$
13,297
1,226
(12)
12,083
3,465
8,618
(23)
10,489
6,400
(58)
4,147
867
3,280
4,772
48,664
112,316
15
(63,667)
(11,975)
(51,692)
5,992
$ 8,595
$
16,291
$
$
13.7%
8,542
8,052
$ (45,700)
13,577
$
69,125
13.5%
7,155
15.2%
39,314
$
$
$
$
$
$
0.16
$
(0.01)
0.16
–
–
0.23
0.13
$
$
$
$
$
–
0.17
0.06
0.19
–
$
$
$
$
$
$
(1.90)
(1.90)
0.20
0.20
1.05
0.13
$
$
$
$
$
$
$
$
353,922
265,834
88,088
50,226
9,342
28,520
23,215
(145)
5,450
1,069
4,381
(2,588)
1,793
39,407
11.1%
20,344
38,625
61,502
21
(22,898)
(5,762)
(17,136)
2,996
(14,140)
50,645
12.8%
25,274
$
$
(1.52)
$
0.01
(1.52)
$
0.01
0.10
$
(0.10)
0.10
$
(0.10)
0.67
–
$
$
0.54
–
31-Dec-15
439,367
124,223
31-Dec-14
462,370
257,838
31-Dec-13
440,223
220,115
(1) See the section below entitled “Non-IFRS Measures” for further details concerning how the Company calculates Operating EBITDA, Operating EBITDA Margin, Adjusted Net
Income and Adjusted Earnings per Share (EPS) and for reconciliation to the most comparable IFRS measure.
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Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
7 Four th Qua rter 2015 ve rsus Fo ur th Q uarte r 2014
CO NtINuINg OPERA tIONS
Revenues
Revenues increased by 18.4%, from $100.6 million in Q4 2014 to $119.1 million in Q4 2015 primarily driven by a 12.9% increase in SSSG.
See “Non-IFRS Measures”. Sales growth was further aided by the addition of 13 new stores in 2015 as well the one new store opened
in Q4 2014.
The increase in total revenue was comprised of an increase in mattress sales and accessory sales. Mattress sales revenue increased by
15.6%, from $81.1 million to $93.7 million. Accessory revenue increased by 29.8%, from $19.5 million to $25.4 million.
Gross profit
Gross profit was $32.6 million in Q4 2015 compared to $26.8 million in Q4 2014, representing an increase of $5.8 million. Gross profit
margin increased by 0.7% to 27.3% for Q4 2015 from 26.6% in Q4 2014 as a result of the following factors:
• Sales and distribution compensation decreased as a percentage of sales from 17.1% in Q4 2014 to 16.2% in Q4 2015;
• Improved leverage on store occupancy costs which decreased as a percentage of sales from 10.6% to 9.7%; and
• Inventory and other directly related expenses net of volume rebates increased as a percentage of sales from 44.9%
to 46.1% mainly due to increased warranty provisions taken.
General and administrative (“G&A”) expenses
Total G&A expenses increased by $2.7 million, or 19.6%, from $13.8 million in Q4 2014 to $16.5 million in Q4 2015; however, as a
percentage of sales, G&A remained flat. The increase in G&A was driven by a:
• planned $1.4 million increase in advertising expense to drive more traffic into SCC’s stores;
• $0.5 million increase in professional fees mostly due to public company expenses; and
• $0.3 million increase in bank and finance charges due to an increase in sales volume.
EBITDA
EBITDA was $16.1 million for Q4 2015 compared to $12.9 million for Q4 2014, representing an increase of $3.2 million (or 24.8%). See
“Non-IFRS Measures”. The increase was primarily due to strong revenue growth in Q4 2015 combined with improved gross profit
margins partially offset by an increase in G&A expenses.
Operating EBITDA
Operating EBITDA was $16.3 million for Q4 2015 compared to $13.6 million for Q4 2014, representing an increase of $2.7 million (or
19.9%). See “Non-IFRS Measures”. The increase was primarily due to strong revenue growth in Q4 2015 combined with improved gross
profit margins partially offset by an increase in G&A expenses.
Depreciation and amortization expenses
Depreciation and amortization increased from $2.5 million in Q4 2014 to $2.8 million in Q4 2015 mainly due to capital expenditure on
new stores and store renovations.
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Finance related expenses
Prior to the IPO, finance related expenses consisted of interest on senior credit facilities, finance leases, Series A and B promissory
notes and Class A convertible shares and fair value adjustment expense on Class B common shares. Class B common shares were
accounted for as liabilities. Subsequent to the completion of the IPO on July 16, 2015, finance related expenses consist of interest on
senior credit facilities and finance leases.
Finance related expenses were $1.2 million in Q4 2015 compared to $6.4 million in Q4 2014, representing a decrease of $5.2 million (or
81.3%). $5,366 of the finance related expense in Q4 2014 was due to the early settlement of Series A and B promissory notes and Class
A convertible shares and restructuring of Class B common shares in connection with the Pre-Closing Transactions. After the IPO, these
finance related expenses were no longer incurred.
Excluding finance expenses that related to the capital structure that existed prior to the IPO, finance related expenses increased from
$1.0 million in Q4 2014 to $1.2 million in Q4 2015, mainly due to higher average outstanding balances on the senior credit facilities in
Q4 2015 compared to Q4 2014.
Income taxes (recovery)
Q4 2015 had an income tax expense of $3.5 million versus $0.9 million for Q4 2014.
The increase in current income tax expense of $2.9 million was as a result of the increased taxable income, due to improved business
results and operating margins and a higher allocation of partnership income of SCCLP to SCCI.
The increase in current income tax expense was offset by an increase in deferred income tax recoveries of $0.3 million mainly due to
a favorable deferred tax impact of additional finance costs associated with early repayment of the subordinated debts.
Net income
The net income for Q4 2015 was $8.6 million ($0.16 per share) compared to $3.3 million (loss of $0.01 per share) in Q4 2014
representing an increase of $5.3 million. The increase was mainly due to an increase in EBITDA, lower finance related expenses,
partially offset by an increase in income tax expense. See “Non-IFRS Measures”.
Adjusted net income
Adjusted Net Income for Q4 2015 was $8.5 million ($0.23 per share) compared to $7.2 million ($0.19 per share) for Q4 2014, which
is an increase of $1.3 million (or 19.4%). The increase was primarily due to higher Operating EBITDA partially offset by an increase in
finance related expenses and income tax expense. See “Non-IFRS Measures”.
DISCO NtINuED OPERA tIONS
Net income (loss)
The sale of the Sleep America business for US$12.4 million (net of working capital adjustment of US$0.1 million) closed on January 6,
2015. Subsequently, in Q4 2015, Sleep America, LLC (the entity that operated the Sleep America business), SC US Holdco and
SC Management were wound up into SCCLP. As a result, SCC realized a year-to-date gain of $6.0 million, of which $nil million was
recognized in Q4 2015. The performance of the Sleep America business was presented in Q4 2014 as “Discontinued Operations”
following the approval of the sale on November 5, 2014.
S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
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9
Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
8 A nn ual Financia l Re su lts 2015 ver sus 201 4
CO NtINuINg OPERA tIONS
Revenues
Revenues increased by 15.2%, from $396.1 million in 2014 to $456.2 million in 2015 primarily driven by an 11.3% increase in SSSG. See
“Non-IFRS Measures”. Sales growth was further aided by the addition of 13 new stores in 2015 as well as the five new stores opened
in 2014.
The increase in total revenue was comprised of an increase in mattress sales and accessory sales. Mattress sales revenue increased by
13.1%, from $323.1 million to $365.6 million. Accessory revenue increased by 24.2%, from $73.0 million to $90.6 million.
Gross profit
Gross profit was $126.8 million in 2015 compared to $103.4 million in 2014, representing an increase of $23.4 million. Gross profit margin
increased by 1.7% to 27.8% for 2015 from 26.1% in 2014. The increase in gross profit margin was mainly due to the following factors:
• Inventory and other directly related expenses net of volume rebates decreased as a percentage of sales from 45.7%
to 45.5% mainly due to a more favourable product mix;
• Sales and distribution compensation decreased as a percentage of sales from 17.0% in 2014 to 16.3% in 2015; and
• Improved leverage on store occupancy costs which decreased as a percentage of sales from 10.6% to 9.7%.
G&A expenses
Total G&A expenses increased by $12.9 million, or 23.5%, from $54.9 million in 2014 to $67.8 million in 2015 mainly due to $6.9 million
in non-recurring management bonus relating to the legacy option plan that existed prior to the IPO and $2.4 million in non-recurring
professional fees related to the IPO. Excluding these non-recurring costs related to the IPO, total G&A expenses increased by
$3.6 million, or 6.7%, mainly due to an increase in advertising costs and an increase in bank and finance charges related to increased
sales volumes.
EBITDA
EBITDA was $59.0 million for 2015 compared to $48.5 million for 2014, representing an increase of $10.5 million (or 21.6%). See
“Non-IFRS Measures”. The increase was primarily due to the strong revenue growth in 2015 combined with improved gross profit
margins on a more favorable product mix and operating leverage on fixed costs including G&A expenses, offset by $6.9 million in
non-recurring bonus relating to the legacy option plan that existed prior to the IPO and $2.4 million in non-recurring professional fees
related to the IPO.
Operating EBITDA
Operating EBITDA was $69.1 million for 2015 compared to $50.6 million for 2014, representing an increase of $18.5 million (or 36.6%).
Operating EBITDA Margin also improved from 12.8% to 15.2% in 2015 compared to 2014. The increase in Operating EBITDA was
primarily due to the strong revenue growth in 2015 combined with improved gross profit margins on a more favorable product mix
and operating leverage on fixed costs including G&A expenses. See “Non-IFRS Measures”.
Depreciation and amortization expenses
Depreciation and amortization increased marginally from $9.9 million in 2014 to $10.3 million in 2015, mainly due to capital expenditure
on new stores and store renovations.
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Finance related expenses
Prior to the IPO, finance related expenses consisted of interest on senior credit facilities, finance leases, Series A and B promissory
notes and Class A convertible shares and fair value adjustment expense on Class B common shares. Class B common shares were
accounted for as liabilities. Subsequent to the completion of the IPO on July 16, 2015, finance related expenses consist of interest on
senior credit facilities and finance leases.
Finance related expenses were $112.3 million in 2015 compared to $61.5 million in 2014, representing an increase of $50.8 million (or
82.6%). The increase was mainly due to the non-cash accelerated interest accretion upon the early repayment of certain promissory
notes, non-cash accelerated interest accretion recognized upon redemption of certain convertible shares, non-cash fair value
adjustment on Class B common shares, higher interest expense on the increased senior credit facility and interest paid on Class B
common shares. The contractual term for the promissory notes and convertible shares had a redemption date of 2023. As a result of
their early settlement in July 2015 as part of Pre-Closing Transactions, non-cash accelerated interest expense has been recognized
in the quarter. The non-cash accelerated interest expense including accretion on the promissory notes in 2015 was $84.7 million
(2014 – $46.1 million) and the interest expense on the Class A convertible shares and Class B common shares, along with the non-
cash fair value adjustment on the Class B common shares in 2015 was $20.6 million (2014 – $10.6 million). In addition, acceleration of
amortization of debt issuance cost relating to the senior credit facility that was in place prior to the IPO was $1.2 million (2014 – $nil).
Excluding finance expenses that related to the capital structure that existed prior to the IPO, finance related expenses increased from
$4.8 million in 2014 to $5.8 million in 2015, mainly due to higher average outstanding balances on the senior credit facilities in 2015
compared to 2014.
Income taxes (recovery)
2015 had an income tax recovery of $12.0 million versus an income tax recovery of $5.8 million for 2014.
The deferred income tax recovery increased by $11.4 million from $10.7 million for 2014 to $22.1 million for 2015 mainly as a result of a
favourable deferred tax impact of IPO-related costs and additional finance costs associated with early repayment of the subordinated
debt. This increase was offset by an increase in current income tax expense of $5.1 million from $5.0 million in 2014 to $10.1 million in
2015 as a result of the increased taxable income due to improved business results and a higher allocation of partnership income of
SCCLP to SCCI.
Net loss
During 2015, the Company incurred a number of one-time, non-cash transactions related to the capital structure that existed prior
to the IPO as well as other non-recurring items at the time of the IPO. Including these items, which are not indicative of strong
core business performance achieved in the period, net loss for 2015 was $51.7 million ($1.90 loss per share) compared to a loss of
$17.1 million ($1.52 loss per share) for 2014. The items that impacted the net loss in 2015 were:
i) the non-cash accelerated interest accretion expense upon the early settlement of the subordinated debt and
convertible shares amounting to $105.3 million;
ii) acceleration on the amortization of debt issuance costs relating to the senior credit facility that existed prior to
the IPO amounting to $1.2 million;
iii) non-recurring management bonus relating to the legacy option plan that existed prior to the IPO amounting to
$6.9 million;
iv) non-recurring professional fees related to the IPO of $2.4 million;
v) management compensation of $0.7 million that has reduced since the IPO; and
vi) share based compensation associated with the new management compensation plan of $0.2 million.
In aggregate, these items amounted to $91.2 million on an after-tax basis.
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11
Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
Adjusted Net Income
Adjusted Net Income for 2015 was $39.3 million compared to $25.3 million for 2014, which is an increase of $14.0 million (or 55.6%).
The increase was primarily due to improved Operating EBITDA, offset by higher finance related expenses and higher taxation expense.
See “Non-IFRS Measures”.
DIS CO NtINuED OPERA tIONS
Net income (loss)
The sale of the Sleep America business for US$12.4 million (net of working capital adjustment of US$0.1 million) closed on January 6,
2015. Subsequently, in Q3 2015, Sleep America, LLC (the entity that operated the Sleep America business), SC US Holdco and
SC Management were wound up into SCCLP. As a result, SCC realized a gain of $6.0 million. The performance of the Sleep America
business was presented in Q4 2014 as “Discontinued Operations” following the approval of the sale on November 5, 2014.
9 Summary of Qua rte rly Re s ul t s
Over the past two years, the Company’s quarterly revenue and earnings have steadily increased with the third quarter typically
generating the greatest contribution to revenues and earnings, and the first quarter the least. This is largely due to the seasonal
nature of revenue and the timing of marketing programs. Accordingly, results of operations for any interim period are not necessarily
indicative of the results of operations for the full fiscal year. The following table shows the financial performance of the Company by
quarter for the last two years and has been prepared in accordance with IFRS.
(C$ thousands unless otherwise stated)
Q4
Q3
Q2
Q1
2015
total
Revenues
SSSG
EBITDA(1)
Operating EBITDA(1)
Operating EBITDA Margin(1)
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Adjusted net income from continuing operations(1)
Earnings per share from
continuing operations – Basic
Earnings per share from
discontinued operations – Basic
Earnings per share from
continuing operations – Diluted
Earnings per share from
discontinued operations – Diluted
Adjusted earnings per share from
continuing operations(1)
Note:
$ 119,106
$ 142,946
$
102,520
$
91,613
$
456,185
12.9%
16,071
16,291
13.7%
8,618
(23)
8,595
8,542
13.4%
19,700
28,742
20.1%
8,047
(176)
7,871
17,811
7.7%
12,935
13,370
13.0%
(50,666)
(586)
(51,252)
7,085(2)
10.5%
10,304
10,722
11.7%
(17,691)
6,777
(10,914)
5,876(2)
11.3%
59,010
69,125
15.2%
(51,692)
5,992
(45,700)
39,314
$
$
$
$
$
0.16
–
0.16
–
0.23
$
$
$
$
$
0.39
$
(2.70)
$
(1.09)
$
(1.90)
(0.01)
$
(0.02)
$
0.20
$
0.20
0.39
$
(2.70)
$
(1.09)
$
(1.90)
(0.01)
$
(0.02)
$
0.20
0.47
$
0.19
$
0.16
$
$
0.20
1.05
(1) See the section below entitled “Non-IFRS Measures” for further details concerning how the Company calculates SSSG, EBITDA, Operating EBITDA, Operating EBITDA Margin,
Adjusted Net Income and Adjusted Earnings per Share (EPS) and for reconciliation to the most comparable IFRS measure.
(2) Prior to the IPO, a certain percentage of taxable income of Sleep Country Canada LP (“SCCLP”) was allocated to minority shareholders. As a result of the Pre-Closing
Transactions, 100% of taxable income of SCCLP is allocated to SCCI. Adjustments have been made to reflect the change in taxation expense.
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(C$ thousands unless otherwise stated)
Q4
Q3
Q2
Q1
2014
Total
Revenues
SSSG
EBITDA(1)
Operating EBITDA(1)
Operating EBITDA Margin(1)
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Adjusted net income from continuing operations(1)
Earnings per share from
continuing operations – Basic
Earnings per share from
discontinued operations – Basic
Earnings per share from
continuing operations – Diluted
Earnings per share from
discontinued operations – Diluted
Adjusted earnings per share from
continuing operations(1)
Note:
$ 100,649
$
121,426
$
92,666
$
81,344
$
396,085
10.2%
12,948
13,577
13.5%
3,280
4,772
8,052
7,155
11.1%
22,224
22,727
18.7%
10,531
(527)
10,004
13,086
9.1%
7,594
8,782
9.5%
(27,946)
(688)
(28,634)
3,553(2)
1.30%
5,756
5,559
6.8%
(3,001)
(561)
(3,562)
1,480(2)
8.3%
48,522
50,645
12.8%
(17,136)
2,996
(14,140)
25,274(2)
$
(0.01)
$
$
$
$
0.17
–
0.06
0.19
$
$
$
$
$
0.21
(0.02)
0.07
(0.01)
0.35
$
$
$
$
$
(1.56)
$
(0.19)
$
(1.52)
(0.02)
$
(0.02)
$
0.10
(1.56)
$
(0.19)
$
(1.52)
(0.02)
$
(0.02)
$
0.10
0.09
$
0.04
$
0.67
(1) See the section below entitled “Non-IFRS Measures” for further details concerning how the Company calculates SSSG, EBITDA, Operating EBITDA, Operating EBITDA Margin,
Adjusted Net Income and Adjusted Earnings per Share (EPS) and for reconciliation to the most comparable IFRS measure.
(2) Prior to the IPO, a certain percentage of taxable income of Sleep Country Canada LP (“SCCLP”) was allocated to minority shareholders. As a result of the Pre-Closing
Transactions, 100% of taxable income of SCCLP is allocated to SCCI. Adjustments have been made to reflect the change in taxation expense.
10 Se gment Pe rformance
As at December 31, 2015, SCC manages its business on the basis of one operating segment, being Canada, which is also SCC’s only
reportable segment consistent with the internal reporting provided to management.
11 Liqu idity an d Ca pital Res o u rce s
LIQuIDIty
SCC’s primary sources of cash consist of existing cash balances, operating activities, and available credit facilities. SCC’s primary uses
of cash are to fund operating expenses, capital expenditures, finance costs, taxation expense, debt principal payments and dividends.
Historically, SCC has experienced lower sales and EBITDA in the first quarter of the year. Management believes that cash generated
from operations, together with cash and cash equivalents on hand and amounts available under SCC’s credit facilities will be sufficient
to meet its future cash requirements. However, SCC’s ability to fund future cash requirements will depend on its future operating
performance, which could be affected by general economic, financial and other factors including factors beyond its control despite
the risk management strategies that management puts in place. See the section entitled “Risk Factors” in the AIF for a discussion of
the various risks and uncertainties that may affect the Company’s ability to fund its future cash requirements.
Management reviews new store opening, acquisition and investment opportunities in the normal course of its business and may,
if suitable opportunities arise, realize these opportunities to meet SCC’s business strategy. Historically, the funding for any such
acquisitions or investments has come from cash flow generated from operating activities and/or additional debt.
The Company operates under a negative working capital position as a result of the difference in timing between when a customer
pays for their purchased product and when the Company pays their suppliers. Typically, a customer will pay in full at the time of the
sale; however, the Company has negotiated extended payment terms with the majority of its suppliers. Management believes that
cash generated from operations, together with cash and cash equivalents on hand and amounts available under SCC’s credit facilities
will be sufficient to sustain a negative working capital position.
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13
Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
A summary of net cash flows by activities is presented below for 2015 and 2014:
(C$ thousands unless otherwise stated)
Cash flows from operating activities
Cash flows from (used in) investing activities
Cash flows used in financing activities
Exchange rate difference on cash and cash equivalents
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Net cash flows from operating activities
$
$
2015
58,992
(196,379)
112,688
–
(24,699)
41,338
2014
47,715
(7,285)
(26,534)
41
13,937
27,401
$
16,639
$
41,338
Net cash flows generated from operating activities increased from $47.7 million for 2014 to $59.0 million for 2015. During 2015,
cash generated from operating activities before changes in Working Capital was $50.0 million and was positively impacted by cash
generated of $9.0 million from a decrease in Working Capital. The decrease in Working Capital for 2015 was primarily driven by higher
trade and other payables, higher customer deposits, lower prepaid expenses and deposits and was offset by higher inventories and
trade and other receivables. During 2014, cash generated from operating activities before changes in Working Capital of $41.6 million
was positively impacted by cash generated of $6.1 million from a decrease in Working Capital. The decrease in Working Capital for
2014 was primarily driven by higher trade and other payables and customer deposits, and was offset by higher inventories, trade and
other receivables and prepaid expenses and deposits.
Net cash flows used in investing activities
Net cash flows generated from investing activities consist mainly of purchase of shares in SCCI of $196.8 million and proceeds from
the sale of Sleep America for US$12.4 million offset by investments in capital expenditure. Total capital expenditure increased from
$7.3 million for 2014 to $14.6 million for 2015 mainly due to new store openings and store renovations.
Net cash flows used in financing activities
Net cash flows generated by financing activities were $112.7 million for 2015, consisting primarily of cash received from the IPO (net of
IPO expenses) of $283.5 million and from the issue of Class E shares of $2.3 million. This was partially offset by a net decrease in the
senior term loan of $2.8 million, repayment of the promissory notes, Class A convertible shares, Class B common shares and Class D
common shares of SCCI of $78.8 million, purchase of Class A common shares of $77.6 million, dividends on shares of $5.8 million and
interest payments of $6.6 million on the senior term loan and Class B common shares. Net cash flows used in 2014 were $26.5 million
consisting primarily of the repayment of promissory notes of $60.5 million, interest payment of $6.0 million on the senior term loan
and Class B common shares, dividends on Class A shares of SCCI of $7.5 million, return of capital on Class A convertible, Class B and
Class D common shares of $7.0 million, financing costs on the senior credit facility of $1.4 million offset by additional senior term loan
taken of $56.8 million.
Contractual obligations
The Company’s contractual obligations consist primarily of leases for stores and distribution centres, all of which are classified as
operating leases. Minimum lease payments under long-term leases for store locations and distribution centres, excluding percentage
rent, as at December 31, 2015, are listed below.
Not later than one year
Later than one year and not later than five years
Later than five years
total
$
33,636
89,058
34,301
$
156,995
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CA P It AL RESOuRCES
Senior secured credit facility
On January 1, 2015, SCCI held a revolving credit facility of $15 million and a term credit facility of $130 million. On February 25, 2015,
SCCI increased its revolving credit facility by $15 million to $30 million. On July 16, 2015, concurrently with the closing of the IPO,
SCCI replaced its $30 million revolving and $130 million term credit facilities with a $175 million revolving credit facility which matures
on July 16, 2020, with full repayment due at maturity of all amounts outstanding. Net transaction costs associated with the replaced
revolving and term facilities of $1,205 were expensed in 2015.
As at December 31, 2015, the balance outstanding on the revolving credit facility was $124 million (December 31, 2014 – $nil and
$126.75 million outstanding on the term credit facility).
Interest on the term facility is based on the prime or bankers’ acceptance rates plus applicable margins based on the achievement
of certain targets, as defined by the senior secured credit agreement. As at December 31, 2015 the applicable margin for bankers’
acceptances was 225 basis points and the applicable margin for prime was 125 basis points. Interest on the bankers’ acceptance
is payable in advance, whereas that on the prime rate is payable in arrears. Interest on the revolving facilities is payable monthly
in advance at the bankers’ acceptance rate or in arrears at the prime rate plus the applicable margin based on the achievement of
certain targets, as defined by the senior secured credit agreement.
Under the terms of the revolving credit facilities, certain financial and non-financial covenants must be maintained. As at December 31,
2015, the Company and its subsidiaries were in compliance with all covenants under the senior secured credit facility.
Series A and Series B promissory notes
In 2015, $61.9 million of Series A and Series B notes were repaid. Also, promissory notes held by related parties were early settled as
part of the IPO in July 2015. As a result of these transactions, the cash flow assumptions related to the Series A and B promissory notes
were revised and resulted in non-cash accelerated interest expense being recognized. For 2015, SCCI incurred non-cash accelerated
interest expense as noted, including accretion, of $84.7 million (2014 – $46.1 million) on the Series A and B notes.
In connection with the closing of the IPO, the Series A and B notes were settled for Class A common shares of SCCI based on their
face value of $140,092.
Class A convertible shares and Class B common shares
On February 25, 2015, there was a repayment of $4.0 million on the Class A convertible shares. Also, convertible shares held by
related parties were early settled as part of the IPO in July 2015. This resulted in non-cash accelerated interest accretion expense
being recognized on the Class A convertible shares. The non-cash interest accretion on the Class A convertible shares, along with
interest expense on the Class B common shares were partially offset by a non-cash fair value adjustment, for a cumulative expense of
$20.6 million recorded for 2015 (2014 – $10.6 million).
In connection with the closing of the IPO, the Class A convertible shares were converted into Class A common shares of SCCI based
on their face value of $33.4 million.
OFF BALA NCE SHEEt ARRANgEMENt S
SCC did not have any material off-balance sheet arrangements as at December 31, 2015 and December 31, 2014, nor does it have any
subsequent to December 31, 2015.
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15
Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
RE LA tE D P A Rty tRANSACtIONS
Funds controlled by Birch Hill Equity Partners Management Inc. (“Birch Hill”) beneficially own, control or direct, directly or indirectly,
approximately 14.5% of the votes attached to the Company’s issued and outstanding common shares. Birch Hill also has dispositive
powers, but not voting direction or control, with respect to approximately 4.4% of the common shares beneficially owned by certain
co-investors. Birch Hill also maintains two nominee directors on the Company’s Board of Directors. As such, Birch Hill is considered to
have significant influence and is deemed to be a be related party of the Company as at December 31, 2015.
The following balances are due from related parties:
Short-term advances to related parties
2015
$
4
$
2014
16
Short-term advances due from related parties were a result of tax liability and professional fee expenses paid by the Company on
behalf of the related parties.
Prior to the IPO, 28.82% of the Class A convertible shares and 97.64% of the Class B common shares of SCCI were held by key
management, of which two members of the Board of Directors held an ownership interest.
12 Transactions wit h Key Man a g e m en t Perso nnel
Key management personnel are those individuals having authority and responsibility for planning, directing and controlling the
activities of the Company, including members of the Company’s Board of Directors. The Company considers key management to be
the Board of Directors and its five most highly compensated executive officers. SCC incurred the following compensation expenses
in relation to key management personnel:
(C$ thousands unless otherwise stated)
Salaries and short-term employee benefits
Share-based compensation
Non recurring bonus relating to the legacy option plan
Directors fees
$
$
2015
5,006
171
5,096
150
2014
3,620
14
–
–
$
10,423
$
3,634
13 Risk Factors
SCC’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair value
interest risk), credit risk and liquidity risk. SCC’s overall risk management program and business practices seek to minimize any
potential adverse effects on SCC’s consolidated financial performance.
Risk management is carried out by the senior management team and is reviewed by SCC’s Board of Directors.
MARkEt RISk
Market risk is the loss that may arise from changes in factors such as interest rates, foreign exchange rates and the impact these
factors may have on other counterparties.
FO REIgN Ex CH A NgE RISk
SCC’s operating results are reported in Canadian dollars. A portion of the Company’s merchandise purchases are denominated in U.S.
dollars which results in foreign currency exposure related to fluctuations between the Canadian and U.S. dollars. The Company does
not currently use foreign exchange option or forward contracts to hedge its foreign currency risk. A sudden increase in the U.S. dollar
relative to the Canadian dollar could result in higher costs to the Company which could in turn result in increased prices and reduced
sales, decreased profit margins and could negatively impact the Company’s business and financial results.
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CASH FLO w AND FAIR v ALuE INtERES t RISk
SCC has no significant interest-bearing assets. SCC’s income and operating cash flows are substantially independent of changes in
market interest rates.
SCC’s primary interest rate risk arises from long-term debt. SCC manages its exposure to changes in interest rates by using a combination
of fixed and variable rate debt and utilizing interest rate swaps as necessary to achieve the desired proportion of variable and fixed rate
debt. An increase (or decrease) in interest rates by 1% would result in a $1.2 million increase (or decrease) on annual interest expense on
the credit facility. SCC also has a small number of finance leases that carry interest at variable rates.
CRED It RISk
Credit risk refers to the risk of losses due to failure of SCC’s customers or other counterparties to meet their payment obligations.
Credit risk arises from deposits with banks, as well as credit exposures from mattress suppliers for the payment of volume and co-
operative advertising rebate amounts and balances owed from third-party financing companies under the various financing plans
SCC offers its customers. In accordance with SCC’s investment practice, all deposits are held at banks possessing a credit rating of
“AA-” or better. Sales to retail customers are settled in cash, financed by third-party financing companies or by using major credit
cards. SCC transfers the credit risk for financing plans to third-party financing companies. The third-party financing companies that
SCC deals with carry a minimum rating of “BBB” or better.
There are no significant impaired receivables that have not been provided for in the allowance. There are no amounts considered past
due or impaired.
LIQuIDIty RI Sk
Liquidity risk is the risk that SCC cannot meet a demand for cash or fund its obligations as they come due. Liquidity risk also
includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management implies
maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit
facilities.
CA P It AL RI Sk
SCC’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for its
shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital structure to minimize
the cost of capital.
For an understanding of other potential risks, including non-financial risks, see the section entitled “Risk Factors” in the AIF.
14 Cri tical Accou nt ing Estim ate s
A summary of significant accounting policies is included in Note 3 of SCC’s 2015 audited consolidated financial statements. Critical
accounting estimates require management to make certain judgments and estimates, which may differ from actual results. Accounting
estimates are based on historical experience and other factors that management believes to be reasonable under the time frame and
circumstances. Changes in management’s accounting estimates can have a material impact on the financial results of the Company.
The Company’s critical accounting estimates are included in Note 4 of the SCC’s 2015 audited consolidated financial statements and
are described below.
S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
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17
Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
IMPA IRMENt OF gOOD wILL AND BRANDS
Management is required to use judgment in determining the grouping of assets to identify the Company’s cash generating units
(“Cgus”) for the purposes of testing fixed assets for impairment. Judgment is further required to determine appropriate groupings
of CGUs for the level at which goodwill and intangible assets are tested for impairment. In addition, judgment is used to determine
whether a triggering event has occurred requiring an impairment test to be completed.
In determining the recoverable amount of a CGU, various estimates are employed. The Company determines fair value less costs of
disposal using estimates such as projected future sales, earnings, capital investments and discount rates. Projected future sales and
earnings are consistent with strategic plans provided to the Company’s Board of Directors. Discount rates are based on an estimate
of the Company’s weighted average cost of capital taking into account external industry information reflecting the risk associated
with the specific cash flows. As at December 31, 2015 and 2014, impairment reviews were performed by comparing the carrying value
of goodwill and brands with the recoverable amount of the CGU to which goodwill and brands have been allocated. Management
determined that there has been no impairment.
LO Ng-tERM DE B t – PROMISSOR y NO tES A AND B, CLASS B COMMON SH ARES AND
CL ASS A C ONvER tIBLE SHARES
The calculation of amortized cost associated with the Series A and B promissory notes, Class B common shares and the Class A
convertible shares, in each case of SCCI, required management to utilize the effective interest rate approach and make certain
judgments regarding the expected cash outflows associated with the respective financial liability. Changes in the expected timing and
amounts of cash outflows due to early repayments or changes in the redemption values impacted amounts recognized as interest
expense. For example, if the promissory notes were repaid prior to the contractual maturity date, non-cash interest accretion would
be accelerated resulting in additional charges in the consolidated statement of operations, which would be material.
15 F inancial In strume nts
At December 31, 2015, the financial instruments consisted of cash, accounts receivable, accounts payable and accrued liabilities and
senior secured notes. Cash and cash equivalents, trade and other receivables, due from related companies, accounts payable and
accrued liabilities are measured at amortized cost and their fair values approximate carrying values due to their short-term nature.
The carrying values of the revolving facilities approximate their fair values as the terms and conditions of the borrowing arrangements
are comparable to market terms and conditions as at December 31, 2015 and December 31, 2014. The finance leases approximate their
fair values as the implicit interest rates used in determining their fair value approximate interest rates as at December 31, 2015 and
December 31, 2014. The Company’s financial instruments are exposed to certain financial risks, including currency risk, interest rate risk,
credit risk and liquidity risk, which are discussed above under the heading “Risk Factors”.
16 Disclo sure Controls a nd Pro ce d u res
Disclosure controls and procedures are designed to provide reasonable assurance that material information relating to the Company
is made known to the Chief Executive Officer and the Chief Financial Officer (the “Certifying Officers”) by others on a timely basis
so that appropriate decisions can be made regarding public disclosure within the time periods required by applicable securities
laws. The Certifying Officers are responsible for establishing and maintaining the Company’s disclosure controls and procedures.
Our system of disclosure controls and procedures includes, but is not limited to, our Disclosure Policy, our Code of Business
Conduct, the effective functioning of our Disclosure Committee, procedures in place to systematically identify matters warranting
consideration of disclosure by the Disclosure Committee, verification processes for individual financial and non-financial metrics
and information contained in annual and interim filings, including the consolidated financial statements, MD&As, AIF, Management
Information Circular and other documents and external communications.
Based on an evaluation of the Company’s disclosure control and procedures, the Certifying Officers have concluded that these
controls are appropriately designed and were operating effectively as of December 31, 2015. Although the Company’s disclosure
controls and procedures were operating effectively as of December 31, 2015, there can be no assurance that the Company’s disclosure
controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise
required to be set forth in the Company’s regulatory filings.
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17 I nterna l Control ove r Fin a nc i a l Rep o rti ng
Management is also responsible for establishing and maintaining appropriate internal controls over financial reporting. Our internal
controls over financial reporting include, but are not limited to, Entity Level Controls, Information Technology General Controls,
Information Technology Application and Development Controls, detailed policies and procedures related to financial accounting and
reporting and controls over systems that process and summarize transactions. Our procedures for financial reporting also include
the active involvement of qualified financial professionals, senior management, executive management and our Audit Committee.
Internal control over financial reporting (“ICFR”) is designed to provide reasonable assurance regarding the reliability of the Company’s
financial reporting and the preparation of financial statements in accordance with IFRS. The Certifying Officers are responsible
for establishing and maintaining adequate ICFR for the Company. In designing ICFR, it should be recognized that due to inherent
limitations, any controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives and may not prevent or detect misstatements. Projections of any evaluations of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Additionally, management is required to use judgment in evaluating ICFR.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial
statements.
A “material weakness” in internal control over financial reporting is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim
financial statements will not be prevented or detected in a timely basis by the company’s internal controls.
The Certifying Officers have evaluated the effectiveness of the Company’s ICFR as at December 31, 2015 using the framework established
in “Internal Control – Integrated Framework (COSO Framework)” published by The Committee of Sponsoring Organizations of the
Treadway Commission (COSO), 2013. Based on that evaluation, the Certifying Officers concluded that the ICFR, as defined by National
Instrument 52-109 – Certification of Disclosure on Issuers’ Annual and Interim Filings, are appropriately designed and were operating
effectively as at December 31, 2015 and that no material weaknesses were identified through their evaluation.
18 Fu ture Accounting Sta nd a rd s
The IASB and International Financial Reporting Interpretation Committee (IFRIC) have issued the following standards that have
not been applied in preparing these consolidated financial statements as their effective dates fall within annual periods beginning
subsequent to the current reporting period. The company is evaluating the impact of these standards and whether to early adopt
these standards:
AME ND MENt t O IAS 1, PRESENt AtION OF FINANCIAL S tAtEMENt S
This standard was amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial
statements, and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, 2016.
IF RS 15, REvE NuE FROM CONtRACt S wItH CuS tOMERS
This standard replaces all previous revenue recognition standards, including IAS 18 - Revenue. The new standard is effective for
annual periods beginning on or after January 1, 2018 with early adoption permitted. The Company is analyzing the new standard to
determine its impact on the Company’s consolidated balance sheet and consolidated statement of operations.
S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
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19
Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
IF R S 9, FI NAN CIAL INS tRuMENt S
This standard was issued concerning classification and measurement, impairment and hedge accounting, to supersede IAS 39,
Financial Instruments: Recognition and Measurement. IFRS 9 will be effective for years beginning on or after January 1, 2018 with
early adoption permitted. The Company is analyzing the new standard to determine its impact on the Company’s consolidated
balance sheet and consolidated statement of operations.
AME ND MENt t O IFRS 7, FINANCIAL INS tRuMENt S: DISCLOSuRES
This standard was amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments are
effective on adoption of IFRS 9.
IF R S 16, LEASES
IFRS 16, Leases (“IFRS 16”) sets out the principles for the recognition, measurement, presentation and disclosure of leases for
both parties to a contract, the customer (lessee) and the supplier (lessor). This will replace IAS 17, Leases (“IAS 17”) and related
Interpretations. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of a
contract. IFRS 16 introduces a single accounting model for all lessees and requires a lessee to recognize right-of-use assets and lease
liabilities for leases with terms of more than 12 months, unless the underlying asset is of low value, and depreciation of lease assets
separately from interest on lease liabilities in the income statement. Under IFRS 16, lessor accounting for operating and finance
leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier
application permitted for entities that apply IFRS 15, Revenue from Contracts with Customers.
As the Company has significant contractual obligations in the form of operating leases under IAS 17, there will be a material increase
to both assets and liabilities upon adoption of IFRS 16, and material changes to the timing of recognition of expenses associated with
the lease arrangements. The Company is analyzing the new standard to determine its impact on the Company’s consolidated balance
sheet and consolidated statement of operations.
19 Outstanding Share Dat a
As of the date hereof, 37,578,176 common shares and no Class A common shares of the Company are issued and outstanding. As of
the date hereof, 139,334 options to purchase an equivalent number of common shares and 30,495 performance share units are issued
and outstanding. For further details concerning the rights, privileges and restrictions attached to the common shares and the Class
A common shares, please refer to the section entitled “Description of Share Capital” in the AIF.
20 No n- IFRS Me asure s
The Company prepares its financial statements in accordance with IFRS. In order to provide additional insight into the business,
to provide investors with supplemental measures of its operating performance and to highlight trends in its business that may not
otherwise be apparent when relying solely on IFRS financial measures, the Company has also provided in this MD&A certain non-IFRS
measures, including “Same Store Sales Growth” or “SSSG”, “EBITDA”, “Operating EBITDA”, “Operating EBITDA Margin”, “Adjusted
Net Income”, “Adjusted EPS” and “Working Capital”, each as defined below. These measures are provided as additional information
to complement IFRS measures by providing further understanding of the Company’s results of operations from management’s
perspective. Management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to
period, to prepare annual operating budgets and forecasts and to determine components of management compensation. The
Company also believes that securities analysts, investors and other interested parties frequently use non-IFRS measures in the
evaluation of issuers.
Readers are cautioned that these non-IFRS measures are not recognized under IFRS and do not have a standardized meaning
prescribed by IFRS. They are therefore unlikely to be comparable to similarly titled measures presented by other publicly traded
companies. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the Company’s financial
information reported under IFRS. See below for further details concerning how the Company calculates these non-IFRS measures
and for reconciliations to the most comparable IFRS measures.
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EB ItDA A ND OPERA tINg EBItDA FROM CONtINuINg OPERA tIONS
EBITDA and Operating EBITDA from continuing operations are used by SCC to assess its operating performance.
EBITDA is defined as income (loss) before interest, taxes, depreciation and amortization expenses.
Operating EBITDA is defined as income (loss) before interest, taxes, depreciation and amortization expenses adjusted for:
• Normalization of management bonuses;
• Reduction in management compensation due to a change in the senior leadership team;
• Non-recurring management bonuses;
• Certain non-recurring professional fees relating to the IPO and certain shareholder matters, and
• Share based compensation.
NEt IN COME AN D AD juS tED NEt IN CO ME FR OM CONtINuINg OPER A tIONS
Adjusted Net Income from continuing operations is used by SCC to assess its operating performance. Adjusted Net Income from
continuing operations is defined as net income (loss) from continuing operations adjusted for:
• Interest expense on Series A and B notes;
• Interest expense and non-cash fair value adjustment on Class A convertible shares and Class B common shares;
• Acceleration of amortization of debt issuance costs;
• Normalization of management bonuses;
• Non-recurring management bonuses;
• Certain non-recurring professional fees relating to the IPO and certain shareholder matters;
• Reduction in management compensation due to a change in the senior leadership team;
• Share based compensation; and
• Tax impact of the change in corporate structure.
wORkINg CA PIt AL
“working Capital” is defined as the sum of trade and other receivables, due from related parties, inventories, prepaid expenses and
deposits less trade and other payables and customer deposits.
S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
ı
21
Management’s Discussion and Analysis of Financial Condition and Results
of Operation of Sleep Country Canada Holdings Inc.
CA LCuL A tIO N OF NON-IFRS MEASuRES
(C$ thousands unless otherwise stated, except earnings per share)
Reconciliation of net loss from continuing operations
to EBItDA and Operating EBItDA:
Net loss from continuing operations
Interest and other (income) expenses – net
Finance related expenses
Income taxes
Depreciation and amortization
EBItDA
Adjustments to EBITDA:
Reduction in management bonuses1
Non-recurring management bonuses2
Non recurring items3
Reduction in management compensation4
Share-based compensation5
Total adjustments
Q4 2015
Q4 2014
2015
2014
2013
$
$
8,618
(12)
1,226
3,465
2,774
16,071
3,280
(58)
6,400
867
2,459
12,948
$ (51,692)
15
112,316
(11,975)
10,346
59,010
$
–
–
121
–
99
220
120
–
160
346
3
629
3
6,898
2,358
685
171
10,115
$
(17,136)
21
61,502
(5,762)
9,897
48,522
389
–
356
1,364
14
2,123
4,381
(145)
23,215
1,069
9,342
37,862
167
–
24
1,337
17
1,545
Operating EBItDA
Operating EBItDA Margin
16,291
13.7%
13,577
13.5%
69,125
15.2%
50,645
12.8%
39,407
11.1%
$
8,618
$ 3,280
$
(51,692)
$
(17,136)
$
4,720
4,498
84,726
46,051
18,059
Reconciliation of net loss from continuing
operations to Adjusted Net Income:
Net income loss
Adjustments:
Interest expense on Series A and B notes6
Interest expense and fair value adjustment on
Class A convertible shares and
Class B common shares7
Acceleration on amortization of debt issuance cost8
Total interest adjustment
Reduction in management bonuses1
Non-recurring management bonuses2
Non recurring items3
Reduction in management compensation4
Share-based compensation5
Total adjustments
Tax impact of all adjustments
Tax impact of change in corporate structure9
Adjusted net income from continuing operations
weighted average number of shares10
Earnings per share from continuing operations
Adjusted earnings per share from
continuing operations
$
$
–
–
–
–
–
–
121
–
99
220
(58)
(238)
8,542
37,554
0.16
$
868
–
5,366
120
–
160
346
3
5,995
(1,117)
(1,003)
7,155
37,539
(0.01)
0.23
$
0.19
20,602
1,205
106,533
3
6,898
2,358
685
171
116,648
(25,404)
(238)
39,314
37,543
(1.90)
1.05
$
$
10,584
–
56,635
389
–
356
1,364
14
58,758
(12,656)
(3,692)
25,274
37,539
(1.52)
0.67
$
$
2,370
–
20,429
167
–
24
1,337
17
21,974
(5,147)
(1,203)
20,344
37,539
0.01
0.54
$
$
1 Due to the fluctuation of financial performance, the management bonus payout in certain years hit stretch targets with a higher than what would be considered to be a “normal”
run-rate. Adjustments are made to bring the management bonus payout to the average percentage payout of past 6 years over the base bonus level (or 126% over base).
2 Adjustment for non-recurring management bonus relating to the close out of the legacy option plan that existed prior to the IPO.
3 Non-recurring items include professional fees and internal costs relating to SCCHI’s capital reorganization and IPO.
4 Reduction in management compensation upon internal restructuring following the IPO.
5 Adjustment for share-based compensation, a non-cash item.
6 Adjustment for interest expense on promissory notes that were restructured in connection with the Pre-Closing Transactions.
7 Adjustment for non-cash fair value adjustment and interest expense on convertible shares and Class B common shares that were restructured in connection with the Pre-
Closing Transactions.
8 Adjustment for acceleration of amortization of debt issuance cost relating to the senior credit facility that was in place prior to the IPO.
9 Prior to the IPO, a certain percentage of taxable income of Sleep Country Canada LP (“SCCLP”) was allocated to minority shareholders. As a result of the Pre-Closing
Transactions, 100% of taxable income of SCCLP is allocated to SCCI and therefore this adjustment reflects the change in taxation expense.
10 This reflects the number of common shares outstanding post-IPO under the new corporate structure. The actual number of shares outstanding in 2014 for basic earnings per
share were 19,711,000 shares for the twelve-month period ended December 31, 2014 and 18,990,000 shares for the three-month period ended December 31, 2014.
21 Add itional Inform ation
Additional information relating to the Company, including the Company’s annual information form, quarterly and annual reports and
supplementary information is available on SEDAR at www.sedar.com. Press releases and other information are also available in the
Investor Relations section of the Company’s website at www.sleepcountry.ca.
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Independent Auditor ’s Report
February 24, 2016
to the Shareholders of
Sleep Country Canada Holdings Inc.
We have audited the accompanying consolidated financial statements of Sleep Country Canada Holdings Inc., which comprise the
consolidated statements of financial position as at December 31, 2015 and December 31, 2014 and the consolidated statements of
operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for the years then ended, and the related
notes, which comprise a summary of significant accounting policies and other explanatory information.
MAN A gEMENt’S RESPONSIBILIty FOR tHE CONSOLIDA tED FINANCIAL S tAtEMENt S
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
AuDIt OR’S RESPONSIBILIty
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
OP IN ION
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Sleep Country
Canada Holdings Inc. as at December 31, 2015 and December 31, 2014 and the results of its operations and its cash flows for the years
then ended in accordance with International Financial Reporting Standards.
(Signed) PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
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23
2015
$
2014
$
16,639
8,402
4
32,070
1,624
–
58,739
28,987
4,956
463
104,076
242,146
439,367
46,024
15,598
725
–
62,347
8,897
10,309
124,223
205,776
350,655
(117,064)
–
–
233,591
439,367
41,331
6,477
16
26,369
2,475
14,086
90,754
24,948
–
480
104,042
242,146
462,370
33,729
12,116
7,367
5,210
58,422
6,965
31,820
257,838
355,045
123,603
(63,693)
428
46,987
107,325
462,370
Consolidated Statements of Financial Position
of Sleep Country Canada Holdings Inc.
As at December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
Assets
Current assets
Cash and cash equivalents (note 5)
Trade and other receivables (note 6)
Due from related parties – non-interest bearing and due on demand (note 19)
Inventories (note 7)
Prepaid expenses and deposits
Assets of disposal group held for sale (note 22)
Property and equipment (note 8)
Deferred tax assets (note 13)
Other assets
Intangible assets other than goodwill (note 9)
goodwill (note 9)
Liabilities
Current liabilities
Trade and other payables (note 10)
Customer deposits
Long-term debt (note 12)
Liabilities of disposal group held for sale (note 22)
Other liabilities (note 11)
Deferred tax liabilities (note 13)
Long-term debt (note 12)
Shareholders’ Equity
Share capital and other (note 15)
Deficit
Currency translation reserve
Non-controlling interest (note 23)
Contingent liabilities and unrecognized contractual commitments (note 17)
Approved by the Board of Directors
Andrew Moor
Director
David Shaw
Director
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Operations
of Sleep Country Canada Holdings Inc.
For the years ended December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
Revenues
Cost of sales (notes 7 and 14)
gross profit
general and administrative expenses (note 14)
Depreciation and amortization
Income before finance, interest and other (income) expenses and income taxes
Finance related expenses (note 12)
Interest and other (income) expenses – net
Loss before income tax recovery
Provision for income taxes (recovery) (note 13)
Current
Deferred
Net loss from continuing operations
Net income from discontinued operations (note 22)
Net loss for the year
total net income (loss) attributable to
Owners of the parent
Non-controlling interest
2015
$
456,185
329,370
126,815
67,805
10,346
48,664
112,316
15
112,331
2014
$
396,085
292,665
103,420
54,898
9,897
38,625
61,502
21
61,523
(63,667)
(22,898)
10,112
(22,087)
(11,975)
(51,692)
5,992
(45,700)
(46,879)
1,179
(45,700)
4,959
(10,721)
(5,762)
(17,136)
2,996
(14,140)
(28,002)
13,862
(14,140)
Earnings (loss) per share attributed to the common shareholders of the Company (note 16)
Basic and diluted earnings (loss) per share (in dollars)
Continuing operations
Discontinued operations
Earnings (loss) per share
$
$
$
(1.90)
0.20
(1.70)
$
(1.52)
0.10
(1.42)
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Comprehensive Income (Loss)
of Sleep Country Canada Holdings Inc.
For the years ended December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
Net loss for the year
Other comprehensive income (loss) to be reclassified to consolidated statement of operations
Cumulative translation differences related to discontinued operations
total comprehensive loss for the year
total comprehensive income (loss) attributable to
Owners of the parent
Non-controlling interest
The accompanying notes are an integral part of these consolidated financial statements.
2015
$
2014
$
(45,700)
(14,140)
(428)
348
(46,128)
(13,792)
(47,307)
1,179
(46,128)
(27,654)
13,862
(13,792)
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Consolidated Statements of Changes in Shareholders’ Equity
of Sleep Country Canada Holdings Inc.
For the years ended December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
Share capital and other
Sleep
Country
Canada
Holdings
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Sleep
Country
Canada
Inc.
$
123,994
–
–
–
14
(405)
–
123,603
123,603
–
–
–
–
–
626,647
(276,159)
–
(123,603)
Balance – january 1, 2014
Net income (loss) for the year
Other comprehensive income
Comprehensive income (loss)
for the year
Share-based compensation
Repurchase of shares and other
Pre-Offering dividends
Balance - December 31, 2014
Balance – january 1, 2015
Net income (loss) for the year
Other comprehensive loss
Comprehensive income (loss)
for the year
Pre-Offering dividend declared
Post-Offering dividend declared
Issuance of common shares
(note 15)
Reorganization (notes 15 and 23)
Share-based compensation
(note 20)
167
Balance – December 31, 2015
350,655
–
–
Currency
translation
reserve
$
Controlling
interest
$
Deficit
$
Total
Non-
controlling
interest
$
Total
equity
$
80
–
348
348
–
–
–
428
428
–
(28,234)
95,840
33,125
128,965
(28,002)
(28,002)
13,862
(14,140)
–
348
–
348
(28,002)
–
-
(27,654)
14
(405)
(7,457)
(7,457)
13,862
–
–
–
(13,792)
14
(405)
(7,457)
(63,693)
60,338
46,987
107,325
(63,693)
60,338
46,987
107,325
(46,879)
(46,879)
1,179
(45,700)
(428)
–
(428)
–
(428)
(428)
–
–
(46,879)
(1,612)
(4,880)
(47,307)
(1,612)
(4,880)
1,179
–
–
(46,128)
(1,612)
(4,880)
–
–
–
–
–
–
–
626,647
(399,762)
–
(48,166)
626,647
(447,928)
167
(117,064)
233,591
–
–
167
233,591
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Cash Flows
of Sleep Country Canada Holdings Inc.
For the years ended December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
Cash provided by (used in)
Operating activities
Net loss for the year
Items not affecting cash
Depreciation of property and equipment (note 8)
Amortization of intangible assets (note 9)
Reversal of brand intangible asset impairment (note 9)
Share-based compensation
Gain on sale of Sleep America (note 22)
Finance related expenses
Other non-cash expenses
Deferred income taxes
Changes in non-cash items relating to operating activities (note 18)
Investing activities
Purchase of property and equipment
Purchase of intangible assets (note 9)
Proceeds on sale of Sleep America (note 22)
Purchase of Sleep Country Canada Inc.’s shares (note 23)
Financing activities
Issuance of common shares (note 23)
Purchase of Class A common shares for cancellation (note 23)
Issuance of Class E special shares (note 23)
Additional term loan taken on senior secured credit facility (note 12)
Repayment of senior secured credit facility
Financing costs on senior secured credit facility
Repayment of Series A and B promissory notes (note 12)
Repayment on Class A convertible shares, Class B and Class D common shares
Dividends paid on Class A common shares
Interest paid
Decrease in other long-term debt
Exchange rate difference on cash and cash equivalents
Increase (decrease) in cash and cash equivalents during the year
Cash and cash equivalents – Beginning of year
Cash and cash equivalents – End of year
Non-cash investing and financing activities
Series B promissory notes issued – interest in kind (note 12)
Acquisition of property and equipment under finance lease
The accompanying notes are an integral part of these consolidated financial statements.
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2015
$
2014
$
(45,700)
(14,140)
9,004
1,341
–
171
(6,016)
112,316
887
(22,087)
49,916
9,076
58,992
(13,200)
(1,375)
14,984
(196,788)
(196,379)
283,428
(77,621)
2,337
–
(2,750)
(721)
(61,855)
(16,987)
(5,769)
(6,636)
(738)
112,688
–
(24,699)
41,338
16,639
17,684
1
9,003
1,629
(5,981)
14
–
61,502
330
(10,721)
41,636
6,079
47,715
(6,533)
(752)
–
–
(7,285)
–
–
–
60,000
(3,250)
(1,409)
(60,502)
(7,035)
(7,457)
(5,971)
(910)
(26,534)
41
13,937
27,401
41,338
20,841
398
Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
1 Orga nization
Sleep Country Canada Holdings Inc. (the Company or SCC) was incorporated by articles of incorporation under the Canada Business
Corporations Act on May 27, 2015. The Company is authorized to issue an unlimited number of common shares without par value.
The common shares are voting and entitled to dividends if, as and when declared by the Board of Directors. On May 27, 2015, the
Company issued one common share to Birch Hill Feather (US) Holdings LP for cash consideration of $1.
On July 16, 2015, in connection with the closing of its initial public offering of common shares (the Offering or the IPO), the Company
completed the acquisition (the Acquisition) of all of the issued and outstanding shares of Sleep Country Canada Inc. (SCCI), Sleep
Country US Holdco Canada Inc. (SC US Holdco) and SC Management Holding Inc. (SC Management, and together with SCCI and
SC US Holdco, the Acquired Entities) not already owned by the Company pursuant to the terms and conditions of a share purchase
agreement dated July 10, 2015 (the Purchase Agreement) entered into between the Company, the Acquired Entities and the former
shareholders of the Acquired Entities. The Company and the Acquired Entities were controlled by funds managed by Birch Hill Equity
Partners Management Inc. (Birch Hill). Prior to the Offering, Birch Hill held 84.6% of Class A common shares, 81.62% of Series A and B
promissory notes and 71.18% of Class A convertible shares of SCCI. Upon completion of the Offering and the Acquisition, Birch Hill, and
certain co-investors had voting direction and control over approximately 45.6% of the Company’s common shares. On December 11,
2015, Birch Hill and its co-investors completed a secondary offering of 10,000,000 common shares of the Company (the Secondary
Offering), following which Birch Hill and its co-investors had voting direction and control over approximately 18.9% of the Company’s
common shares.
Following completion of the Acquisition, on July 16, 2015, SC US Holdco and SC Management were dissolved into SCCI, leaving SCCI
as the sole limited partner of Sleep Country Canada LP (SCCLP). On completion of the Acquisition, the general partner of SCCLP was
Sleep Country Canada GP ULC, a newly formed Alberta unlimited liability Company (SCCGP). On January 1, 2016, SCCGP and SCCLP
were dissolved and all the assets of SCCLP were transferred to SCCI.
The Company and its subsidiaries operate in the retail market place, offering mattresses and bedding related products. As at
December 31, 2015, the main subsidiaries of the Company were SCCI, SCC GP and SCCLP.
The address of its registered office is 140 - Unit 1, Wendell Avenue, Toronto, Ontario.
2 B asis of Pre sentation
The consolidated financial statements of the Company are prepared in accordance with International Financial Reporting Standards
(IFRS), as issued by the International Accounting Standards Board (IASB) and using the accounting policies described herein.
As the Company is a newly formed entity incorporated in 2015 and Birch Hill retained control over the Company and SCCI prior to the
Offering and the Acquisition, the Acquisition is accounted for as a reorganization and recapitalization using the continuity of interests
method. Financial information for the pre-Acquisition period, including the comparative period, is presented based on the historical
financial information of SCCI.
The consolidated financial statements of the Company include the financial results of Sleep Country Canada Holdings Inc. and its
subsidiaries.
The Company’s operations can be affected by seasonal fluctuations due to changes in customer buying habits throughout the year.
The consolidated financial statements were reviewed by the Company’s Audit Committee and approved and authorized for issuance
by the Board of Directors on February 24, 2016.
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
3 Si gni ficant Accounting Pol i c i e s
The significant accounting policies set out below have been applied consistently to all periods presented in these consolidated
financial statements.
BAS I S OF CONSOLIDA tION
The consolidated financial statements include the accounts of the Company and other entities that the Company controls. Control
exists when the Company is exposed to or has rights to variable returns from its involvement in the entity and has the ability to
direct the activities that significantly affect the entities’ returns through its power over the entity. All intercompany transactions and
balances are eliminated on consolidation.
NO N-CONtROLLINg INtERES tS
Non-controlling interest represents equity interests in subsidiaries owned by outside parties. The share of net assets of subsidiaries
attributable to non-controlling interests is presented as a component of equity. Their share of net earnings is recognized directly in
equity. Changes in the parent company’s ownership interest in subsidiaries that do not result in a loss of control are accounted for as
transactions within equity. When the Company ceases to have control or significant influence, any retained interest in the entity is re-
measured to its fair value, with the change in the carrying amount recognized in net income (loss). The fair value is the initial carrying
amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset.
As at December 31, 2015, the Company held through its subsidiaries the general partner unit and all of the preferred and common
units of SCCLP. As at December 31, 2015, all commercial operations of the Company were undertaken by SCCLP and its registered
address is 140 - Unit 1, Wendell Avenue, Toronto, Ontario.
As at December 31, 2014, SCCI held the general partner unit and the preferred units in Sleep Country LP, representing 98% of the
partners’ capital as at December 31, 2014, with common units being held by third party investors.
The allocation of the profit or loss of SCCLP is specified in the limited partnership agreement whereby on an annual basis specific
allocations are made to the general partner and the remaining profit or loss is allocated to the third party investors on a pro rata basis
based on the percentage of common units held. On July 16, 2015, subsequent to Acquisition, the Company effectively controlled the
general partner unit, preferred units and 100% of the common units of SCCLP. For the year ended December 31, 2015, the allocation
of profit or loss to the Company was 94.6% until July 16, 2015 and 100% thereafter (December 31, 2014 – 67%).
FI NANCIAL ASSEt S AND LIABILItIES
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provision of the financial
instrument. Financial assets are derecognized when the contractual rights to receive cash flows from the financial asset expire and
financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled. Financial instruments
upon initial recognition are measured at fair value and classified as financial assets or liabilities at fair value through the consolidated
statements of operations, loans and receivables or other financial liabilities. Loans and receivables and other financial liabilities are
measured at amortized cost. The following classifications have been applied:
• cash and cash equivalents, trade and other receivables and due from related parties are classified as loans and
receivables; and
• trade and other payables, customer deposits and long-term debt have been classified as other financial liabilities.
The Class B common shares of SCCI meet the definition of a financial liability under IFRS as the redemption feature
(puttable on the death of the employee or certain other circumstances) creates an unavoidable contractual obligation
to pay cash. The Class B common shares of SCCI are presented as a liability, measured at amortized cost based on
the calculated redemption amount at each reporting period.
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Long-term debt is recognized initially at fair value, net of recognized transaction costs, and is subsequently measured at amortized
cost, being the carrying value. Any difference between the carrying value and the redemption value is recognized in the consolidated
statements of operations and comprehensive income (loss) using the effective interest rate method.
Fees paid on the establishment of senior credit facilities are capitalized as a prepayment for liquidity services and amortized over the
period of the facility to which it relates.
OFFSEttINg FINANCIAL INS tRuMENt S
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position
when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to
realize the asset and settle the liability simultaneously.
FOREIgN CuRRENC y tRANSLA tION
• Functional and presentation currency
Items included in the consolidated financial statements of each of the Company’s entities are measured using
the currency of the primary economic environment in which the entity operates (the functional currency). The
functional currencies of the subsidiaries are Canadian dollars and, prior to January 6, 2015, United States dollars. The
consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency.
The Company translates its foreign operations, whereby assets and liabilities are translated at the exchange rate in
effect at the consolidated statements of financial position dates, while revenues and expenses are translated at an
appropriate weighted average rate. Any resulting translation gains or losses are included in other comprehensive
income (loss) and the currency translation reserve.
• Transactions and balances
Transactions denominated in a foreign currency are translated into the functional currencies at the rate in effect at
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the
functional currencies at the exchange rates in effect at the year-end date and revenues and expenses are translated
at the average rate during the year. Foreign exchange gains and losses are included in the consolidated statements
of operations.
SEgME Nt IN FORMA tION
As at December 31, 2015, the Company manages its business on the basis of one operating segment, which is also the Company’s
only reportable segment, which is consistent with the internal reporting provided to the chief operating decision-maker, the Chief
Executive Officer. The Company operates in Canada, which is its country of domicile.
CASH A ND C ASH EQuIv ALENt S
Cash and cash equivalents include cash on hand, deposits held with banks and other short-term highly liquid investments with
original maturities of three months or less.
INvE Nt ORI ES
Inventories are stated at the lower of their carrying value determined on a specific item basis and estimated net realizable value.
Net realizable value is the estimated selling price less applicable selling expenses. Trade discounts and volume rebates earned are
deducted in determining the carrying value of inventory purchases.
t RA DE AND O tHER RECEIv ABLES
Receivable balances are recognized initially at fair value and a provision for impairment is established when there is evidence that the
Company will not be able to collect all the amounts due according to the original terms of the receivable balance.
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
PRO PE R ty AND EQuIPM ENt
Property and equipment are recorded at cost less accumulated depreciation, net of any impairment loss. Depreciation is computed
on a straight-line basis at annual rates based on the estimated useful lives of the related assets as follows:
Computer hardware
Furniture, fixtures and other
36 months
48 to 60 months
Leasehold improvements
over the term of the lease
Assets under finance lease
over the term of the lease
Included in furniture, fixtures and other are office equipment depreciated over 60 months and certain vehicles depreciated over
48 months. Assets under finance lease primarily represent the delivery truck fleet.
The Company recognizes in the carrying amount of property and equipment the full purchase price of assets acquired/constructed
as well as the costs incurred that are directly incremental as a result of the construction of a specific asset, when they relate to
bringing the asset into working condition.
Estimates of useful lives, residual values and methods of depreciation are reviewed annually. Any changes are accounted for
prospectively as a change in accounting estimate.
g OO DwIL L A N D INt ANgIBLE ASSEt S
Intangible assets are assets acquired that lack physical substance and that meet the specified criteria for separate recognition from
goodwill.
• Computer software
Computer software is recorded at cost less accumulated amortization, net of any impairment loss. Amortization is
computed on a straight-line basis at annual rates based on the estimated useful life of 36 months.
• Non-compete contracts
Non-compete contracts are amortized over an estimated life of ten years.
• Brands
Brands are recorded at cost and are not subject to amortization, having an indefinite life. They are tested for
impairment annually, as of the consolidated statements of financial position dates, or more frequently if events
or circumstances indicate that they may be impaired.
• Goodwill
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the
amounts allocated to the assets acquired, less liabilities assumed. Goodwill is not amortized and management tests
goodwill for impairment annually or more frequently if events or changes in circumstances indicate that the asset
might be impaired.
IMPA IRMENt OF NON-FINAN CIAL ASSEt S
Impairment of goodwill and indefinite life intangibles
Management tests goodwill and brands for impairment annually or more frequently if events or changes in circumstances indicate
that the asset might be impaired. The asset will be written down if the carrying amount of the asset exceeds the higher of its fair value
less costs to sell and its value in use.
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For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash
flows. Goodwill is allocated to cash generating units (CGUs) or groups of CGUs for the purpose of impairment testing. The allocation
is made to those CGUs or groups of CGUs that are expected to benefit from the synergies of the business combination from which
the goodwill arose. The impairment tests are performed by comparing the carrying value of the assets (or asset groups) of these
CGUs with their recoverable amount, which is the higher of their fair value less costs to sell and their value in use (which is the present
value of the expected future cash flows of the relevant asset or CGU), as determined by management.
Impairment of definite life intangibles and property and equipment
Assets that are subject to amortization are periodically reviewed for indicators of impairment. Whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable, the asset or CGU is tested for impairment. To the extent
that the asset or CGU’s carrying amount exceeds its recoverable amount, an impairment loss is recognized in the consolidated
statement of operations. The recoverable amount of an asset or a CGU is the higher of its fair value less costs of disposal and its value
in use. Value in use is the present value of the future cash flows expected to be derived from an asset or CGU. The fair value is the
price that could be received for an asset or CGU in an orderly transaction between market participants at the measurement date, less
costs of disposal. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately
identifiable cash flows.
Impairment reversals
If, in a subsequent period, the amount of recognized impairment loss decreases and the decrease can be related objectively to an
event occurring after the impairment was recognized, a reversal of the previously recognized impairment, except for goodwill, is
recognized in the consolidated statement of operations.
t RADE AN D O tHER PA yABLES
Trade and other payables are obligations to pay for goods or services that have been acquired or rendered in the ordinary course of
business from suppliers and employees. Trade and other payables are classified as current liabilities if payment is due or expected
within one year or less. Otherwise, they are presented as non-current liabilities. Trade and other payables are recognized initially at
fair value and subsequently measured at amortized cost.
C uS tOME R DEP OSIt S
Customer deposits represent amounts paid by customers in advance of delivery of product (i.e. mattresses). These deposits can be for
all or a portion of the total purchase price of the product. The amounts received representing the customer deposit is unencumbered
and can be used for general corporate purposes. Once the product is delivered to the customer the liability is relieved and is recorded
in sales. Over time, some portion of the customer deposits are not redeemed (breakage). Breakage income on customer deposits is
determined based on historical patterns when it can be determined that the likelihood of usage is remote.
DECOMMISSIONINg PRO vISIONS
These provisions represent the cost of the Company’s obligation to rehabilitate its stores and is estimated based on the present value
of expected future rehabilitation costs and is recognized in the period in which the obligation is incurred. The present value of these
costs is added to the cost of the associated asset and amortized over its useful life, while the corresponding liability will accrete to
its future value over the same period.
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
SH A RE-BASED COMPENSA tION
The Company has a share-based compensation plan (the stock option plan) and a performance share unit plan (PSU plan), which are
equity-settled share-based arrangements.
Equity-settled share-based payments to employees are measured at the fair value of the equity instrument granted. An option valuation
model (Black-Scholes) is used to fair value stock options issued to employees on the date of grant. The market value of the Company’s
common shares on the date of the grant is used to determine the fair value of the equity-based share units issued to participants.
The Company grants stock options to certain employees, key management and the directors of the Company, while PSUs are granted
only to key management. Stock options cliff vest after four years and PSUs cliff vest after three years. The initial fair value of equity-
settled share-based arrangements is recognized as compensation expense with a corresponding increase in equity reserves over
the related service period provided to the Company. Compensation expense is recognized over the applicable vesting period by
increasing contributed surplus based on the number of awards expected to vest. This number is reviewed at least annually, with any
change in estimate recognized immediately in compensation expense with a corresponding adjustment to contributed surplus.
REvE NuE RECOgNItION
Revenue is recognized either on the customer picking up the product or on delivery of the product to the customer’s home. Provisions
for returns relating to the Company’s various customer satisfaction programs are accrued based on historical experience.
LE AS ES
Assets, primarily delivery trucks, held under leases which result in the Company receiving substantially all the risks and rewards of
ownership of the asset (finance leases) are capitalized at the lower of the fair value of the property and equipment or the estimated
present value of the minimum lease payments. The corresponding finance lease obligation is included within long-term debt. The
interest element is amortized using the effective interest rate method.
The Company leases stores and distribution centres. Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. The Company recognizes rental expense incurred and inducements received
from landlords on a straight-line basis over the term of the lease. Any difference between the calculated expense and the amounts
actually paid is reflected as deferred lease inducements in other liabilities in the Company’s consolidated statements of financial position.
INCOME t AxE S
Income taxes comprise current and deferred income taxes. Income taxes are recognized in the consolidated statements of operations,
except to the extent that they relate to items recognized directly in other comprehensive income (loss) or directly in equity, in which
case the income tax is recognized directly in other comprehensive income (loss) or equity, respectively.
Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted
at the end of the reporting period, and any adjustment to tax payable in respect of previous years.
Income taxes provided for by the Company and its corporate subsidiaries are accounted for using the liability method. Deferred
income taxes arise due to the temporary differences in the financial reporting and tax bases of assets and liabilities. Changes in
these temporary differences are reflected in the provision for deferred income taxes using substantively enacted income tax rates
and regulations. Deferred taxes are recognized for all temporary differences except where they arise on goodwill that is not tax
deductible, on the initial recognition of an asset or liability that is not a business combination and at the time of the transaction
affects neither accounting nor taxable income, and in respect of differences associated with investments in subsidiaries where the
group is able to control the timing of their reversal and it is probable that the temporary differences will not reverse in the foreseeable
future. Deferred income tax assets are recognized to the extent that the recoverability of deferred income tax assets is considered
more likely than not.
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ASSEt S H ELD FOR SALE AND DISCONtINuED OPER A
tIONS
Assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and
a sale is considered highly probable. They are stated at the lower of the carrying amount and fair value less costs to sell. There were
no impairment losses recognized on the initial classification of these assets. Reversals of impairments are not recognized in excess of
any cumulative impairment loss.
A discontinued operation is a component of the Company’s business that represents a separate major line of business or geographical
area of operations that has been disposed of or is held for sale. Classification as a discontinued operation including related impairment
charges occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation
is classified as a discontinued operation, the comparative consolidated statement of operations is presented as if the operation had
been discontinued from the start of the comparative period.
ACCOuNtI Ng S tANDARDS AND AMENDMENt S ISSuED But NO t yEt ADOPtED
The IASB and International Financial Reporting Interpretation Committee (IFRIC) have issued the following standards that have
not been applied in preparing these consolidated financial statements as their effective dates fall within annual periods beginning
subsequent to the current reporting period. The Company is evaluating the impact of these standards and whether to early adopt
these standards:
Amendment to IAS 1, Presentation of Financial Statements
This standard was amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial
statements, and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, 2016.
IFRS 15, Revenue from Contracts with Customers
This standard replaces all previous revenue recognition standards, including IAS 18 – Revenue. The new standard is effective for
annual periods beginning on or after January 1, 2018 with early adoption permitted. The Company is analyzing the new standard to
determine its impact on the Company’s consolidated statements of financial position and consolidated statements of operations.
IFRS 9, Financial Instruments
This standard was issued concerning classification and measurement, impairment and hedge accounting, to supersede IAS 39,
Financial Instruments: Recognition and Measurement. IFRS 9 will be effective for years beginning on or after January 1, 2018 with
early adoption permitted. The Company is analyzing the new standard to determine its impact on the Company’s consolidated
statements of financial position and consolidated statements of operations.
Amendment to IFRS 7, Financial Instruments: Disclosures
This standard was amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments are
effective on adoption of IFRS 9.
IFRS 16, Leases
IFRS 16, Leases (IFRS 16) sets out the principles for the recognition, measurement, presentation and disclosure of leases for both
parties to a contract, the customer (lessee) and the supplier (lessor). This will replace IAS 17, Leases (IAS 17) and related Interpretations.
IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16
introduces a single accounting model for all lessees and requires a lessee to recognize right-of-use assets and lease liabilities for
leases with terms of more than 12 months, unless the underlying asset is of low value, and depreciation of lease assets separately
from interest on lease liabilities in the income statement. Under IFRS 16, lessor accounting for operating and finance leases will
remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier application
permitted for entities that apply IFRS 15, Revenue from Contracts with Customers.
S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
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35
Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
As the Company has significant contractual obligations in the form of operating leases under IAS 17, there will be a material increase
to both assets and liabilities upon adoption of IFRS 16, and material changes to the timing of recognition of expenses associated
with the lease arrangements. The Company is analyzing the new standard to determine its impact on the Company’s consolidated
statements of financial position and consolidated statements of operations.
4 Critica l A ccounting E st imate s a nd J udgments
The preparation of financial statements requires management to make estimates and assumptions using judgments that affect the
application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting
period. Estimates and other judgments are continually evaluated and are based on management’s experience and other factors,
including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ
from those estimates.
The following discusses the most significant accounting judgments and estimates that the Company has made in the preparation of
the consolidated financial statements.
IMPA IRMENt OF gOOD wILL AND BRANDS
Management is required to use judgment in determining the grouping of assets to identify their CGUs for the purposes of testing
fixed assets for impairment. Judgment is further required to determine appropriate groupings of CGUs in order to determine the level
at which goodwill and intangible assets are tested for impairment. In addition, judgment is used to determine whether a triggering
event has occurred requiring an impairment test to be completed.
In determining the recoverable amount of a CGU, various estimates are employed. The Company determines fair value less costs of
disposal using estimates such as projected future sales, earnings, capital investments and discount rates. Projected future sales and
earnings are consistent with strategic plans provided to the Company’s Board of Directors. Discount rates are based on an estimate
of the Company’s weighted average cost of capital taking into account external industry information reflecting the risk associated
with the specific cash flows. As at December 31, 2015 and December 31, 2014, impairment reviews were performed by comparing the
carrying value of goodwill and brands with the recoverable amount of the CGU to which goodwill and brands have been allocated.
Management determined that there had been no impairment as at both of those dates (note 9).
Long-term debt – Series A and B promissory notes, Class B common shares and Class A convertible shares
The calculation of amortized cost associated with the Series A and B promissory notes, Class B common shares and the Class A
convertible shares, in each case of SCCI, required management to utilize the effective interest rate approach and make certain
judgments regarding the expected cash outflows associated with the respective financial liability. Changes in the expected timing
and amounts of cash outflows due to early repayments or changes in the redemption values impacted amounts recognized as
interest expense. For example, if the promissory notes were repaid prior to the contractual maturity date, non-cash interest accretion
would be accelerated resulting in additional charges in the consolidated statements of operations, which would be material.
36
ı S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
5 Ca sh and C as h E quiva lents
Cash at bank
6 Trade and O the r R ece ivable s
2015
$
16,639
2014
$
41,331
The Company’s trade and other receivables consist of balances due from vendors related to volume and co-operative advertising
rebates and balances due from the third party financing companies. As at December 31, 2015, no receivable balances were considered
impaired (2014 – $nil). The carrying amounts of the Company’s trade and other receivables, which approximate their fair values, are
denominated in Canadian dollars.
The maximum exposure to credit risk at the reporting date is the carrying value of the trade and other receivables.
7 Inve nto ries
Merchandise
Inventory and directly related costs recognized as an expense
Write-downs of inventory due to net realizable value lower than cost
Write-offs due to damage or shrinkage
There have been no reversals of previously taken write-downs in 2015 or 2014.
2015
$
2014
$
32,070
26,369
205,324
155
874
178,932
855
760
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Assets
under
finance
lease
$
2,676
398
(717)
(95)
–
–
Total
$
30,455
6,931
(9,003)
(174)
316
(3,577)
23,204
5,589
(6,539)
(77)
258
(2,956)
19,479
2,262
24,948
43,540
(24,061)
4,794
56,334
(2,532)
(31,386)
19,479
2,262
24,948
19,479
10,813
(6,601)
(145)
2,262
1
(739)
–
24,948
13,200
(9,004)
(157)
23,546
1,524
28,987
53,064
(29,518)
4,440
65,884
(2,916)
(36,897)
23,546
1,524
28,987
Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
8 Pro pe rty a nd E qu ipm ent
Computer
hardware
$
Furniture,
fixtures
and other
$
Leasehold
improvements
$
year ended December 31, 2014
At January 1, 2014
Additions
Depreciation
Disposal
Exchange differences
Transferred to disposal group classified as held for sale
At December 31, 2014
At December 31, 2014
Cost
Accumulated depreciation
Net book value
year ended December 31, 2015
At January 1, 2015
Additions
Depreciation
Disposal
At December 31, 2015
At December 31, 2015
Cost
Accumulated depreciation
Net book value
1,206
448
(697)
–
8
(82)
883
3,148
(2,265)
883
883
713
(677)
–
919
2,305
(1,386)
919
3,369
496
(1,050)
(2)
50
(539)
2,324
4,852
(2,528)
2,324
2,324
1,673
(987)
(12)
2,998
6,075
(3,077)
2,998
38
ı S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
9 Intangible A ss ets
year ended December 31, 2014
At January 1, 2014
Additions
Amortization for the year
Disposal during the year
Exchange differences
Reversal of impairment loss
Transferred to disposal group classified as held for sale
At December 31, 2014
At December 31, 2014
Cost
Accumulated amortization and impairments
Net book value
year ended December 31, 2015
At January 1, 2015
Additions
Amortization for the year
Exchange differences
At December 31, 2015
At December 31, 2015
Cost
Accumulated amortization and impairments
Net book value
Brands
$
Non-compete
contracts
$
Computer
software
$
Total
$
105,006
752
(1,629)
(80)
4
5,981
1,333
–
(280)
–
–
–
–
2,133
752
(1,349)
(80)
4
–
(11)
(5,992)
1,053
1,449
104,042
2,804
(1,751)
1,053
8,035
(6,586)
112,379
(8,337)
1,449
104,042
1,053
–
(282)
–
771
1,449
1,375
(1,059)
–
104,042
1,375
(1,341)
–
1,765
104,076
2,804
(2,033)
9,191
(7,426)
113,535
(9,459)
771
1,765
104,076
101,540
–
–
–
–
5,981
(5,981)
101,540
101,540
–
101,540
101,540
–
–
–
101,540
101,540
–
101,540
Amortization of $1,341 (2014 – $1,572) from the Canadian operating segment is included in the consolidated statements of operations.
Amortization of $nil (2014 – $57) from the United States operating segment is reported in the net result of discontinued operations in
the consolidated statements of operations.
In 2009, due to continued weakness in the business environment in which Sleep America operated, management determined that
the value of the corporate brand had been impaired and a write-down of $5,981 was recorded in the same year. As a result of entering
into a sale agreement for the Sleep America assets on November 5, 2014, the impairment taken in 2009 was reversed, as discussed
below (note 22).
Goodwill of $242,146 (2014 – $242,146) and the Sleep Country and Dormez-vous? corporate brands of $101,540 (2014 – $101,540)
have been allocated to the overall Canadian operating segment: mattress retailer (Canadian Goodwill CGU). Goodwill of $490,
updated annually for foreign exchange translation, was allocated to the United States operating segment (US Goodwill CGU), and
included as assets of disposal group held for sale as at December 31, 2014. Management has determined, using appropriate valuation
methodologies, that there was no impairment of its goodwill or brands as at December 31, 2015 or December 31, 2014. In assessing
goodwill and brands for impairment as at December 31, 2015, the Company compared the aggregate recoverable amount of the assets
included in the CGUs to their respective carrying amounts. The recoverable amount has been determined based on the fair value less
cost of disposal (discounted cash flows) of the CGUs using the 2016 budgets approved by management that made maximum use of
observable markets for inputs and outputs. The fair value less cost of disposal is categorized as Level 3 in the fair value hierarchy. For
periods beyond the budget period, cash flows were extrapolated using revenue growth rates of 6.2% – 6.5% (2014 – 4.5% – 5.3%) and a
terminal growth rate of 2.5% (2014 – 2.5%) that do not exceed the long-term average for the mattress retailer segment. A discount rate
of 10.3% (2014 – 12.5%) was used in the model. As at December 31, 2015 and December 31, 2014, any reasonable changes to the model
assumptions would not result in an impairment.
S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
In January 2015, the Sleep America business was sold in excess of its carrying amount, which led to the reversal of a previously taken
impairment on the Sleep America brand intangible in the amount of $5,981. The recoverable amount was determined by the fair value
less costs to sell and is categorized as Level 2 in the fair value hierarchy. The recoverable amount does not exceed the initial carrying
value. The intangible asset was subsequently classified as an asset held for sale (note 22).
10 Acco unts P ayab le a nd A ccru ed L iabilities
Trade payables
Income taxes payable
Accrued expenses
2015
$
19,291
3,234
23,499
46,024
2014
$
12,174
4,081
17,474
33,729
Under certain agreements, the Company has the right to set off financial assets with financial liabilities with respect to vendor rebates
owed and purchases. At December 31, 2015, the Company had gross financial assets of $241 offset against gross financial liabilities
of $19,532. The net amount of $19,291 owing has been recorded in trade payables as at December 31, 2015. The total gross financial
assets of $1,043 and gross financial liabilities of $13,217 were netted to $12,174 as trade payables owing at December 31, 2014.
11 Other L ia bilit ies
Rent escalation
Decommissioning provisions
Deferred lease inducements
Warranty liability
12 Lo ng- Term D ebt
Senior secured credit facility (i)
Series A and Series B promissory notes of SCCI
Class B common shares (2014 – 1,033,229) of SCCI
Class A convertible shares (2014 – 31,509,702) of SCCI
Finance lease obligation
Less: Current portion of long-term debt
2015
$
1,928
847
4,593
1,529
8,897
2015
$
123,424
–
–
–
1,524
124,948
725
124,223
2014
$
2,104
822
3,515
524
6,965
2014
$
125,483
117,436
2,494
17,530
2,262
265,205
7,367
257,838
(i) Represented net of transaction costs of $576 as at December 31, 2015 (2014 – $1,267).
SE N IO R SECuRED CREDIt FACILIty
On June 30, 2014, SCCI replaced an existing $70,000 term credit facility with a five-year senior credit agreement with a term credit
facility of $130,000, which was fully drawn upon the agreement date, and a revolving credit facility of $15,000, with an accordion
feature of $15,000, subject to a standby fee. The terms of this credit facility included quarterly principal repayments payable in
arrears commencing September 30, 2014.
40
ı S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
On February 25, 2015, SCCI increased its revolving credit facility by $15,000 to $30,000. On July 16, 2015, SCCI replaced its $30,000
revolving and $130,000 term credit facilities with a $175,000 revolving credit facility which matures on July 16, 2020, with full
repayment due at maturity of all amounts outstanding. Net transaction costs associated with the replaced revolving and term facilities
of $1,205 were expensed. The Company has guaranteed all of SCCI’s obligations under the new credit facilities.
As at December 31, 2015, the balance outstanding on the revolving credit facility was $124,000 (December 31, 2014 – $nil on the
revolving credit facility and $126,750 outstanding on the term credit facility).
Interest on the term facility is based on the prime or bankers’ acceptance rates plus applicable margins based on the achievement
of certain targets, as defined by the senior secured credit agreement. As at December 31, 2015, the applicable margin for bankers’
acceptances was 225 basis points and the applicable margin for prime was 125 basis points. Interest on the bankers’ acceptance is
payable in advance, whereas that on the prime rate is payable in arrears. Interest on the revolving facilities is payable monthly in
advance at the bankers’ acceptance rate or in arrears at the prime rate plus the applicable margin based on the achievement of certain
targets, as defined by the senior secured credit agreement. The weighted average interest rate on the facility was 4.6% (2014 – 4.9%).
Under the terms of the new credit facilities, certain financial (which includes leverage and interest coverage ratios) and non-financial
covenants must be maintained. As at December 31, 2015, SCCI was in compliance with all covenants.
The new credit facilities are secured by a first ranking charge on the assets of SCCI and SCC, except for specified permitted
encumbrances.
SERIES A A N D SERIES B PROMISSOR y NO tES OF SCCI
The Series A promissory notes of SCCI (Series A notes) were recorded at their amortized cost, representing the present value of
future interest and principal repayments to maturity, at a discount rate of 15%, being the estimated fair value rate of interest. Interest
expense was accreting monthly such that on maturity the carrying amount would be equal to the principal of the Series A notes plus
the issued Series B promissory notes of SCCI (Series B notes) that are issued in lieu of cash interest payments.
The Series A notes bore interest at a fixed rate of 12% per annum and interest was due on December 31 of each year. The Series A
notes, including all accrued but unpaid interest, were due and payable on September 23, 2023. The Series A note holders were
subordinated to the credit facility. Each Series A note ranked pari passu with all other notes.
SCCI had the option to pay the annual interest payment in cash or to issue to the note holder a Series B note for the amount of
interest due. The Series B notes were non-interest bearing. An amount of $17,684, net of withholding tax, in non-interest bearing
Series B notes in lieu of the cash interest payment due on December 31, 2014 was issued in January 2015 (2014 – $20,841). As at
December 31, 2014, 82.36% of the Series A and Series B notes were held by related parties (note 19).
In 2015, $61,855 of Series A and Series B notes were repaid. In July 2015, SCCI was acquired by the Company, prior to which, the
outstanding Series A and B promissory notes were settled in shares of SCCI at their face value of $140,092 (note 23). As a result of
these transactions, the cash flow assumptions related to the Series A and Series B promissory notes were revised and resulted in
accelerated interest expense being recognized. For the twelve-month period ended December 31, 2015, SCCI incurred accelerated
interest expense as noted, including accretion, of $84,726 (twelve-month period ended December 31, 2014 – $46,051) on Series A
and B notes.
CL ASS B COMMON SHARES OF SCCI
As at December 31, 2014, the majority of the Class B common shares of SCCI were held by management. Under the terms of the
investor agreement, management employees had the ability, upon death or disability, to put these shares back to SCCI for cash equal
to the then fair market value of the shares. Due to this put option, Class B common shares of SCCI were accounted for as a liability
and recorded at their amortized cost, determined in reference to the redemption amount. As a part of the acquisition of SCCI by the
Company on July 16, 2015, the Class B common shares were settled for shares of the Company.
S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
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41
Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
CL ASS A CONvER tIBLE SHARES OF SCCI ( CONvER tIBLE SHARES)
The convertible shares were mandatorily redeemable, paid a fixed rate of return of 12% and as such were presented as debt in the
consolidated financial statements. The convertible shares could not be repaid either in full or in part unless a concurrent pro rata
payment was made on the Series A and Series B notes. There could also be no payment in respect of the interest on any of the Series A
notes unless there was a concurrent pro rata dividend payment in cash in respect of the convertible shares. Each convertible share
was to be converted into the number of Class D common shares equal to the notional value of the convertible share divided by the fair
value of the Class D common share, which includes accrued dividends at 12%. Legal waivers were obtained from each of the convertible
shareholders in respect of the non-payment of dividends that would otherwise be required during the year.
The convertible shares are recorded at amortized cost representing the present value of future dividends and redemption amounts,
using the same term to maturity as the Series A notes, and at a discount rate of 15%, being the estimated fair value rate of interest
and was accreting monthly such that on redemption the carrying amount will be equal to the redemption amount plus the accrued
and unpaid dividends.
On February 25, 2015, there was a repayment of $3,987 on the Class A convertible shares (2014 – $7,035). In July 2015, SCCI was
acquired by the Company. As part of the acquisition, the convertible shares were converted into Class D common shares of SCCI
based on their face value of $33,444 and ultimately exchanged for shares in the Company (note 23).
As a result of these transactions, the cash flow assumptions on the convertible shares have been revised and resulted in accelerated
interest accretion. Due to the interest accretion, an expense of $19,901 has been recorded for the twelve-month period ended
December 31, 2015 (twelve-month period ended December 31, 2014 – $8,810).
Finance related expenses included in the consolidated statements of operations include the following:
Interest on finance lease obligations
Revolver commitment fees
Interest expense on senior credit facility
Interest expense on Series A and Series B notes
Interest expense and fair value adjustment on Class A convertible and Class B common shares
13 In come T ax
CO MPO NENt S O F I NCOME t Ax PRO vISION (RECO vER y)
Significant components of the income tax provision (recovery) are as follows:
Current income tax expense
Deferred income tax expense (recovery) relating to
Temporary differences
Deferred income tax rate changes
Recovery of income taxes
42
ı S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
2015
$
154
93
6,741
84,726
20,602
112,316
2015
$
10,112
(22,300)
213
(22,087)
(11,975)
2014
$
193
81
4,593
46,051
10,584
61,502
2014
$
4,959
(10,721)
–
(10,721)
(5,762)
RECON CILIA tION t O EFFECtIvE t Ax RA tE
The overall income tax provision differs from the amount that would be obtained by applying the combined statutory income tax rate
to income (loss) due to the following:
Loss of continuing operations before income taxes (recovery)
Weighted average Canadian income tax rate
Income tax expense (recovery) based on statutory income tax rate
Effect of income tax allocated to non-controlling interest
Effect of non-deductible expenses and other items
Deferred tax rate changes
Effective income tax rate
DEFERRED IN COM E t Ax LIABILIty
Significant components of the net deferred income tax liability are as follows:
Excess of carrying value of intangible assets over tax values
Benefit of share issuance costs and financing fees deductible in future years
Loss carry-forwards – net of unrecognized deferred tax assets
Other temporary differences
Deferred income tax liability on Series A and B notes
2015
$
(63,667)
26.50%
(16,872)
(238)
4,922
213
2014
$
(22,898)
26.28%
(6,017)
(3,692)
3,947
–
(11,975)
(5,762)
18.80%
25.16%
2015
$
(13,636)
4,581
789
2,913
–
(5,353)
2014
$
(13,620)
219
–
2,001
(20,420)
(31,820)
SCC has recognized a deferred tax asset of $4,956, which is dependent on future taxable income. The Company has tax planning
strategies available to ensure the realization of the deferred tax asset in the future.
Reconciliation of deferred income tax movement:
Deferred tax recovery in the consolidated statement of operations
Deferred tax expense (recovery) recorded in equity relating to share issuance costs
2015
$
(22,088)
(4,378)
(26,466)
2014
$
(10,721)
–
(10,721)
The US operations were wound up in 2015 with the sale of the Sleep America business. The unrecognized deferred tax assets of
US$14,903 as at December 31, 2014 are no longer available. The deferred income tax assets were not included in the sale of Sleep
America’s assets and liabilities as described in note 22.
The Company has a refundable tax on hand balance of $1,038 at the end of the 2014 taxation year.
As at December 31, 2015, the Company has unused capital losses of $20,644 (2014 – $nil) with no expiry date.
Capital losses may only be used to offset capital gains. No deferred tax benefit has been set up for these losses as the Company does
not expect to realize capital gains in the foreseeable future.
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Cost of sales
2014
$
180,821
67,307
42,001
2,536
2015
$
207,701
74,349
44,317
3,003
329,370
292,665
General and administrative
2015
$
20,499
3,093
20,407
9,800
6,640
3,443
3,923
67,805
2014
$
18,814
2,954
13,036
8,941
6,645
1,084
3,424
54,898
2015
$
626,647
(276,159)
167
350,655
2014
$
–
–
–
–
Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
14 Ex penses by N ature
Inventory and directly related costs recognized as an expense, including write-downs and write-offs
Salaries, wages and benefits
Rent and other occupancy charges
Other
Media and advertising expenses
Telecommunication and information technology
Salaries, wages and benefits
Credit card and finance charges
Rent and other occupancy charges
Professional fees
Other
15 Sh are C ap ita l and O the r
Authorized share capital – SCC
Unlimited common shares
Unlimited Class A common shares
Issued and outstanding, no par value
37,578,176 common shares (2014 – nil)
Reorganization adjustment and other
Contributed surplus
44
ı S L E E P C O U N T R Y C A N A D A ı 2 0 1 5 A N N U A L R E P O R T
On incorporation May 27, 2015
Shares issued for cash
Less: Issuance costs*
Shares issued on capital reorg
Share-based compensation
Dividend re-reinvestment
As at December 31, 2015
Number
of shares
1
17,650,000
–
19,889,134
–
39,041
Common Reorganization Contributed
surplus
adjustment
$
$
shares
$
–
300,050
(12,242)
338,115
–
724
–
–
–
(276,159)
–
–
total
$
–
300,050
(12,242)
61,956
167
724
350,655
–
–
–
–
167
–
167
37,578,176
626,647
(276,159)
* Issuance costs are net of deferred tax of $4,956, which is recorded on the statement of financial position as at December 31, 2015.
COM MON SHA RES AND CLASS A COMM ON SH ARES – SCC
The holders of common shares are entitled to receive notice of any meetings of shareholders, to attend and to cast one vote per
common share at all such meetings. Holders of common shares do not have cumulative voting rights with respect to the election
of directors and, accordingly, holders of a majority of the common shares entitled to vote in any election of directors may elect all
directors standing for election. Holders of common shares are entitled to receive on a pro rata basis such dividends, if any, as and
when declared by the Board of Directors at its discretion from funds legally available therefor and upon liquidation, dissolution
or winding-up of the Company are entitled to receive on a pro rata basis the net assets of the Company after payment of debts
and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attaching to any other series or class
of shares ranking senior in priority to or on a pro rata basis with the common shares with respect to dividends or liquidation. The
common shares do not carry any pre-emptive, subscription, redemption or conversion rights, nor do they contain any sinking or
purchase fund provisions.
Holders of Class A common shares will be entitled to the same rights and privileges as holders of common shares described above
and will rank equally with the holders of common shares upon liquidation, dissolution or winding-up of the Company. The Class A
common shares will not carry any pre-emptive or subscription rights, nor will they contain any sinking or purchase fund provisions.
Class A common shares are redeemable at the option of the Company upon written notice to the holders of the Class A common
shares, with the redemption price being equal to the price per common share in the initial public offering. In the event that the
Company did not redeem Class A common shares within 45 days of initial public offering of the common shares, the Class A common
shares were to automatically convert, on a one-for-one basis, into common shares. 4,565,962 Class A common shares were issued
on July 16, 2015, all of which were redeemed on the same date with the net proceeds of $77,621 from the initial public offering. As at
December 31, 2015, there are no outstanding Class A common shares.
Authorized share capital – SCCI
Unlimited common shares
Unlimited Class A, B, C and D common shares
Issued and outstanding – SCCI
Class A common shares (2014 – 18,989,868)
Contributed surplus
2015
$
–
–
–
2014
$
18,989
104,614
123,603
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
CL ASS A , B, C AND D COMMON SHARES ( COMMON SHARES) OF SCCI
The holders of the common shares of SCCI were entitled to receive, equally on a per share basis with the common shareholders,
dividends as and when declared by the Board of Directors of SCCI. However, the holders of Class B common shares were entitled to
receive, as and when declared by the Board of Directors of SCCI, dividends without dividends being declared to the Class A, C and
D common shareholders.
The holders of Class A, B and C common shares are entitled to receive notice of and to attend all meetings of the shareholders of SCCI
and are entitled to receive one vote per share on all matters to be voted on at all meetings of shareholders. The holders of Class D
common shares are not entitled to receive notice of and to attend all meetings of the shareholders of SCCI and are not entitled to
vote. The holders of common shares are not entitled to vote separately as a class or series or to dissent on certain proposals specified
in the Articles of Incorporation.
Upon the voluntary or involuntary liquidation, dissolution or windup of SCCI, the holders of the common shares are entitled to share
in the remaining assets available for distribution after payment of liabilities.
CL ASS E SP ECIAL SHARES (SPECIAL SHARES) OF SCCI
The holders of the special shares shall be entitled, at their option, to have the special shares converted into Class D common shares of
SCCI. Each special share shall be converted into the number of Class D common shares having an aggregate value equal to the value
of the special units of SCCLP then held by SCCI less the aggregate amount of dividends paid on the special shares.
Upon the voluntary or involuntary liquidation, dissolution or windup of SCCI, the holders of the special shares are entitled to receive,
concurrent with any distribution of any amount of any part of the assets of SCCI among any of the other classes of shares, for each
special share, an amount determined by the Board of Directors of SCCI.
16 Ear nings (Loss) pe r S hare (E PS)
Basic earnings (loss) per share amounts are calculated by dividing the net earnings (loss) attributable to common shareholders of the
Company by the weighted average number of shares issued and outstanding during the year.
Diluted earnings (loss) per share amounts are calculated by dividing the net earnings (loss) attributable to common shareholders
of the Company by the weighted average number of shares issued and outstanding during the year, adjusted for the effects of
potentially dilutive stock options and PSUs.
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The following table sets forth the calculation of basic and diluted EPS:
Basic and diluted
Continuing operations
Discontinued operations
Basic and diluted
Continuing operations
Discontinued operations
Attributable to common shareholders
Net
earnings
(loss)
$
weighted
average
number
of shares
(in thousands
of shares)
(52,508)
5,629
(46,879)
27,582
27,582
27,582
2015
EPS
$
(1.90)
0.20
(1.70)
Attributable to common shareholders
Weighted
average
number
of shares
(in thousands
of shares)
19,711
19,711
19,711
Net
earnings
(loss)
$
(30,009)
2,007
(28,002)
2014
EPS
$
(1.52)
0.10
(1.42)
The effects of stock options were anti-dilutive for the three and twelve-month periods ended December 31, 2015 and for the twelve-
month period ended December 31, 2014. The effects of performance share units (PSUs) were dilutive for the three and twelve-month
periods ended December 31, 2015. The effects of convertible shares of SCCI were anti-dilutive for the twelve-month period ended
December 31, 2014.
17 Contingent L iabilit ies a nd U nre cognized C ontractual C om mitments
OP ERA tINg L EASES
The Company and its subsidiaries conduct all of their operations from leased stores and distribution centres. The Company has
entered into operating lease arrangements for leased premises, delivery trucks, passenger vehicles and office equipment with terms
varying from three to 15 years. For the year ended December 31, 2015, the total amount paid under these operating leases was
$33,057 (2014 – $37,084).
Non-cancellable operating lease rentals are payable as follows:
Less than 1 year
Between 1 and 5 years
More than 5 years
2015
2014
$
$
33,636
89,058
34,301
156,995
32,260
85,179
34,175
151,614
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
18 Ch anges in N on-C as h I te ms R el at ing to O perating A ctivities
Trade and other receivables
Due from related companies
Inventories
Prepaid expenses and deposits
Trade and other payables
Customer deposits
Other
2015
$
(1,925)
12
(5,701)
851
12,295
3,482
62
9,076
2014
$
(951)
(5)
(2,608)
(60)
6,730
2,389
584
6,079
19 Related P ar ty T ransa ction s a nd B alances
As at December 31, 2014, SCCI was controlled by funds controlled by Birch Hill, which owned approximately 80.36% of SCCI’s
common shares, 82.36% of Class A and B promissory notes and 71.18% of Class A convertible shares. As at December 31, 2014, 28.82%
of SCCI’s Class A convertible shares and 97.64% of the Class B common shares were held by management. In connection with the
Offering, all of the Class A convertible shares and Class B common shares of SCCI were disposed of by management and Birch Hill.
SCCI is now a direct wholly-owned subsidiary of the Company.
Following completion of the Offering and the Secondary Offering, as at December 31, 2015, funds controlled by Birch Hill beneficially
own, control or direct, directly or indirectly, approximately 14.5% of the votes attached to the Company’s issued and outstanding
common shares. Birch Hill also has dispositive powers, but not voting direction or control, with respect to approximately 4.4% of the
common shares beneficially owned by certain co-investors. Birch Hill also maintains two nominee directors on the Company’s Board
of Directors. As such, Birch Hill is considered to have significant influence and is deemed to be a related party of the Company as at
December 31, 2015.
The following balances are due from related parties:
Short-term advances to related parties
2015
$
4
2014
$
16
Short-term advances due from related parties were a result of tax liability and professional fee expenses paid by the Company on
behalf of the related parties.
Compensation awarded to key management included:
Salaries and short-term employee benefits
Share-based compensation
Bonus related to Pre-IPO stock option plan
Directors fees
The Company considers key management to be the Board of Directors and its executive team.
2015
$
5,006
171
5,096
150
10,423
2014
$
3,620
14
–
–
3,634
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20 Share-Base d Compe nsat i o n
On July 16, 2015, in connection with the completion of the Offering, the Company established new share-based compensation
arrangements consisting of a stock option plan and a performance share unit plan (PSU). The impact of share-based compensation
is summarized as follows:
Stock options (a)
Performance share unit plan (b)
Number
outstanding
Expense
$
139,334
30,495
88
79
167
Both the stock options and PSUs are to be equity settled. As such, the expense associated with these instruments is recorded
as share-based compensation expense through the consolidated statements of operations with a corresponding entry made to
contributed surplus on the consolidated statements of financial position.
The maximum number of common shares that may be issued under all security-based compensation arrangements implemented by
the Company, including the stock option plan and the PSU plan, may not exceed 10% of the total number of common shares issued
and outstanding from time to time. The maximum number of common shares that may be issued under the PSU plan is 4% of the
total number of common shares issued and outstanding from time to time.
(a) Stock options
The Company has established a stock option plan under which options to purchase common shares may be granted to directors,
officers and employees of the Company. Options granted under the plan have an exercise price of not less than the weighted
average trading price of the common shares on the Toronto Stock Exchange for the five trading days prior to the date of the grant.
Options granted vest on the fourth anniversary of the grant date. All issued options expire after ten years from the date granted.
The Company’s stock options transactions during the year were as follows:
Balance – July 16, 2015
Granted
Balance – December 31, 2015
weighted
average
exercise
price per
share
$
–
17.00
17.00
Number
of options
–
139,334
139,334
The Black-Scholes model was used to estimate the fair value of stock options. Key assumptions include a risk free interest rate of
1.39%, which is based on a Government of Canada 5 to 10-year benchmark bond yield at the date of grant, expected volatility of
43%, which is based on certain industry comparables, an estimated divided yield of 3% and a 7-year expected life of the options.
The options expire 10 years from the date of grant and vest on the fourth anniversary of the grant date.
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
(b) PSU plan
The Company has established a PSU plan for full-time employees of the Company. A PSU represents the right to receive a
common share of the Company, subject to adjustment as described below. PSUs granted will vest as to 100% on the third
anniversary of the grant date and will generally be settled by the issuance of treasury shares or with shares purchased on the
open market. The number of common shares to be issued on the settlement of a PSU will depend on an adjustment factor
that ranges from 0.5 to 1.5 based on the Company’s achievement of certain performance targets established by the Board of
Directors at the time of grant. Therefore, the number of common shares that will be issued to settle outstanding PSUs may be
higher or lower than the number of outstanding PSUs set out below.
The Company’s PSU plan transactions during 2015 were as follows:
Balance – July 16, 2015
Granted – July 16, 2015
Granted – November 26, 2015
Balance – December 31, 2015
Number
–
30,291
204
30,495
The grant date fair value of the units was $17.00 per unit.
The vested number of units outstanding as at December 31, 2015 was nil (December 31, 2014 – nil).
At December 31, 2015, the total number of units outstanding (vested and unvested) was 30,495.
(c) Pre-IPO stock options
SCCI had established a share-based compensation plan on November 1, 2008 (the Pre-IPO Option Plan) to provide long-term
incentives to certain key officers and employees of SCCI and its subsidiaries. Under the Pre-IPO Option Plan, 960,000 options
were granted to purchase Class E special shares of SCCI at a strike price of $2.80 per share and 140,000 options were granted
at a strike price of $3.04 per share. These options were not exercisable until the occurrence of a liquidity event. In July 2015,
as a result of the Offering, a liquidity event was triggered and as such, the options under the Pre-IPO Option Plan became
exercisable. At the discretion of SCCI, the options were exercised for Class E Special shares and cash reflecting the growth value
of certain options (note 23).
21 Financial I nst rum ents and R isk M anagement
The Company’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair
value interest risk), credit risk and liquidity risk. The Company’s overall risk management program and business practices seek to
minimize any potential adverse effects on the Company’s consolidated financial performance.
Risk management is carried out by the senior management team and overseen by the Board of Directors.
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MARkEt RISk
Market risk is the loss that may arise from changes in factors such as interest rate, foreign exchange and the impact these factors may
have on other counterparties.
• Foreign exchange risk
The Company operates in Canada. The exposure related to foreign exchange is limited to United States dollar
payments to suppliers which is not significant.
• Cash flow and fair value interest risk
The Company has no significant interest-bearing assets. The Company’s income and operating cash flows are
substantially independent of changes in market interest rates.
The Company’s primary interest rate risk arises from long-term debt. The Company manages its exposure to changes
in interest rates by using a combination of fixed and variable rate debt and utilizing interest rate swaps as necessary
to achieve the desired proportion of variable and fixed rate debt. An increase or decrease in interest rates by 1%
would result in an increase/decrease of $1,268 on interest expense on the credit facilities. There are also a small
number of finance leases at variable interest rates.
CRED It RISk
Credit risk refers to the risk of losses due to failure of the Company’s customers or other counterparties to meet their payment
obligations. Credit risk arises from deposits with banks, as well as credit exposures from mattress vendors for the payment of volume
and co-operative advertising rebate amounts and balances owed from third party financing companies under the various financing
plans the Company offers its customers. In accordance with SCC’s investment practice, all deposits are held at banks possessing a
credit rating of AA- or better. Sales to retail customers are settled in cash, financed by third party financing companies or by using
major credit cards. The Company transfers the credit risk for financing plans to third party financing companies. The third party
financing companies that SCC deals with carry a minimum rating of BBB or better.
There are no significant impaired receivables that have not been provided for in the allowance. There are no amounts considered past
due or impaired.
LIQuIDIty RI Sk
Liquidity risk is the risk that the Company cannot meet a demand for cash or fund its obligations as they come due. Liquidity risk
also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management
implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed
credit facilities.
The table below analyzes the Company’s financial liabilities into relevant maturity groupings based on the remaining period from
the consolidated statement of financial position date to the contractual maturity date. The amounts discussed in the table are
contractual undiscounted cash flows.
At December 31, 2015
Trade and other payables
Long-term debt
At December 31, 2014
Trade and other payables
Long-term debt
Class A convertible and Class B common shares of SCCI
within
1 year
$
Between 1
and 5 years
$
Over
5 years
$
46,023
4,702
50,725
33,729
12,245
–
–
141,139
141,139
–
135,898
–
–
17
17
–
350,789
58,643
45,974
135,898
409,432
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
FAI R vA LuE OF FINANCIAL INS tRuMENt S
The different levels used to determine fair values have been defined as follows:
• Level 1 – inputs use quoted prices (unadjusted) in active markets for identical financial assets or financial liabilities
that the Company has the ability to access.
• Level 2 – inputs other than quoted prices included in Level 1 that are observable for the financial asset or financial
liability, either directly or indirectly. Level 2 inputs include quoted prices for similar financial assets and financial
liabilities in active markets, and inputs other than quoted prices that are observable for the financial liabilities.
• Level 3 – inputs are unobservable inputs for the financial asset or financial liability and include situations where there
is little, if any, market activity for the financial asset or financial liabilities.
The following describes the fair value determinations of financial instruments:
The carrying values of cash and cash equivalents, trade and other receivables, due from related companies, trade and other payables,
other assets and liabilities and customer deposits approximate their fair values due to the relatively short periods to maturity of these
financial instruments. The carrying values of the revolving and term facilities approximate their fair values as the terms and conditions
of the borrowing arrangements are comparable to market terms and conditions as at December 31, 2015 and December 31, 2014. The
finance leases approximate their fair values as the implicit interest rates used in determining their fair value approximate interest rates
as at December 31, 2015 and December 31, 2014. The Class B common shares of SCCI approximate their fair value as the implicit interest
rates used in determining their fair value approximate interest rates as at December 31, 2014.
The fair value of the Series A and Series B promissory notes of SCCI is estimated to be $nil (2014 – $200,483) and is within Level 3 of
the fair value hierarchy. The fair value of the Class A convertible shares of SCCI is estimated to be $nil (2014 – $37,310) and is within
Level 3 of the fair value hierarchy. The valuation techniques used to estimate the fair value of the Series A and Series B promissory
notes and Class A convertible shares incorporate discounted contractual obligations using assumptions such as interest rate curves
and an estimated credit spread.
CA P It AL RI Sk MANA gEM ENt
The Company’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide
returns for its common shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital
structure to minimize the cost of capital.
In order to maintain or adjust the capital structure, the Company may issue new shares or sell assets to reduce long-term debt.
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22 Assets H el d for S ale an d D is conti nued O peratio ns
As at December 31, 2014, the assets and liabilities for the Sleep America business were presented as held for sale following the
approval of the sale on November 5, 2014 for US$12,500. The completion of this transaction occurred on January 6, 2015. As part
of this agreement, US$1,250 is held in escrow with 50% released on January 6, 2016 and the remainder 50% to be released on
July 6, 2016.
ASSEt S O F DISPOSAL gROuP HELD FOR SALE
Current assets
Cash
Trade and other receivables
Inventories
Prepaid expenses and deposits
Property and equipment
Intangible assets other than goodwill
Goodwill
LIAB ILItIES OF DISPOSAL gROuP HELD FOR SALE
Current liabilities
Trade and other payables
Customer deposits
Other liabilities
ANA LySIS O F tHE RESuL t OF DISCONtINuED OPERA tIONS
Revenue
Cost of sales
Gross profit
General and administrative expenses
Depreciation and amortization
Loss before interest and impairment reversal
Impairment reversal on intangible asset (note 9)
Interest income and other expenses – net
Net income from discontinued operations
2015
$
–
–
–
–
–
–
–
–
2015
$
–
–
–
–
2015
$
–
–
–
–
–
–
–
5,992
5,992
2014
$
7
335
3,621
64
3,577
5,992
490
14,086
2014
$
3,985
402
823
5,210
2014
$
40,710
35,809
4,901
6,963
735
(2,797)
5,981
(188)
2,996
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
CAS H FLO wS
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities
Exchange rate difference on cash
2015
$
(5,992)
14,984
(8,992)
–
–
2014
$
189
(128)
–
41
102
23 Issuance o f S hares and R eorg aniz ation
Pursuant to a final prospectus filed on July 10, 2015 with various Canadian provincial security commissions, the Company made an
initial public offering and listed its common shares on the Toronto Stock Exchange. The offering of 17,650,000 common shares at
$17 per common share raised gross proceeds of $300,050. The net proceeds from the transaction after deducting transaction and
underwriter expenses was $283,428. The Company also issued $338,115 of common shares in exchange for shares of SCCI, SC US
Holdco and SC Management (see below). The total net issuance of 37,539,135 common shares was for $621,543.
In connection with the Offering, the Series A and B promissory notes of SCCI were converted into 95,549,701 Class A common shares
of SCCI and the Class A convertible shares of SCCI were converted into 22,810,379 Class D common shares of SCCI based on the
relative fair values at the conversion date. Subsequent to the conversion of the above instruments, SCCI declared and paid a capital
dividend in the aggregate amount of $12,903 on its Class A common shares, Class B common shares and Class D common shares. On
closing of the Offering, the unvested options under SCCI’s Pre-IPO Option Plan vested and the options were settled for a combination
of cash and 594,761 Class E special shares of SCCI. SCCI’s shares were then sold to the Company for a combination of cash, common
shares of the Company and acquisition notes based on the economic value of the Company’s shares as determined on July 10, 2015.
Prior to the Offering, SCCI paid $6,898 of bonuses relating to key management and, along with the Company, also incurred $2,358
in professional services fees associated with the Offering. These expenses are recognized as general and administrative expenses on
the consolidated statement of operations for the year ended December 31, 2015.
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The following table reflects the adjustments to shareholders’ equity as a result of the reorganization:
Reorganization
adjustment
$
Share
capital and
other -
SCCI
$
Non-
controlling
interest
$
Balance as at January 1, 2015
Allocation to non-controlling interest for the period January 1, 2015 to July 16, 2015
Conversion of Series A and B promissory notes (i)
Conversion of Class A convertible shares (ii)
Exercise of SCCI Pre-IPO options (iii)
Exercise of SCCI Pre-IPO options for growth value (iv)
Capital distribution (v)
Issuance of shares (vi)
SCCI Pre-IPO share-based compensation expense
Acquisition of SCCI, SC US Holdco and SC Management through cash
and share issuance (vii)
Balance as at December 31, 2015
(i) Conversion of Series A and B notes
–
–
–
–
–
–
–
–
–
123,603
–
140,092
33,444
2,337
(9,843)
(12,903)
59,635
12
(276,159)
(336,377)
(276,159)
–
46,987
1,179
–
–
–
–
–
(48,166)
–
–
–
On July 16, 2015, the SCCI promissory series notes A and B (see note 12) were converted into 95,549,701 Class A common shares
of SCCI at their carrying value of $140,092.
(ii) Conversion of Class A convertible shares
On July 16, 2015, the SCCI Class A convertible shares (see note 12) were converted into 22,810,379 Class A common shares of
SCCI at their carrying value of $33,444.
(iii) Exercise of SCCI Pre-IPO options
On July 16, 2015, members and former members of key management of SCCI and its subsidiaries exercised their stock options
under the SCCI Pre-IPO Option Plan. These options were only exercisable upon the occurrence of a liquidity event, which included
the Offering. 824,750 options were exercised at a strike price of $2.80 per share to acquire Class E special shares of SCCI.
(iv) Issuance of shares under the Offering
July 16, 2015, SCCI elected to settle certain outstanding stock options under the Pre-IPO Option Plan by way of a cash payment
equal to the difference between the aggregate value of the SCCI shares that would have been issued upon the exercise of these
options and the aggregate exercise price of the options. These options, which had an exercise price of $2.80 and $3.04, were
accounted for as equity settled, and the payment of $9,843 was charged to equity.
(v) Capital distribution
On July 16, 2015, SCCI made a capital dividend to its existing owners (prior to the Offering) of $12,903.
(vi) Issuance of shares
Prior to the Offering, SCCI issued $25,504 in value of Class A common shares of SCCI to a fund indirectly controlled by Birch Hill
in exchange for units of SCCLP having an equivalent value. SCCI also issued $34,131 in value of Class A common shares to the
Company in exchange for an increased investment in SCCI and for shares in SC US Holdco and SC Management.
(vii) Acquisition of SCCI, SC US Holdco and SC Management through cash and share issuance
As part of the Offering, the Company acquired all of the issued and outstanding shares of the Acquired Entities for consideration
consisting of cash and common shares of the Company. The common shares of the Company issued to the former shareholders
of the Acquired Entities were valued at the Offering price of $17.00 per share. The total cash and share consideration paid by the
Company to acquire the Acquired Entities was $612,524 and the book value of the shares of the Acquired Entities purchased by
the Company was $336,365. The difference between these two figures of $276,159 was recorded as a reserve which is presented
as a contra-share capital amount. Upon completion of the Acquisition, the Company acquired a 100% interest in each of the
Acquired Entities (indirectly a 100% ownership interest in SCCLP) and the minority interest was therefore eliminated.
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Notes to Consolidated Financial Statements
of Sleep Country Canada Holdings Inc.
December 31, 2015 and December 31, 2014
(in thousands of Canadian dollars, except per share amounts)
Subsequent to the Offering, the Company owned 100% of the shares of SCCI and 100% interest in SCCLP. All earnings of SCCLP
subsequent to the Offering are allocated to the Company and there is no longer a non-controlling interest.
24 Subsequent Events
On January 1, 2016, SCCLP was wound up and SCCGP was dissolved, in each case into SCCI.
On January 29, 2016, the Board of Directors of the Company declared a dividend on the Company’s common shares in the amount of
$0.13 per share, payable on February 26, 2016 to shareholders of record at the close of business on February 16, 2016.
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Shareholder Information
ExCH A NgE LIS tINg
The Toronto Stock Exchange
Common Shares
Ticker Symbol: ZZZ
AuDIt OR
PricewaterhouseCoopers LLP
PwC Tower
18 York Street, Suite 2600
Toronto, ON M5J 0B2
BA NkER
TD Securities
TD West Tower, 30th Floor
100 Wellington Street West
Toronto, ON M5K 1A2
REgI S tRA R AND tRANSFER AgENt
Computershare
100 University Avenue, 8th Floor
Toronto, ON M5J 2Y1
www.computershare.com
SHA REHOLDER C ONt ACt
Robert Masson
CFO, Sleep Country Canada
robert.masson@sleepcountry.ca
ANNu A L MEEtINg OF SHAREHOLDERS
Date: Wednesday, May 11, 2016
Time: 10:30am (EST)
Davies Ward Phillips & Vineberg
155 Wellington Street West
Toronto, ON M5V 3J7
Reception on 40th Floor
BOARD OF DIRECt ORS
Stephen Gunn
Executive Co-Chair
Christine Magee
Executive Co-Chair
David Friesema
Stephen Dent
Thecla Sweeney
Andrew Moor
David Shaw
John Cassaday
Douglas Bradley
OFFICERS
David Friesema
Chief Executive Officer
Robert Masson
Chief Financial Officer
Stewart Schaefer
Chief Business Development Officer & President,
Dormez-vous?
CAPIt AL St OCk
As at December 31, 2015, there were 37,578,176
common shares outstanding.
Sleep Country/Dormez-vous?
140 Wendell Avenue, Unit 1
North York, ON M9N 3R2
T: 416 242 4774
sleepcountry.ca