Sleep Country Canada
Annual Report 2016

Download report
Get a demo

More annual reports from Sleep Country Canada:

2023 Report
2022 Report
2021 Report
2020 Report
2019 Report

Peers and competitors of Sleep Country Canada:

Sports Direct International Plc
Indigo Books & Music
Canadian Tire
Mothercare plc
Nick Scali

Plain-text annual report

SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 2 SOUND SLEEP.SOUND INVESTMENT. 2016 WAS ANOTHER YEAR OF ROBUST GROWTH DUE TO THE CONTINUED EXECUTION OF OUR PROVEN STRATEGY. By combining new store openings, the renovation of stores to our enhanced design and continued investments to drive higher customer traffic, shopper-to-buyer conversion rates and higher transaction size, our strategy delivers a sound sleep for our customers and a sound investment for our shareholders. REVENUE (C$ MILLIONS) ACCESSORY REVENUE MATTRESS REVENUE 332.6 17.1% 353.9 17.7% 456.2 19.9% 396.1 18.4% 523.8 21.6% 82.9% 82.3% 81.6% 80.1% 78.4% OPERATING EBITDA1 (C$ MILLION) OPERATING EBITDA MARGIN1 (% PERCENT) 11.5% 11.1% 38.4 39.4 12.8% 50.6 16.2% 85.0 15.2% 69.1 1. See the section in the Management Discussion and Analysis entitled “Non-IFRS Measures” for further details concerning 3 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 how the company calculates Operating EBITDA, Operating EBITDA Margin and Same Store Sales. 2012201320142015201620122013201420152016 2016 HIGHLIGHTS Sales grew by 14.8% year over year Operating EBITDA up 23% compared with 2015 19.4% year over year increase in gross profit 11 new stores opened 175 new employees 20 stores renovated to the new enhanced design 14th consecutive quarter of same stores sales growth GROSS PROFIT (C$ MILLIONS) GROSS MARGIN (% PERCENT) 151.4 126.8 103.4 80.9 88.1 24.3 24.9 26.1 27.8 28.9 SAME STORE SALES GROWTH & TOTAL SALES GROWTH (% PERCENT) 12.6 13.1 13.1 12.6 14.7 10.6 6.2 5.5 SAME STORE SALES GROWTH1 TOTAL SALES GROWTH 17.7 18.3 17.1 17.3 13.7 12.5 0.8 7.3 1.3 9.1 11.1 10.2 10.5 7.7 13.4 12.9 11.7 12.2 7.7 9.6 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14 Q4’14 Q1’15 Q2’15 Q3’15 Q4’15 Q1’16 Q2’16 Q3’16 Q4’16 SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 1 2012201320142015201620122013201420152016 THE ONLY SPECIALTY MATTRESS RETAILER WITH A NATIONAL AND REGIONALLY DIVERSE FOOTPRINT #1 MATTRESS RETAILER 235 STORES 17 9 DISTRIBUTION CENTRES PROVINCES 6 7 MB SK 40 BC 29 AB STORE COUNT (# STORES) 2012 2013 2014 2015 2016 2 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 2 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 94 ON 50 QC 9 NS, PEI, NB 195 208 212 224 235 In 2016, Sleep Country continued to execute on its strategy of growing same store sales through an enhanced store design, a focus on accessory sales, investments in sales training, and increased advertising. 2017 OUTLOOK Launch of e-Commerce shopping platform featuring exclusive bed in a box mattress Renovate between 20 to 30 stores in the new enhanced store design Open between 8 and 12 new stores in new, existing or satellite markets Create new efficiencies and further expand capacity by relocating four distribution centres SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 3 1 Basis of Presentation 2 Forward-Looking Information 3 Overview 4 Corporate Highlights for Fiscal 2016 5 Factors Affecting our Results of Operations 6 Fourth Quarter and Full Year Operational Highlights 7 Fourth Quarter 2016 versus Fourth Quarter 2015 8 Annual Financial Results 2016 versus 2015 9 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 Management’s Discussion and Analysis of Financial Condition and Results of Operation 5 5 5 6 6 7 9 12 14 17 18 18 21 21 22 23 23 24 24 25 25 28 29 31 33 34 35 36 37 37 37 38 46 47 47 48 49 50 50 50 52 54 54 55 57 57 58 61 63 63 64 IBC 1 Organization 2 Basis of Presentation 3 Significant Accounting Policies 4 Critical Accounting Estimates and Judgments 5 Trade and Other Receivables 6 Inventories 7 Property and Equipment 8 Intangible Assets 9 Trade and Other Payables 10 Other Liabilities 11 Long-term Debt 12 Income Tax 13 Expenses by Nature 14 Share Capital and Other 15 Earnings (Loss) per Share (EPS) 16 Contingent Liabilities and Unrecognized Contractual Commitments 17 Related Party Transactions and Balances 18 Share-Based Compensation 19 Financial Instruments and Risk Management 20 Assets Held for Sale and Discontinued Operations 21 Issuance of Shares and Reorganization 22 Subsequent Events Shareholder Information 4 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 5 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 1 The following Management’s Discussion and Analysis (“MD&A”) is prepared as of February 28, 2017 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, 2016 and should be read in conjunction with the audited annual consolidated financial statements of SCC and the accompanying notes for the year ended December 31, 2016 and the audited consolidated financial statements of SCC and accompanying notes for the year ended December 31, 2015 and the related MD&A 1 Basis of Presentation The Company’s audited annual consolidated financial statements and accompanying notes have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and International Accounting Standard 34, “Interim Financial Reporting”, 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 “Q4 2016” are to SCC’s fiscal quarter ended December 31, 2016 and to “Q4 2015” are to SCC’s fiscal quarter ended December 31, 2015. All references in this MD&A to “2016” are to SCC’s year ended December 31, 2016 and to “2015” are to SCC’s year ended December 31, 2015. This MD&A includes financial information for Sleep Country Canada Inc. (“SCCI”) for periods prior to its acquisition by SCC on July 16, 2015. This information is based on the historical financial information as previously reported by SCCI. SCCI is currently a wholly-owned subsidiary of SCC. The audited annual consolidated financial statements of SCC and the accompanying notes for the year ended December 31, 2016 and this MD&A were reviewed by the Company’s Audit Committee and were approved by its Board of Directors on February 28, 2017. 2 Forward-looking Information 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 2016 annual information form (the “AIF”) filed on February 28, 2017. 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 6 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 2 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. 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”): “Sleep Country Canada”, the largest mattress retailer in Canada excluding Québec, and “Dormez-vous?”, the largest retailer of mattresses in Québec. Sleep Country continues to expand its presence coast to coast. As at December 31, 2016, Sleep Country had 235 stores (2015-224) and 17 distribution centres (2015-17) 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 (“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, Sleep Country 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. Sleep Country Canada Sleep Country launched its concept in the Vancouver market with four stores in 1994 and has since expanded across Canada with 185 corporately owned stores and 15 distribution centres in British Columbia, Alberta, Manitoba, Saskatchewan, Ontario, Nova Scotia, New Brunswick and Prince Edward Island as at December 31, 2016. 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. Dormez-vous? In January 2006, Sleep Country acquired Dormez-vous?, a Québec based mattress retailer with five stores and one distribution centre in the Montréal area. As of December 31, 2016, the Dormez-vous? Banner has expanded to 50 stores with two distribution centres in Montréal and Québec City. 4 Corporate Highlights f or Fiscal 2016 Senior Secured Credit Facility On July 16, 2015, in connection with SCC’s initial public offering (the “IPO”), SCCI had entered into a new revolving credit facility with a limit of $175 million, which was scheduled to mature on July 16, 2020. This revolving credit facility was guaranteed by SCC. On June 29, 2016, the senior secured credit agreement was amended and restated and SCC became the borrower under the revolving credit facility and SCCI, a wholly-owned subsidiary of SCC, became the sole guarantor. In addition, the credit limit under the revolving credit facility was reduced to $150 million and the maturity date was extended to June 29, 2021. The revolving credit facility is secured by all of the present and after-acquired personal property of SCC and SCCI. As at December 31, 2016, the balance outstanding on the revolving credit facility was $119.0 million (2015-$ 124.0 million). Dividends The Board of Directors of the Company have periodically declared dividends on the Company’s common shares as follows: SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 3 Date of declaration Record date Payment date Dividend declared (per share) November 3, 2015 November 15, 2016 November 26, 2015 $ 0.13 January 29, 2016 February 16, 2016 February 26, 2016 $ 0.13 May 10, 2016 May 20, 2016 May 30, 2016 $ 0.13 July 28, 2016 August 16, 2016 August 26, 2016 $ 0.15 November 1, 2016 November 18, 2016 November 28, 2016 $ 0.15 January 26, 2017 February 17, 2017 February 27, 2017 $ 0.15 All dividends are designated as an “eligible dividends” for Canadian tax purposes. 5 Factors Affecting Our Results of Operations Revenues Revenues are derived primarily from the retail sales of mattress sets and Accessories (including bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards). Revenue is recognized on 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 growing Same Store Sales (or “SSS”), 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. Same Store Sales SSS 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 the prior year. SSS 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 SSS 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. SSS is primarily driven by:  increases in customer traffic through marketing and advertising;  increases in the conversion rate of turning shoppers into buyers; and  increases in the average transaction size. Expansion Opportunities 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 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 and Prince Edward Island, 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) 8 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 4 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 SCC can successfully incorporate its culture (vision and mission) into the new region. To help accomplish this, SCC has traditionally started by ensuring 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 have 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-month periods and fiscal years ended December 31, 2016 and December 31, 2015: Q4 Annual 2016 2015 2016 2015 Number of stores, beginning of period 234 224 224 212 Stores newly opened 1 1 11 13 Stores closed - 1 - 1 Number of stores, end of period 235 224 235 224 Number of stores in new store design, end of period 63 32 Stores relocated - 1 1 3 Stores renovated 9 5 19 10 The one new store opened in Q4 2016 was located in a satellite market. Enhanced Store Design An enhanced store design was first introduced in certain existing stores during the second half of 2014. As at December 31, 2016, there were 63 stores that featured the new store design, of which 25 were new stores and 38 were renovations or relocations of existing stores. Over time, SCC intends to select additional stores to renovate to this new design, which will continue to be featured by all new stores it opens. Competition 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 22 years and serves as a significant barrier to entry. Seasonality 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. The average quarterly share of annual sales over the last three fiscal years is as follows: First quarter 20% Second quarter 23% Third quarter 31% Fourth quarter 26% Yearly total 100% SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 9 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 5 Cost of Sales 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, freight 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 Fourth Quarter and Full Year Operational Highlights Q4 Annual (C$ thousands unless otherwise stated; other than store count) 2016 2015 Change 2016 2015 Change Revenues $ 135,430 $ 119,106 13.7% $ 523,787 $ 456,185 14.8% SSS 9.6% 12.9% 10.0% 11.3% Stores opened 1 1 11 13 Stores closed - 1 - 1 Stores renovated/relocated 9 6 20 13 Gross profit margin 28.8% 27.3% 28.9% 27.8% Operating EBITDA (1) 19,123 16,291 17.4% 85,045 69,125 23.0% Operating EBITDA margin % (1) 14.1% 13.7% 16.2% 15.2% Net income (loss) from continuing operations 11,177 8,618 29.7% 49,574 (51,692) N/M(2) Earnings (loss) per share from continuing operations-Basic 0.30 0.16 85.6% 1.32 (1.90) N/M(2) Earnings (loss) per share from continuing operations-Diluted 0.29 0.16 83.9% 1.31 (1.90) N/M(2) Adjusted net income from continuing operations (1) 11,655 8,542 36.4% 51,103 39,314 30.0% Adjusted earnings per share from continuing operations (1) $ 0.31 $ 0.23 36.1% $ 1.36 $ 1.05 29.7% Note: (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 a reconciliation to the most comparable IFRS measure. (2) Not meaningful. Highlights of Results from Continuing Operations in Q4 2016 Total revenues increased by 13.7% driven by strong SSS growth of 9.6% on top of 12.9% in Q4 2015. Sales growth was further aided by the addition of 11 new stores since December 31, 2015. Gross profit margins and Operating EBITDA margins improved in Q4 2016 compared to Q4 2015, which translated into higher Adjusted Net Income of $11.7 million (Q4 2015 – $8.5 million) and a growth of 36.1% in Adjusted Earnings per Share from $0.23 in Q4 2015 10 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 6 to $0.31 in Q4 2016. See “Non-IFRS Measures”. The Net income from continuing operations in Q4 2016 was $11.7 million (Q4 2015 - $8.6 million) resulting in Basic Earnings per Share of $0.30 (Q4 2015 - $0.16). Highlights of Results from Continuing Operations in 2016 Total revenues increased by 14.8% driven by strong SSS growth of 10.0% on top of 11.3% in 2015. Sales growth was further aided by the addition of 11 new stores since December 31, 2015. Management believes revenue was also positively impacted by the enhanced store design, which was first introduced in certain existing stores during the second half of 2014. To date, 33 of SCC’s existing stores have been renovated to this enhanced design. As at December 31, 2016, the renovated stores have on average, achieved higher SSS than other stores in their regions since their respective reopening dates. Gross profit margins and Operating EBITDA margins improved in 2016 compared to 2015, which translated into a growth in Adjusted Net Income of 30.0% from $39.3 million in 2015 to $51.1 million in 2016. Adjusted Earnings per Share increased by 29.7% to $1.36 in 2016 from $1.05 in 2015. 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 (loss of $1.90 per share) compared to an income of $49.6 million ($1.32 per Share) for 2016. 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 operations of Sleep America have been presented as “Discontinued Operations” in 2015. Outlook Management believes Sleep Country is well-positioned to continue to grow revenue, profitability and cash flows. Key initiatives planned for 2017 include the following:  launching a new corporate website which will contain full eCommerce capabilities;  opening 8 to 12 new stores;  growing SSS by continuing to invest in advertising and sales training;  renovating 20 to 30 stores to feature the enhanced store design;  relocating 4 distribution centres; and  continuing to expand merchandising opportunities in Accessories. The distribution centre relocations will result in additional capital expenditure of approximately $6 to $8 million. These relocations will result in a one-time EBITDA drag of approximately $1 million, but will improve efficiency and grow distribution capacity for the long term. The eCommerce platform will feature our new exclusive Bed in a Box mattress and our full line up of Accessories and enables Sleep Country to better meet its customers’ needs, as they seek the convenience of shopping online. 2017 will be a year of ramp up for the eCommerce platform and may be a near-term drag on EBITDA of approx. $1 to $1.5 million. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 11 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 7 Selected Financial Information The following table sets out selected IFRS and certain non-IFRS financial measures of SCC and should be read in conjunction with the audited annual consolidated financial statements for 2016 and 2015. Q4 Annual (C$ thousands unless otherwise stated) 2016 2015 Change 2016 2015 Change Consolidated Income Statement Revenues $ 135,430 $ 119,106 13.7% $ 523,787 $ 456,185 14.8% Cost of sales 96,425 86,548 11.4% 372,389 329,370 13.1% Gross profit 39,005 32,558 19.8% 151,398 126,815 19.4% General and administrative expenses 20,360 16,487 23.5% 67,882 67,805 0.1% Depreciation and amortization 3,335 2,774 20.2% 11,869 10,346 14.7% Income before finance related expenses, interest income and other expenses and income taxes 15,310 13,297 15.1% 71,647 48,664 47.2% Finance related expenses 834 1,226 (32.0)% 4,121 112,316 (96.3)% Interest and other expenses (income) – net 75 (12) N/M(2) 118 15 686.7% Net Income (loss) before income taxes 14,401 12,083 19.2% 67,408 (63,667) N/M(2) Income taxes 3,224 3,465 (7.0)% 17,834 (11,975) N/M(2) Net income (loss) from continuing operations 11,177 8,618 29.7% 49,574 (51,692) N/M(2) Net income (loss) from discontinued operations - (23) N/M(2) - 5,992 N/M(2) Net income (loss) $ 11,177 $ 8,595 30.0% $ 49,574 $ (45,700) N/M(2) EBITDA (1) $ 18,645 $ 16,071 16.0% $ 83,516 $ 59,010 41.5% Operating EBITDA (1) $ 19,123 $ 16,291 17.4% $ 85,045 $ 69,125 23.0% Operating EBITDA Margin (1) 14.1% 13.7% 16.2% 15.2% Adjusted net income from continuing operations (1) $ 11,655 $ 8,542 36.4% $ 51,103 $ 39,314 30.0% Earnings (loss) per share from continuing operations – Basic $ 0.30 $ 0.16 85.6% $ 1.32 $ (1.90) N/M(2) Earnings (loss) per share from continuing operations – Diluted $ 0.29 $ 0.16 83.9% $ 1.31 $ (1.90) N/M(2) Earnings per share from discontinued operations – Basic $ - $ - N/M(2) $ - $ 0.20 N/M(2) Earnings per share from discontinued operations - Diluted $ - $ - N/M(2) $ - $ 0.20 N/M(2) Adjusted earnings per share from continuing operations (1) $ 0.31 $ 0.23 36.1% $ 1.36 $ 1.05 29.7% Dividends declared per share $ 0.15 $ 0.13 15.4% $ 0.56 $ 0.13 346.2% 31-Dec-16 31-Dec-15 Total assets $ 461,008 $ 439,367 Long-term debt $ 118,751 $ 124,223 Note: (1) See the section below entitled “Non-IFRS Measures” for further details concerning how the Company calculates EBITDA, Operating EBITDA, Operating EBITDA Margin, Adjusted Net Income and Adjusted Earnings per Share (EPS) and for a reconciliation to the most comparable IFRS measure. (2) Not meaningful. 12 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 8 7 Fourth Quarter 20 16 versus Fourth Quarter 20 15 Continuing Operations Revenues Revenues increased by 13.7%, from $119.1 million in Q4 2015 to $135.4 million in Q4 2016, primarily driven by a 9.6% increase in SSS. See “Non-IFRS Measures”. Sales growth was further aided by the addition of 11 new stores since December 31, 2015. The increase in total revenue was comprised of an increase in mattress sales and accessory sales. Mattress revenue increased by 12.4%, from $93.7 million to $105.3 million. Accessory revenue increased by 18.7%, from $25.4 million to $30.2 million. Gross profit Gross profit was $39.0 million in Q4 2016 compared to $32.6 million in Q4 2015, representing an increase of $6.4 million. Gross profit margin increased by 1.5% to 28.8% for Q4 2016 from 27.3% in Q4 2015 primarily as a result of the following factors:  sales and distribution compensation was 15.4% of revenue in Q4 2016 compared to 16.2% of revenue in Q4 2015 mainly as a result of improved leverage;  improved leverage on store occupancy costs, which decreased as a percentage of revenue from 9.7% to 8.8%; and  inventory and other directly related expenses net of volume rebates increased as a percentage of revenue from 46.1% to 46.3%. General and administrative (“G&A”) expenses Total G&A expenses increased by $3.9 million, or 23.5%, from $16.5 million in Q4 2015 to $20.4 million in Q4 2016; and, as a percentage of revenue, G&A increased from 13.8% in Q4 2015 to 15.0% in Q4 2016. Q4 (C$ millions unless otherwise stated) 2016 % of revenue 2015 % of revenue Change Media and advertising expenses (1) $ 7.7 5.7% $ 5.8 4.9% $ 1.9 Salaries, wages and benefits (2) 4.0 3.0% 2.9 2.5% 1.1 Credit card and finance charges (3) 2.9 2.2% 2.7 2.2% 0.3 Rent and other occupancy charges (4) 1.9 1.4% 1.7 1.5% 0.2 Professional fees (5) 0.9 0.7% 0.7 0.6% 0.1 Telecommunication and information technology 1.0 0.7% 0.9 0.8% 0.1 Other 1.9 1.4% 1.7 1.4% 0.2 Total G&A expenses $ 20.4 15.0% $ 16.5 13.8% $ 3.9 (1) Media and advertising expenses increased by $1.9 million mainly as a result of additional spend in TV, radio and print to provide additional support to the Accessories category, continued support of the mattress category as well as the promotion of new satellite markets. (2) Salaries, wages and benefits increased by $1.1 million mainly as a result of a $0.4 million increase in stock compensation expense, a non-recurring credit received in Q4 2015 from the government on labour-related matters and additional compensation expense incurred in the regular course of business as a result of merit increases and additional hires to support growth of the business. (3) Credit card and finance charges are variable costs and remained stable as a percentage of revenue. (4) Rent and other occupancy charges include rent for the distribution centres and office space. (5) Professional fees increased mainly as a result of additional legal expenses relating to the Company’s trademark infringement litigation against Sears Canada Inc. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 13 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 9 EBITDA EBITDA was $18.6 million for Q4 2016 compared to $16.1 million for Q4 2015, representing an increase of $2.6 million (or 16.0%). See “Non-IFRS Measures”. The increase was primarily due to strong revenue growth in Q4 2016 combined with improved gross profit margins partially offset by an increase in the G&A expenses Operating EBITDA Operating EBITDA was $19.1 million for Q4 2016 compared to $16.3 million for Q4 2015, representing an increase of $2.8 million (or 17.4%). See “Non-IFRS Measures”. The increase was primarily due to strong revenue growth in Q4 2016 combined with improved gross profit margins partially offset by an increase in G&A expenses. Depreciation and amortization expenses Depreciation and amortization increased by $0.6 million from $2.8 million in Q4 2015 to $3.3 million in Q4 2016. The increase was mainly a result of the higher net book value of property and equipment which was driven by increased capital expenditures on new stores and store renovations. Finance related expenses Finance related expenses were $0.8 million in Q4 2016 compared to $1.2 million in Q4 2015, representing a decrease of $0.4 million mainly as a result of a lower average balance outstanding on the senior credit facility and a lower effective interest rate of 2.73% in Q4 2016 compared to 3.48% in Q4 2015. The nature of the Company’s finance related expenses are described in this MD&A below under the heading “Annual Financial Results 2016 versus 2015 – Finance related expenses”. Income taxes (recovery) Q4 2016 had an income tax expense of $3.2 million versus $3.5 million for Q4 2015. During Q4 2016, there was a reversal of certain tax attributes of $0.9 million that related to the capital structure that existed prior to the IPO. The tax expense in Q4 2015 included the tax effect of certain transactions relating to the IPO. Net income The net income for Q4 2016 was $11.2 million ($0.30 per share) compared to $8.6 million ($0.16 per share) in Q4 2015 representing an increase of $2.6 million (or 29.7%). The increase was mainly due to an increase in EBITDA, lower finance related expenses and a lower income tax expense. See “Non-IFRS Measures”. Adjusted net income Adjusted Net Income for Q4 2016 was $11.7 million ($0.31 per share) compared to $8.5 million ($0.23 per share) for Q4 2015, an increase of $3.1 million (or 36.4%). The increase was primarily due to higher Operating EBITDA together with a decrease in finance related expenses and a decrease in income tax expense, partially offset by an increase in depreciation and amortization expenses. See “Non-IFRS Measures”. Discontinued Operations 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. As a result, SCC realized a net gain of $6.0 million in 2015, most of which recognized prior to Q4 2015. The performance of the Sleep America business was presented in “Discontinued Operations” following the approval of the sale on November 5, 2014. 14 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 10 8 Annual Financial Results 2016 versus 2015 Continuing Operations Revenues Revenues increased by 14.8%, from $456.2 million in 2015 to $523.8 million in 2016, primarily driven by a 10.0% increase in SSS. See “Non-IFRS Measures”. Sales growth was further aided by the addition of 11 new stores since December 31, 2015. The increase in total revenue was comprised of an increase in mattress sales and Accessory sales. Mattress revenue increased by 12.3%, from $365.6 million to $410.5 million. Accessory revenue increased by 25.0%, from $90.6 million to $113.3 million. Gross profit Gross profit was $151.4 million in 2016 compared to $126.8 million in 2015, representing an increase of $24.6 million. Gross profit margin increased by 1.1% to 28.9% for 2016 from 27.8% in 2015 as a result of the following factors:  sales and distribution compensation was 15.8% of revenue in 2016 compared to 16.3% of revenue in 2015 mainly as a result of improved leverage;  improved leverage on store occupancy costs, which decreased as a percentage of revenue from 9.7% to 9.0%; and  inventory and other directly related expenses net of volume rebates increased marginally as a percentage of revenue from 45.5% in 2015 to 45.6% in 2016. G&A expenses Total G&A expenses increased marginally by $0.1 million, or 0.1%, from $67.8 million in 2015 to $67.9 million in 2016. Expenses in 2015 included certain non-recurring expenses, excluding these non-recurring expenses, G&A expenses increased to 13.0% of revenue in 2016 from 12.7% of revenue in 2015. Annual (C$ millions unless otherwise stated) 2016 % of revenue 2015 % of revenue Change Media and advertising expenses (1) $ 23.7 4.5% $ 20.5 4.5% $ 3.2 Salaries, wages and benefits (2) 15.6 3.0% 20.2 4.4% (4.6) Credit card and finance charges (3) 11.4 2.2% 9.8 2.1% 1.6 Rent and other occupancy charges 7.3 1.4% 6.6 1.5% 0.6 Professional fees(4) 1.7 0.3% 3.4 0.8% (1.7) Telecommunication and information technology 3.5 0.7% 3.1 0.7% 0.4 Other 4.7 0.9% 4.1 0.9% 0.6 Total G&A expenses $ 67.9 13.0% $ 67.8 14.9% $ 0.1 (1) Media and advertising expenses increased by $3.2 million mainly as a result of additional spend in TV, radio and print to provide additional support to the Accessories category, the continued support of the mattress category as well as the promotion of new and satellite markets. (2) Salaries, wages and benefits expenses for 2015 include $6.9 million in non-recurring management bonus relating to the close-out of the management option plan that existed prior to the IPO and a $0.7 million reduction in management compensation upon internal restructuring following the IPO. Excluding these items, salaries, wages and benefits increased by $3.0 million (or 23.5%) mainly as a result of an increase in stock compensation expense, a non-recurring credit received in Q4 2015 from the government on labour-related matters and additional compensation expense incurred in the regular course of business as a result of merit increases and additional hires to support growth of the business. (3) Credit card and finance charges are variable costs and remained relatively stable as a percentage of revenue. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 15 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 11 (4) Professional fees for 2015 include $2.4 million in non-recurring professional fees related to the IPO. Excluding this, professional fees increased from $1.1 million in 2015 to $1.7 million in 2016 mainly as a result of additional legal expenses relating to the Company’s trademark infringement litigation against Sears Canada Inc. EBITDA EBITDA was $83.5 million for 2016 compared to $59.0 million for 2015, representing an increase of $24.5 million (or 41.5%). See “Non-IFRS Measures”. The increase was primarily due to strong revenue growth in 2016 combined with improved gross profit margins. Operating EBITDA Operating EBITDA was $85.0 million for 2016 compared to $69.1 million for 2015, representing an increase of $15.9 million (or 23.0%). See “Non-IFRS Measures”. The increase was primarily due to strong revenue growth in 2016 combined with improved gross profit margins partially offset by an increase in G&A expenses. Depreciation and amortization expenses Depreciation and amortization increased from $10.3 million in 2015 to $11.9 million in 2016 mainly due to higher a net book value of property and equipment which was driven by increased capital expenditures on new stores and store renovations. Finance related expenses Prior to the IPO, finance related expenses consisted of interest on the senior credit facility, finance leases, Series A and B promissory notes and Class A convertible shares and fair value adjustment expenses 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 $4.1 million in 2016 compared to $112.3 million in 2015, representing a decrease of $108.2 million. $105.3 million of the finance related expense in 2015 related to finance costs of Series A and B promissory notes, Class A convertible shares and Class B common shares. The promissory notes and Class A convertible shares were early settled in connection with the closing of the IPO, $1.2 million of finance related expenses in 2015 related to accelerated amortization of debt issuance costs as a result of renegotiation of the senior credit facility in connection with the IPO. 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 decreased from $5.8 million in 2015 to $4.1 million in 2016 mainly as a result of a lower average balance outstanding on the senior credit facility and a lower annual effective rate of 3.07% in 2016 compared to 4.70% in 2015. Income taxes (recovery) 2016 had an income tax expense of $17.8 million versus a recovery of $12.0 million for 2015. The current income tax expense in 2015 was $10.1 million compared to a current income tax expense of $17.5 million in 2016, an increase of $7.4 million. The increase was mainly a result of higher taxable income due to improved business results and operating margins, a 100% allocation of the taxable income generated from the operating business in 2016 compared to a partial allocation in 2015, the tax effect of certain transactions in connection with the IPO-related restructuring and a tax credit that offset some tax payable in 2015. The increase in current income tax expense was offset by a decrease in deferred income tax recoveries. The deferred tax recovery was $22.1 million in 2015 compared to a deferred tax expense of $0.3 million in 2016. The deferred tax recovery in 2015 was mainly due to the favourable deferred tax impact of IPO-related costs and additional finance costs associated with the early repayment of the subordinated debt in 2015. 16 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 12 Net income (loss) The net income for 2016 was $49.6 million ($1.32 per share) compared to a loss of $51.7 million (loss of $1.90 per share) in 2015 representing an increase of $101.3 million. The increase was mainly due to an increase in EBITDA and lower finance related expenses, partially offset by an increase in depreciation and income tax expense. See “Non-IFRS Measures”. Adjusted net income Adjusted Net Income for 2016 was $51.1 million ($1.36 per share) compared to $39.3 million ($1.05 per share) for 2015, which is an increase of $11.8 million (or 30.0%). The increase was primarily due to higher Operating EBITDA and lower finance related expenses, partially offset by an increase in depreciation and income tax expense. See “Non-IFRS Measures”. Discontinued Operations 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. As a result, SCC realized a net gain of $6.0 million in 2015. The performance of the Sleep America business was presented in “Discontinued Operations” following the approval of the sale on November 5, 2014. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 17 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 13 9 Summary of Quarterly Results Over the past two years, the Company’s quarterly revenue and earnings have steadily increased with the third quarter typically generating the greatest contribution to revenues and earnings, and the first quarter the least. This is largely due to the seasonal nature of revenue and the timing of marketing programs. Accordingly, results of operations for any interim period are not necessarily indicative of the results of operations for the full fiscal year. The following table shows the financial performance of the Company for the last eight quarters and has been prepared in accordance with IFRS. 2016 2015 (C$ thousands unless otherwise stated) Q4 Q3 Q2 Q1 TOTAL Q4 Q3 Q2 Q1 TOTAL Revenues $ 135,430 $ 160,847 $ 120,212 $ 107,298 $ 523,787 $ 119,106 $ 142,946 $ 102,520 $ 91,613 $ 456,185 SSS(1) 9.6% 7.7% 12.2% 11.7% 10.0% 12.9% 13.4% 7.7% 10.5% 11.3% Gross profit $ 39,005 $ 52,053 $ 33,693 $ 26,647 $ 151,398 $ 32,558 $ 45,020 $ 27,004 $ 22,233 $ 126,815 EBITDA(1) $ 18,645 $ 33,152 $ 17,522 $ 14,197 $ 83,516 $ 16,071 $ 19,700 $ 12,935 $ 10,304 $ 59,010 Operating EBITDA(1) $ 19,123 $ 33,624 $ 17,884 $ 14,414 $ 85,045 $ 16,291 $ 28,742 $ 13,370 $ 10,722 $ 69,125 Operating EBITDA Margin(1) 14.1% 20.9% 14.9% 13.4% 16.2% 13.7% 20.1% 13.0% 11.7% 15.2% Net income (loss) from continuing operations $ 11,177 $ 21,402 $ 9,699 $ 7,296 $ 49,574 $ 8,618 $ 8,047 $ (50,666) $ (17,691) $ (51,692) Net income (loss) from discontinued operations $ - $ - $ - $ - $ - $ (23) $ (176) $ (586) $ 6,777 $ 5,992 Net income (loss) $ 11,177 $ 21,402 $ 9,699 $ 7,296 $ 49,574 $ 8,595 $ 7,871 $ (51,252) $ (10,914) $ (45,700) Adjusted net income from continuing operations(1) $ 11,655 $ 21,874 $ 10,061 $ 7,513 $ 51,103 $ 8,542 $ 17,811 $ 7,085(2) $ 5,876(2) $ 39,314 Earnings (loss) per share from continuing operations - Basic $ 0.30 $ 0.57 $ 0.26 $ 0.19 $ 1.32 $ 0.16 $ 0.39 $ (2.70) $ (1.09) $ (1.90) Earnings (loss) per share from discontinued operations - Basic $ - $ - $ - $ - $ - $ - $ (0.01) $ (0.02) $ 0.20 $ 0.20 Earnings (loss) per share from continuing operations - Diluted $ 0.29 $ 0.56 $ 0.26 $ 0.19 $ 1.31 $ 0.16 $ 0.39 $ (2.70) $ (1.09) $ (1.90) Earnings (loss) per share from discontinued operations – Diluted $ - $ - $ - $ - $ - $ - $ (0.01) $ (0.02) $ 0.20 $ 0.20 Adjusted earnings per share from continuing operations(1) $ 0.31 $ 0.58 $ 0.27 $ 0.20 $ 1.36 $ 0.23 $ 0.47 $ 0.19 $ 0.16 $ 1.05 NOTE: (1) See the section below entitled “Non-IFRS Measures” for further details concerning how the Company calculates EBITDA, Operating EBITDA, Operating EBITDA Margin, Adjusted Net Income and Adjusted Earnings per Share (EPS) and for a 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 the minority shareholders. As a result of certain pre-closing transactions carried out prior to the IPO, 100% of the taxable income of SCCLP is allocated to SCCI. Adjustments have been made to reflect the change in taxation expense. 18 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 14 10 Segment Performance As at December 31, 2016, SCC manages its business on the basis of one operating segment (Canada) which is also SCC’s only reportable segment consistent with the internal reporting provided to management. 11 Liquidity and Capital Resources 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 half of the year. Management believes cash generated from operations, together with cash 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. A summary of net cash flows by activities is presented below for 2016 and 2015: (C$ thousands unless otherwise stated) 2016 2015 Cash flows from operating activities $ 53,948 $ 58,992 Cash flows from (used in) investing activities (17,111) 409 Cash flows from used in financing activities (29,656) (84,100) Net increase (decrease) in cash 7,181 (24,699) Cash at beginning of period 16,639 41,338 Cash at end of period $ 23,820 $ 16,639 Net cash flows from operating activities Net cash flows generated by operating activities were $53.9 million in 2016 comprised of the positive impact of cash generated from operating activities of $65.8 million offset by a $11.9 million use of cash as a result of an increase in non-cash items relating to operating activities (working capital). The increase in working capital was primarily driven by higher trade and other receivables, higher inventories, lower trade and other payables partially offset by lower customer deposits. 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 higher trade and other receivables. See “Non-IFRS Measures”. Net cash flows from (used in) investing activities Net cash flows used in investing activities in 2016 consist of investments in capital expenditures mainly due to new store openings and store renovations. Net cash flow generated from investing activities in 2015 includes $15.0 million proceeds from the sale of Sleep America offset by $14.6 million in capital expenditures mainly spent on store openings and store renovations. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 19 Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 15 Net cash flows used in financing activities Net cash flows used in financing activities were $29.7 million for 2016, consisting primarily of a net decrease in the revolving credit facility of $5.0 million, dividends on the common shares of $19.9 million and interest payments of $3.7 million on the senior credit facility and finance leases. Net cash flows used in 2015 were $84.1 million consisting primarily of net cash outflow of $69.1 million relating to the pre-IPO reorganization, interest payments of $6.6 million on the senior credit facility, and finance leases, dividends paid of $4.2 million, repayment of the senior credit facility of $2.8 million and financing costs paid related to the senior credit facility $0.7 million. Contractual obligations The following table summarizes the Company’s significant contractual obligation and commitments as at December 31, 2016 based on undiscounted cash flow including estimated interest payable as per the terms of the long-term debt: (C$ thousands unless otherwise stated) 2017 2018 2019 2020 2021 Thereafter Total Commitments: Operating leases $ 35,292 $ 30,308 $ 26,232 $ 23,173 $ 17,030 $ 38,517 $ 170,552 Financial obligation: Trade and other payable 40,522 - - - - - 40,522 Long-term debt: Existing credit facility: 3,522 3,522 3,522 3,522 120,737 - 134,825 Finance leases 494 197 120 88 42 15 956 Total contractual obligation $ 79,830 $ 34,027 $ 29,874 $ 26,783 $ 137,809 $ 38,532 $ 346,855 The Company enters into operating leases for stores and distribution centres, passenger vehicles and office equipment with terms varying from three to 15 years. The existing credit facility represents a revolving credit facility with a balance outstanding as at December 31, 2016 of $119.0 million (December 31, 2015 - $124.0 million). The finance leases are mainly comprised of leases on delivery trucks. As at December 31, 2016, the outstanding principal of the finance leases was $0.9 million (2015 - $1.5 million). Capital Resources Senior secured credit facility 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 was scheduled to mature on July 16, 2020. This revolving credit facility was guaranteed by SCC. On June 29, 2016, the senior secured credit agreement was amended and restated and SCC became the borrower under the revolving credit facility and SCCI, the wholly - owned operating subsidiary of SCC, became the sole guarantor. In addition, the credit limit under the revolving credit facility was reduced to $150.0 million and the maturity date was extended to June 29, 2021. The revolving credit facility is secured by all of the present and after - acquired personal property of SCC and SCCI. As at December 31, 2016, the balance outstanding on the revolving credit facility was $119.0 million (December 31, 2015 - $124.0 million). 20 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 16 The revolving credit facility allows for the debt to be held in Canadian or US dollars. During the year, the Company held the debt in US dollars for 162 days. To mitigate the foreign exchange risk, the Company entered into forward foreign exchange contracts to sell US dollars in the equal amount of the debt with an overall impact of $nil recorded in general and administrative expenses in the consolidated statements of operations. As at December 31, 2016, the debt is held in Canadian dollars and no forward foreign exchange contracts were outstanding. Interest on the revolving credit facility is based on the prime or bankers’ acceptance rates plus applicable margins based on the achievement of certain targets, as defined by the amended and restated senior secured credit agreement. As at December 31, 2016, the applicable margin for bankers’ acceptances was 187.5 basis points and the applicable margin for prime rate loans was 87.5 basis points. 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 2.84% (2015 - 4.6%). Under the terms of the revolving credit facility, certain financial and non-financial covenants must be complied with. As at December 31, 2016, and during fiscal 2016, SCC was 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 on the Series A and B notes, of which $nil million was incurred in Q4 2015. 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 $140.1 million. 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 was partially offset by a non-cash fair value adjustment, for a cumulative expense of $20.6 million recorded for 2015, of which $nil million was recorded in Q4 2015. 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 $33.4 million. Off-balance sheet arrangements SCC did not have any material off-balance sheet arrangements as at December 31, 2016 and December 31, 2015, nor does it have any subsequent to December 31, 2016. Related party transactions As at December 31, 2015, Birch Hill Equity Partners Management Inc. (“Birch Hill”) beneficially owned, controlled or directed the voting of, directly or indirectly, approximately 14.5% of the Company’s issued and outstanding common shares. Birch Hill also had dispositive powers, but not voting direction or control, with respect to approximately 4.4% of the common shares beneficially owned by certain co-investors. In May 2016, Birch Hill and its co-investors divested themselves of their remaining shareholdings in the Company. Birch Hill continues to maintain two nominee directors on the Company’s Board of Directors. As such, Birch Hill is deemed to be a related party of the Company as at December 31, 2016. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 21 Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 17 The following balances are due from related parties: (C$ thousands unless otherwise stated) 31-Dec-16 31-Dec-15 Short-term advances to related parties $ 2 $ 4 Short-term advances due from related parties were a result of tax liability, professional fee and other expenses paid by the Company on behalf of the related parties. 12 Transactions with Key Management Personnel 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 six most highly compensated executive officers. SCC incurred the following compensation expenses in relation to key management personnel: (C$ thousands unless otherwise stated) 2016 2015 Salaries and short-term employee benefits $ 3,913 $ 4,821 Share-based compensation 1,373 171 Non-recurring bonus relating to the legacy option plan - 5,096 Directors fees 615 335 $ 5,901 $ 10,423 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 risks), credit risk, liquidity risk and capital risk. SCC’s overall risk management program and business practices seek to minimize any potential adverse effects on SCC’s 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. Foreign Exchange Risk SCC’s operating results are reported in Canadian dollars. A portion of the Company’s merchandise purchases are denominated in US dollars which results in foreign currency exposure related to fluctuations between the Canadian and US dollars. The Company does not currently use foreign exchange options or forward contracts to hedge its foreign currency risk relating to merchandise purchases. A sudden increase in the US 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. The Company’s revolving credit facility allows the Company to borrow in Canadian and US dollars. To mitigate any foreign exchange risk related to its US dollar denominated debt, the Company enters into forward foreign exchange contracts to sell US dollars in an amount equal to the principal amount of its US dollar denominated borrowings. 22 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 18 Cash Flow and Fair Value Interest 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 varying lengths of terms 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. Credit 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 Risk Liquidity risk is the risk SCC will not be able to 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 the availability of funding through an adequate amount of committed credit facilities. Capital Risk 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 Critical Accounting Estimates A summary of significant accounting policies is included in Note 3 of SCC’s 2016 audited annual consolidated financial statements. The Company’s critical accounting estimates are included in Note 4 of SCC’s 2016 audited annual consolidated financial statements and are described below. 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. Impairment of Goodwill and Brands Management is required to use judgment in determining the grouping of assets to identify the Company’s cash SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 23 Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 19 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, 2016 and December 31, 2015, 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. Long-term Debt – Promissory Notes A and B, 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 statement of operations, which would be material. 15 Financial Instruments At December 31, 2016, the financial instruments consisted of cash, trade and other receivables, trade and other payables, customer deposits, senior secured credit facilities and finance leases. The carrying values of cash, trade and other receivables, trade and other payables 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 credit facilities approximate their fair value as the terms and conditions of the borrowing arrangements are comparable to market terms and conditions as at December 31, 2016 and December 31, 2015. 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, 2016 and December 31, 2015. 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 Disclosure Controls and Procedures 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, 2016. Although the 24 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 20 Company’s disclosure controls and procedures were operating effectively as of December 31, 2016, 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. 17 Internal Control Over Financial Reporting Management is also responsible for establishing and maintaining appropriate internal controls over financial reporting (“ICFR”). Our ICFR 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. 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, 2016 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, 2016 and that no material weaknesses were identified through their evaluation. 18 Future Accounting Standards The IASB and International Financial Reporting Interpretation Committee (“IFRIC”) have issued the following standards that have not been applied in preparing these condensed interim 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. 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 SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 25 Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 21 and consolidated statement 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 statement 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 the lease assets is shown separately from interest on lease liabilities in the income statement. Under IFRS 16, lessor’s 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 on 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 statement of operations. 19 Outstanding Share Data As of the date hereof, 37,648,349 common shares and no Class A common shares of the Company are issued and outstanding. As of the date hereof, 473,613 options to purchase an equivalent number of common shares, 90,603 performance share units and 8,920 deferred 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 Non-IFRS Measures 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” or “SSS”, “EBITDA”, “Operating EBITDA”, “Operating EBITDA Margin”, “Adjusted Net Income” and “Adjusted EPS” 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 26 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 22 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. Same Store Sales (SSS) SSS 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 the prior year. SSS 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 SSS 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. EBITDA and Operating EBITDA from Continuing Operations EBITDA and Operating EBITDA from continuing operations are used by SCC to assess its operating performance. EBITDA is defined as income (loss) from continuing operations adjusted for:  finance related expenses;  income taxes;  depreciation and amortization; and  interest and other expenses (income) – net. Operating EBITDA is defined as EBITDA adjusted for:  normalization of management bonuses;  non-recurring management bonuses;  certain non-recurring professional fees related to IPO and certain shareholder matters;  reduction in management compensation due to a change in the senior leadership team; and  share-based compensation. Net Income and Adjusted Net Income from Continuing Operations 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 on amortization of debt issuance costs;  normalization of management bonuses;  certain non-recurring professional fees related 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. Adjusted EPS Adjusted EPS is defined as Adjusted net income from continuing operations attributable to the common shareholders of the Company divided by weighted average number of shares issued and outstanding during the year. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 27 Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 23 Calculation of Non-IFRS Measures Q4 Annual (C$ thousands unless otherwise stated, except earnings per share) 2016 2015 2016 2015 Reconciliation of net income (loss) from continuing operations to EBITDA and Operating EBITDA: Net income (loss) from continuing operations $ 11,177 $ 8,618 $ 49,574 $ (51,692) Interest and other expenses (income) - net $ 75 $ (12) $ 118 $ 15 Finance related expenses $ 834 $ 1,226 $ 4,121 $ 112,316 Income taxes $ 3,224 $ 3,465 $ 17,834 $ (11,975) Depreciation and amortization $ 3,335 $ 2,774 $ 11,869 $ 10,346 EBITDA $ 18,645 $ 16,071 $ 83,516 $ 59,010 Adjustments to EBITDA: Reduction in management bonuses1 $ - $ - $ - $ 3 Non-recurring management bonuses2 $ - $ - $ - $ 6,898 Non-recurring items3 $ - $ 121 $ - $ 2,358 Reduction in management compensation4 $ - $ - $ - $ 685 Share-based compensation5 $ 478 $ 99 $ 1,529 $ 171 Total adjustments $ 478 $ 220 $ 1,529 $ 10,115 Operating EBITDA $ 19,123 $ 16,291 $ 85,045 $ 69,125 Operating EBITDA margin 14.1% 13.7% 16.2% 15.2% Reconciliation of net income (loss) from continuing operations to Adjusted Net Income: Net income (loss) $ 11,177 $ 8,618 $ 49,574 $ (51,692) Adjustments: Interest expense on Series A and B notes6 $ - $ - $ - $ 84,726 Interest expense and fair value adjustment on Class A convertible shares and Class B common shares7 $ - $ - $ - $ 20,602 Acceleration on amortization of debt issuance cost8 $ - $ - $ - $ 1,205 Total interest adjustment $ - $ - $ - $ 106,533 Reduction in management bonuses1 $ - $ - $ - $ 3 Non-recurring management bonuses2 $ - $ - $ - $ 6,898 Non-recurring items3 $ - $ 121 $ - $ 2,358 Reduction in management compensation4 $ - $ - $ - $ 685 Share-based compensation5 $ 478 $ 99 $ 1,529 $ 171 Total adjustments $ 478 $ 220 $ 1,529 $ 116,648 Tax impact of all adjustments $ - $ (58) $ - $ (25,404) Tax impact of change in corporate structure9 $ - $ (238) $ - $ (238) Adjusted net income from continuing operations $ 11,655 $ 8,542 $ 51,103 $ 39,314 Weighted average number of shares $ 37,648 $ 37,554 $ 37,638 $ 37,543 Earnings (loss) per share from continuing operations $ 0.30 $ 0.16 $ 1.32 $ (1.90) Adjusted earnings per share from continuing operations $ 0.31 $ 0.23 $ 1.36 $ 1.05 1 Due to the fluctuation of financial performance prior to the IPO, 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 the past six 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 SCC’s capital reorganization and IPO. 4 Reduction in management compensation on 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 as part of certain pre-closing transactions carried out prior to the IPO. 7 Adjustment for non-cash fair value adjustment and interest expense on convertible shares and Class B common shares that are to be restructured in connection with the closing of the IPO. 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 SCCLP was allocated to minority shareholders. As a result of certain pre-closing transactions carried out prior to the IPO, 100% of taxable income of SCCLP is allocated to SCCI and therefore this adjustment reflects the change in taxation expense. 28 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLEEP COUNTRY CANADA HOLDINGS INC.Management’s Discussion and Analysis of Financial Condition and Results of Operation of Sleep Country Canada Holdings Inc. 24 21 Additional Information 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. INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF SLEEP COUNTRY CANADA HOLDINGS INC. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 29 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. INDEPENDENT AUDITOR’S REPORT (continued) TO THE SHAREHOLDERS OF SLEEP COUNTRY CANADA HOLDINGS INC. 30 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 2016 AND DECEMBER 31, 2015 (In thousands of Canadian dollars, except per share amounts) The accompanying notes are an integral part of these consolidated financial statements. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 31 2016$2015$AssetsCurrent assetsCash 23,82016,639Trade and other receivables (note 5)14,9378,406Inventories (note 6)34,53832,070Prepaid expenses and deposits2,3992,08775,69459,202Property and equipment (note 7)33,927 28,987 Deferred tax assets (note 12) 4,7434,956Intangible assets other than goodwill (note 8)104,498104,076Goodwill (note 8)242,146 242,146 461,008439,367 SLEEP COUNTRY CANADA HOLDINGS INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued) AS AT DECEMBER 31, 2016 AND DECEMBER 31, 2015 (In thousands of Canadian dollars, except per share amounts) The accompanying notes are an integral part of these consolidated financial statements. 32 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 2016$2015$LiabilitiesCurrent liabilitiesTrade and other payables (note 9)40,52246,024Customer deposits17,55415,598Long-term debt (note 11)44572558,52162,347Other liabilities (note 10)8,478 8,897 Deferred tax liabilities (note 12)10,43310,309Long-term debt (note 11)118,751124,223196,183205,776Shareholders’ EquityShare capital and other (note 14)353,389 350,655 Deficit(88,564)(117,064)264,825233,591461,008439,367Contingent liabilities and unrecognized contractual commitments (note 16) SLEEP COUNTRY CANADA HOLDINGS INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2016 AND DECEMBER 31, 2015 (In thousands of Canadian dollars, except per share amounts) The accompanying notes are an integral part of these consolidated financial statements. SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 33 2016$2015$Revenues523,787456,185Cost of sales (notes 6and 13)372,389329,370Gross profit151,398126,815General and administrative expenses(note13)67,88267,805Depreciation and amortization11,86910,346Income before finance related expenses, interest income and other expenses and income taxes71,647 48,664 Finance related expenses(note 11)4,121112,316Interest income and other expenses-net118154,239112,331Income (loss) before provision for (recovery of) income taxes67,408(63,667)Provision for (recovery of) income taxes(note 12)Current17,49710,112Deferred337(22,087)17,834(11,975)Net income (loss) from continuing operations49,574(51,692)Net income from discontinued operations (note20)-5,992Net income (loss) for the year49,574(45,700)Total net income (loss) attributable toOwners of the parent49,574(46,879)Non-controlling interest-1,17949,574(45,700)Earnings (loss) per share attributed to the common shareholders of the Company(note 15)Basic earnings(loss) per share (in dollars)Continuing operations1.32(1.90)Discontinued operations-0.20Earnings (loss) per share1.32(1.70)Diluted earnings(loss) per share (in dollars)Continuing operations1.31(1.90)Discontinued operations-0.20Earnings (loss) per share1.31(1.70) SLEEP COUNTRY CANADA HOLDINGS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Loss) FOR THE YEARS ENDED DECEMBER 31, 2016 AND DECEMBER 31, 2015 (In thousands of Canadian dollars, except per share amounts) The accompanying notes are an integral part of these consolidated financial statements. 34 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 2016$2015$Net income (loss) for the year49,574(45,700)Other comprehensive loss to be reclassified to consolidated statement of operationsCumulative translation differences related to discontinued operations-(428)Total comprehensive income (loss) for the year49,574(46,128)Total comprehensive income (loss) attributable toOwners of the parent49,574(47,307)Non-controlling interest-1,17949,574(46,128) Y T I U Q E ’ S R E D L O H E R A H S N I S E G N A H C F O S T N E M E T A T S D E T A D I L O S N O C . C N I S G N I D L O H A D A N A C Y R T N U O C P E E L S 5 1 0 2 , 1 3 R E B M E C E D D N A 6 1 0 2 , 1 3 R E B M E C E D D E D N E S R A E Y E H T R O F ) s t n u o m a e r a h s r e p t p e c x e , s r a l l o d n a i d a n a C f o s d n a s u o h t n I ( . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 35 SharecapitalandotherTotalSleepCountryCanadaHoldings$SleepCountryCanadaInc.$Currencytranslationreserve$Deficit$Controllinginterest$Non-controllinginterest$Equity$Balance-January1,2015-123,603428(63,693)60,33846,987107,325Netincome(loss)fortheyear---(46,879)(46,879)1,179(45,700)Othercomprehensiveloss--(428)-(428)-(428)Comprehensiveincome(loss)fortheyear--(428)(46,879)(47,307)1,179(46,128)Pre-Offeringdividenddeclared---(1,612)(1,612)-(1,612)Post-Offeringdividenddeclared---(4,880)(4,880)-(4,880)Issuanceofcommonshares(note21)625,923---625,923-625,923Reorganization(notes14and21)(276,159)(123,603)--(399,762)(48,166)(447,928)Sharesissued-DividendReinvestmentPlan724---724-724Share-basedcompensation(note18)167---167-167Balance-December31,2015350,655--(117,064)233,591-233,591Balance-January1,2016350,655--(117,064)233,591-233,591Netincomefortheyear---49,57449,574-49,574Comprehensiveincomefortheyear---49,57449,574-49,574Dividenddeclared---(21,074)(21,074)-(21,074)Sharesissued-DividendReinvestmentPlan1,205---1,205-1,205Share-basedcompensation(note18)1,529---1,529-1,529Balance-December31,2016353,389--(88,564)264,825-264,825     SLEEP COUNTRY CANADA HOLDINGS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND DECEMBER 31, 2015 (In thousands of Canadian dollars, except per share amounts) The accompanying notes are an integral part of these consolidated financial statements. 36 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 2016$2015$Cash provided by (used in)Operating activitiesNet income (loss) for the year49,574(45,700)Items not affecting cashDepreciation of property and equipment (note 7)10,7449,004Amortization of intangible assets (note 8)1,1251,341Share-based compensation1,529171Gain on sale of Sleep America (note 20)-(6,016)Finance related expenses4,121112,316Loss on disposal of property and equipment86157Deferred lease inducements and escalated rent1,003902Decommissioning liabilities10725Warranty liability(1,529)1,005Other non-cash changes-(1,158)Deferred income taxes337(22,087)67,09749,960Changes in non-cash items relating to operating activitiesTrade and other receivables(6,531)(1,913)Inventories(2,468)(5,701)Prepaid expenses and deposits(312)869Trade and other payables(5,792)12,295Customer deposits1,9563,482(13,147)9,03253,95058,992Investing activitiesPurchase of property and equipment (net of proceeds of $26, 2015 -nil)(15,565)(13,200)Purchase of intangible assets(1,547)(1,375)Proceeds on sale of Sleep America (note20)-14,984(17,112)409Financing activitiesAdditional revolving loan taken on senior secured credit facility (note 11)20,000-Repayment of senior secured credit facility(25,000)(2,750)Financing costs on senior secured credit facility(234)(721)Financing activities related to the reorganization (note 21)-(69,098)Dividends paid on Class A common shares(19,869)(4,157)Interest paid(3,680)(6,636)Repayment of finance lease obligation(874)(738)(29,657)(84,100)Increase (decrease) in cash during the year7,181(24,699)Cash -Beginning of year16,63941,338Cash -End of year23,82016,639Supplementary informationSeries B promissory notes issued -interest in kind (note 11)-17,684Acquisition of property and equipment under finance lease3251Disposal of property and equipment under finance lease120- SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2016 AND DECEMBER 31, 2015 (In thousands of Canadian dollars, except per share amounts) SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 37 38 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts) SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 39 40 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts) SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 41 Computer hardware36monthsFurniture, fixtures and other48 to 60monthsLeasehold improvementsover the term of the leaseAssets under financeleaseover the term of the lease 42 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts) SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 43 44 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts) SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 45 46 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts) SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 47 2016$2015$Trade and other receivables 9,0828,406Income taxes recoverable5,855-14,9378,4062016$2015$Merchandise36,80233,476Provision for obsolescence(2,264)(1,406)34,53832,070Writedowns of inventory due to net realizable value lower than cost1,008155Writeoffs due to damage or shrinkage1,191874 48 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts)Computer hardware $Furniture, fixtures and other $Leasehold improvements $Assetsunder finance lease $Total $Year ended December 31,2015At January 1, 20158832,32419,4792,26224,948Additions7131,67310,813113,200Depreciation(677)(987)(6,601)(739)(9,004)Disposal-(12)(145)-(157)At December 31,20159192,99823,5461,52428,987At December 31, 2015Cost2,3056,07553,0644,44065,884Accumulated depreciation(1,386)(3,077)(29,518)(2,916)(36,897)Net book value9192,99823,5461,52428,987Year ended December 31, 2016At January 1, 20169192,99823,5461,52428,987Additions8161,55913,21532615,916Depreciation(715)(1,264)(7,891)(874)(10,744)Disposal-(25)(86)(121)(232)At December 31, 20161,0203,26828,78485533,927At December 31, 2016Cost3,0867,34960,9794,04075,454Accumulated depreciation(2,066)(4,081)(32,195)(3,185)(41,527)Net book value1,0203,26828,78485533,927 SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 49 Brands $Non-competecontracts $Computersoftware $Total $Year ended December 31, 2015At January 1, 2015101,5401,0531,449104,042Additions--1,3751,375Amortization for the year-(282)(1,059)(1,341)At December 31,2015101,5407711,765104,076At December 31, 2015Cost101,5402,8049,191113,535Accumulated amortization and impairments-(2,033)(7,426)(9,459)Net book value101,5407711,765104,076Year ended December 31, 2016At January 1, 2016101,5407711,765104,076Additions--1,5471,547Amortization for the year-(168)(957)(1,125)At December 31, 2016101,5406032,355104,498At December 31, 2016Cost101,5402,8046,951111,295Accumulated amortization and impairments-(2,201)(4,596)(6,797)Net book value101,5406032,355104,498 50 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts)2016$2015$Trade payables21,62119,291Income taxes payable-3,234Accrued expenses18,90123,49940,52246,0242016 $2015 $Deferred lease inducements and rent escalation7,5246,521Decommissioning provisions954847Warranty liability-1,5298,4788,8972016$2015$Senior secured credit facility (i)118,341123,424Finance lease obligation8551,524119,196124,948Less: Current portion of long-term debt445725118,751124,223 SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 51 2016$2015$Interest on finance lease obligations123154Revolver commitment fees14993Interest expense on senior credit facility3,8496,741Interest expense on SeriesA and SeriesB notes-84,726Interest expense and fair value adjustment on ClassA convertible and Class B common shares - 20,602 4,121112,316 52 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts)2016$2015$Current income tax expense17,49710,112Deferred income tax expense (recovery) relating toTemporary differences269(22,300)Deferred income tax rate changes68213337(22,087)Provision for (recovery of) income taxes17,834(11,975)2016$2015$Income (loss) of continuing operations before income taxes (recovery) 67,408 (63,667)Weighted average Canadian income tax rate26.50%26.50%Income tax expense (recovery) based on statutory income tax rate 17,863 (16,872)Effect of income tax allocated to non-controlling interest-(238)Unused capital loss not recognized in prior years(896)-Capital gain on partners interest on dissolution of partnership 896 - Effect of non-deductible expenses and other items(97)4,922Deferred tax rate changes6821317,834(11,975)Effective income tax rate26.46%18.80% SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 53 2016$2015$Excess of carrying value of intangible assets over tax values(13,684)(13,636)Benefit of share issuance costs and financing fees deductible in future years 3,516 4,581 Loss carry-forwards -net of unrecognized deferred tax assets1,528789Other temporary differences2,9482,913(5,692)(5,353)2016$2015$Deferred tax expense (recovery)in the consolidated statement of operations337(22,088)Deferred tax expense (recovery) recorded in equity relating to share issuance costs-(4,378)337(26,466) 54 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts)Cost of sales2016$2015$Inventory and directly related costs recognizedas an expense, including writedowns and writeoffs 238,918 207,701 Salaries, wages and benefits82,50574,349Rent and other occupancy charges47,25344,317Other3,7133,003372,389329,370General andadministrative2016$2015$Media and advertising expenses23,70620,499Salaries, wages and benefits15,63820,247Credit card and finance charges11,3679,800Rent and otheroccupancy charges7,2596,640Professional fees1,7263,443Telecommunication and information technology3,4683,093Other4,7184,08367,88267,8052016$2015$37,648,349 common shares (2015-37,578,176)627,852626,647Reorganization adjustment and other(276,159)(276,159)Contributed surplus1,696167353,389350,655 SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 55 56 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts)Attributable to common shareholders2016Net earnings $Weightedaverage number of shares EPS $(in thousandsof shares)BasicContinuing operations49,57437,6381.32DilutedContinuingoperations49,57437,7721.31Attributable to common shareholders2015Net earnings (loss) $Weightedaverage number of shares EPS $(in thousands of shares) Basic and dilutedContinuing operations(52,508)27,582(1.90)Discontinued operations5,62927,5820.20(46,879)27,582(1.70) SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 57 2016$2015$Less than 1 year35,29233,636Between 1 and 5 years96,74389,058More than 5 years38,51734,301170,552156,9952016$2015$Short-term advances to related parties24 58 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts)2016$2015$Salaries and short-term employee benefits3,9134,821Share-based compensation1,373171Bonus related to Pre-IPO stock option plan-5,096Directors fees6153355,90110,4232016$2015$473,613Stock options(2015 -139,334)(a)5448890,603Performance share unit plan(2015 -30,495)(b)778798,920Deferred share unit plan (2015 -nil) (c)207-1,529167 SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 59 Number of options Weightedaverage exercise price per share $Balance -December 31, 2015139,33417.00Granted on March 7, 2016334,27919.31Balance -December 31, 2016473,61318.63 60 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts)Number of options Weightedaverage exercise price per share $Balance -December 31, 201530,49517.00Issued as dividend equivalents -February 26, 201622317.71Granted -March 7, 201659,39819.31Issued as dividend equivalents -May 30, 201617223.09Issued as dividend equivalents -August 26, 201615330.76Issued as dividend equivalents -November 28, 201616228.90Balance -December 31, 201690,60318.57Number Grant datefair value per unit $Granted - August 10, 2016 8,920 31.77 Balance - December 31, 2016 8,920 31.77 SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 61 62 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts)Within1 year $Between 1and 5 years $Over5 years $At December 31, 2016Trade and other payables40,522--Long-term debt4,016131,7501544,538131,75015At December 31, 2015Trade and other payables46,024--Long-term debt4,701141,1391750,725141,13917 SLEEP COUNTRY CANADA ANNUAL REPORT 2016 | 63 64 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2016 AND DECEMBER 31, 2015(In thousands of Canadian dollars, except per share amounts)2016 $ 2015 $ Repayment of Series A and B promissory notes (note 4)- (61,855)Repayment of Class A convertible shares, Class B common shares and Class D shares (note 4) - (16,987)Issuance of common shares - 283,428 Purchase of SCCI’s shares - (196,788)Purchase of Class A common shares for cancellation (note 14)-(77,621)Issuance of Class E shares of SCCI -2,337Pre-Offering dividend on common shares-(1,612)- (69,098) SHAREHOLDER INFORMATION EXCHANGE LISTING The Toronto Stock Exchange Common Shares Ticker Symbol: ZZZ AUDITOR PricewaterhouseCoopers LLP PWC Tower 18 York Street, Suite 2600 Toronto, ON M5J 0B2 BANKER TD Securities TD West Tower, 30th Floor 100 Wellington Street West Toronto, ON M5K 1A2 REGISTRAR AND TRANSFER AGENT Computershare 100 University Avenue, 8th Floor Toronto, ON M5J 2Y1 computershare.com SHAREHOLDER CONTACT Robert Masson Chief Financial Officer Sleep Country Canada robert.masson@sleepcountry.ca ANNUAL MEETING OF SHAREHOLDERS Date: Friday, May 12, 2017 Time: 10:00am (EST) Davies Ward Phillips & Vineberg 155 Wellington Street West Toronto, ON M5V 3J7 Reception on 40th Floor BOARD OF DIRECTORS Stephen Gunn Co-Chair Christine Magee 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? CAPITAL STOCK As at December 31, 2016, there were 37,648,349 common shares outstanding. Sleep Country/Dormez-vous? 140 Wendell Avenue, Unit 1 North York, ON M9N 3R2 T: 416-242-4774 sleepcountry.ca 1 | SLEEP COUNTRY CANADA ANNUAL REPORT 2016

Continue reading text version or see original annual report in PDF format above