SLEEP COUNTRY CANADA HOLDINGS INC.

Transcription

1 No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons authorized to sell such securities. The securities offered hereby have not been and will not be registered under the United States Securities Act of 1933, as amended, or any state securities laws and may not be offered or sold in the United States or to or for the benefit of U.S. persons absent registration or pursuant to an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended, and applicable state securities laws. See Plan of Distribution. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of these securities in the United States. PROSPECTUS Initial Public Offering July 10, JUN SLEEP COUNTRY CANADA HOLDINGS INC. $300,050,000 17,650,000 Common Shares This prospectus (the Prospectus ) qualifies the distribution (the Offering ) of 17,650,000 Common Shares (the Offered Shares ) of Sleep Country Canada Holdings Inc. (the Company or Sleep Country ) to be issued and sold at a price of $17.00 per Offered Share (the Offering Price ). The net proceeds of the Offering will be used to acquire Sleep Country Canada Inc. ( SCCI ) and certain of its affiliates. See Use of Proceeds and The Acquisition and Related Transactions. Unless the context indicates or requires otherwise, as used in this Prospectus, the terms the Company or Sleep Country means Sleep Country Canada Holdings Inc. and SCCI, together with its subsidiaries, assuming the completion of the Offering and the Acquisition (as defined herein). Sleep Country is Canada s leading mattress retailer and the only specialty mattress retailer with a national footprint. Sleep Country operates under two mattress retail banners (the Banners ): Dormez-vous?, the largest retailer of mattresses in Québec; and Sleep Country Canada the largest mattress retailer in the rest of Canada. Sleep Country continues to expand its presence coast to coast. Since the beginning of 2007, the Company has opened 78 new stores and, as at March 31, 2015, it had 215 stores and 16 distribution centres across Canada. The Company has a 20-year track record of profitable growth. Under the leadership of its experienced and committed management team, since 1996, Sleep Country has grown sales at a CAGR of 16.1% and EBITDA at a CAGR of 24.1% with strong Free Cash Flow Conversion. Over the last four quarters, management believes that Sleep Country has outperformed the North American industry, reporting average same store sales growth of 10.3%. See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to EBITDA and Free Cash Flow. Upon completion of the Offering and the Acquisition, it is expected that (i) the Existing Shareholders (as defined herein), either directly or indirectly, will own 19,889,133 Common Shares, assuming the conversion of the Acquisition Notes (as defined herein), representing a 53.0% interest in the Company (or 17,241,633 Common Shares, representing a 45.9% interest in the Company if the Over-Allotment Option is exercised in full) and (ii) of the Existing Shareholders, the Birch Hill Entities (as defined herein) together with the Co-Investors (as defined herein), either directly or indirectly, will have direction and control over 17,104,996 Common Shares, assuming the conversion of the Acquisition Notes, representing a 45.6% interest in the Company (or 14,457,496 Common Shares, representing a 38.5% interest in the Company if the Over-Allotment Option is exercised in full). As a result, the Birch Hill Entities will have a significant influence on the Company. See Principal Shareholders and Risk Factors. The Toronto Stock Exchange ( TSX ) has conditionally approved the listing of the Offered Shares under the symbol ZZZ. Listing is subject to the Company fulfilling all of the requirements of the TSX on or before October 1, See Plan of Distribution. The Offering Price has been determined by negotiation among Sleep Country and TD Securities Inc. ( TD ), BMO Nesbitt Burns Inc. ( BMO ), CIBC World Markets Inc. ( CIBC ), Scotia Capital Inc. ( Scotia ), Credit Suisse Securities (Canada), Inc., GMP Securities L.P., National Bank Financial Inc. ( National Bank ) and Raymond James Ltd. ( Raymond James and, collectively, the Underwriters ). See Plan of Distribution. There is currently no market through which the Offered Shares may be sold and purchasers may not be able to resell Offered Shares purchased under this Prospectus. This may affect the pricing of the Offered Shares in the secondary market, the transparency and availability of trading prices, the liquidity of the Offered Shares and the extent of issuer regulation. See Risk Factors. Closing of the Offering is conditional on the Offered Shares being approved for listing on the TSX. (continued on next page)

2 Canada s Leading Specialty Mattress Retailer Compelling Industry Fundamentals Best-in-Class Retailer Driven by Superior Strategy and Execution Clear Growth Strategy Attractive Financial Model with Strong Cash Flow Conversion Experienced and Committed Management Team Targeting Significant Growth Over the Next 5 7 Years?

3 LARGEST MATTRESS RETAILER IN CANADA Clear Growth Strategy Nationally recognized banners 215 stores and 16 distribution centres across eight provinces 1 2 Increase Traffic Increase Conversion of Shoppers to Buyers Increased marketing investment Expand messaging Continued focus on hiring the best people Additional training initiatives Stores by Province 3 Higher AUSP Continued shift to higher quality mattresses Larger sizes increasing in popularity 4 Increase Accessory Sales Sleep Country Accessories Revenue 11.5% CAGR BC $73 36? AB 26 SK 6 MB 7 ON 86 QC 47 NF PE NB NS 7 5 Bedframes, pillows, mattress pads, sheets, duvets, headboards and footboards Enhanced Store Design $ (1) Source: Company report Continued implementation of enhanced store design 2014 Revenue & Operating EBITDA Quarterly Same Store Sales Growth Since re-opening, early results for the four stores renovated in 2014 show an 18% increase in revenues above Sleep Country s other stores in the same region Operating EBITDA Margin Revenue Operating EBITDA 11.5% $ % $ % $ % $55.8 Began to realize benefits of strategic operational initiatives 3.8% (2.5%) (3.9%) 0.8% 7.3% 1.3% 11.1% 10.5% 10.2% 9.1% 6 Add Stores in Existing, Satellite and New Markets Sleep Country 162 Leading U.S. Specialty Mattress Retailer Net New Stores $ $ $ LTM (March 31, 2015) 4 $ (10.2%) (7.4%) (0.1%) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q (1) Source: Company report. See Non-IFRS Measures and Retail Industry Metrics and Selected Consolidated Financial Information. There is currently one Sleep Country store for every 162,000 people in markets in which the Company operates, compared to one store for every 84,000 people for the leading US. retailer. We believe there is capacity to increase our store density to one store per approximately 100,000 in population. Over the next five to seven years, we intend to open between 8 and 12 new stores annually. Today 140 (2) 5 7 Years 84 All Markets (1) Source: Based on Statistic Canada s total 2014 population in each province. Note: Store Count as of March 31, 2015 (2) Assuming a 2% population growth per year for seven years (3) Source: Company filings 60 High Density Markets

4 (continued from cover) An investment in the Offered Shares is highly speculative and involves significant risks that should be carefully reviewed and considered by prospective purchasers before purchasing the Offered Shares. See Risk Factors. Price: $17.00 per Offered Share Price to the Underwriters Net Proceeds to Public Fee the Company (1) Per Offered Share... $17.00 $0.935 $ Total Offering (2)... $300,050,000 $16,502,750 $283,547,250 Notes: (1) After deducting the fee payable to the Underwriters (the Underwriters Fee ), but before deducting the Company s expenses of the Offering, estimated to be $2.4 million, which will be paid from the proceeds of the Offering. See The Acquisition and Related Transactions, Use of Proceeds and Plan of Distribution. (2) The Company has granted the Underwriters an option (the Over-Allotment Option ) exercisable, in whole or in part, at the sole discretion of the Underwriters, until the date that is 30 days from the date of the closing of the Offering to purchase up to an additional 2,647,500 Offered Shares (being equal to 15% of the Offered Shares sold in the Offering) at the Offering Price solely to cover any over-allotments, if any, and for market stabilization purposes. If the Over-Allotment Option is exercised in full, the total price to the public will be $345,057,500, the Underwriters Fee will be $18,978, and the net proceeds to the Company will be $326,079, (before deducting the expenses of the Offering). This Prospectus also qualifies the distribution of the Over-Allotment Option and the Offered Shares that are issued pursuant to the exercise of the Over-Allotment Option. See Plan of Distribution. A purchaser who acquires Offered Shares forming part of the Over-Allotment Option acquires those securities under this Prospectus, regardless of whether the Over-Allotment Option is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases. The following table sets out the number of Offered Shares that have been issued or may be issued by the Company to the Underwriters pursuant to the Over-Allotment Option: Maximum Size or Number of Underwriters Position Offered Shares Available Exercise Period Exercise Price Over-Allotment Option Up to an additional Up to 30 days following the Closing Date $ ,647,500 Offered Shares The Underwriters, as principals, conditionally offer the Offered Shares, subject to prior sale, if, as and when issued, sold and delivered by the Company and accepted by the Underwriters in accordance with the conditions contained in the Underwriting Agreement (as defined herein) referred to under Plan of Distribution and subject to the approval of certain legal matters on behalf of the Company by Davies Ward Phillips & Vineberg LLP and on behalf of the Underwriters by Stikeman Elliott LLP. The Underwriters may offer the Offered Shares at prices lower than stated above. In connection with the Offering and in accordance with applicable law and policies, the Underwriters may over-allot or effect transactions which stabilize or maintain the market price of the Offered Shares at a level other than that which might otherwise prevail in the open market. Such transactions, if commenced, may be discontinued at any time. See Plan of Distribution. Subscriptions for Offered Shares will be received subject to rejection or allotment, in whole or in part, and the right is reserved to close the subscription books at any time without notice. The closing of the Offering (the Closing ) is expected to occur on or about July 16, 2015 or such other date as the Company and the Underwriters may agree, but in any event no later than July 30, 2015 (the Closing Date ). Affiliates of TD, BMO, National Bank and Raymond James are lenders to SCCI under the Existing Credit Facilities (as defined herein). Furthermore, affiliates of TD, BMO, CIBC, Scotia, National Bank and Raymond James are expected to be lenders to SCCI under the New Credit Facility (as defined herein) to be provided on Closing. See Description of Material Indebtedness. Accordingly, the Company may be considered to be a connected issuer of each of TD, BMO, CIBC, Scotia, National Bank and Raymond James for the purposes of applicable Canadian securities legislation. See Plan of Distribution. Other than Offered Shares sold in the United States, which will be represented by individual certificates, registration of interests in and transfers of Offered Shares held through CDS Clearing and Depository Services Inc. ( CDS ) or its nominee will be made electronically through the non-certificated inventory ( NCI ) system of CDS. Offered Shares registered to CDS or its nominee will be deposited electronically with CDS on an NCI basis on the closing of the Offering. Canadian resident purchasers of Offered Shares will receive only a customer confirmation from the registered dealer from or through whom a beneficial interest in the Offered Shares is purchased. The Company s head and registered office is located at 140 Wendell Avenue, North York, Ontario, M9N 3R2.

5 TABLE OF CONTENTS Page ABOUT THIS PROSPECTUS... 4 PRINCIPAL SHAREHOLDERS MARKET DATA AND INDUSTRY DATA. 4 DIRECTORS AND EXECUTIVE MEANING OF CERTAIN REFERENCES. 5 OFFICERS FORWARD-LOOKING INFORMATION.. 5 AUDIT COMMITTEE PRESENTATION OF FINANCIAL CORPORATE GOVERNANCE MATTERS... 6 EXECUTIVE COMPENSATION NON-IFRS MEASURES AND RETAIL DIRECTOR COMPENSATION INDUSTRY METRICS... 7 INDEBTEDNESS OF DIRECTORS AND TRADEMARKS AND TRADENAMES... 8 EXECUTIVE OFFICERS MARKETING MATERIALS... 8 PLAN OF DISTRIBUTION ELIGIBILITY FOR INVESTMENT... 8 RISK FACTORS PROSPECTUS SUMMARY... 9 PROMOTERS INDUSTRY OVERVIEW MATERIAL CONTRACTS DESCRIPTION OF THE BUSINESS LEGAL PROCEEDINGS SELECTED CONSOLIDATED FINANCIAL INFORMATION REGULATORY ACTIONS INTEREST OF MANAGEMENT AND MANAGEMENT S DISCUSSION AND OTHERS IN MATERIAL ANALYSIS OF FINANCIAL TRANSACTIONS... CONDITION AND RESULTS OF 116 OPERATIONS OF SCCI AUDITORS, TRANSFER AGENT AND MANAGEMENT S DISCUSSION AND REGISTRAR ANALYSIS OF FINANCIAL LEGAL MATTERS CONDITION AND RESULTS OF OPERATIONS OF SC US HOLDCO PURCHASERS STATUTORY RIGHTS MANAGEMENT S DISCUSSION AND GLOSSARY ANALYSIS OF FINANCIAL INDEX TO FINANCIAL STATEMENTS.. F-1 CONDITION AND RESULTS OF OPERATIONS OF SC MANAGEMENT. 75 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL USE OF PROCEEDS CONDITION AND RESULTS OF THE ACQUISITION AND RELATED OPERATIONS OF SC US HOLDCO... M-1 TRANSACTIONS MANAGEMENT S DISCUSSION AND DESCRIPTION OF SHARE CAPITAL ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF DESCRIPTION OF MATERIAL OPERATIONS OF SC MANAGEMENT. M-13 INDEBTEDNESS CERTIFICATE OF ISSUER... C-1 CAPITALIZATION DIVIDEND POLICY Page CERTIFICATE OF THE UNDERWRITERS... C-2 PRIOR SALES OF COMMON SHARES.. 82 CERTIFICATE OF PROMOTERS... C-3 3

6 ABOUT THIS PROSPECTUS An investor should rely only on the information contained in this Prospectus and is not entitled to rely on parts of the information contained in this Prospectus to the exclusion of others. The Company has not, and the Underwriters have not, authorized anyone to provide investors with additional or different information. The Company is not, and the Underwriters are not, offering to sell the Offered Shares in any jurisdiction where the offer or sale of such securities is not permitted. The information contained in this Prospectus is accurate only as of the date of this Prospectus or the date indicated, regardless of the time of delivery of this Prospectus or of any sale of the Offered Shares. For investors outside Canada, none of the Company or any of the Underwriters has done anything that would permit the Offering or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than in Canada. Investors are required to inform themselves about, and to observe any restrictions relating to, the Offering and the possession or distribution of this Prospectus. This Prospectus includes a summary description of certain material agreements of the Company. See Material Contracts. The summary description discloses all attributes that the Company believes would be material to a prospective purchaser of Offered Shares but is not complete and is qualified by reference to the terms of the material agreements, which will be filed with the Canadian securities regulatory authorities and available on SEDAR. Investors are encouraged to read the full text of such material agreements. Any graphs, tables or other information demonstrating the historical performance of the Company or any other entity contained in this Prospectus are intended only to illustrate past performance of such entities and are not necessarily indicative of future performance of the Company or such entities. MARKET DATA AND INDUSTRY DATA Market data and industry forecasts used in this Prospectus were obtained from government or other industry publications (including the International Sleep Products Association ( ISPA ) 2014 Mattress Industry Report of Sales and Trends; Furniture Today, September 2005; Furniture Today, September 2013; and Furniture Today Yearbook, November 2014), various publicly available sources and reports purchased and commissioned by the Company or based on estimates derived from such publications and reports and management s knowledge of, and experience in, the markets in which the Company operates, including information provided by suppliers, customers and other industry participants. Government and industry publications and reports generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Actual outcomes may vary materially from those forecast in such reports or publications, and the prospect for material variation can be expected to increase as the length of the forecast period increases. Although we believe that these sources are generally reliable, the accuracy and completeness of such information are not guaranteed and have not been independently verified. Further, market and industry data is subject to variations and cannot be verified due to limits on the availability and reliability of data inputs, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey. See also Forward-Looking Information and Non-IFRS Measures and Retail Industry Metrics. The Company s estimate of its national market share of 23% has been derived by dividing its total revenues from the sale of mattress sets (i.e., excluding sales of accessories) for the year ended December 31, 2014, which was $323 million, by the total size of the Canadian retail mattress industry, which the Company estimates to be approximately $1.4 billion. Estimates of the Company s share of consumer transactions, brand awareness and conversion rates have been derived from a market survey (the Market Survey ) prepared by Ideas and Equities Market Research ( IEMR ) in September 2014, which was commissioned and paid for by the Company. In connection with the Market Survey, IEMR polled 700 individuals across Canada who had purchased a mattress in the previous six months. There is no comprehensive industry data regarding the size of the addressable Canadian sleep related products and accessories market. Management estimates regarding the size of the addressable Canadian sleep related products and accessories market are based on U.S. industry data, publications and reports and information provided by the Company s suppliers and industry participants. 4

7 MEANING OF CERTAIN REFERENCES In this Prospectus, it is assumed that the Offering and the transactions described under The Acquisition and Related Transactions have been completed and that the Over-Allotment Option is not exercised, unless otherwise indicated. As used in this Prospectus, unless the context indicates or requires otherwise, the terms Sleep Country, the Company, we, us and our mean Sleep Country Canada Holdings Inc. and Sleep Country Canada Inc. together with its subsidiaries assuming the completion of the Offering and the Acquisition. Certain other terms used in this Prospectus are defined under Glossary on page 117. FORWARD-LOOKING INFORMATION This Prospectus contains forward-looking information within the meaning of applicable Canadian securities laws. Forward-looking information may relate to the Company s future outlook and anticipated events or results and may include information regarding the financial position, business strategy, growth strategy (including the objectives to open new stores, to drive annual SSSG and to increase revenue and Operating EBITDA over the next five to seven years), budgets, operations, financial results, taxes, dividends, plans and objectives of the Company. Particularly, information regarding future results, performance, achievements, prospects or opportunities of the Company or the Canadian or U.S. market is forward-looking information. In some cases, but not necessarily in all cases, forward-looking information can be identified by the use of forwardlooking terminology such as plans, targets, expects or does not expect, is expected, an opportunity exists, is positioned, estimates, intends, assumes, anticipates or does not anticipate or believes, or variations of such words and phrases or state that certain actions, events or results may, could, would, might, will or will be taken, occur or be achieved. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management s expectations, estimates and projections regarding future events. Discussions containing forward-looking information may be found, among other places, under Industry Overview, Description of the Business, Selected Consolidated Financial Information, Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Use of Proceeds, The Acquisition and Related Transactions, Description of Share Capital, Capitalization, Description of Material Indebtedness, Dividend Policy, Principal Shareholders, Plan of Distribution and Risk Factors. These forward-looking statements include, among other things, statements relating to: the Company s expectations regarding its revenue, expenses and operations; the Company s future growth plans, including new store openings and store closures, entry into existing, satellite and new markets, and acquisitions; the Company s expectations with respect to SSSG and growth of revenue and Operating EBITDA; the Company s expectations with respect to growth resulting from its marketing and advertising efforts; the Company s expectations with respect to growth resulting from the continued implementation of the enhanced store design; the Company s expectations with respect to growth resulting from the continued implementation of its sales associate training programs; the Company s intention to declare dividends and the anticipated quantum of any dividends; the Company s expectations with respect to its relationships with its suppliers; the Company s expectations with respect to its ability to leverage its scale to improve margins; anticipated trends and challenges in the Company s business and the market in which it operates; the Company s anticipated use of the net proceeds of the Offering and completion of the Acquisition; and the market price for the Common Shares. 5

8 In addition, the Company s assessment of potential new store openings and SSSG and increases in revenue and Operating EBITDA over the next five to seven years is considered forward-looking information. See Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook for additional information concerning the Company s strategies, assumptions and outlook in relation to this assessment. These statements and other forward-looking information are based on opinions, assumptions and estimates made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors that the Company believes are appropriate and reasonable in the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. In addition, if any of the assumptions or estimates made by management prove to be incorrect, actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this Prospectus. Accordingly, prospective purchasers are cautioned not to place undue reliance on such statements. Forward-looking information is necessarily based on a number of opinions, assumptions and estimates that, while considered reasonable by the Company as of the date such statements are made, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forwardlooking information, including but not limited to the following factors described in greater detail in Risk Factors : industry risk and economic sensitivity; effectiveness and efficiency of advertising expenditures; ability to maintain profitability and implement growth strategy; fluctuations in same store sales; damage to the Company s reputation; competition; seasonality and weather; real estate; dependence on key personnel; labour relations; relationship with suppliers; intellectual property; dependence on distribution centres and timely delivery to customers; dependence on management information systems; insurance; comfort and price guarantees; debt covenants in New Credit Facility; dependence on operating subsidiaries; fluctuations in product cost, inflation and foreign currency; legal proceedings; government regulation; third-party consumer financing arrangements; absence of a prior public market for the Offered Shares; price volatility of the Offered Shares; forward-looking information; risks relating to the Acquisition; significant ownership by the Birch Hill Entities; future sales of Common Shares by the Birch Hill Entities and directors and officers of the Company; payment of dividends; pro forma financial information; public company status; financial reporting and other public company requirements; dilution; and securities analysts research or reports could impact the price of the Common Shares. These factors and assumptions are not intended to represent a complete list of the factors and assumptions that could affect the Company. These factors and assumptions, however, should be considered carefully. All of the forward-looking information in this Prospectus is qualified by these cautionary statements. Statements containing forward-looking information contained herein are made only as of the date of this Prospectus. The Company expressly disclaims any obligation to update or alter statements containing any forward-looking information, or the factors or assumptions underlying them, whether as a result of new information, future events or otherwise, except as required by law. PRESENTATION OF FINANCIAL MATTERS In this Prospectus, all references to $ are to the lawful currency of Canada and all dollar amounts herein are in Canadian dollars, unless otherwise indicated. Effective January 1, 2011, SCCI transitioned to IFRS, while prior to January 1, 2011, SCCI prepared its financial statements in accordance with Canadian generally accepted accounting principles. As a result, financial information included in this Prospectus: (i) for periods prior to January 1, 2011, has been prepared in accordance with Canadian generally accepted accounting principles; and (ii) for periods following January 1, 2011, has been prepared in accordance with IFRS. 6

9 NON-IFRS MEASURES AND RETAIL INDUSTRY METRICS This Prospectus makes reference to certain non-ifrs measures. These measures are not recognized measures under International Financial Reporting Standards ( IFRS ) and do not have a standardized meaning prescribed by IFRS. They are therefore unlikely to be comparable to similar measures presented by other companies. Rather, 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. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the Company s financial information reported under IFRS. The Company uses non-ifrs measures, including Adjusted Net Income, EBITDA, Free Cash Flow, Free Cash Flow Conversion, gross profit margin, Operating EBITDA, Operating EBITDA margin and Working Capital. This Prospectus also makes reference to certain operating metrics that are commonly used in the retail industry, including AUSP, conversion and Same Store Sales Growth or SSSG. These non-ifrs measures and retail industry operating metrics are used to provide investors with supplemental measures of the Company s operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. The Company also believes that securities analysts, investors and other interested parties frequently use non-ifrs measures and these retail industry metrics in the evaluation of issuers and to compare the Company s performance against others in the retail industry. The Company s management also uses non-ifrs measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and to determine components of management compensation. See Selected Consolidated Financial Information. Prospective investors should review this information in conjunction with SCCI s consolidated financial statements and the Company s pro forma financial statements, including the notes thereto, as well as Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI, Use of Proceeds, Capitalization and Description of Material Indebtedness, included elsewhere in this Prospectus. Adjusted Net Income is defined as net income (loss) from continuing operations adjusted for: (i) interest expense on the Series A and Series B promissory notes of SCCI; (ii) interest expense and fair value adjustment on Class A convertible shares and Class B common shares of SCCI; (iii) reduction in management bonuses; (iv) reduction in management compensation; (v) certain non-recurring items (shareholder capital reorganization, professional fees and customer deposit breakages and other provision); and (vi) share based compensation. AUSP is defined as the average unit selling price of a mattress or foundation. EBITDA is defined as net earnings (loss) from continuing operations before: (i) net interest expense and other financing charges; (ii) income taxes; (iii) depreciation of property, plant and equipment; and (iv) amortization of other assets. conversion is defined as the number of customers who entered a store and made a purchase divided by the total number of customers who entered the store (expressed as a percentage). Free Cash Flow is defined as EBITDA less: (i) maintenance capital expenditures; and (ii) changes in Working Capital. Free Cash Flow Conversion is defined as Free Cash Flow divided by EBITDA. gross profit margin is defined as gross profit divided by revenues. Operating EBITDA is defined as EBITDA adjusted for: (i) reduction in management bonuses; (ii) reduction in management compensation; (iii) certain non-recurring items (shareholder reorganization, professional fees and customer deposit breakages and other provision); and (iv) share based compensation. Operating EBITDA margin is defined as Operating EBITDA divided by revenues. Same Store Sales Growth or SSSG is a retail industry metric used to compare sales derived from the established stores of certain period over the same period in prior year. SSSG helps to explain what portion of sales growth can be attributed to growth in established stores and what portion can be attributed to the opening of the new stores. Sleep Country calculates SSSG as the percentage increase or decrease in sales of stores opened for at least 12 complete months relative to the same period in the prior year. Working Capital is defined as the sum of trade and other receivables, inventories, prepaid expenses and deposits less trade and other payables and customer deposits. See Selected Consolidated Financial Information and Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI. 7

10 TRADEMARKS AND TRADENAMES This Prospectus includes trademarks, such as Sleep Country Canada, Dormez-vous?, Why buy a mattress anywhere else? and Tout le monde devrait bien dormir, which are protected under applicable intellectual property laws and are the property of the Company. Solely for convenience, the Company s trademarks and tradenames referred to in this Prospectus may appear without the or symbol, but such references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and tradenames. All other trademarks used in this Prospectus are the property of their respective owners. MARKETING MATERIALS A template version of the following marketing materials (each as defined in National Instrument General Prospectus Requirements) filed with the securities commission or similar authority in each of the provinces and territories of Canada is specifically incorporated by reference into this Prospectus: 1. the term sheet filed on SEDAR on June 23, 2015; and 2. the investor presentation filed on SEDAR on June 23, The term sheet and investor presentation are available under the Company s profile on SEDAR at On July 10, 2015, a revised term sheet was filed with the securities commission or similar regulatory authority in each of the provinces and territories of Canada. The term sheet was revised to, among other things, increase the size of the Offering from $200,000,000 to $300,050,000, increase the Offering Price to $17.00, to reflect the Company s decision to opt out of the PREP procedures, to include the expected shareholdings of the Birch Hill Entities, the Co-Investors and management of the Company following completion of the Offering and the Acquisition and to update the current status of the Company s listing application with the TSX. These revisions are all reflected in this Prospectus. The revised term sheet and a blackline against the original term sheet are available under the Company s profile on In addition, any template version of any other marketing materials filed with the securities commission or similar authority in each of the provinces and territories of Canada in connection with the Offering after the date hereof, but prior to the termination of the distribution of the Offered Shares under this Prospectus (including any amendments to, or an amended version of, any template version of any marketing materials), is deemed to be incorporated by reference herein. Any template version of any marketing materials that are utilized by the Underwriters in connection with the Offering are not part of this Prospectus to the extent that the contents of the template version of the marketing materials have been modified or superseded by a statement contained in this Prospectus. ELIGIBILITY FOR INVESTMENT In the opinion of Davies Ward Phillips & Vineberg LLP and Stikeman Elliott LLP, provided that they are listed on a designated stock exchange in Canada, the Offered Shares, if issued on the date hereof, would be qualified investments under the Income Tax Act (Canada) (the Tax Act ) for a trust governed by a registered retirement savings plan ( RRSP ), a registered retirement income fund ( RRIF ), a deferred profit sharing plan, a registered education savings plan, a registered disability savings plan or a tax-free savings account ( TFSA ). Notwithstanding that the Offered Shares may be a qualified investment for a trust governed by a TFSA, RRSP or RRIF, the holder of a TFSA or the annuitant of a RRSP or RRIF, as the case may be, will be subject to a penalty tax in respect of Offered Shares held in the TFSA, RRSP or RRIF if such Offered Shares are a prohibited investment within the meaning of the Tax Act. The Offered Shares will not be a prohibited investment provided that the holder of the TFSA or the annuitant of the RRSP or RRIF does not have a significant interest in the Company, within the meaning of the prohibited investment rules in the Tax Act, and the Company deals at arm s length with the holder or annuitant. In addition, the Offered Shares will not be a prohibited investment if the Offered Shares are excluded property for a trust governed by a TFSA, RRSP or RRIF within the meaning of the prohibited investment rules in the Tax Act. Holders of a TFSA or annuitants of a RRSP or RRIF should consult their own tax advisors as to whether Offered Shares will be prohibited investments in their particular circumstances. 8

11 PROSPECTUS SUMMARY The following is a summary of the principal features of the Offering and is qualified in its entirety by, and should be read together with, the more detailed information and the financial data and statements contained elsewhere in this Prospectus including under Risk Factors. THE COMPANY Sleep Country is Canada s leading mattress retailer and the only specialty mattress retailer with a national footprint. Sleep Country operates under two mattress retail banners (the Banners ): Dormez-vous?, the largest retailer of mattresses in Québec; and Sleep Country Canada the largest mattress retailer in the rest of Canada. Sleep Country continues to expand its presence coast to coast. Since the beginning of 2007, the Company has opened 78 new stores and, as at March 31, 2015, it had 215 stores and 16 distribution centres across Canada. The Company s stores average approximately 5,000 square feet and offer a large selection of mattresses and a wide assortment of complementary sleep related products and accessories. Between 2006 and 2014, Sleep Country more than doubled its sales of complementary sleep products and accessories which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. Sleep Country s stores are all corporate-owned, enabling it to develop and maintain a strong culture of customer service, resulting in a consistent and superior in-store and home delivery customer experience. Sleep Country s National Footprint (# of Stores) BC NL AB SK MB 6 7 ON 86 QC 47 NB PE NS 7 4JUN Source: Company report. Note: Store count as of March 31,

12 The Company has an attractive financial model that enables it to fund its growth from internal cash flow due to its low capital expenditure requirements. Sleep Country is also able to generate cash from Working Capital as the business grows. It has compelling new store economics where new stores typically contribute positive cash flow to the business within a short period of time after opening. The Company has a 20-year track record of profitable growth and has established its presence and brand as the leading mattress retailer in Canada. Under the leadership of its experienced and committed management team, since 1996, Sleep Country has grown sales at a CAGR of 16.1% and EBITDA at a CAGR of 24.1% with strong Free Cash Flow Conversion. Over the last four quarters, management believes that Sleep Country has outperformed the North American industry, reporting average SSSG of 10.3%. Sleep Country intends to leverage its strong platform to continue this pattern of stable and consistent growth. See Non-IFRS Measures and Retail Industry Metrics, Description of the Business and Risk Factors. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to EBITDA and Free Cash Flow. Sleep Country Revenue (C$ millions) $396 $406 $315 $336 $330 $340 $337 $333 $354 $286 $27 $52 $75 $94 $113 $127 $151 $165 $195 $ LTM 5JUN Source: Company report. Sleep Country EBITDA (C$ millions) $56 $34 $38 $41 $43 $45 $48 $42 $38 $39 $51 $28 $13 $16 $16 $19 $22 $8 $1 $ LTM 5JUN Source: Company report. Note: The 2012, 2013, 2014 and LTM numbers represent Operating EBITDA. EBITDA for 2012, 2013, 2014 and LTM was $38 million, $38 million, $49 million and $53 million, respectively. See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net income (loss) from continuing operations to EBITDA and Operating EBITDA. 10

13 As with most industry sectors, Sleep Country s financial performance during the period from 2009 to 2012 was adversely affected by the global financial crisis which began in Although revenues were largely flat throughout this period, the Company remained highly profitable and demonstrated strong Free Cash Flow Conversion. In 2009, with the effects of the recession impacting the retail industry generally and management anticipating lower customer demand during the challenging economic environment, the Company reduced operational overhead and scaled back marketing expenditures. While the cost reductions initially supported robust EBITDA growth of 6.1% in 2009 and 5.9% in 2010, management believes that the cost reductions contributed to a decline in EBITDA in 2011 and See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to EBITDA and Free Cash Flow. Beginning in 2012, under the supervision of David Friesema, Stewart Schaefer and the rest of the current management team, the Company undertook a comprehensive review of its operations. As a result of this review, since 2012, the Company has implemented and invested in a number of strategic programs aimed at driving future growth, including: revamped the advertising strategy, enhanced the sales and service training, redesigned and expanded the accessories line, broadened the real estate footprint across Canada, implemented an enhanced store design, upgraded logistics systems and software, and divested Sleep America and exited the U.S. market. The Company believes these initiatives were the primary drivers for the significant SSSG increase since the second quarter of 2013 and the increase in revenue and Operating EBITDA performance over the last two years, and have positioned the Company for continued strong growth and profitability as a public company. The Company has increased its Operating EBITDA margins from 11.5% in 2012 to 13.7% for the 12-month period ended March 31, See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to Operating EBITDA. INDUSTRY OVERVIEW Market Size and Growth The North American mattress and foundation industry is characterized by stable, long-term growth and a high degree of resiliency to economic swings. According to ISPA, the U.S. wholesale mattress and foundation market grew to US$7.5 billion in 2014 and exhibited a 6% CAGR between 1974 and U.S. Mattress and Foundation Wholesale Sales (US$ billions) Recession $5.8 $5.2 $4.6 $4.6 $4.8 $4.4 $4.0 $3.6 $3.0 $3.2 $3.3 $0.8 $0.9 $0.9 $1.0 $1.1 $1.2 $1.3 $1.4 $1.4 $1.6 $1.7 $1.8 $1.9 $2.1 $2.3 $2.3 $2.3 $2.4 $2.6 $2.8 $7.5 $6.5 $6.8 $6.9 $6.8 $7.0 $6.2 $6.3 $5.9 $ JUN Source: ISPA. Sleep Country believes that the preferences and shopping patterns of Canadian mattress consumers are very similar to those of U.S. consumers. As a result, the comprehensive historical wholesale sales data available with respect to the United States mattress and foundation wholesale industry provides insight into the Canadian mattress and foundation wholesale industry which, over the long-term, follows the same trends. Management estimates that the Canadian retail mattress and foundation market is approximately a $1.4 billion industry. 11

14 Management believes that the North American mattress and foundation industry has exhibited stable growth characteristics for five principal reasons: Necessity item: Mattresses are a necessity rather than a fashion purchase. During an economic downturn, purchases are typically deferred and not lost; Replacement cycle: Customers typically replace their mattresses every 10 to 12 years, generating a steady flow of recurring demand; Demographic trends: Unit demand is further driven by steady long-term demographic trends, including general population increases, the formation of new households, the growth in recreational properties and the trend towards a larger number of rooms in homes; Consumer preferences for high-quality sleep: In recent years, the mattress industry has experienced an increase in the demand for larger size mattresses and premium quality products, due in some measure to the aging North American population, its relative affluence and its growing health awareness. The Company believes that this increase in demand for larger and better quality products has resulted in a shift to higher-priced mattress sets. According to ISPA, from 1974 to 2014, the AUSP in the U.S. mattress and foundation wholesale market grew at a CAGR of 4%; and Inflation: Price increases from manufacturers due in large part to inflation are typically passed through to customers. U.S. Wholesale Mattress and Foundation AUSP (US$) $225 $175 $125 $75 $25 4JUN Source: ISPA. Shift Toward Specialty Mattress Retailers The North American retail mattress industry has undergone a fundamental shift in consumer preference toward specialty mattress retailers like Sleep Country and away from department stores and furniture retailers. In the U.S., specialty mattress retailers increased their market share from 32% of total retail sales in 2000 to 58% in 2013; over the same period, furniture retailers and department stores lost market share, declining from 42% to 26%, and 13% to 7%, respectively. (1) Management believes that this trend is also prevalent in Canada. (1) Source: Furniture Today. 12

15 Management believes that the specialty mattress retail format has distinguished itself as the most effective distribution channel for mattresses for the following reasons: Unique Consumer Needs. Consumers typically have highly personalized tastes, preferences and budgets and prefer a broad selection of mattresses to find the product that is right for them at the best value. Big-Ticket Purchase and Lack of Consumer Product Knowledge. Consumers generally view mattress sets as a big-ticket purchase. In addition, mattress sets are typically only purchased every 10 to 12 years leading to a lack of consumer product knowledge. When combined with the complex and constantly evolving product landscape, it can be challenging for consumers to compare mattress sets. As a result, consumers prefer to be served by staff with technical product knowledge that can help them make an informed decision. Management believes that once consumers become informed on the technical aspects of mattresses by shopping at specialty mattress retailers, these consumers will typically transact at higher price points. Consumers Conduct Online Research but Continue to Purchase Mattresses In-store The retail mattress industry has remained a brick-and-mortar business with limited traction gained from online sales given the challenges in gaining an understanding of the differences in the feel of each mattress and in comparing mattress sets across different retailers. Consumers primarily use the internet to conduct online research to educate themselves on product characteristics and price points. In a 2013 A.T. Kearney analysis, U.S. retailers with a brick-and-mortar presence were found to capture the vast majority of furniture sales. (2) Management believes that given the unique characteristics of mattress sets (i.e., tactile decision, difficult to compare, big-ticket purchase and lack of consumer product knowledge), the Canadian mattress retail market is at a lower risk to online cannibalization and showrooming than other retail categories. Sleep Related Products & Accessories Industry The addressable Canadian sleep related products and accessories market, which management estimates to be approximately $830 million in size, is highly fragmented. INVESTMENT HIGHLIGHTS Compelling Industry Fundamentals Management believes that the North American wholesale mattress industry is characterized by steady, stable long-term growth. Between 1974 and 2014, the U.S. wholesale mattress industry exhibited a CAGR of approximately 6%. Management believes the industry is well-positioned to continue its growth trajectory given favourable fundamentals and long-term trends. See Industry Overview. The Leading Specialty Mattress Retailer in Canada Sleep Country launched its concept in the Vancouver market with four stores in Sleep Country has grown to become the leading specialty retailer of mattresses in Canada, with 215 stores and 16 distribution centres in eight provinces across Canada as at March 31, Sleep Country is the only specialty mattress retailer in Canada with a national and regionally diverse footprint. As the leading specialty mattress retailer in Canada, Sleep Country has an estimated national market share of 23%. According to the Market Survey, in the Province of Québec, Dormez-vous? has a 17% share of consumer transactions, while Sleep Country Canada s share of consumer transactions in the rest of the country is 24%. (2) Source: A.T. Kearney On Solid Ground: Brick-and-Mortar Is the Foundation of Omnichannel Retailing. 13

16 Canadian Mattress Industry Share of Consumer Transactions 3JUN JUN Others 33% Sleep Country Canada 24% Others 38% Dormez-vous? 17% BMTC 13% Sears Canada 15% Sears Canada 11% Hudson's Bay 4% Leon's 4% IKEA 8% The Brick 12% 5JUN Hudson's Bay 2% Leon's 2% Matelas Bonheur 5% IKEA 7% The Brick 5% 5JUN Source: Market Survey, September Purchase data based on six months ended September Note: Leon s Furniture Ltd. owns both Leon s and The Brick banners. Best-in-Class Retailer Driven By Superior Strategy and Execution Sleep Country is a best-in-class retailer creating a competitive advantage for the Company that is anchored in a highly focused and an exceptionally executed strategy. Strong Brand Recognition Sleep Country invests significantly in advertising and brand development to create top-of-mind unaided brand awareness which drives the largest share of customer visits across Canada. Through a combination of radio, television, print, targeted online advertising and digital presence for 52 weeks of every year, Sleep Country conveys a consistent message that it is a trustworthy, enjoyable place to purchase high quality mattresses and accessories at competitive prices. Messages are repeated frequently, with consistent elements and a focus on a Banner s name, logo, use of a catchy jingle, and trade-marks of Why Buy a Mattress Anywhere Else? for Sleep Country Canada and Tout le monde devrait bien dormir for Dormez-vous?. The Company s cumulative advertising investment over the past 20 years and differentiated brand development strategy represent a substantial competitive advantage in the retail mattress industry and has led to industry-leading brand awareness and also the highest percentage of customer visits, as evidenced by the charts below. Top-of-Mind Unaided Brand Awareness 36% 3JUN JUN % 15% 13% 8% 5% 3% 18% 12% 6% 5% Sleep Country Canada Sears Canada The Brick IKEA Leon s Hudson s Bay Dormez- BMTC Sears vous? Canada Matelas Bonheur The Brick 5JUN Source: Market Survey, September Participants polled were asked: Thinking about stores that sell mattresses, that you would shop at if you were buying a mattress, please tell me the name of the store that comes to mind first. Note: Leon s Furniture Ltd. owns both Leon s and The Brick banners. 14

17 Customer Traffic (% of Total Shoppers Who Visited Store) 3JUN JUN % 34% 30% 30% 27% 26% 16% 14% 13% 16% 9% Sleep Country Canada Sears Canada The Brick IKEA Leon's Hudson's Bay Dormezvous? Sears Canada BMTC The Brick Matelas 5JUN Bonheur Source: Market Survey, September Traffic data based on six months ended September Note: Leon s Furniture Ltd. owns both Leon s and The Brick banners. Unrivalled In-Store Customer Experience The Company distinguishes itself through a superior in-store experience that results in high conversion of sales, repeat business and superior sales per associate metrics. Due to the fact that a mattress is an infrequent purchase, a big-ticket item and a difficult product to compare, customers require a knowledgeable and effective sales associate. Customers also have highly personalized tastes, preferences, needs and budgets, which combined with the complex and constantly evolving product landscape, increases the need for a knowledgeable and effective sales associate. In response, Sleep Country invests heavily in initial and ongoing training to ensure it delivers a highly informative, friendly and helpful (not pushy or intrusive) customer experience. This experience is further enhanced by the cumulative knowledge and abilities of a long tenured full-time sales team with low turnover. In addition, the Company offers a superior and extensive assortment of mattresses and related products, including a wide range of comfort choices, styles, sizes and price points. The Company strives to take the worry out of the customer s purchase decision by offering 60-day price and comfort guarantees. The collective efforts to create and sustain an unrivalled in-store customer experience have resulted in a high level of conversion from shoppers to buyers relative to the Company s competitors. Shopper to Buyer Conversion (% of Shoppers that Purchase) 3JUN JUN % 50% 44% 40% 31% 31% 70% 57% 50% 50% 41% 40% 33% 31% Sleep Country Canada IKEA Sears Canada The Brick Hudson's Bay Leon's IKEA Dormez -vous? B&M Matelas Bonheur Sears Hudson's Bay Leon s The Brick Canada 8JUL Source: Market Survey, September Conversion data based on six months ended September Note: Leon s Furniture Ltd. owns both Leon s and The Brick banners. 15

18 Superior Home Delivery Experience and Ongoing Customer Relationships Management believes that the home delivery experience is just as critical as the in-store experience and has developed a customer centric approach to its delivery model which it believes plays a critical role in customer satisfaction, repeat sales and word-of-mouth advertising. Sleep Country offers delivery seven days a week within a specified three-hour time frame. The Company selects individuals with positive attitudes and teaches them critical customer service and delivery skills. Delivery personnel are uniformed, wear shoe covers to protect the customer s home and are trained to be courteous. New mattresses are setup, packaging materials are removed and the replaced mattress set is either donated to charity or recycled. Management believes that the entire delivery process makes for a very positive experience and often leads to favourable word-of-mouth advertising. In addition, the entire customer experience is complemented by both a well-trained, in-house customer service department and a complete enterprise-wide information technology system to support delivery logistics and provide a seamless customer experience. Sleep Country continually receives positive feedback from customers and, in 2014, Sleep Country was recognized as being best-in-class in Ontario and Québec in overall customer satisfaction according to a WOW! Retail Customer Experience Survey conducted by Leger Metrics Inc. Leading Home Decor Customer Satisfaction Score Ontario Québec Rank Retailer 2014 Rank Retailer JUN Ameublements Tanguay Kitchen Stuff Plus JUN Williams-Sonoma Stokes Stokes Williams-Sonoma IKEA Brault & Martineau Crate&Barrel Germain Larivière Pier 1 Imports Linen Chest Sears Home Decor J.C. Perreault The Brick IKEA Home Sense Pier 1 Imports 58.5 Source: WOW! Retailer Ranking by Sector by Leger Metrics Inc. Note: Ontario survey based on 113 Ontario retailers. Over 500 recent customers 15 years of age or older were asked to respond to 16 dimensions. Québec survey based on 148 Québec retailers. Over 400 recent customers 15 years of age or older were asked to respond to 10 to 16 dimensions. Highly Trained and Dedicated Workforce with a Strong Culture of Customer Service Sleep Country has a comprehensive approach to human resource management that is built on a foundation of family values, commitment to training and development and competitive compensation and benefits. This has resulted in a workforce dedicated to delivering superior customer service, underpinned by excellent relations between management and employees and reinforced by high retention rates. In 2014, Sleep Country s average employee turnover rate of approximately 16% was approximately one-third of the retail industry average of 44%, as reported by a survey of Canadian retailers conducted by Mercer. (3) Also in 2014, and in addition to previous recognitions, Sleep Country received both the Canada s Passion Capitalists and Canada s 10 Most Admired Corporate Cultures awards. Convenient and Highly Visible Locations Sleep Country s stores are located in convenient locations to make it easy for customers to visit a store when they are shopping for a mattress. Stores are strategically located in each regional market close to residential areas, in high-traffic, highly visible locations with prominent signage and convenient access. While customers may research mattresses online, management believes that the vast majority of mattress customers visit a mattress retailer to test the product and make a purchase. (3) Mercer Retail Industry Compensation and Benefits Survey, August

19 Clear Growth Strategy Since its inception, Sleep Country has developed a leading regional market strategy, a strong brand with top-of-mind unaided brand awareness, a reputation for excellence in customer service and strong supplier relationships. Now that this platform has been established, the Company believes it has a low-risk path to growth and expansion within its existing markets. Management believes that Sleep Country is well-positioned to continue to grow revenue, profitability and cash flows by driving SSSG, continuing to add stores in existing, satellite and new markets and expanding its merchandising opportunities in accessories. Sleep Country s position as a best-in-class retailer with superior strategy and execution results in highly productive stores and an effective employee base as evidenced by strong SSSG of 7.2% over the last seven quarters, which management believes is in excess of the growth experienced by the Company s peers. Management believes that, over the next five to seven years, an opportunity exists to open 50 to 70 new stores, drive annual SSSG between 3% and 6%, grow total revenue from $406 million for the 12-month period ended March 31, 2015 to between $575 million and $640 million annually, and to increase Operating EBITDA from approximately $56 million for the 12-month period ended March 31, 2015 to between $80 million and $90 million annually. See Non-IFRS Measures and Retail Industry Metrics, Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Forward-Looking Information and Risk Factors. See Selected Consolidated Financial Information for a reconciliation of net income (loss) from continuing operations to Operating EBITDA. Driving Same Store Sales Growth Sleep Country s differentiated growth strategy has delivered positive SSSG for the last seven quarters. Management believes the opportunity exists to drive annual SSSG between 3% and 6% over the next five to seven years by, among other things, employing the strategies listed below. See Non-IFRS Measures and Retail Industry Metrics, Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Forward-Looking Information and Risk Factors. Increase Mattress Sales. Sleep Country expects to increase its mattress sales by, among other things: Focusing on increasing traffic through marketing and advertising: The Company will focus on expanding its marketing efforts through increased and targeted advertising campaigns in each of its regional markets. Management has observed that customer traffic is highly correlated with the Company s regional and targeted advertising initiatives. Increasing customer conversion rates: As the primary point of contact with customers, Sleep Country s sales associates are vital to achieving strong customer conversion rates. In 2012, the Company increased the quality and quantity of its sales associate training programs which it believes has contributed to a 17.3% improvement in the conversion rate of shoppers to purchasers since Sleep Country will continue to build upon and reinforce its comprehensive, on-going training programs to ensure that it has an effective and best-in-class salesforce. The Company also believes that its assortment of superior and differentiated mattresses and related accessories will continue to increase customer traffic and conversion. Driving increased AUSP: Since 2012, the Company has increased its AUSP by approximately 10%. Combined with an overall increased demand in the market for higher quality and specialty mattresses, the Company expects that its salesforce will also help drive further increases in its AUSP. 17

20 Increase Accessories Sales. In recent years, Sleep Country has seen significant growth in sales of accessories which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. Since 2006, sales of accessories have grown at a CAGR of 11.5%. In addition, sales of complementary sleep products and accessories typically carry a gross margin that is approximately 10% higher than mattress sets. Management believes that the Company s focus on this broader related product offering, its procurement, sales training and dedicated advertising, will help the Company capitalize on the growing accessories category and is expected to result in increased customer traffic, conversion and AUSP. In 2014, Sleep Country s total accessories sales were approximately $73 million. This is only a small portion of what management believes is an $830 million addressable market in Canada. Management believes that an opportunity exists to expand Sleep Country s market share in the accessories category. Sleep Country Accessories Revenue (C$ millions) $73 $ JUN Source: Company report. Continued Implementation of Enhanced Store Design. In 2014, management developed and implemented an enhanced design for the Company s stores with a contemporary design and bright, welcoming atmosphere. In addition to the improved aesthetics, the new layout and design places a greater emphasis on products in the growing accessories category. To date, four of the Company s existing stores have been renovated to this enhanced design. Over time, Sleep Country intends to strategically select stores to renovate to this design, which will also be featured by all new stores that it opens. Currently, the Company anticipates renovating 10 to 15 stores each year over the next five to seven years. Early results have reported that the four stores renovated in 2014 have achieved better SSSG than the previous formats, showing an 18% increase in revenues since re-opening above Sleep Country s other stores in the same region. 18

21 Adding Stores in Existing, Satellite and New Markets Management has defined growth opportunities in existing, satellite and new markets. An existing market or in-fill opportunity is a pre-existing built out region in which the Company already has an established store presence serviced by one or more existing distribution centres. In-fill stores are typically cash flow positive within the first six months of opening and in most cases do not require an increase in advertising, regional management or fixed distribution costs. A satellite market is a new region/store which is adjacent or close to a pre-existing built out region which benefits from advertising spill and is serviced logistically from the nearby distribution centre. Satellite markets usually require an additional investment in advertising and also require additional logistic costs to transport products to our stores and to customers beyond the normal range of our existing distribution centres. Stores in satellite markets are typically cash flow positive within the first 12 months of opening. A new market is a brand new territory, such as the Company s recent entry into New Brunswick, requiring incremental advertising and distribution logistics. Stores in new markets are typically cash flow positive within the first 24 months of opening. Sleep Country s regional market strategy has led to significant store growth over the past 20 years and management has identified a number of additional markets across Canada where it intends to focus Sleep Country s growth efforts. In particular, management believes that, over the next five to seven years, an opportunity exists to open between eight and 12 new stores annually, resulting in an expected overall increase of between 50 and 70 new stores. See Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Forward-Looking Information and Risk Factors. Sleep Country Store Count (# of Stores) JUN Mar-15 Source: Company report. Note: Based on store count as of December 31 for 1994 to 2014 and March 31, Sleep Country s in-fill site selection strategy is focused on maximizing sales per store and per region throughout its store network. Prior to identifying and ultimately selecting locations for new stores, management conducts extensive analysis utilizing the following factors: (i) demographics such as population density, household income and population growth rates; (ii) store visibility and accessibility; (iii) lease and advertising economics; (iv) competitive dynamics; (v) overlap with existing stores and distribution footprint; and (vi) potential cannibalization of existing stores. Since the beginning of 2012, the Company has opened 20 in-fill stores which have added to sales in the local geographic area while having a minimal cannibalization impact on the existing stores. As an example, in one of the Company s longest standing markets which had 19 stores at the beginning of 2012, the Company opened six new stores over the past three years. This has increased sales in the region by 22%, while the legacy stores in the region experienced SSSG of 7%, resulting in a total increase in sales in the region of 29%. As stated above, in-fill stores are typically cash flow positive within the first six months of opening and in most cases do not require an increase in advertising, regional management or fixed distribution costs. As a result, incremental stores increase regional profitability through economies of scale and have a low break-even point before contributing to regional profitability. See Non-IFRS Measures and Retail Industry Metrics and Risk Factors Real estate. 19

22 As at March 31, 2015, Sleep Country achieved an average store density of one store per approximately 162,000 people in markets in which the Company operates. Management believes that adding 50 to 70 new stores will result in an average store density of approximately 140,000 people per store, assuming a 2% population growth per year for seven years. Management believes there is capacity to increase store density to one store per approximately 100,000 in population without oversaturating the market. This density level would be comparable to the Company s U.S. peers. For example, the leading specialty mattress retailer in the United States has publicly disclosed in its filings with the U.S. Securities and Exchange Commission that it has an average store density of one store per approximately 84,000 people and, in its most concentrated markets, an average store density of one store per approximately 60,000 people. Sleep Country Population Per Store Store Count (#) Population per Store (Thousand / Store) British Columbia Alberta Saskatchewan Manitoba Ontario Québec New Brunswick Nova Scotia Existing Canadian Source: Based on Statistics Canada s total 2014 population in each province. Note: Store count as of March 31, JUN Markets Operating Leverage on Sales Growth Sleep Country s centralized support infrastructure (in particular with respect to regional advertising, management and fixed distribution centre costs) is highly scalable making revenue growth achievable with limited additional overhead costs required. Due to the existing support infrastructure, management expects Operating EBITDA to grow at a faster rate than sales. See Selected Consolidated Financial Information for a reconciliation of net income (loss) from continuing operations to Operating EBITDA. Selectively Consider Strategic Acquisitions Sleep Country will also selectively consider strategic acquisitions that management believes are accretive and that will enhance existing market opportunities. Attractive Financial Model with Strong Cash Flow Conversion Sleep Country has a highly attractive financial model that allows it to leverage its national and regional platform, operate with negative Working Capital and fund growth initiatives with minimal capital investments. In addition, the Company has compelling new store economics with new stores quickly contributing positive cash flow to the business. As a result, Sleep Country is uniquely positioned to simultaneously achieve significant growth and generate strong Free Cash Flow without the need to obtain external financing to fund its growth. The Company has enjoyed Free Cash Flow Conversion in excess of 85% in each of the past three years. See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to Free Cash Flow. 20

23 National and Regional Scale Create Economic Advantages The Company s overall size, national and regional market leadership and collaborative approach results in strong relationships with its leading suppliers and provides the Company with competitive pricing and a unique assortment of products, creating a competitive advantage and a significant barrier to entry for competitors. This set of supplier relationships allows management to negotiate exclusive features for certain products, contributing to the salesforces ability to help customers find the most appropriate product for their needs. The Company s national scale also provides operating leverage with respect to corporate general and administrative expense overhead. Regional Scale Optimizes Economics on a Per-Store Basis The retail mattress industry is characterized by the existence of substantial regional fixed costs (advertising, regional management and distribution) that are independent of the number of stores in a particular region. Management believes that its strategy of becoming the market leader in each region with a higher store density brings regional fixed costs to a more attractive economic level on a per-store basis. Sleep Country has built regional market leadership by focusing on one regional market at a time before expanding into the next regional market. Management implements a significant sustained advertising program to build and maintain leading brand awareness in each market in which it operates. Typically, within the first year of entering a new regional market, management opens 50% to 75% of the stores it ultimately projects to have within each market. In order to ensure that the in-store and home delivery service is as strong in the new market as in the existing markets, stores and distribution centres are initially staffed with a combination of new local hires and experienced managers and sales and delivery associates who have been relocated to the new region. Negative Working Capital Operating Model Sleep Country has a negative Working Capital business model that helps the Company fund its growth. Critical to this arrangement is the just in time inventory relationship that Sleep Country has with its suppliers. As the figure below demonstrates, the model typically works as follows: (i) Sleep Country is paid in full by the customer at the time of the sale of the mattress set; (ii) Sleep Country orders the mattress set from its supplier the next day; (iii) the mattress set is received by Sleep Country within two days of placing the order with the supplier; and (iv) Sleep Country typically has between 30 and 45 days to pay its supplier following receipt of the mattress set which results in 33 to 48 days of negative Working Capital. This favourable payment cycle means that Sleep Country is able to generate cash from Working Capital as it grows rather than having to invest in Working Capital. See Non-IFRS Measures and Retail Industry Metrics and Selected Consolidation Financial Information. Sleep Country Working Capital Cycle Day 1: Mattress Ordered Day 4: Mattress Delivered to Customer Day 0 Day 1 Day 3 Day 4 Day 33 Day 48 Day 0: Customer Purchase Customer Payment Day 3: Mattress Delivered to Warehouse Day 33-48: Pay Supplier Day Payment Terms from Supplier 5JUN Source: Company report. See Non-IFRS Measures and Retail Industry Metrics and Selected Consolidation Financial Information. 21

24 Low Capital Expenditure Requirements Sleep Country operates an asset-light business model, choosing to lease all of its stores, distribution centres and trucks. As a result, Sleep Country has low maintenance and growth capital expenditure requirements. Specifically, maintenance capital expenditures have averaged 1.0% of revenue from 2008 to Management intends to continue leasing all stores and distribution centres. Sleep Country Maintenance and Growth Capital Expenditures (% of Sales) Maintenance Growth 3.1% 2.9% 2.6% 1.1% 1.9% 1.5% 1.9% 1.8% 1.5% 1.2% 0.9% 0.7% 0.5% 1.3% 1.4% 0.8% 0.8% 1.0% 1.3% 1.2% 0.5% Source: Company report. 5JUN Compelling New Store Economics A new in-fill store at Sleep Country is typically cash flow positive within the first six months of opening. In most cases, opening new stores in existing markets does not require an increase in advertising, regional management or fixed distribution centre costs. As a result, incremental stores increase regional profitability through economies of scale. In addition, because Sleep Country leases all of its locations, opening a new store typically only requires a modest capital expenditure and Working Capital investment (net of tenant inducement allowances) of approximately $325,000. The Company is able to simultaneously achieve significant growth and generate strong cash flow given the low capital expenditure requirements per store and negative Working Capital from customer deposits and supplier financing. See Non-IFRS Measures and Retail Industry Metrics, Selected Consolidated Financial Information and Risk Factors Real estate. Experienced and Committed Management Team Sleep Country is led by a highly experienced management team with a proven track record. On average, the Company s executives have over 15 years of experience with Sleep Country and over 20 years of relevant industry experience. Sleep Country s Chief Executive Officer, David Friesema, joined the Company in 1995 and, along with Stewart Schaefer, President of Dormez-vous? and Chief Business Development Officer and other members of senior management, has been instrumental in enhancing the sales training programs, refocusing the advertising strategy, expanding the accessories category of the business and driving new store expansion. In addition, the Company s co-founders, Stephen Gunn and Christine Magee, remain committed to the business and its long-term success, and each will serve as an Executive Co-Chair of the Company. 22

25 Throughout the Company s history, including during turbulent economic times, the management team has demonstrated its ability to successfully execute on its business strategy, evidenced by the 18-year revenue and EBITDA CAGRs of 16.1% and 24.1%, respectively. The Company also has a proven track record of operating as a public company, evidenced by the superior returns that it delivered to investors relative to the broader market during the period from 2003 to 2008 when it was previously listed on the TSX as an income fund. Between April 15, 2003 and September 24, 2008, management achieved a total return of 218%, including a total dividend return of 98%. See Selected Consolidated Financial Information for a reconciliation of net income (loss) from continuing operations to EBITDA. THE ACQUISITION At Closing, immediately following completion of this Offering, the Company will complete the Acquisition of all of the issued and outstanding shares (the Purchased Shares ) of SCCI, SC US Holdco and SC Management (together with SCCI and SC US Holdco, the Acquired Entities ) not already owned by it pursuant to the terms and conditions of a share purchase agreement dated July 10, 2015 (the Purchase Agreement ) entered into between the Company, the Acquired Entities and the Existing Shareholders. The Existing Shareholders include the Birch Hill Entities, the Co-Investors, the Executive Group and certain current and former employees of SCCI. See The Acquisition and Related Transactions. Pursuant to the Purchase Agreement, the purchase price payable by the Company to the Existing Shareholders for the Purchased Shares is equal to $461,673,036 which is to be satisfied by (a) an aggregate cash payment of $193,512,214, (b) the issuance to the Existing Shareholders of an aggregate of 13,126,666 Common Shares, and (c) the issuance to the Birch Hill Entities and the Co-Investors of an aggregate of $45,007,500 principal amount of non-interest bearing, unsecured subordinated convertible notes. The Purchase Agreement will contain representations and warranties and related indemnities from the Existing Shareholders on a several, and not joint and several, basis (except with respect to the Birch Hill Entities which will jointly and severally represent, warrant and provide the related indemnities with each other but no other Existing Shareholders). The Existing Shareholders will provide representations and warranties regarding title to the Purchased Shares and the business carried on by Sleep Country. The Existing Shareholders have also represented that this Prospectus contains full, true and plain disclosure of all material facts relating to Sleep Country and does not contain any misrepresentation (as defined under applicable securities laws). See The Acquisition and Related Transactions The Purchase Agreement and Risk Factors Risks relating to the Acquisition. 23

26 RISK FACTORS Any investment in the Offered Shares involves a high degree of risk. See Risk Factors. You should carefully consider the following, together with all other information included in this Prospectus, before making an investment decision: Industry risk and economic sensitivity. Effectiveness and efficiency of advertising expenditures. Ability to maintain profitability and implement growth strategy. Fluctuations in same store sales. Damage to the Company s reputation. Competition. Seasonality and weather. Real estate. Dependence on key personnel. Labour relations. Relationship with suppliers. Intellectual property. Dependence on distribution centres and timely delivery to customers. Dependence on management information systems. Insurance. Comfort and price guarantees. Debt covenants in New Credit Facility. Dependence on operating subsidiaries. Fluctuations in product cost, inflation and foreign currency. Legal proceedings. Government regulation. Third-party consumer financing arrangements. Absence of a prior public market for the Offered Shares. Price volatility of the Offered Shares. Forward-looking information. Risks relating to the Acquisition. Significant ownership by the Birch Hill Entities. Future sales of Common Shares by the Birch Hill Entities and directors and officers of the Company. Payment of dividends. Pro forma financial information. Public company status. Financial reporting and other public company requirements. Dilution. Securities analysts research or reports could impact the price of the Common Shares. 24

27 Issuer: Offering: Offering Price: Offering Size: Over-Allotment Option: Shares Outstanding: Use of Proceeds: THE OFFERING Sleep Country Canada Holdings Inc. 17,650,000 Offered Shares $17.00 per Offered Share. $300,050,000 ($345,057,500 if the Over-Allotment Option is exercised in full) The Company has granted to the Underwriters the Over-Allotment Option exercisable for a period of 30 days from the Closing Date to purchase up to an additional 2,647,500 Offered Shares (being equal to 15% of the Offered Shares sold as at the Closing Date) at the Offering Price. Upon completion of the Offering and the Acquisition and assuming no exercise of the Over-Allotment Option and the conversion of the Acquisition Notes, 37,539,133 Common Shares will be issued and outstanding. If the Over-Allotment Option is exercised in full, 37,539,133 Common Shares will be issued and outstanding after the completion of the Offering and the Acquisition. The net proceeds of the Offering are expected to be approximately $281.2 million, after deducting the Underwriters Fee and the expenses of the Offering, but before giving effect to the Over-Allotment Option. If the Over-Allotment Option is exercised in full, the net proceeds to the Company will be approximately $324 million. The Company expects to use the net proceeds of the Offering as follows: (i) $193,512,214 to partially satisfy the purchase price for the acquisition (the Acquisition ) of all of the issued and outstanding shares of Sleep Country Canada Inc. ( SCCI ), Sleep Country US Holdco Canada Inc. ( SC US Holdco ) and SC Management Holding Inc. ( SC Management and together with SCCI and SC US Holdco, the Acquired Entities ) from the Existing Shareholders; (ii) $77,621,360 to redeem the Class A Common Shares held by BH Feather US (one of the Birch Hill Entities) which will be issued as part of the Pre-Closing Transactions; and (iii) $10,060,098 to subscribe for additional common shares of SCCI. SCCI will use the funds it receives from the Company, after deducting its share of the expenses of the Offering and the other transactions described in this Prospectus, to pay bonuses and other deferred compensation payments owed to members of management. If the Over-Allotment Option is exercised in full, the Company will use the proceeds received, after deducting the Underwriters Fee, to repay the principal amount of the Acquisition Notes. If the Over-Allotment Option is exercised only in part, the Company will repay the principal amount of such Acquisition Notes on a pro rata basis, to the extent of the proceeds received after deducting the Underwriters Fee, and the balance of the outstanding principal amount of the Acquisition Notes will be automatically converted into Common Shares on closing of the Over-Allotment Option at a price per share equal to the Offering Price. If the Over-Allotment Option is not exercised, the principal amount of the Acquisition Notes will be automatically converted into Common Shares on the 45 th day following the Closing Date at a price per share equal to the Offering Price. See Use of Proceeds and The Acquisition and Related Transactions. 25

28 Acquisition: Dividend Policy: Dividend Reinvestment Plan: A portion of the net proceeds of the Offering will be used to acquire the Acquired Entities. The balance of the purchase price will be satisfied by the issuance of 13,126,666 Common Shares to the Existing Shareholders and the issuance of the Acquisition Notes to the Birch Hill Entities and the Co- Investors. See Use of Proceeds and The Acquisition and Related Transactions. Subject to financial results, capital requirements, available cash flow and any other factors that the Board of Directors may consider relevant, it is the intention of the Board of Directors following Closing to declare quarterly cash dividends. It is expected that future cash dividend payments will be made to shareholders of record as of the close of business on the last business day of each fiscal quarter. All dividends expected to be paid by the Company, unless otherwise indicated, are designated as eligible dividends in accordance with subsection 89(14) of the Tax Act and any applicable corresponding provincial or territorial provisions. See Risk Factors Payment of dividends. Initially, the Company anticipates paying quarterly cash dividends, with annualized aggregate dividend payments of approximately $17 million. The first dividend that would be payable to investors in the Offering would be the dividend for the period beginning on the Closing Date and ending on September 30, The Company expects the first dividend would be equal to an aggregate amount of approximately $4 million (or approximately $0.11 per Common Share). Dividends will be declared and paid in arrears. Accordingly, the Company expects the first dividend payment on the Common Shares would be declared following the announcement of the Company s results for the third quarter of fiscal 2015 in November 2015 and would be paid in December The amount and timing of the payment of any dividends are not guaranteed and are subject to the discretion of the Board of Directors. See Risk Factors Payment of dividends. Following Closing and subject to the receipt of any required regulatory approvals, the Company intends to adopt a dividend reinvestment plan, pursuant to which resident Canadian holders of Common Shares will be entitled to elect to have all of the cash dividends of the Company payable to such person automatically reinvested in additional Common Shares. Pursuant to the plan, cash dividends will be reinvested at a price per Common Share calculated by reference to the volume weighted average of the trading price for Common Shares on the relevant stock exchange or marketplace for the five trading days immediately preceding the relevant dividend date, less a discount, if any, of up to 5%, at the Company s election. The Company has set the initial discount at 3%. The Company may, subject to the terms of the dividend reinvestment plan, alter or eliminate this discount at any time. See Dividend Policy Dividend Reinvestment Plan. 26

29 Principal Shareholders: Lock-Up Arrangements: Upon completion of the Offering and the Acquisition, it is expected that (i) the Existing Shareholders, either directly or indirectly, will own 19,889,133 Common Shares, assuming the conversion of the Acquisition Notes, representing a 53.0% interest in the Company (or 17,241,633 Common Shares, representing a 45.9% interest in the Company if the Over-Allotment Option is exercised in full) and (ii) of the Existing Shareholders, the Birch Hill Entities together with the Co-Investors, either directly or indirectly, will have direction and control over 17,104,996 Common Shares, assuming the conversion of the Acquisition Notes, representing a 45.6% interest in the Company (or 14,457,496 Common Shares, representing a 38.5% interest in the Company if the Over-Allotment Option is exercised in full). As a result, the Birch Hill Entities will have a significant influence on the Company. See Principal Shareholders and Risk Factors. Upon completion of the Offering and the Acquisition, it is expected that management of Sleep Country will, directly or indirectly, own 2,508,192 Common Shares, representing a 6.7% interest in the Company, whether or not the Over-Allotment Option is exercised. In connection with the completion of the Offering and the Acquisition, the Company, the Existing Shareholders and each of Sleep Country s directors have agreed not to, directly or indirectly, without the prior written consent of TD and BMO, on behalf of the Underwriters, issue, sell, grant any option, right or warrant for the sale of, lend, secure, pledge or otherwise dispose or monetize, or make any short sale, engage in any hedging transaction, or enter into any form of arrangement the consequence of which is to directly or indirectly transfer to someone else, in whole or in part, any of the economic consequences of ownership of, or offer or announce any intention to do so, in a public offering or by way of private placement or otherwise, any Common Shares or any securities convertible or exchangeable into Common Shares or any other securities of Sleep Country, for a period of 180 days after the Closing Date, subject to certain limited exceptions. See Plan of Distribution Lock-Up Arrangements. 27

30 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table sets forth selected consolidated financial information for the periods indicated. The selected consolidated financial information set out below as of March 31, 2015 and for the three months ended March 31, 2015 and March 31, 2014 has been derived from SCCI s unaudited interim condensed consolidated financial statements and accompanying notes, and the selected consolidated financial information set out below as of December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014 ( Fiscal 2014 ), December 31, 2013 ( Fiscal 2013 ) and December 31, 2012 ( Fiscal 2012 ) has been derived from SCCI s audited consolidated financial statements and accompanying notes, in each case prepared in accordance with IFRS and contained elsewhere in this Prospectus. The consolidated financial statements for Fiscal 2012, Fiscal 2013 and Fiscal 2014 have been audited by PricewaterhouseCoopers LLP, and the auditor s report on these consolidated financial statements is included elsewhere in this Prospectus. The selected consolidated financial information should be read in conjunction with: (i) Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI ; (ii) the unaudited interim condensed consolidated financial statements and the audited consolidated financial statements of SCCI and accompanying notes contained elsewhere in this Prospectus; and (iii) the pro forma financial statements of the Company and accompanying notes contained elsewhere in this Prospectus. The selected pro forma consolidated financial information below gives effect to the Offering, the Acquisition and the Pre-Closing Transactions and assumes no exercise of the Over-Allotment Option, and has been prepared by management on the basis of the information contained in this Prospectus. This analysis is not a forecast or a projection of future results. The actual results of operations of Sleep Country for any period, whether before or after the Acquisition will likely vary from the amounts set forth in the following analysis and such variation may be material. The selected consolidated and pro forma financial information set out below may not be indicative of Sleep Country s future performance. The figures in the table for the 12 months ended March 31, 2015 are based on the consolidated financial statements of SCCI contained elsewhere in this Prospectus and have been calculated by adding the figures for the three months ended March 31, 2015 to the figures for the year ended December 31, 2014 and deducting the figures for the three months ended March 31, The results of operations for this period are not necessarily indicative of the results of operations to be expected in any given fiscal year. Prospective investors should review this information in conjunction with Non-IFRS Financial Measures and Retail Industry Metrics, Use of Proceeds, Capitalization, The Acquisition and Related Transactions, Risk Factors and Description of Material Indebtedness, included elsewhere in this Prospectus. 28

31 Selected Financial Information Twelve Months Three Months Three Months Three Months Ended Ended Ended Ended Mar 31, Fiscal Fiscal Fiscal Fiscal Mar 31, Mar 31, Mar 31, (C$ thousands unless otherwise stated) SCCI (pro forma) SCCI SCCI SCCI (pro forma) SCCI SCCI Consolidated Income Statement Data from Continuing Operations Revenues , , , , ,581 91,613 91,613 81,344 Cost of sales , , , , ,710 69,380 69,380 63,712 Gross profit , , ,420 88,088 80,871 22,233 22,233 17,632 General and administrative expenses... 54,951 54,916 54,898 50,226 42,641 11,933 11,929 11,876 Depreciation and amortization... 9,850 9,897 9,897 9,342 7,872 2,466 2,466 2,513 Income before finance, interest and other (income) expenses and income taxes... 43,220 38,607 38,625 28,520 30,358 7,834 7,838 3,243 Finance related expenses... 87,925 6,162 61,502 23,215 23,126 1,514 33,369 6,946 Interest income and other expenses (net)... (131) (145) (102) (149) (149) 3 Income (loss) before income taxes... (44,574) 32,424 (22,898) 5,450 7,334 6,469 (25,382) (3,706) Income taxes... (12,748) 12,206 (5,762) 1, ,749 (7,691) (705) Net income (loss) from: Continuing operations... (31,826) 20,218 (17,136) 4,381 6,399 4,720 (17,691) (3,001) Discontinued operations... 10,334 2,996 (2,588) (1,311) 6,777 (561) Net income (loss)... (21,492) 20,218 (14,140) 1,793 5,088 4,720 (10,914) (3,562) March 31, March 31, Fiscal Fiscal Fiscal (C$ thousands unless otherwise stated) Notes (pro forma) SCCI SCCI SCCI SCCI Consolidated Financial Position Data Cash... Note 1 14,300 13,486 41,331 27,401 16,912 Working Capital... Note 10 (12,392) (5,486) (10,524) (6,303) (8,505) Assets of disposal group held for sale... 14,086 Property and equipment... 24,938 24,938 24,948 30,455 24,948 Total assets , , , , ,180 Liabilities of disposal group held for sale... 5,210 Long-term debt... Note 2 155, , , , ,595 Total liabilities , , , , ,029 Total equity ,822 95, , , ,151 Other Financial and Operating Metrics for Continuing Operations: Twelve Months Three Months Three Months Ended Ended Ended Mar 31, Fiscal Fiscal Fiscal Mar 31, Mar 31, (C$ thousands unless otherwise stated) Notes SCCI SCCI SCCI SCCI SCCI SCCI Number of stores at period end Total sales growth % 11.9% 6.4% (1.2%) 12.6% 5.5% Same store sales growth... Note % 8.3% 1.0% (4.2%) 10.5% 1.3% Gross profit margin... Note % 26.1% 24.9% 24.3% 24.3% 21.7% Operating EBITDA... Note 10 55,808 50,645 39,407 38,361 10,722 5,559 Operating EBITDA margin... Note % 12.8% 11.1% 11.5% 11.7% 6.8% Maintenance capital expenditures... 2,233 2,010 4,272 4,482 1, Growth capital expenditures... 4,572 5,086 6,708 5,060 1,406 1,920 Total capital expenditures... 6,805 7,096 10,980 9,542 2,475 2,766 Working Capital... Note 10 (5,486) (10,524) (6,817) (8,356) (5,486) (7,819) Cash flows from (used in) change in Working Capital... (2,333) 3,707 (1,539) (260) (5,038) 1,002 Free Cash Flow... Notes 3, 10 48,504 50,219 32,051 33,488 4,197 5,912 Free Cash Flow Conversion... Note 10 91% 103% 85% 88% 41% 103% 29

32 Twelve Months Three Months Three Months Three Months Ended Ended Ended Ended Mar 31, Fiscal Fiscal Fiscal Fiscal Mar 31, Mar 31, Mar 31, (C$ thousands unless otherwise stated) Notes SCCI (pro forma) SCCI SCCI SCCI (pro forma) SCCI SCCI Reconciliation of net income (loss) from continuing operations to EBITDA and Operating EBITDA: Net income (loss) from continuing operations... (31,826) 20,218 (17,136) 4,381 6,399 4,720 (17,691) (3,001) Interest income and other expenses net... (131) (145) (102) (149) (149) 3 Finance related expenses... 87,925 6,162 61,502 23,215 23,126 1,514 33,369 6,946 Income taxes... (12,748) 12,206 (5,762) 1, ,749 (7,691) (705) Depreciation and amortization... 9,850 9,897 9,897 9,342 7,872 2,466 2,466 2,513 EBITDA... Note 10 53,070 48,504 48,522 37,862 38,230 10,300 10,304 5,756 Adjustments to EBITDA: Reduction in management compensation... Note 4 1,714 1,364 1,364 1,337 1, Reduction in management bonuses.. Note (81) 3 3 (270) Share-based compensation... Note Non-recurring items... Note (1,160) 6 Operating EBITDA... Note 10 55,808 50,627 50,645 39,407 38,361 10,718 10,722 5,559 Reconciliation of EBITDA to Free Cash Flow: EBITDA... Note 10 53,070 48,522 37,862 38,230 10,304 5,756 Cash from (used in) change in Working Capital... (2,333) 3,707 (1,539) (260) (5,038) 1,002 Less: Maintenance capital expenditures. 2,233 2,010 4,272 4,482 1, Free Cash Flow... Note 10 48,504 50,219 32,051 33,488 4,197 5,912 Reconciliation of Net Income (loss) from Continuing Operations to Adjusted Net Income: Net income (loss) from continuing operations... (31,826) 20,218 (17,136) 4,381 6,399 4,720 (17,691) (3,001) Adjustments: Interest expense on Series A and B notes... Note 8 71,049 46,051 18,059 17,480 29,203 4,205 Interest expense and fair value adjustment on Class A convertible shares and Class B common shares. Note 9 11,167 10,584 2,370 1,195 2,648 2,065 Total interest adjustment... 82,216 56,635 20,429 18,675 31,851 6,270 Reduction in management compensation... 1,714 1,364 1,364 1,337 1, Reduction in management bonuses (81) 3 3 (270) Share-based compensation Non-recurring items (1,160) 6 Total adjustments... 84,954 2,123 58,758 21,974 18, ,269 6,073 Tax impact of all adjustments... (19,388) (558) (12,656) (5,147) (4,574) (110) (7,784) (1,052) Adjusted Net Income... 33,740 21,783 28,966 21,208 20,631 5,028 6,794 2,020 Notes: (1) Prior to Closing, SCCI intends to declare and pay dividends to the Existing Shareholders in the aggregate amount of up to $13 million. (2) In connection with the Pre-Closing Transactions, Series A and B promissory notes of SCCI will be converted into shares of SCCI. All interest on Series A and B promissory notes of SCCI will be converted into Series B promissory notes of SCCI prior to the settlement of the notes. The Class A convertible shares of SCCI will be converted into shares of SCCI. The Class B common shares of SCCI will be acquired by the Company in connection with the Acquisition. At Closing, the Company is expected to have gross outstanding long term debt of approximately $157.1 million, consisting of $155 million drawn under the New Credit Facility and finance leases of approximately $2.1 million. (3) Free Cash Flow is defined as EBITDA less: (i) maintenance capital expenditures; and (ii) changes in Working Capital. (4) Reduction in management compensation upon internal restructuring following the completion of this Offering. (5) Management bonus payouts in certain years that hit stretch targets have been adjusted to reflect the average percentage payout of the past six fiscal years over the base bonus level (or 126% over base). During that period the Company paid 163% over base for 2014 (the highest during the period) and did not pay a bonus in 2011 (the lowest during the period). Management bonus payments are determined by the Company s board of directors on an annual basis based on achieving certain financial benchmarks established with reference to prior years financial performance and internally set benchmarks. For 2015 and in future years, management bonuses may be greater or less than 126% over base (with a maximum potential bonus payment of 185% over base and a minimum of 0% of base). (6) Adjustments for share-based compensation, a non-cash item. (7) Non-recurring items include certain professional fees and internal costs relating to SCCI s capital reorganization, as well as in Fiscal 2012, based on trend analysis, management revised its estimates on certain provisions and accruals and made some non-recurring adjustments. (8) Adjustment for interest expense on debt that will be restructured in connection with the Pre-Closing Transactions. (9) Adjustment for interest expense on convertible shares and Class B common shares of SCCI that will be restructured in connection with the Pre-Closing Transactions. (10) See Non-IFRS Measures and Retail Industry Metrics. 30

33 INDUSTRY OVERVIEW Market Size and Growth The North American mattress and foundation industry is characterized by stable, long-term growth and a high degree of resiliency to economic swings. According to ISPA, the U.S. wholesale mattress and foundation market grew to US$7.5 billion in 2014 and exhibited a 6% CAGR between 1974 and U.S. Mattress and Foundation Wholesale Sales (US$ billions) Recession $5.8 $5.2 $4.6 $4.6 $4.8 $4.4 $4.0 $3.6 $3.0 $3.2 $3.3 $0.8 $0.9 $0.9 $1.0 $1.1 $1.2 $1.3 $1.4 $1.4 $1.6 $1.7 $1.8 $1.9 $2.1 $2.3 $2.3 $2.3 $2.4 $2.6 $2.8 $7.5 $6.5 $6.8 $6.9 $6.8 $7.0 $6.2 $6.3 $5.9 $ JUN Source: ISPA. Management estimates that the Canadian retail mattress and foundation market is approximately a $1.4 billion industry. Management believes that the North American mattress and foundation industry has exhibited stable growth characteristics for five principal reasons: Necessity item: Mattresses are a necessity rather than a fashion purchase. During an economic downturn, purchases are typically deferred and not lost; Replacement cycle: Customers typically replace their mattresses every 10 to 12 years, generating a steady flow of recurring demand; Demographic trends: Unit demand is further driven by steady long-term demographic trends, including general population increases, the formation of new households, the growth in recreational properties and the trend towards a larger number of rooms in homes; Consumer preferences for high-quality sleep: In recent years, the mattress industry has experienced an increase in the demand for larger size mattresses and premium quality products, due in some measure to the aging North American population, its relative affluence and its growing health awareness. The Company believes that this increase in demand for larger and better quality products has resulted in a shift to higher-priced mattress sets. According to ISPA, from 1974 to 2014, the AUSP in the U.S. mattress and foundation wholesale market grew at a CAGR of 4%; and Inflation: Price increases from manufacturers due in large part to inflation are typically passed through to customers. 31

34 U.S. Wholesale Mattress and Foundation AUSP (US$) $225 $175 $125 $75 $25 4JUN Source: ISPA. Canadian Mattress and Foundation Market Sleep Country believes that the preferences and shopping patterns of Canadian mattress consumers are very similar to those of U.S. consumers. As a result, the comprehensive historical wholesale sales data available with respect to the United States mattress and foundation wholesale industry provides insight into the Canadian mattress and foundation wholesale industry which, over the long-term, follows the same trends. Industry data indicates that U.S. wholesale mattress and foundation sales held steady during three of the four recessionary periods since 1974, and only suffered a decline during the global financial crisis of 2008 and 2009, but have since returned to historical levels. Like the U.S. industry, management believes that the Canadian wholesale mattress and foundation industry grew at a CAGR of 6% prior to the global financial crisis, following which the industry suffered a decline and has not yet returned to its historical long-term growth rate. Management believes that the Canadian industry will return to its historical long-term growth rate, similar to the experience in the U.S. Notwithstanding the lag in the Canadian market growth, since 2012, the Company has increased its revenues and Operating EBITDA by 22.2% and 45.5%, respectively. See Selected Consolidated Financial Information for a reconciliation of net income (loss) from continuing operations to Operating EBITDA. Market Participants Concentrated Market The Canadian retail mattress and foundation market is fairly concentrated. The seven leading retailers in the industry include Sleep Country / Dormez-vous?, Sears Canada Inc. ( Sears Canada ), Leon s Furniture Limited ( Leon s ) / The Brick Ltd. ( The Brick ), The Hudson s Bay Company ( Hudson s Bay ), BMTC Group Inc. ( BMTC ), IKEA and Costco Wholesale Canada Ltd. ( Costco ). Management believes that these seven retailers generate almost two-thirds of retail industry sales, with the balance generated by a number of smaller specialty mattress stores, other furniture stores, discounters and warehouse clubs, mass merchandisers, and small independent retailers. Mattress retailers are supplied by numerous mattress manufacturers, ranging from small family-owned plants to the four large international manufacturers, namely, Tempur-Sealy, Serta, Simmons and Kingsdown. 32

35 Shift Toward Specialty Mattress Retailers The North American retail mattress industry has undergone a fundamental shift in consumer preference toward specialty mattress retailers like Sleep Country and away from furniture retailers and department stores. In the U.S., specialty mattress retailers increased their market share from 32% of total retail sales in 2000 to 58% in 2013; over the same period, furniture retailers and department stores lost market share, declining from 42% to 26%, and 13% to 7%, respectively. (4) Management believes that this trend is also prevalent in Canada. U.S. Mattress Industry Market Share Source: Furniture Today. Department Stores 13% Others 13% Furniture Retailers 42% Specialty Mattress Retailers 32% Department Stores 7% Others 9% Furniture Retailers 26% Specialty Mattress Retailers 58% 5JUN Management believes that the specialty mattress retail format has distinguished itself as the most effective distribution channel for mattresses for the following reasons: Unique Consumer Needs. Consumers typically have highly personalized tastes, preferences and budgets and prefer a broad selection of mattresses to find the product that is right for them at the best value. Big-Ticket Purchase and Lack of Consumer Product Knowledge. Consumers generally view a mattress sets as a big-ticket purchase. In addition, mattress sets are typically only purchased every 10 to 12 years leading to a lack of consumer product knowledge. When combined with the complex and constantly evolving product landscape, it can be challenging for consumers to compare mattress sets. As a result, consumers prefer to be served by staff with technical product knowledge that can help them make an informed decision. Management believes that once consumers become informed on the technical aspects of mattresses by shopping at specialty mattress retailers, these consumers will typically transact at higher price points. Consumers Conduct Online Research but Continue to Purchase Mattresses In-store The retail mattress industry has remained a brick-and-mortar business with limited traction gained from online sales given the challenges in gaining an understanding of the differences in the feel of each mattress and in comparing mattress sets across different retailers. Consumers primarily use the internet to conduct online research to educate themselves on product characteristics and price points. In a 2013 A.T. Kearney analysis, U.S. retailers with a brick-and-mortar presence were found to capture the vast majority of furniture sales. (5) Management believes that given the unique characteristics of mattress sets (i.e., tactile decision, difficult to compare, big-ticket purchase and lack of consumer product knowledge), the Canadian mattress retail market is at a lower risk to online cannibalization and showrooming than other retail categories. Sleep Related Products & Accessories Industry The addressable Canadian sleep related products and accessories market, which management estimates to be approximately $830 million in size, is highly fragmented. (4) Source: Furniture Today. (5) Source: A.T. Kearney On Solid Ground: Brick-and-Mortar Is the Foundation of Omnichannel Retailing. 33

36 DESCRIPTION OF THE BUSINESS Business Overview Sleep Country is Canada s leading mattress retailer and the only specialty mattress retailer with a national footprint. Sleep Country operates under two Banners: Dormez-vous?, the largest retailer of mattresses in Québec; and Sleep Country Canada the largest mattress retailer in the rest of Canada. Sleep Country continues to expand its presence coast to coast. Since the beginning of 2007, the Company has opened 78 new stores and, as at March 31, 2015, it had 215 stores and 16 distribution centres across Canada. The Company s stores average approximately 5,000 square feet and offer a large selection of mattresses and a wide assortment of complementary sleep related products and accessories. Between 2006 and 2014, Sleep Country more than doubled its sales of complementary sleep products and accessories which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. Sleep Country s stores are all corporate-owned, enabling it to develop and maintain a strong culture of customer service, resulting in a consistent and superior in-store and home delivery customer experience. The Company has an attractive financial model that enables it to fund its growth from internal cash flow due to its low capital expenditure requirements. Sleep Country is also able to generate cash from Working Capital as the business grows. It has compelling new store economics where new stores typically contribute positive cash flow to the business within a short period of time after opening. The Company has a 20-year track record of profitable growth and has established its presence and brand as the leading mattress retailer in Canada. Under the leadership of its experienced and committed management team, since 1996, Sleep Country has grown sales at a CAGR of 16.1% and EBITDA at a CAGR of 24.1% with strong Free Cash Flow Conversion. Over the last four quarters, management believes that Sleep Country has outperformed the North American industry, reporting average SSSG of 10.3%. Sleep Country intends to leverage its strong platform to continue this pattern of stable and consistent growth. See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net income (loss) from continuing operations to EBITDA and Free Cash Flow. Sleep Country Revenue (C$ millions) $396 $406 $315 $336 $330 $340 $337 $333 $354 $286 $27 $52 $75 $94 $113 $127 $151 $165 $195 $ LTM 5JUN Source: Company report. 34

37 Sleep Country EBITDA (C$ millions) $56 $34 $38 $41 $43 $45 $48 $42 $38 $39 $51 $28 $13 $16 $16 $19 $22 $8 $1 $ LTM 5JUN Source: Company report. Note: The 2012, 2013, 2014 and LTM numbers represent Operating EBITDA. EBITDA for 2012, 2013, 2014 and LTM was $38 million, $38 million, $49 million and $53 million, respectively. See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net income (loss) from continuing operations to EBITDA and Operating EBITDA. Company History Sleep Country launched its concept in the Vancouver market with four stores in 1994 and has since expanded across Canada with 215 corporate-owned stores and 16 distribution centres in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, Nova Scotia and New Brunswick as at March 31, Sleep Country entered the Québec market through the acquisition of Dormez-vous? Sleep Centres in January 2006 by acquiring five stores and one distribution centre. The Company began operating in the United States when it acquired Sleep America, LLC, a mattress retailer located in the State of Arizona, in March The Company operated in the U.S. under the banner Sleep America until January 2015 when it sold all of its interest in the Sleep America assets to a national U.S. mattress retailer in order to focus management s efforts on growing the Company s Canadian market share. Sleep Country was listed on the TSX between 2003 and 2008 as an income fund. The income fund was acquired in 2008 by a group of investors led by Birch Hill Equity Partners, a leading Canadian mid-market private equity fund, together with members of management including co-founding partners Stephen Gunn and Christine Magee, the Company s Chief Executive Officer, David Friesema, and Chief Business Development Officer and President of Dormez-vous?, Stewart Schaefer. Initiatives taken during the global financial crisis As with most industry sectors, Sleep Country s financial performance during the period from 2009 to 2012 was adversely affected by the global financial crisis which began in Although revenues were largely flat throughout this period, the Company remained highly profitable and demonstrated strong Free Cash Flow Conversion. In 2009, with the effects of the recession impacting the retail industry generally and management anticipating lower customer demand during the challenging economic environment, the Company reduced operational overhead and scaled back marketing expenditures. While the cost reductions initially supported robust EBITDA growth of 6.1% in 2009 and 5.9% in 2010, management believes that the cost reductions contributed to a decline in EBITDA in 2011 and See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to EBITDA and Free Cash Flow. 35

38 Beginning in 2012, under the supervision of David Friesema, Stewart Schaefer and the rest of the current management team, the Company undertook a comprehensive review of its operations. As a result of this review, since 2012, the Company has implemented and invested in a number of strategic programs aimed at driving future growth, including: revamped the advertising strategy, enhanced the sales and service training, redesigned and expanded the accessories line, broadened the real estate footprint across Canada, implemented an enhanced store design, upgraded logistics systems and software, and divested Sleep America and exited the U.S. market. Revamped advertising strategy. The Company increased its internal and external marketing resources to bolster its traditional and online marketing strategies, expanding the creative messaging to create better breakthrough with consumers. In 2013, the Company also increased its total expenditures on advertising and improved the mix of media that it deployed in its advertising strategy. Enhanced the sales and service training. The Company enhanced its already comprehensive onboarding and initial training programs, supplemented its on-going training workshops and advanced training with a focus on enriching the knowledge base and skill sets of its sales associate team. Redesigned and expanded accessories line. The Company focused on creating a broader selection of sleep accessories and supported the program with additional training programs in sales and operations. Broadened real estate footprint across Canada. The Company placed greater focus on locating appropriate in-fill, satellite and new market stores which has led to the addition of 30 stores since the beginning of Implemented enhanced store design. In 2014, management developed and implemented an enhanced design for the Company s stores featuring a bright, contemporary design and welcoming atmosphere. In addition to the improved aesthetics, the new layout and design places a greater emphasis on accessories product lines. Upgraded logistics systems and software. By upgrading its point-of-sale software, the Company improved the effectiveness of the communication between its stores and distribution centres. Additional upgrades to the logistics and routing software allowed the Company to schedule and complete home deliveries in a more efficient manner resulting in enhanced customer service. Divested Sleep America and exited the U.S. market. While Sleep America was growing at a rate that exceeded the local markets in Arizona, management believed that focusing on expanding the Company s Canadian operations organically or through acquisitions presented a more attractive return on capital opportunity. As a result, the Company sold Sleep America in January 2015 to focus management s attention on the Canadian market. The Company believes the above initiatives were the primary drivers for the significant SSSG increase since the second quarter of 2013 and the increase in revenue and Operating EBITDA performance over the last two years, and have positioned the Company for continued strong growth and profitability as a public company. The Company has increased its Operating EBITDA margins from 11.5% in 2012 to 13.7% for the 12-month period ended March 31, See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to Operating EBITDA. 36

39 Sleep Country Same Store Sales Growth 15.0% 10.0% 5.0% 3.8% Began to realize benefits of strategic operational initiatives 7.3% 9.1% 11.1% 10.2% 10.5% 0.8% 1.3% 0.0% (0.1%) (5.0%) (2.5%) (3.9%) (10.0%) (10.2%) (7.4%) (15.0%) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q JUN Source: Company report. See Non-IFRS Measures and Retail Industry Metrics and Selected Consolidated Financial Information. Investment Highlights Compelling Industry Fundamentals Management believes that the North American wholesale mattress industry is characterized by steady, stable long-term growth. Between 1974 and 2014, the U.S. wholesale mattress industry exhibited a CAGR of approximately 6%. See Industry Overview. Management believes the industry is well-positioned to continue its growth trajectory given favourable fundamentals and long-term trends driven by the following key factors: Necessity item: Mattresses are a necessity rather than a fashion purchase. During an economic downturn, purchases are typically deferred and not lost. Replacement cycle: Customers typically replace their mattresses every 10 to 12 years, generating a steady flow of recurring demand. Demographic trends: Unit demand is further driven by steady long-term demographic trends, including general population increases, the formation of new households, the growth in recreational properties and the trend towards a larger number of rooms in homes. Consumer preferences for high-quality sleep: In recent years, the mattress industry has experienced an increase in the demand for larger size mattresses and for premium quality products, due in some measure to the aging North American population, its relative affluence and its growing health awareness. The Company believes that this increase in demand for larger and better quality products has resulted in a shift to higher-priced mattress sets. Shift toward specialty retailers: There has been a shift in consumer preference toward specialty retailers given the unique consumer needs, the big-ticket purchase and lack of consumer familiarity with developments in product offerings. Specialty retailers have grown from 32% of mattress sales in the U.S. in 2000 to 58% in (6) Online research: Consumers often conduct online research to gain product knowledge and perform general price comparisons. However, compared to other retail categories, the mattress industry is not as vulnerable to showrooming or online shopping as it is difficult to compare models and brands between retailers and the purchase decision is highly tactile. As a result, the vast majority of consumers test and purchase the product in-store. Inflation: Price increases from manufacturers due in large part to inflation are typically passed through to customers. (6) Source: Furniture Today. 37

40 The Leading Specialty Mattress Retailer in Canada Sleep Country launched its concept in the Vancouver market with four stores in Sleep Country has grown to become the leading specialty retailer of mattresses in Canada, with 215 stores and 16 distribution centres in eight provinces across Canada as at March 31, Sleep Country is the only specialty mattress retailer in Canada with a national and regionally diverse footprint. Sleep Country s National Footprint (# of Stores) BC NL AB SK MB 6 7 ON 86 QC 47 NB PE NS 7 4JUN Source: Company report. Note: Store count as of March 31, As the leading specialty mattress retailer in Canada, Sleep Country has an estimated national market share of 23%. According to the Market Survey, in the Province of Québec, Dormez-vous? has a 17% share of consumer transactions, while Sleep Country Canada s share of consumer transactions in the rest of the country is 24%. Canadian Mattress Industry Share of Consumer Transactions 3JUN JUN Others 33% Sleep Country Canada 24% Others 38% Dormez-vous? 17% BMTC 13% Sears Canada 15% Sears Canada 11% Hudson's Bay 4% Leon's 4% IKEA 8% The Brick 12% 5JUN Hudson's Bay 2% Leon's 2% Matelas Bonheur 5% IKEA 7% The Brick 5% 5JUN Source: Market Survey, September Purchase data based on six months ended September Note: Leon s Furniture Ltd. owns both Leon s and The Brick banners. 38

41 Best-in-Class Retailer Driven By Superior Strategy and Execution Sleep Country is a best-in-class retailer creating a competitive advantage for the Company that is anchored in a highly focused and an exceptionally executed strategy. Strong Brand Recognition Sleep Country invests significantly in advertising and brand development to create top-of-mind unaided brand awareness which drives the largest share of customer visits across Canada. Through a combination of radio, television, print, targeted online advertising and digital presence for 52 weeks of every year, Sleep Country conveys a consistent message that it is a trustworthy, enjoyable place to purchase high quality mattresses and accessories at competitive prices. Messages are repeated frequently, with consistent elements and a focus on a Banner s name, logo, use of a catchy jingle, and trade-marks of Why Buy a Mattress Anywhere Else? for Sleep Country Canada and Tout le monde devrait bien dormir for Dormez-vous?. The Company s cumulative advertising investment over the past 20 years and differentiated brand development strategy represent a substantial competitive advantage in the retail mattress industry and has led to industry-leading brand awareness and also the highest percentage of customer visits, as evidenced by the charts below. Top-of-Mind Unaided Brand Awareness 36% 3JUN JUN % 15% 13% 8% 5% 3% 18% 12% 6% 5% Sleep Country Canada Sears Canada The Brick IKEA Leon s Hudson s Bay Dormez- BMTC Sears vous? Canada Matelas Bonheur The Brick 5JUN Source: Note: Market Survey, September Participants polled were asked: Thinking about stores that sell mattresses, that you would shop at if you were buying a mattress, please tell me the name of the store that comes to mind first. Leon s Furniture Ltd. owns both Leon s and The Brick banners. Customer Traffic (% of Total Shoppers Who Visited Store) 3JUN JUN % 34% 30% 30% 27% 26% 16% 14% 13% 16% 9% Sleep Country Canada Sears Canada The Brick IKEA Leon's Hudson's Bay Dormezvous? Sears Canada BMTC The Brick Matelas 5JUN Bonheur Source: Market Survey, September Traffic data based on six months ended September Note: Leon s Furniture Ltd. owns both Leon s and The Brick banners. 39

42 Unrivalled In-Store Customer Experience The Company distinguishes itself through a superior in-store experience that results in high conversion of sales, repeat business and superior sales per associate metrics. Due to the fact that a mattress is an infrequent purchase, a big-ticket item and a difficult product to compare, customers require a knowledgeable and effective sales associate. Customers also have highly personalized tastes, preferences, needs and budgets, which combined with the complex and constantly evolving product landscape, increases the need for a knowledgeable and effective sales associate. In response, Sleep Country invests heavily in initial and ongoing training to ensure it delivers a highly informative, friendly and helpful (not pushy or intrusive) customer experience. This experience is further enhanced by the cumulative knowledge and abilities of a long tenured full-time sales team with low turnover. In addition, the Company offers a superior and extensive assortment of mattresses and related products, including a wide range of comfort choices, styles, sizes and price points. The Company strives to take the worry out of the customer s purchase decision by offering 60-day price and comfort guarantees. The collective efforts to create and sustain an unrivalled in-store customer experience have resulted in a high level of conversion from shoppers to buyers relative to the Company s competitors. Shopper to Buyer Conversion (% of Shoppers that Purchase) 3JUN JUN % 50% 44% 40% 31% 31% 70% 57% 50% 50% 41% 40% 33% 31% Sleep Country Canada IKEA Sears Canada The Brick Hudson's Bay Leon's IKEA Dormez -vous? B&M Matelas Bonheur Sears Hudson's Bay Leon s The Brick Canada 8JUL Source: Market Survey, September Note: Leon s Furniture Ltd. owns both Leon s and The Brick banners. 40

43 Superior Home Delivery Experience and Ongoing Customer Relationships Management believes that the home delivery experience is just as critical as the in-store experience and has developed a customer centric approach to its delivery model which it believes plays a critical role in customer satisfaction, repeat sales and word-of-mouth advertising. Sleep Country offers delivery seven days a week within a specified three-hour time frame. The Company selects individuals with positive attitudes and teaches them critical customer service and delivery skills. Delivery personnel are uniformed, wear shoe covers to protect the customer s home and are trained to be courteous. New mattresses are setup, packaging materials are removed and the replaced mattress set is either donated to charity or recycled. Management believes that the entire delivery process makes for a very positive experience and often leads to favourable word-of-mouth advertising. In addition, the entire customer experience is complemented by both a well-trained, in-house customer service department and a complete enterprise-wide information technology system to support delivery logistics and provide a seamless customer experience. Sleep Country continually receives positive feedback from customers and, in 2014, Sleep Country was recognized as being best-in-class in Ontario and Québec in overall customer satisfaction according to a WOW! Retail Customer Experience Survey conducted by Leger Metrics Inc. Leading Home Decor Customer Satisfaction Score Ontario Québec Rank Retailer 2014 Rank Retailer JUN Ameublements Tanguay Kitchen Stuff Plus JUN Williams-Sonoma Stokes Stokes Williams-Sonoma IKEA Brault & Martineau Crate&Barrel Germain Larivière Pier 1 Imports Linen Chest Sears Home Decor J.C. Perreault The Brick IKEA Home Sense Pier 1 Imports 58.5 Source: Note: WOW! Retailer Ranking by Sector by Leger Metrics Inc. Ontario survey based on 113 Ontario retailers. Over 500 recent customers 15 years of age or older were asked to respond to 16 dimensions. Québec survey based on 148 Québec retailers. Over 400 recent customers 15 years of age or older were asked to respond to 10 to 16 dimensions. Highly Trained and Dedicated Workforce with a Strong Culture of Customer Service Sleep Country has a comprehensive approach to human resource management that is built on a foundation of family values, commitment to training and development and competitive compensation and benefits. This has resulted in a workforce dedicated to delivering superior customer service, underpinned by excellent relations between management and employees and reinforced by high retention rates. In 2014, Sleep Country s average employee turnover rate of approximately 16% was approximately one-third of the retail industry average of 44%, as reported by a survey of Canadian retailers conducted by Mercer. (7) Also in 2014, and in addition to previous recognitions, Sleep Country received both the Canada s Passion Capitalists and Canada s 10 Most Admired Corporate Cultures awards. Convenient and Highly Visible Locations Sleep Country s stores are located in convenient locations to make it easy for customers to visit a store when they are shopping for a mattress. Stores are strategically located in each regional market close to residential areas, in high-traffic, highly visible locations with prominent signage and convenient access. While customers may research mattresses online, management believes that the vast majority of mattress customers visit a mattress retailer to test the product and make a purchase. (7) Mercer Retail Industry Compensation and Benefits Survey, August

44 Clear Growth Strategy Since its inception, Sleep Country has developed a leading regional market strategy, a strong brand with top-of-mind unaided brand awareness, a reputation for excellence in customer service and strong supplier relationships. Now that this platform has been established, the Company believes it has a low-risk path to growth and expansion within its existing markets. Management believes that Sleep Country is well-positioned to continue to grow revenue, profitability and cash flows by driving SSSG, continuing to add stores in existing, satellite and new markets and expanding its merchandising opportunities in accessories. Sleep Country s position as a best-in-class retailer with superior strategy and execution results in highly productive stores and an effective employee base as evidenced by strong SSSG of 7.2% over the last seven quarters, which management believes is in excess of the growth experienced by the Company s peers. Management believes that, over the next five to seven years, an opportunity exists to open 50 to 70 new stores, drive annual SSSG between 3% and 6%, grow total revenue from $406 million for the 12-month period ended March 31, 2015 to between $575 million and $640 million annually, and to increase Operating EBITDA from approximately $56 million for the 12-month period ended March 31, 2015 to between $80 million and $90 million annually. See Non-IFRS Measures and Retail Industry Metrics, Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Forward-Looking Information and Risk Factors. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to Operating EBITDA. Driving Same Store Sales Growth Sleep Country s differentiated growth strategy has delivered positive SSSG for the last seven quarters. Management believes the opportunity exists to drive annual SSSG between 3% and 6% over the next five to seven years by, among other things, employing the strategies listed below. See Non-IFRS Measures and Retail Industry Metrics, Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Forward-Looking Information and Risk Factors. Increase Mattress Sales. Sleep Country expects to increase its mattress sales by, among other things: Focusing on increasing traffic through marketing and advertising: The Company will focus on expanding its marketing efforts through increased and targeted advertising campaigns in each of its regional markets. Management has observed that customer traffic is highly correlated with the Company s regional and targeted advertising initiatives. Increasing customer conversion rates: As the primary point of contact with customers, Sleep Country s sales associates are vital to achieving strong customer conversion rates. In 2012, the Company increased the quality and quantity of its sales associate training programs which it believes has contributed to a 17.3% improvement in the conversion rate of shoppers to purchasers since Sleep Country will continue to build upon and reinforce its comprehensive, on-going training programs to ensure that it has an effective and best-in-class salesforce. The Company also believes that its assortment of superior and differentiated mattresses and related accessories will continue to increase customer traffic and conversion. Driving increased AUSP: Since 2012, the Company has increased its AUSP by approximately 10%. Combined with an overall increased demand in the market for higher quality and specialty mattresses, the Company expects that its salesforce will also help drive further increases in its AUSP. 42

45 Increase Accessories Sales. In recent years, Sleep Country has seen significant growth in sales of accessories which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. Since 2006, sales of accessories have grown at a CAGR of 11.5%. In addition, sales of complementary sleep products and accessories typically carry a gross margin that is approximately 10% higher than mattress sets. Management believes that the Company s focus on this broader related product offering, its procurement, sales training and dedicated advertising, will help the Company capitalize on the growing accessories category and is expected to result in increased customer traffic, conversion and AUSP. In 2014, Sleep Country s total accessories sales were approximately $73 million. This is only a small portion of what management believes is an $830 million addressable market in Canada. Management believes that an opportunity exists to expand Sleep Country s market share in the accessories category. Sleep Country Accessories Revenue (C$ millions) $73 $ JUN Source: Company report. Continued Implementation of Enhanced Store Design. In 2014, management developed and implemented an enhanced design for the Company s stores with a contemporary design and bright, welcoming atmosphere. In addition to the improved aesthetics, the new layout and design places a greater emphasis on products in the growing accessories category. To date, four of the Company s existing stores have been renovated to this enhanced design. Over time, Sleep Country intends to strategically select stores to renovate to this design, which will also be featured by all new stores that it opens. Currently, the Company anticipates renovating 10 to 15 stores each year over the next five to seven years. Early results have reported that the four stores renovated in 2014 have achieved better SSSG than the previous formats, showing an 18% increase in revenues since re-opening above Sleep Country s other stores in the same region. Adding Stores in Existing, Satellite and New Markets Management has defined growth opportunities in existing, satellite and new markets. An existing market or in-fill opportunity is a pre-existing built out region in which the Company already has an established store presence serviced by one or more existing distribution centres. In-fill stores are typically cash flow positive within the first six months of opening and in most cases do not require an increase in advertising, regional management or fixed distribution costs. A satellite market is a new region/store which is adjacent or close to a pre-existing built out region which benefits from advertising spill and is serviced logistically from the nearby distribution centre. Satellite markets usually require an additional investment in advertising and also require additional logistic costs to transport products to our stores and to customers beyond the normal range of our existing distribution centres. Stores in satellite markets are typically cash flow positive within the first 12 months of opening. A new market is a brand new territory, such as the Company s recent entry into New Brunswick, requiring incremental advertising and distribution logistics. Stores in new markets are typically cash flow positive within the first 24 months of opening. 43

46 Sleep Country s regional market strategy has led to significant store growth over the past 20 years and management has identified a number of additional markets across Canada where it intends to focus Sleep Country s growth efforts. In particular, management believes that, over the next five to seven years, an opportunity exists to open between eight and 12 new stores annually, resulting in an expected overall increase of between 50 and 70 new stores. See Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Forward-Looking Information and Risk Factors. Sleep Country Store Count (# of Stores) JUN Mar-15 Source: Company report. Note: Based on store count as of December 31 for 1994 to 2014 and March 31, Sleep Country s in-fill site selection strategy is focused on maximizing sales per store and per region throughout its store network. Prior to identifying and ultimately selecting locations for new stores, management conducts extensive analysis utilizing the following factors: (i) demographics such as population density, household income and population growth rates; (ii) store visibility and accessibility; (iii) lease and advertising economics; (iv) competitive dynamics; (v) overlap with existing stores and distribution footprint; and (vi) potential cannibalization of existing stores. Since the beginning of 2012, the Company has opened 20 in-fill stores which have added to sales in the local geographic area while having a minimal cannibalization impact on the existing stores. As an example, in one of the Company s longest standing markets which had 19 stores at the beginning of 2012, the Company opened six new stores over the past three years. This has increased sales in the region by 22%, while the legacy stores in the region experienced SSSG of 7%, resulting in a total increase in sales in the region of 29%. As stated above, in-fill stores are typically cash flow positive within the first six months of opening and in most cases do not require an increase in advertising, regional management or fixed distribution costs. As a result, incremental stores increase regional profitability through economies of scale and have a low break-even point before contributing to regional profitability. See Non-IFRS Measures and Retail Industry Metrics and Risk Factors Real estate. 44

47 As at March 31, 2015, Sleep Country achieved an average store density of one store per approximately 162,000 people in markets in which the Company operates. Management believes that adding 50 to 70 new stores will result in an average store density of approximately 140,000 people per store, assuming a 2% population growth per year for seven years. Management believes there is capacity to increase store density to one store per approximately 100,000 in population without oversaturating the market. See Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Forward-Looking Information and Risk Factors. This density level would be comparable to the Company s U.S. peers. For example, the leading specialty mattress retailer in the United States has publicly disclosed in its filings with the U.S. Securities and Exchange Commission that it has an average store density of one store per approximately 84,000 people and, in its most concentrated markets, an average store density of one store per approximately 60,000 people. Sleep Country Population Per Store Store Count (#) Population per Store (Thousand / Store) British Columbia Alberta Saskatchewan Manitoba Ontario Québec New Brunswick Nova Scotia Existing Canadian Source: Based on Statistics Canada s total 2014 population in each province. Note: Store count as of March 31, JUN Markets Operating Leverage on Sales Growth Sleep Country s centralized support infrastructure (in particular with respect to regional advertising, management and fixed distribution centre costs) is highly scalable making revenue growth achievable with limited additional overhead costs required. Due to the existing support infrastructure, management expects Operating EBITDA to grow at a faster rate than sales. See Non-IFRS Measures and Retail Industry Metrics, Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Forward-Looking Information and Risk Factors. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to EBITDA. Selectively Consider Strategic Acquisitions Sleep Country will also selectively consider strategic acquisitions that management believes are accretive and that will enhance existing market opportunities. Attractive Financial Model with Strong Cash Flow Conversion Sleep Country has a highly attractive financial model that allows it to leverage its national and regional platform, operate with negative Working Capital and fund growth initiatives with minimal capital investments. In addition, the Company has compelling new store economics with new stores quickly contributing positive cash flow to the business. As a result, Sleep Country is uniquely positioned to simultaneously achieve significant growth and generate strong Free Cash Flow without the need to obtain external financing to fund its growth. The Company has enjoyed Free Cash Flow Conversion in excess of 85% in each of the past three years. See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to Free Cash Flow. 45

48 National and Regional Scale Create Economic Advantages The Company s overall size, national and regional market leadership and collaborative approach results in strong relationships with its leading suppliers and provides the Company with competitive pricing and a unique assortment of products, creating a competitive advantage and a significant barrier to entry for competitors. This set of supplier relationships allows management to negotiate exclusive features for certain products, contributing to the salesforces ability to help customers find the most appropriate product for their needs. The Company s national scale also provides operating leverage with respect to corporate general and administrative expense overhead. Regional Scale Optimizes Economics on a Per-Store Basis The retail mattress industry is characterized by the existence of substantial regional fixed costs (advertising, regional management and distribution) that are independent of the number of stores in a particular region. Management believes that its strategy of becoming the market leader in each region with a higher store density brings regional fixed costs to a more attractive economic level on a per-store basis. Sleep Country has built regional market leadership by focusing on one regional market at a time before expanding into the next regional market. Management implements a significant sustained advertising program to build and maintain leading brand awareness in each market in which it operates. Typically, within the first year of entering a new regional market, management opens 50% to 75% of the stores it ultimately projects to have within each market. In order to ensure that the in-store and home delivery service is as strong in the new market as in the existing markets, stores and distribution centres are initially staffed with a combination of new local hires and experienced managers and sales and delivery associates who have been relocated to the new region. Negative Working Capital Operating Model Sleep Country has a negative Working Capital business model that helps the Company fund its growth. Critical to this arrangement is the just in time inventory relationship that Sleep Country has with its suppliers. As the figure below demonstrates, the model typically works as follows: (i) Sleep Country is paid in full by the customer at the time of the sale of the mattress set; (ii) Sleep Country orders the mattress set from its supplier the next day; (iii) the mattress set is received by Sleep Country within two days of placing the order with the supplier; and (iv) Sleep Country typically has between 30 and 45 days to pay its supplier following receipt of the mattress set which results in 33 to 48 days of negative Working Capital. This favourable payment cycle means that Sleep Country is able to generate cash from Working Capital as it grows rather than having to invest in Working Capital. See Non-IFRS Measures and Retail Industry Metrics and Selected Consolidation Financial Information. Sleep Country Working Capital Cycle Day 1: Mattress Ordered Day 4: Mattress Delivered to Customer Day 0 Day 1 Day 3 Day 4 Day 33 Day 48 Day 0: Customer Purchase Customer Payment Day 3: Mattress Delivered to Warehouse Day 33-48: Pay Supplier Day Payment Terms from Supplier 5JUN Source: Company report. See Non-IFRS Measures and Retail Industry Metrics and Selected Consolidated Financial Information. 46

49 Low Capital Expenditure Requirements Sleep Country operates an asset-light business model, choosing to lease all of its stores, distribution centres and trucks. As a result, Sleep Country has low maintenance and growth capital expenditure requirements. Specifically, maintenance capital expenditures have averaged 1.0% of revenue from 2008 to Management intends to continue leasing all stores and distribution centres. Sleep Country Maintenance and Growth Capital Expenditures (% of Sales) Maintenance Growth 3.1% 2.9% 2.6% 1.1% 1.9% 1.5% 1.9% 1.8% 1.5% 1.2% 0.9% 0.7% 0.5% 1.3% 1.4% 0.8% 0.8% 1.0% 1.3% 1.2% 0.5% Source: Company report. 5JUN Compelling New Store Economics A new in-fill store at Sleep Country is typically cash flow positive within the first six months of opening. In most cases, opening new stores in existing markets does not require an increase in advertising, regional management or fixed distribution centre costs. As a result, incremental stores increase regional profitability through economies of scale. In addition, because Sleep Country leases all of its locations, opening a new store typically only requires a modest capital expenditure and Working Capital investment (net of tenant inducement allowances) of approximately $325,000. The Company is able to simultaneously achieve significant growth and generate strong cash flow given the low capital expenditure requirements per store and negative Working Capital from customer deposits and supplier financing. See Non-IFRS Measures and Retail Industry Metrics, Selected Consolidated Financial Information and Risk Factors Real estate. Experienced and Committed Management Team Sleep Country is led by a highly experienced management team with a proven track record. On average, the Company s executives have over 15 years of experience with Sleep Country and over 20 years of relevant industry experience. Sleep Country s Chief Executive Officer, David Friesema, joined the Company in 1995 and, along with Stewart Schaefer, President of Dormez-vous? and Chief Business Development Officer and other members of senior management, has been instrumental in enhancing the sales training programs, refocusing the advertising strategy, expanding the accessories category of the business and driving new store expansion. In addition, the Company s co-founders, Stephen Gunn and Christine Magee, remain committed to the business and its long-term success, and each will serve as an Executive Co-Chair of the Company. 47

50 Throughout the Company s history, including during turbulent economic times, the management team has demonstrated its ability to successfully execute on its business strategy, evidenced by the 18-year revenue and EBITDA CAGRs of 16.1% and 24.1%, respectively. The Company also has a proven track record of operating as a public company, evidenced by the superior returns that it delivered to investors relative to the broader market during the period from 2003 to 2008 when it was previously listed on the TSX as an income fund. Between April 15, 2003 and September 24, 2008, management achieved a total return of 218%, including a total dividend return of 98%. See Non-IFRS Measures and Retail Industry Metrics. See Selected Consolidated Financial Information for a reconciliation of net earnings (loss) from continuing operations to EBITDA. Competition The retail mattress industry is highly competitive. The seven leading retailers in the industry include Sleep Country / Dormez-vous?, Sears Canada, Leon s / The Brick, Hudson s Bay, BMTC, IKEA and Costco. Of these leading seven retailers, Sleep Country is the only specialty mattress retailer. The remaining industry sales are highly fragmented amongst a number of smaller specialty mattress stores, other furniture stores, discounters and warehouse clubs and small independent retailers. See Risk Factors Competition. This market concentration and Sleep Country s ability to carve a leading position in a highly competitive market place through a highly differentiated service model unrivalled in execution over the last 20 years illustrates the significant barriers to entry now and in years to come. Legal Proceedings The Company is not party to any legal proceedings other than ordinary course, routine litigation which is not material to its business, results of operations or financial condition. Facilities As at March 31, 2015, Sleep Country operated 215 stores and 16 distribution centres in Canada. Stores are generally located in convenient, highly visible locations and average approximately 5,000 square feet in size. Sleep Country s distribution centres range in size from approximately 15,000 square feet to approximately 110,000 square feet. All retail store and distribution centre premises are leased under operating leases that typically have a term of five to 10 years and contain options for renewal or permit continuation of the lease on a month-to-month basis. Management believes that it has a good relationship with each of its landlords, that business carried on at these leased locations is relocatable and that no individual lease or location is material. Employees As at April 1, 2015, Sleep Country had 1,121 employees. Of this group, 1,074 were full-time employees and the remainder were part-time employees. As at April 1, 2015, 99 employees were unionized, comprising approximately 9% of the total workforce. All of the unionized employees are employed at Sleep Country s Richmond, Langley, Victoria and Toronto distribution centres. The current agreement with Retail Wholesale Union Local 580 covering the Richmond, Langley and Victoria sites was renewed on January 1, 2014 for a four year term. The current agreement with the Workers United Canada Council, on its own behalf and on behalf of its Local 2757, in respect of the Toronto site was signed on January 14, 2013 for a three year term. Management believes its relations with employees are excellent and experiences turnover rates well below industry norms. The Company has never experienced a work stoppage and has been successful in renegotiating its collective agreements as they expire. Suppliers The Company s overall size, regional market leadership and approach to supplier relations result in strong relationships with its leading suppliers, Tempur-Sealy, Serta, Simmons and Kingsdown, that yield many advantages. These advantages include better product cost than many of its smaller competitors, and the ability of the Company to obtain unique products and product features and high service levels from suppliers. 48

51 Corporate Structure The Company was incorporated under the Canada Business Corporations Act (the CBCA ) on May 27, SCCI amalgamated under the CBCA on November 1, SCCI is currently the general partner of Sleep Country Canada LP ( SCC LP ), a limited partnership that was formed on October 21, 2008 pursuant to the Limited Partnerships Act (Ontario). SC US Holdco and SC Management were incorporated under the CBCA on October 21, 2008 and October 28, 2008, respectively. In connection with the Acquisition, SCCI will transfer its general partner interest in SCC LP to a newly formed general partner. Following completion of the Acquisition, SCCI will acquire each of SC Management and SC US Holdco. SC Management and SC US Holdco will subsequently be dissolved into SCCI. See The Acquisition and Related Transactions. The following chart identifies Sleep Country s material subsidiaries (including jurisdiction of formation or incorporation of the various entities) following completion of this Offering and the Acquisition. Sleep Country Canada Holdings Inc. (Canada) 100% Sleep Country Canada Inc. (Canada) 100% 100% 100% General Partner Sleep Country US Holdco Canada Inc. (Canada) SC Management Holding Inc. (Canada) General Partner Unit Special Units Preferred Units Common Units (48.5%) Common Units (46.3%) Common Units (5.2%) Sleep Country Canada LP (Ontario) 29JUN Note: Following completion of the Offering and the Acquisition, the limited partners of SCC LP will be SCCI, SC US Holdco and SC Management. Following the dissolution of SC US Holdco and SC Management, SCCI will be the sole limited partner of SCC LP. 49

52 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table sets forth selected consolidated financial information for the periods indicated. The selected consolidated financial information set out below as of March 31, 2015 and for the three months ended March 31, 2015 and March 31, 2014 has been derived from SCCI s unaudited interim condensed consolidated financial statements and accompanying notes, and the selected consolidated financial information set out below as of December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014 ( Fiscal 2014 ), December 31, 2013 ( Fiscal 2013 ) and December 31, 2012 ( Fiscal 2012 ) has been derived from SCCI s audited consolidated financial statements and accompanying notes, in each case prepared in accordance with IFRS and contained elsewhere in this Prospectus. The consolidated financial statements for Fiscal 2012, Fiscal 2013 and Fiscal 2014 have been audited by PricewaterhouseCoopers LLP, and the auditor s report on these consolidated financial statements is included elsewhere in this Prospectus. The selected consolidated financial information should be read in conjunction with: (i) Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI ; (ii) the unaudited interim condensed consolidated financial statements and the audited consolidated financial statements of SCCI and accompanying notes contained elsewhere in this Prospectus; and (iii) the pro forma financial statements of the Company and accompanying notes contained elsewhere in this Prospectus. The selected pro forma consolidated financial information below gives effect to the Offering, the Acquisition and the Pre-Closing Transactions and assumes no exercise of the Over-Allotment Option, and has been prepared by management on the basis of the information contained in this Prospectus. This analysis is not a forecast or a projection of future results. The actual results of operations of Sleep Country for any period, whether before or after the Acquisition will likely vary from the amounts set forth in the following analysis and such variation may be material. The selected consolidated and pro forma financial information set out below may not be indicative of Sleep Country s future performance. The figures in the table for the 12 months ended March 31, 2015 are based on the consolidated financial statements of SCCI contained elsewhere in this Prospectus and have been calculated by adding the figures for the three months ended March 31, 2015 to the figures for the year ended December 31, 2014 and deducting the figures for the three months ended March 31, The results of operations for this period are not necessarily indicative of the results of operations to be expected in any given fiscal year. Prospective investors should review this information in conjunction with Non-IFRS Financial Measures and Retail Industry Metrics, Use of Proceeds, Capitalization, The Acquisition and Related Transactions, Risk Factors and Description of Material Indebtedness, included elsewhere in this Prospectus. 50

53 Selected Financial Information Twelve Months Three Months Three Months Three Months Ended Ended Ended Ended Mar 31, Fiscal Fiscal Fiscal Fiscal Mar 31, Mar 31, Mar 31, (C$ thousands unless otherwise stated) SCCI (pro forma) SCCI SCCI SCCI (pro forma) SCCI SCCI Consolidated Income Statement Data from Continuing Operations Revenues , , , , ,581 91,613 91,613 81,344 Cost of sales , , , , ,710 69,380 69,380 63,712 Gross profit , , ,420 88,088 80,871 22,233 22,233 17,632 General and administrative expenses... 54,951 54,916 54,898 50,226 42,641 11,933 11,929 11,876 Depreciation and amortization... 9,850 9,897 9,897 9,342 7,872 2,466 2,466 2,513 Income before finance, interest and other (income) expenses and income taxes... 43,220 38,607 38,625 28,520 30,358 7,834 7,838 3,243 Finance related expenses... 87,925 6,162 61,502 23,215 23,126 1,514 33,369 6,946 Interest income and other expenses (net)... (131) (145) (102) (149) (149) 3 Income (loss) before income taxes... (44,574) 32,424 (22,898) 5,450 7,334 6,469 (25,382) (3,706) Income taxes... (12,748) 12,206 (5,762) 1, ,749 (7,691) (705) Net income (loss) from: Continuing operations... (31,826) 20,218 (17,136) 4,381 6,399 4,720 (17,691) (3,001) Discontinued operations... 10,334 2,996 (2,588) (1,311) 6,777 (561) Net income (loss)... (21,492) 20,218 (14,140) 1,793 5,088 4,720 (10,914) (3,562) March 31, March 31, Fiscal Fiscal Fiscal (C$ thousands unless otherwise stated) Notes (pro forma) SCCI SCCI SCCI SCCI Consolidated Financial Position Data Cash... Note 1 14,300 13,486 41,331 27,401 16,912 Working Capital... Note 10 (12,392) (5,486) (10,524) (6,303) (8,505) Assets of disposal group held for sale... 14,086 Property and equipment... 24,938 24,938 24,948 30,455 24,948 Total assets , , , , ,180 Liabilities of disposal group held for sale... 5,210 Long-term debt... Note 2 155, , , , ,595 Total liabilities , , , , ,029 Total equity ,822 95, , , ,151 Other Financial and Operating Metrics for Continuing Operations: Twelve Months Three Months Three Months Ended Ended Ended Mar 31, Fiscal Fiscal Fiscal Mar 31, Mar 31, (C$ thousands unless otherwise stated) Notes SCCI SCCI SCCI SCCI SCCI SCCI Number of stores at period end Total sales growth % 11.9% 6.4% (1.2%) 12.6% 5.5% Same store sales growth... Note % 8.3% 1.0% (4.2%) 10.5% 1.3% Gross profit margin... Note % 26.1% 24.9% 24.3% 24.3% 21.7% Operating EBITDA... Note 10 55,808 50,645 39,407 38,361 10,722 5,559 Operating EBITDA margin... Note % 12.8% 11.1% 11.5% 11.7% 6.8% Maintenance capital expenditures... 2,233 2,010 4,272 4,482 1, Growth capital expenditures... 4,572 5,086 6,708 5,060 1,406 1,920 Total capital expenditures... 6,805 7,096 10,980 9,542 2,475 2,766 Working Capital... Note 10 (5,486) (10,524) (6,817) (8,356) (5,486) (7,819) Cash flows from (used in) change in Working Capital... (2,333) 3,707 (1,539) (260) (5,038) 1,002 Free Cash Flow... Notes 3, 10 48,504 50,219 32,051 33,488 4,197 5,912 Free Cash Flow Conversion... Note 10 91% 103% 85% 88% 41% 103% 51

54 Twelve Months Three Months Three Months Three Months Ended Ended Ended Ended Mar 31, Fiscal Fiscal Fiscal Fiscal Mar 31, Mar 31, Mar 31, (C$ thousands unless otherwise stated) Notes SCCI (pro forma) SCCI SCCI SCCI (pro forma) SCCI SCCI Reconciliation of net income (loss) from continuing operations to EBITDA and Operating EBITDA: Net income (loss) from continuing operations... (31,826) 20,218 (17,136) 4,381 6,399 4,720 (17,691) (3,001) Interest income and other expenses net... (131) (145) (102) (149) (149) 3 Finance related expenses... 87,925 6,162 61,502 23,215 23,126 1,514 33,369 6,946 Income taxes... (12,748) 12,206 (5,762) 1, ,749 (7,691) (705) Depreciation and amortization... 9,850 9,897 9,897 9,342 7,872 2,466 2,466 2,513 EBITDA... Note 10 53,070 48,504 48,522 37,862 38,230 10,300 10,304 5,756 Adjustments to EBITDA: Reduction in management compensation... Note 4 1,714 1,364 1,364 1,337 1, Reduction in management bonuses.. Note (81) 3 3 (270) Share-based compensation... Note Non-recurring items... Note (1,160) 6 Operating EBITDA... Note 10 55,808 50,627 50,645 39,407 38,361 10,718 10,722 5,559 Reconciliation of EBITDA to Free Cash Flow: EBITDA... Note 10 53,070 48,522 37,862 38,230 10,304 5,756 Cash from (used in) change in Working Capital... (2,333) 3,707 (1,539) (260) (5,038) 1,002 Less: Maintenance capital expenditures. 2,233 2,010 4,272 4,482 1, Free Cash Flow... Note 10 48,504 50,219 32,051 33,488 4,197 5,912 Reconciliation of Net Income (loss) from Continuing Operations to Adjusted Net Income: Net income (loss) from continuing operations... (31,826) 20,218 (17,136) 4,720 6,399 4,720 (17,691) (3,001) Adjustments: Interest expense on Series A and B notes... Note 8 71,049 46,051 18,059 17,480 29,203 4,205 Interest expense and fair value adjustment on Class A convertible shares and Class B common shares. Note 9 11,167 10,584 2,370 1,195 2,648 2,065 Total interest adjustment... 82,216 56,635 20,429 18,675 31,851 6,270 Reduction in management compensation... 1,714 1,364 1,364 1,337 1, Reduction in management bonuses (81) 3 3 (270) Share-based compensation Non-recurring items (1,160) 6 Total adjustments... 84,954 2,123 58,758 21,974 18, ,269 6,073 Tax impact of all adjustments... (19,388) (558) (12,656) (5,147) (4,574) (110) (7,784) (1,052) Adjusted Net Income... 33,740 21,783 28,966 21,208 20,631 5,028 6,794 2,020 Notes: (1) Prior to Closing, SCCI intends to declare and pay dividends to the Existing Shareholders in the aggregate amount of up to $13 million. (2) In connection with the Pre-Closing Transactions, Series A and B promissory notes of SCCI will be converted into shares of SCCI. All interest on Series A and B promissory notes of SCCI will be converted into Series B promissory notes of SCCI prior to the settlement of the notes. The Class A convertible shares of SCCI will be converted into shares of SCCI. The Class B common shares of SCCI will be acquired by the Company in connection with the Acquisition. At Closing, the Company is expected to have gross outstanding long term debt of approximately $157.1 million, consisting of $155 million drawn under the New Credit Facility and finance leases of approximately $2.1 million. (3) Free Cash Flow is defined as EBITDA less: (i) maintenance capital expenditures; and (ii) changes in Working Capital. (4) Reduction in management compensation upon internal restructuring following the completion of this Offering. (5) Management bonus payouts in certain years that hit stretch targets have been adjusted to reflect the average percentage payout of the past six fiscal years over the base bonus level (or 126% over base). During that period the Company paid 163% over base for 2014 (the highest during the period) and did not pay a bonus in 2011 (the lowest during the period). Management bonus payments are determined by the Company s board of directors on an annual basis based on achieving certain financial benchmarks established with reference to prior years financial performance and internally set benchmarks. For 2015 and in future years, management bonuses may be greater or less than 126% over base (with a maximum potential bonus payment of 185% over base and a minimum of 0% of base). (6) Adjustments for share-based compensation, a non-cash item. (7) Non-recurring items include certain professional fees and internal costs relating to SCCI s capital reorganization, as well as in Fiscal 2012, based on trend analysis, management revised its estimates on certain provisions and accruals and made some non-recurring adjustments. (8) Adjustment for interest expense on debt that will be restructured in connection with the Pre-Closing Transactions. (9) Adjustment for interest expense on convertible shares and Class B common shares of SCCI that will be restructured in connection with the Pre-Closing Transactions. (10) See Non-IFRS Measures and Retail Industry Metrics. 52

55 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SCCI The following Management s Discussion and Analysis ( MD&A ) is prepared as of the date of this Prospectus and is intended to assist readers in understanding the financial performance and financial condition of SCCI. This MD&A provides information concerning SCCI s financial condition as at March 31, 2015, December 31, 2014 and December 31, 2013 and results of operations for the first quarter ended March 31, 2015 and fiscal years ended December 31, 2014, December 31, 2013 and December 31, This MD&A should be read in conjunction with SCCI s audited consolidated financial statements and unaudited consolidated financial statements included elsewhere in this Prospectus. Basis of Presentation The audited consolidated financial statements and unaudited condensed interim consolidated financial statements of SCCI have been prepared in accordance with IFRS and are presented in thousands of Canadian dollars unless otherwise indicated. SCCI s fiscal year is the twelve-month period ending December 31. All references in this MD&A to Fiscal 2014 are to SCCI s fiscal year ended December 31, 2014, to Fiscal 2013 are to SCCI s fiscal year ended December 31, 2013 and to Fiscal 2012 are to SCCI s fiscal year ended December 31, All references in this MD&A to Q are to SCCI s fiscal quarter ended March 31, 2015 and to Q are to SCCI s fiscal quarter ended March 31, Non-IFRS Measures and Retail Industry Metrics This MD&A makes reference to certain non-ifrs measures. These measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS. They are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement IFRS measures by providing further understanding of SCCI s results of operations from management s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of SCCI s financial information reported under IFRS. SCCI uses non-ifrs measures, including Adjusted Net Income, EBITDA, Free Cash Flow, Free Cash Flow Conversion, Operating EBITDA and Working Capital. This MD&A also makes reference to certain operating metrics that are commonly used in the retail industry, including AUSP, conversion and Same Store Sales Growth or SSSG. These non-ifrs measures and retail industry operating metrics are used to provide investors with supplemental measures of SCCI s operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. SCCI also believes that securities analysts, investors and other interested parties frequently use non-ifrs measures and these retail industry metrics in the evaluation of and to compare SCCI s performance against others in the retail industry. SCCI s management also uses non-ifrs measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and to determine components of management compensation. Forward-Looking Statements Some of the information contained in this MD&A contains forward-looking statements. These statements are based on management s reasonable assumptions and beliefs in light of the information currently available to them and are made as of the date of this MD&A. SCCI does not undertake to update any such forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Actual results may differ materially from those indicated or underlying forward-looking statements as a result of various factors, including those described in Risk Factors and elsewhere in this Prospectus. SCCI cautions that the list of risk factors and uncertainties is not exhaustive and other factors could also adversely affect its results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. See Forward-looking Information and Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these statements. 53

56 Overview Sleep Country is Canada s leading mattress retailer and the only specialty mattress retailer with a national footprint. Sleep Country operates under two mattress retail banners (the Banners ): Dormez-vous?, the largest retailer of mattresses in Québec; and Sleep Country Canada the largest mattress retailer in the rest of Canada. Sleep Country continues to expand its presence coast to coast. Since the beginning of 2007, SCCI has opened 78 new stores and, as at March 31, 2015, it had 215 stores and 16 distribution centres across Canada. SCCI s stores average approximately 5,000 square feet and offer a large selection of mattresses and a wide assortment of complementary sleep related products and accessories. Between 2006 and 2014, Sleep Country more than doubled its sales of complementary sleep products and accessories which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. Sleep Country s stores are all corporate-owned, enabling it to develop and maintain a strong culture of customer service, resulting in a consistent and superior in-store and home delivery customer experience. Between March 2006 and December 2014, SCCI was also operating in Arizona, U.S.A. under the Sleep America banner. The Sleep America business was sold on January 6, 2015 and is captured as Discontinued Operations in the financial statements. Sleep Country Canada SCCI launched its concept in the Vancouver market with four stores in 1994 and has since expanded across Canada with 168 corporately owned stores and 14 distribution centres in British Columbia, Alberta, Manitoba, Saskatchewan, Ontario, Nova Scotia and New Brunswick as at March 31, Sleep Country 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; and Halifax, NS. Dormez-vous? In January 2006, SCCI acquired Dormez-vous?, a Québec based mattress retailer with five stores and one distribution centre in the Montreal area. As of March 31, 2015, the Dormez-vous? banner has expanded to 47 stores and two distribution centres in the Montreal and Québec City markets. Review of Q as compared to Q Highlights of results from continuing operations Increased revenues by 12.6%; Achieved Same Store Sales Growth of 10.5%; Opened three new store locations; Increased gross profit margin by 2.6% to 24.3%; Increased Operating EBITDA by 92.9% to $10.7 million primarily driven by strong revenue growth, improved gross profit margin, and better operating leverage on fixed costs including general and administrative expenses; Increased Operating EBITDA margin by 4.9% to 11.7%; Net loss increased from $3.0 million to $17.7 million mainly as a result of the accelerated interest accretion recognized upon the early repayment of certain promissory notes and redemption of certain convertible shares held by related parties; Increased Adjusted Net Income by 236.3% to $6.8 million primarily driven by strong revenue growth, improved gross profit margin, and better operating leverage on fixed costs including general and administrative expenses; and Completed the sale of the Sleep America business for US$12.4 million (net of a working capital adjustment of US$0.1 million). 54

57 Review of Fiscal 2014 as compared to Fiscal 2013 Highlights of results from continuing operations Increased revenues by 11.9% to $396.1 million; Achieved Same Store Sales Growth of 8.3%; Opened four net new store locations; Increased gross profit margin by 1.2% to 26.1%; Increased Operating EBITDA by 28.5% to $50.6 million primarily driven by strong revenue growth, improved gross profit margin, and better operating leverage on fixed costs including general and administration expenses; Increased Operating EBITDA margin by 1.7% to 12.8% from 11.1% for Fiscal 2013; Increased Adjusted Net Income by 36.6% from $21.2 million in Fiscal 2013 to $29.0 million in Fiscal 2014 primarily driven by the strong revenue growth combined with improved gross profit margins and operating leverage on fixed costs including general and administrative expenses. Selected Financial Information The following table summarizes the results of SCCI s continuing operations: (C$ thousands unless otherwise stated) Q Q Fiscal 2014 Fiscal 2013 Fiscal 2012 Consolidated Income Statement Data from Continuing Operations Revenues... $ 91,613 $ 81,344 $396,085 $353,922 $332,581 Cost of sales... 69,380 63, , , ,710 Gross profit... 22,233 17, ,420 88,088 80,871 General and administrative expenses... 11,929 11,876 54,898 50,226 42,641 Depreciation and amortization... 2,466 2,513 9,897 9,342 7,872 Income before finance, interest and other (income) expenses and income taxes... 7,838 3,243 38,625 28,520 30,358 Finance related expenses... 33,369 6,946 61,502 23,215 23,126 Interest income and other (income) expenses net (149) 3 21 (145) (102) Income (loss) before income taxes (recovery)... (25,382) (3,706) (22,898) 5,450 7,334 Income taxes (recovery)... (7,691) (705) (5,762) 1, Net income (loss) from continuing operations... $(17,691) $ (3,001) (17,136) 4,381 6,399 Net income (loss) from Discontinued operations.. 6,777 (561) 2,996 (2,588) (1,311) Net income (loss)... $(10,914) $ (3,562) $(14,140) $ 1,793 $ 5,088 Total assets... $422,888 $462,370 $440,223 $419,180 Long-term debt... $244,597 $257,838 $220,115 $207,595 55

58 (C$ thousands unless otherwise stated) Q Q Fiscal 2014 Fiscal 2013 Fiscal 2012 Reconciliation of net income (loss) from continuing operations to EBITDA and Operating EBITDA: Net income (loss)... $(17,691) $(3,001) $(17,136) $ 4,381 $ 6,399 Interest income and other (income) expenses net... (149) 3 21 (145) (102) Finance related expenses... 33,369 6,946 61,502 23,215 23,126 Income taxes (recovery)... (7,691) (705) (5,762) 1, Depreciation and amortization... 2,466 2,513 9,897 9,342 7,872 EBITDA (7)... $ 10,304 $ 5,756 $ 48,522 $37,862 $38,230 Adjustments to EBITDA: Reduction in management compensation (1) ,364 1,337 1,311 Reduction in management bonuses (2)... 3 (270) (81) Share-based compensation (3) Non-recurring items (4) (1,160) Operating EBITDA (7)... $ 10,722 $ 5,559 $ 50,645 $39,407 $38,361 Reconciliation of net income (loss) from continuing operations to Adjusted Net Income: Net income (loss)... $(17,691) $(3,001) $(17,136) $ 4,381 $ 6,399 Adjustments: Interest expense on Series A and B promissory notes (5)... 29,203 4,205 46,051 18,059 $17,480 Interest expense and fair value adjustment on Class A convertible shares and Class B common shares (6)... 2,648 2,065 10,584 2,370 1,195 Total interest adjustment... 31,851 6,270 56,635 20,429 18,675 Reduction in management compensation ,364 1,337 1,311 Reduction in management bonuses... 3 (270) (81) Share-based compensation Non-recurring items (1,160) Total adjustments... 32,269 6,073 58,758 21,974 18,806 Tax impact of all adjustments... (7,784) (1,052) (12,656) (5,147) (4,574) Adjusted Net Income... $ 6,794 $ 2,020 $ 28,966 $21,208 $20,631 (1) Reduction in management compensation upon internal restructuring following the completion of this Offering. (2) Management bonus payouts in certain years that hit stretch targets have been adjusted to reflect the average percentage payout of the past six fiscal years over the base bonus level (or 126% over base). During that period the Company paid 163% over base for 2014 (the highest during the period) and did not pay a bonus in 2011 (the lowest during the period). Management bonus payments are determined by the Company s board of directors on an annual basis based on achieving certain financial benchmarks established with reference to prior years financial performance and internally set benchmarks. For 2015 and in future years, management bonuses may be greater or less than 126% over base (with a maximum potential bonus payment of 185% over base and a minimum of 0% of base). (3) Adjustments for share-based compensation, a non-cash item. (4) Non-recurring items include professional fees and internal costs relating to SCCI s capital reorganization, as well as in Fiscal 2012, based on trend analysis, management revised its estimates on certain provisions and accruals and made some non-recurring adjustments. (5) Adjustment for interest expense on debt that will be restructured in connection with the Pre-Closing Transactions. (6) Adjustment for interest expense on convertible shares and Class B common shares that will be restructured in connection with the Pre-Closing Transactions. (7) See Non-IFRS Measures and Retail Industry Metrics. 56

59 Factors Affecting our Results of Operations Revenues Revenues are derived primarily from the retail sales of mattress sets, accessories (including bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards), third party warranty products and delivery fees. Revenue is recognized upon either delivery or customer pick-up. SCCI s goal is to build on the market position of its Banners and to grow its revenue by driving SSSG, continuing to add stores in existing, satellite and new markets and expand its merchandising opportunities in accessories. SCCI s revenue is impacted by competition from other retailers that sell similar products and by seasonal patterns. Same Store Sales Growth ( SSSG ) SSSG is a non-ifrs metric used in the retail industry to compare sales derived from the established stores of certain period over the same period in prior year. SSSG helps to explain what portion of sales growth can be attributed to growth in the established stores and what portion can be attributed to the opening of the new stores. SCCI calculates SSSG as the percentage increase or decrease in sales of stores opened for at least 12 complete months relative to the same period in the prior year. SSSG is primarily driven by: Increases in customer traffic through marketing and advertising; Increases in the conversion rate of turning shoppers into purchasers; and Increases in the average transaction size. Expansion Opportunities SCCI 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 SCCI already has an established store presence serviced by one or more existing distribution centres. A satellite market is a new region/store which is adjacent or close to a pre-existing built out region which benefits from advertising spill and is serviced logistically from the nearby distribution centre. A new market is a brand new territory, such as SCCI s recent entry into New Brunswick, requiring incremental advertising and distribution logistics. SCCI has successfully expanded every year since its founding in This capability to expand depends on SCCI 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 Sleep Country and Dormez-vouz?. SCCI s site selection strategy is focused on maximizing sales per store and per region throughout its store network. Prior to identifying and ultimately selecting locations for new stores, management conducts extensive analysis utilizing the following factors: (i) demographics such as population density, household income and population growth rates; (ii) store visibility and accessibility; (iii) lease and advertising economics; (iv) competitive dynamics; (v) overlap with existing stores and distribution footprint; and (vi) potential cannibalization of existing stores. In terms of regional expansion, once a target area has been determined, management focuses on ensuring that SCCI can successfully incorporate its culture (vision and mission) into the new region. To help accomplish this, SCCI has traditionally started by ensuring that the core of its new regional team is comprised of existing employees in leadership roles who are willing to relocate. The team is then supplemented with local hires, who received three to four weeks of training have to spend a few weeks in existing stores and distribution centres learning SCCI s service model and learn the culture. 57

60 The following table summarizes the change in SCCI s store count from continuing operations from Fiscal 2012 to Q1 2015: Canadian Stores: Q Q Number of stores, beginning of period Stores newly opened Stores closed... 1 Number of stores, end of period Stores relocated Stores renovated Of all the new stores opened between January 1, 2012 and March 31, 2015, two in Q were in the new market of New Brunswick, five in 2013 were in the new market of Nova Scotia, four were located in satellite markets and the remaining were in-fill stores. Competition The retail mattress industry is highly competitive. The seven leading retailers in the industry include Sleep Country / Dormez-vous?, Sears Canada, Leon s / The Brick, Hudson s Bay, BMTC, IKEA and Costco. 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 20 years and serves as a significant barrier to entry. Seasonality The mattress retail industry is affected by seasonal conditions. SCCI typically experiences higher sales and a greater proportion of income during the third and fourth fiscal quarters due to a concentration of summer season holidays in the second quarter and other seasonal factors. Sales have historically trended lower in the first fiscal quarter as consumers tighten their budgets after the fourth quarter holiday season and the cold winter weather in the first quarter tends to lower their desire to shop. SCCI expects these trends to continue for the foreseeable future. Average quarterly share of annual sales over the last three fiscal years is as follows: First quarter... 22% Second quarter... 23% Third quarter... 30% Fourth quarter... 25% Yearly total % Cost of Sales and Gross Profit Cost of sales includes product-related costs and the costs of SCCI 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, AUSP, and SCCI s ability to manage store level occupancy costs. Product gross margin is affected by changes in sales product mix, suppliers term discount, and inventory management. The largest component of SCCI s sales operational costs are the sales associates compensation and store occupancy costs. The largest component of SCCI 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 prorated between products sold and those still in inventory. Only rebates on products sold are recorded as a reduction to cost of sales. 58

61 General and Administrative ( G&A ) Expenses G&A expenses include media and advertising costs, telecommunication and information technology expenses, compensation costs associated with corporate management and administrative personnel, credit card and financing charges, warehouse and office occupancy costs, professional fees and other overhead expenses. Depreciation and Amortization Depreciation is computed on a straight-line basis at annual rates based on the estimated useful lives of the related assets as follows: Computer hardware... Furniture, fixtures and other... Leasehold improvements... Assets under finance lease months 48 to 60 months over the term of the lease over the term of the lease Amortization is made up of amortization of computer software and non-compete contracts. Computer software amortization is computed on a straight-line basis at annual rates based on the estimated useful life of 36 months. Non-compete contracts are amortized over an estimated life of ten years. Sleep Country s capital expenditure requirements are modest as all stores and distribution centre locations are leased. The most significant capital expenditure requirements are the leasehold improvements of new and existing stores. An enhanced store design was implemented in certain existing stores during the second half of Over time, SCCI intends to strategically select stores to renovate to this design, which will also be featured by all new stores that it opens. The average capital cost of the enhanced store design is approximately $0.35 million. Finance Related Expenses Finance related expenses are interest and fair value adjustments incurred primarily on long-term debt, Class A convertible shares and Class B common shares. The Class A convertible shares and Class B common shares are classified as debt by their substance. Long-term debt includes senior secured credit facilities of a term loan and revolving credit facilities, unsecured promissory notes, unamortized debt issuance cost and finance leases. Income Taxes SCCI is subject to federal and provincial income taxes in jurisdictions in which it conducts business. SCCI records deferred tax expense (recovery) in respect of realizable temporary differences. SCCI does not recognize a deferred tax asset for temporary differences or loss carry forwards where management does not believe that it is probable these will reverse in the foreseeable future. Discontinued Operations SCCI entered into an agreement to sell the Sleep America business on November 5, 2014 for total proceeds of US$12.4 million (net of a working capital adjustment of US$0.1 million). The assets and liabilities of Sleep America have been presented as held for sale in Fiscal 2014 and its operations as Discontinued Operations in Q1 2015, Fiscal 2014 and all comparative periods. The business was subsequently divested on January 6, EBITDA and Operating EBITDA EBITDA and Operating EBITDA are used by SCCI to assess its operating performance. They are non-ifrs measures and may not be comparable to similar measures used by other companies. See Non-IFRS Measures and Retail Industry Metrics. 59

62 EBITDA is defined as income (loss) before interest, taxes, depreciation and amortization expenses. Operating EBITDA is defined as income (loss) before interest, taxes, depreciation and amortization expenses adjusted for: Reduction / (increase) in management bonuses; Reduction in management compensation; Certain non-recurring items (shareholder reorganization, professional fees and customer deposit breakages and other provision); and Share based compensation. Net Income (loss) from continuing operations and Adjusted Net Income Adjusted Net Income is used by SCCI to assess its operating performance. It is a non-ifrs measure and may not be comparable to similar measures used by other companies. See Non-IFRS Measures and Retail Industry Metrics. Adjusted Net Income is defined as net income (loss) from continuing operations adjusted for: Interest expense on Series A and Series B promissory notes; Interest expense and fair value adjustment on Class A convertible shares and Class B common shares; Reduction / (increase) in management bonuses; Reduction in management compensation; Certain non-recurring items (shareholder capital reorganization, professional fees and customer deposit breakages and other provision); and Share based compensation. Review of Q Compared to Q Continuing Operations Revenues Revenues increased by 12.6%, from $81.3 million in Q to $91.6 million in Q primarily driven by a 10.5% increase in SSSG. Revenue growth was further aided by the addition of three new stores as well as an increase in advertising expenditures on radio, television, print, targeted online advertising and new advertising creative. Cost of sales Cost of sales is comprised of inventory and other directly related expenses, salaries, wages and benefits of the distribution and sales teams, store occupancy costs and other expenses. Cost of sales increased by $5.7 million or 8.9% from $63.7 million in Q to $69.4 million in Q as a result of higher sales. As a percentage of sales, total cost of sales improved by 2.6% compared to Q Inventory and other directly related expenses net of volume rebates, increased by $3.7 million or 9.9%, but as percentage of sales, was 1.1% lower due to a more favourable product mix and the continued improvement in distribution efficiency. Sales and distribution compensation increased by $1.4 million or 9.5% but as percentage of sales, it declined by 0.6% as a result of prudent cost control. Rent expenditures increased $0.4 million or 4.2% in Q mainly due to the opening of two new stores subsequent to Q and three new stores in Q as well as inflationary increases in utilities and common area maintenance expenditures. As a percentage of sales, rent and other expenses were lower by 1.0% due to improved operating leverage on fixed costs. 60

63 Gross profit Gross profit was $22.2 million in Q compared to $17.6 million in Q1 2014, representing an increase of $4.6 million. Gross profit margin increased by 2.6% to 24.3% for Q from 21.7% in Q The increase in gross profit margin was primarily due to higher AUSP, a more favourable product mix, cost savings from improved distribution efficiency and leveraging of fixed costs. G&A expenses Total G&A expenses were generally unchanged at $11.9 million in Q and Q EBITDA EBITDA was $10.3 million for Q compared to $5.8 million for Q1 2014, representing an increase of $4.5 million or 79.0%. The increase was primarily due to the strong revenue growth in Q combined with improved gross profit margins on a more favourable product mix and operating leverage on fixed costs including G&A expenses. Operating EBITDA Operating EBITDA was $10.7 million for Q compared to $5.6 million for Q1 2014, representing an increase of $5.1 million or 92.9%. The increase was primarily due to the strong revenue growth in Q combined with improved gross profit margins on a more favorable product mix and operating leverage on fixed costs including G&A expenses. Depreciation and amortization expenses Depreciation and amortization was generally unchanged at $2.5 million in Q and Q Finance related expenses Finance related expenses consist of interest on senior credit facilities, finance leases, Series A and B promissory notes and Class A convertible shares and fair value adjustment expense on Class B common shares. Class B common shares are accounted for as liabilities. Finance related expenses were $33.4 million in Q1 2015, compared to $6.9 million in Q1 2014, representing an increase of $26.4 million or 380.4%. The increase was mainly due to the accelerated interest accretion upon the early repayment of certain promissory notes, accelerated interest accretion recognized upon redemption of certain convertible shares, fair value adjustment on Class B common shares, higher interest expense on the increased senior credit facility and interest paid on Class B common shares. The accelerated interest expense including accretion on the promissory notes in Q was $29.2 million (Q $4.2 million) and the interest expense on the Class A convertible shares and Class B common shares, along with the fair value adjustment on the Class B common shares in Q was $2.6 million (Q $2.1 million). Income taxes (recovery) Q had an income tax recovery of $7.7 million versus an income tax recovery of $0.7 million for Q The income tax recovery for Q was a result of the increased loss for Q over Q1 2014, largely driven by the additional finance costs associated with the partial early repayment of the subordinated debts. Net loss Net loss for Q was $17.7 million compared to $3.0 million in Q The increase in net loss was mainly due to an increase in the accelerated interest accretion expense by $25.0 million upon the partial early repayment of the subordinated debts. 61

64 Adjusted Net Income Adjusted Net Income for Q was $6.8 million compared to $2.0 million for Q1 2014, which is an increase of $4.8 million. The increase was primarily due to the strong revenue growth in Q combined with improved gross profit margins on a more favorable product mix, and improved leverage on fixed costs including G&A expenses. Discontinued Operations Net income (loss) The sale of the Sleep America business for US$12.4 million (net of a working capital adjustment of US$0.1 million) closed on January 6, 2015, and as a result, SCCI realized a gain of $6.8 million. The results of the Sleep America business were presented in Q as Discontinued Operations following the approval of the sale on November 5, Segment Performance Since the acquisition of Sleep America in 2006, SCCI had two geographical segments, Canada and the United States. The sale of Sleep America s business was approved on November 5, 2014 and closed on January 6, Results of the US business were reported as Discontinued Operations in Q condensed interim consolidated financial statements, as well as in Fiscal 2014, Fiscal 2013 and Fiscal 2012 consolidated financial statements. As at March 31, 2015 and December 31, 2014, SCCI manages its business on the basis of one operating segment, being Canada, which is also SCCI s only reportable segment consistent with the internal reporting provided to management. Review of Fiscal 2014 Compared to Fiscal 2013 Continuing Operations Revenues Revenues increased by 11.9%, from $353.9 million for Fiscal 2013 to $396.1 million for Fiscal 2014, primarily driven by an 8.3% increase in SSSG. Sales growth was further aided by the addition of four net new stores as well as an increase in advertising expenditures on radio, television, print, targeted online advertising and new advertising creative. Management believes that the overall mattress industry sales in Canada decreased by approximately 1% in 2014 compared to Management attributes SCCI s positive sales performance in weaker market conditions to increased spend on advertising and better in-store execution. Advertising expenditures were increased in 2013 and 2014 leading to a strengthening of unaided brand awareness for both Sleep Country Canada and Dormez-vouz?, which translated into higher store traffic. In addition, SCCI s enhanced sales and service training programs helped drive the improvement in shopper to purchaser conversion and an increase in AUSP. Cost of sales Cost of sales is comprised of inventory and other directly related expenses, salaries, wages and benefits of the distribution and sales teams, store occupancy costs and other expenses. Cost of sales increased by $26.8 million, or 10.1%, from $265.8 million for Fiscal 2013 to $292.7 million for Fiscal 2014 primarily as a result of higher sales. As a percentage of sales, total cost of sales decreased by 1.2% compared to Fiscal Cost of inventory net of volume rebates and other directly related expenses, increased by $18.7 million or 11.5%, but as a percentage of sales, was 0.1% lower due to a more favourable product mix and the continued improvement in distribution efficiency. Salaries, wages and benefits of the distribution and sales teams increased by $4.8 million, or 7.7%, but as a percentage of sales, declined by 0.7%as a result of improved cost control. Rent expenditures increased by $3.2 million, or 8.2%, in Fiscal 2014 mainly due to the opening of 13 new stores in 2013 and four net new stores in 2014 as well as inflationary increases in utilities and common area maintenance expenditures. As a percentage of revenue, rent and other expenses were lower by 0.4% year over year due to improved operating leverage on fixed costs. 62

65 Gross profit Gross profit was $103.4 million for Fiscal 2014 compared to $88.1 million for Fiscal 2013, representing an increase of $15.3 million, or 17.4%, year over year. Gross profit margin increased by 1.2% to 26.1% for Fiscal 2014 from 24.9% for Fiscal The increase in gross profit margin was primarily due to higher AUSPs, a more favourable product mix, cost savings from improved distribution efficiency and improved leverage on fixed costs. G&A expenses Total G&A expenses increased by $4.7 million or 9.3% from $50.2 million for Fiscal 2013 to $54.9 million for Fiscal The main factors contributing to the year over year increase were: media and advertising expenses increased by $1.8 million, or 10.6%, as a result of higher spending on radio, television, print, digital advertising and new advertising creative; salaries, wages and benefits increased by $0.7 million, or 5.8%, due to merit increases and higher bonus payouts due to over achievement of operating targets; credit card and finance charges on customer payments increased by $1.0 million, or 11.9%, matching the increased sales performance; and warehouse and office occupancy costs increased by $0.4 million mainly due to the addition of one distribution centre in late 2013 and increases in utilities and common area maintenance expenses. Professional fees were higher in Fiscal 2014 by $0.5 million, or 93.2%, compared to Fiscal 2013 mainly due to increased legal and taxation consulting fees associated with shareholder matters. As a percentage of revenue, G&A expenses decreased by 0.3% to 13.9% for Fiscal 2014 from 14.2% for Fiscal EBITDA EBITDA was $48.5 million for Fiscal 2014 compared to $37.9 million for Fiscal 2013, representing an increase of $10.7 million, or 28.2%. The increase was primarily due to the strong revenue growth in Fiscal 2014 combined with improved gross profit margins, good control of G&A expenses and better leveraging of fixed costs. Operating EBITDA Operating EBITDA was $50.6 million for Fiscal 2014 compared to $39.4 million for Fiscal 2013, representing an increase of $11.2 million, or 28.5%. The increase was primarily due to the strong revenue growth in Fiscal 2014 combined with improved gross profit margins, and improved leverage on fixed costs including G&A expenses. Depreciation and amortization expenses Depreciation and amortization for Fiscal 2014 was $9.9 million compared to $9.3 million for Fiscal 2013, an increase of $0.6 million, or 5.9%. The increase was mainly due to higher capital expenditures on leasehold improvements as a result of store renovations and the new stores added in 2013 and Finance related expenses Finance related expenses consist of interest on senior credit facilities, finance leases, Series A and B promissory notes and Class A convertible shares and fair value adjustment expense of Class B common shares. Class B common shares are accounted for as liabilities. Finance related expenses were $61.5 million for Fiscal 2014, compared to $23.2 million for Fiscal 2013, representing an increase of $38.3 million, or 164.9%. The increase was mainly due to the accelerated interest upon the early repayment of certain promissory notes and convertible shares, fair value adjustment on Class B common shares and higher interest expense on the increased senior credit facility. The accelerated interest expense, including interest accretion, on the promissory notes for Fiscal 2014 was $46.1 million (2013 $18.1 million), the accelerated interest expense including accretion on the Class A convertible shares for Fiscal 2014 was $8.8 million (2013 $2.2 million), and the fair value adjustment on Class B common shares in Fiscal 2014 was $1.8 million (2013 $0.2 million). 63

66 Income taxes (recovery) Fiscal 2014 had an income tax recovery of $5.8 million versus an income tax expense of $1.1 million for Fiscal The income tax recovery for Fiscal 2014 was comprised of a $5.0 million current income tax expense mainly due to stronger operating performance offset by a deferred tax recovery of $10.7 million mainly due to the partial early repayment of the subordinated debts. Net income (loss) Net loss for Fiscal 2014 was $17.1 million compared to a net income of $4.4 million for Fiscal The decline in net income was mainly due to an increase in the accelerated interest expense of $28.0 million upon the partial early repayment of the subordinated debts which are carried at amortized cost and not due until Adjusted Net Income Adjusted Net Income for Fiscal 2014 was $29.0 million compared to $21.2 million for Fiscal 2013, representing an increase of $7.8 million, or 36.6%. The increase was primarily due to the strong revenue growth in Fiscal 2014 combined with improved gross profit margins, good control of general and administration expenses and better leveraging of fixed costs. Analysis of the result of Discontinued Operations Net income (loss) The sale of the Sleep America business for US$12.4 million (net of a working capital adjustment of US$0.1 million) closed on January 6, The performance of the Sleep America business was presented in Fiscal 2014 and all the prior comparative years as Discontinued Operations following the approval of the sale on November 5, The Discontinued Operations generated Revenue of $40.7 million in Fiscal 2014, compared to revenue of $34.3 million in 2013 (2012 $31.9 million). Gross profit for Fiscal 2014 was $4.9 million compared to $3.0 million in 2013 (2012 $3.4 million). General and administrative expenses for Fiscal 2014 were $7.0 million compared to $5.0 million in 2013 (2012 $4.4 million). Depreciation and amortization for Fiscal 2014 was $0.7 million compared to $0.6 million in 2013 (2012 $0.3 million). In Fiscal 2014 there was a reversal of an impairment charge of $6.0 million as a result of the sale of the business in January The net income from discontinued operations was $3.0 million in 2014 compared to a loss of $2.6 million in Fiscal 2013 (2012 loss of $1.3 million). Review of the Fourth Quarter of 2014 Compared to the Fourth Quarter of 2013 Highlights of results from continuing operations Revenues for Q increased by 13.1% compared to Q4 2013, mainly driven by SSSG of 10.2%. Gross profit in Q increased by 16.3% compared to Q mainly due to an improvement in the gross profit margin (up by 0.7%) as well as the increase in sales. EBITDA increased by 25.8% to $12.9 million in Q4 2014, compared to $10.3 million in Q Net income increased by $1.4 million from $1.9 million for Q to $3.3 million for Q mainly due to higher EBITDA partially offset by an increase in finance related expenses and income taxes. 64

67 Review of Fiscal 2013 Compared to Fiscal 2012 Continuing operations Revenues Revenues increased by 6.4% from $332.6 million for Fiscal 2012 to $353.9 million for Fiscal The increase in revenues was comprised of SSSG of 1.0% and an $18.8 million contribution from the 13 new stores which opened in 2013 and the 10 new stores which opened in The improvement in SSSG was driven by management s decision to increase advertising spend on radio, television, print, targeted online advertising and digital presence as well as the successful implementation of enhanced sales and service training. Cost of sales Cost of sales for Fiscal 2013 was $265.8 million compared to $251.7 million for Fiscal 2012, an increase of $14.1 million, or 5.6%. As a percentage of sales, cost of sales for Fiscal 2013 declined by 0.6% from 75.7% for Fiscal 2012 to 75.1% for Fiscal Cost of inventory net of volume rebates and other directly related expenses increased by $8.1 million, or 5.3%, year over year as a result of higher sales, but as a percentage of sales, they decreased by 0.5% as a result of a more favourable product mix. Salaries, wages and benefits of the distribution and sales teams for Fiscal 2013 increased by $3.2 million, or 5.4%, from $59.3 million for Fiscal 2012 to $62.5 million for Fiscal As a percentage of sales, salaries, wages and benefits decreased by 0.1% year over year, mainly attributable to better cost control and improved distribution efficiency. Store occupancy costs increased by $2.3 million, or 6.4%, year over year, however remained flat as a percentage of sales. The higher store occupancy cost in Fiscal 2013 compared to Fiscal 2012 was mainly due to the addition of 13 new stores in Fiscal 2013 and 10 new stores in Fiscal 2012 as well as utility and common area maintenance increases. Gross profit Gross profit increased by $7.2 million, or 8.9%, from $80.9 million for Fiscal 2012 to $88.1 million for Fiscal Gross profit margin was 24.9% for Fiscal 2013 compared to 24.3% for Fiscal 2012, an increase of 0.6%, mainly attributable to improved product mix, higher volume rebates, better cost control and improved distribution efficiency. G&A expenses G&A expenses increased by $7.6 million, or 17.8%, from $42.6 million for Fiscal 2012 to $50.2 million for Fiscal Media and advertising expenses increased by $3.8 million, or 29.2%, year over year as a result of Sleep Country s expansion into the new region of Nova Scotia and management s decision to increase advertising expenditures on radio, television, print, and digital advertising. Total telecommunication and information technology expenses in Fiscal 2013 were consistent with Fiscal Salaries, wages and benefits of corporate and regional offices increased by $1.8 million, or 17.1%, mainly due to merit increases, higher bonus payouts on over-achievement of certain SCCI operating targets, and certain new positions added. Credit card and finance charges relating to customers payments decreased by $0.2 million, or 2.8%, as a result of lower negotiated rates from third party financing companies. Warehouse and office occupancy costs increased by $0.3 million, or 4.8%, mainly due to the addition of one new distribution centre in Nova Scotia in 2013 as well as increased utilities and common area maintenance expenses. Other G&A expenses increased by $1.9 million compared to Fiscal 2012 mainly due to the impact of a change in management s estimate of aged customer deposits and higher travelling and meeting expenses associated with the expansion into Nova Scotia. EBITDA EBITDA was $37.9 million for Fiscal 2013 compared to $38.2 million for Fiscal 2012, representing a decrease of $0.4 million, or 1.0%. During 2013 a decision was made to increase advertising expenditures on radio, television, print, digital advertising and new advertising creative; however, the positive effect of this additional spend was only realized in the second half of EBITDA in Fiscal 2012 also benefitted from a one-time reduction in customer deposits breakage and other provisions as a result of a change in estimates of these provisions and accruals. 65

68 Operating EBITDA Operating EBITDA was $39.4 million for Fiscal 2013 compared to $38.4 million for Fiscal 2012, representing an increase of $1.0 million, or 2.7%. The increase was primarily due to the strong revenue growth in Fiscal 2013 combined with improved gross profit margins, good control of general and administration expenses and better leveraging of fixed costs. Depreciation and amortization expenses Depreciation and amortization for Fiscal 2013 increased by $1.5 million, or 18.7%, from $7.9 million for Fiscal 2012 to $9.3 million for fiscal The increase was a result of capital expenditures on new stores, renovations and the new distribution centre added in Fiscal Finance related expenses Total finance related expenses of $23.2 million for Fiscal 2013 were largely unchanged from $23.1 million for Fiscal Interest expense relating to the senior credit facility was lower in 2013 compared to 2012 following the reduced term loan borrowing in late This was offset by the higher interest expense, including accretion, on the subordinated debt and convertible shares. Net income Net income for Fiscal 2013 of $4.4 million decreased by $2.0 million, or 31.5%, compared to $6.4 million for Fiscal This was mainly due to the higher G&A expenses and depreciation and amortization expenses for Fiscal Adjusted Net Income Adjusted Net Income for Fiscal 2013 of $21.2 million increased by $0.6 million, or 2.8%, compared to $20.6 million for Fiscal The increase was primarily due to the strong revenue growth in Fiscal 2013 combined with improved gross profit margins, and improved leverage on fixed costs including G&A. Discontinued Operations Net loss The discontinued U.S. operations generated a net loss of $2.6 million for Fiscal 2013, compared to a net loss of $1.3 million for Fiscal The higher net loss was mainly attributable to a decline in gross profit margin despite an increase in sales. The strengthening of the U.S. dollar relative to the Canadian dollar was also a contributing factor. Liquidity and Capital Resources Liquidity SCCI s primary sources of cash consist of existing cash balances, operating activities, and available credit facilities. SCCI s primary uses of cash are to fund operating expenses, capital expenditures, finance costs, debt services and dividends. Historically, SCCI has experienced lower sales and EBITDA in the first quarter of the year. Management believes that cash generated from operations, together with cash and cash equivalents on hand and amounts available under the credit facilities, will be sufficient to meet its future cash requirements. However, SCCI 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 Risk Factors. 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 SCCI 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. 66

69 A summary of net cash flows by activities is presented below for the last three fiscal years: (C$ thousands) Fiscal 2014 Fiscal 2013 Fiscal 2012 Cash flows from operating activities... $ 47,715 $ 34,983 $ 38,355 Cash flows used in investing activities... (7,285) (13,752) (10,769) Cash flows used in financing activities... (26,534) (10,769) (31,259) Exchange rate difference (11) Net increase / (decrease) in cash... 13,937 10,489 (3,684) Cash at beginning of year... 27,401 16,912 20,596 Cash at end of year... $41,338 $ 27,401 $ 16,912 Net cash flows from Operating Activities Net cash flows generated from operating activities were $47.7 million for Fiscal 2014 compared to $35.0 million for Fiscal 2013, representing an increase of $12.7 million. The increase was primarily due to an increase in EBITDA of $10.7 million from $37.9 million for Fiscal 2013 to $48.5 million for Fiscal 2014 as well as a decrease in working capital of $6.1 million compared to an increase of $1.1 million for Fiscal The decrease in working capital for Fiscal 2014 was primarily driven by higher trade and other payables and customer deposits, partially offset by higher inventories and trade and other receivables. Net cash flows generated from operating activities totaled $35.0 million for Fiscal 2013 compared to $38.4 million for Fiscal 2012, representing a decrease of $3.4 million. The decrease was mainly due to lower EBITDA and an increase in working capital. The increase in working capital for fiscal 2013 was mainly due to higher inventories and trade and other receivables partially offset by an increase in trade and other payables and customer deposits. Net cash flows used in Investing Activities Net cash flows used in investing activities consist mainly of the investment in capital expenditures. Total capital expenditures for Fiscal 2014 were $7.3 million compared to $13.8 million in Fiscal The $6.5 million decrease was mainly due to lower leasehold improvement capital expenditure. SCCI opened fewer new stores in Fiscal 2014 (five new stores) compared to Fiscal 2013 (13 new stores) and completed fewer store renovations (2014 9, ) and fewer relocations (2014 three, 2013 two). Net cash flows used in investing activities were $13.8 million for Fiscal 2013 compared to $10.8 million for Fiscal The $3.0 million increase year over year was primarily due to higher leasehold improvement capital expenditure for Fiscal 2013 as a result of more new store openings and more store renovations compared to Fiscal Net cash flows used in financing activities Net cash flows used in financing activities were $26.5 million for Fiscal 2014, primarily consisting of a repayment of the promissory notes and Class A convertible shares of $67.5 million, dividend payment of $7.5 million on the Class A common shares and interest payments of $6.0 million, partially funded by an increase in the senior term loan of $55.3 million (net of financing costs). Net cash flows used in financing activities were $10.8 million for Fiscal 2013 mainly consisting of a repayment of notes and Class A convertible shares of $7.5 million and interest payments of $2.7 million. Net cash flows used in financing activities were $31.3 million for Fiscal 2012 mainly consisting of a repayment of the senior secured credit facility of $18.3 million, a repayment of the Series A and Series B promissory notes of $6.6 million and interest payments of $4.3 million. 67

70 A summary of net cash flows by activities is presented below for Q and Q1 2014: (C$ thousands unless otherwise stated) Q Q Cash flows from operating activities... $ 6,264 $ 6,650 Cash flows from (used in) investing activities... 12,281 (2,765) Cash flows used in financing activities... (46,397) (827) Exchange rate difference on cash and cash equivalents Net increase (decrease) in cash... (27,852) 3,076 Cash at beginning of period... 41,338 27,401 Cash at end of period... $ 13,486 $30,477 Net cash flows from Operating Activities Net cash flows generated from operating activities were $6.3 million for Q compared to $6.7 million for Q1 2014, representing a decrease of $0.4 million or 5.8%. The decrease was primarily due to a decrease in working capital of $5.4 million offset by an increase in EBITDA of $4.5 million. The decrease in working capital for Q was primarily driven by lower trade and other payables and lower customer deposits partially offset by higher inventories. Net cash flows used in Investing Activities Net cash flows used in investing activities consist mainly of proceeds from the sale of Sleep America for US$12.4 million (net of a working capital adjustment of US$0.1 million) offset by investments in capital expenditures. Total capital expenditures for Q was $2.5 million compared to $2.8 million for Q Net cash flows used in financing activities Net cash flows used in financing activities were $46.4 million for Q1 2015, consisting primarily of a repayment of the promissory notes and Class A convertible shares of $65.8 million, interest payment of $3.7 million on the senior term loan and Class B common shares partially funded by a net increase in the senior term loan of $23.4 million. Contractual obligations The following table summarizes SCCI s significant contractual obligations and commitments as at December 31, 2014 based on undiscounted cash flow including estimated interest payable as per the terms of the long-term debt: (C$ thousands unless otherwise stated) Thereafter Total Commitments Operating leases... $32,260 $29,724 $23,713 $17,943 $ 13,799 $ 34,175 $151,614 Financial Obligations Trade and other payables... 33,729 33,729 Long-term debt: Existing credit facility... 11,224 12,594 13,872 15,119 92, ,507 Finance leases ,588 Subordinated debts , ,837 Class A convertible and Class B common shares... 58,643 58,643 Total... $78,234 $43,138 $38,084 $33,264 $106,591 $443,607 $742,918 SCCI enters into operating lease agreements for stores and distribution premises, passenger vehicles and office equipment with terms varying from three to 15 years. 68

71 The existing credit facility represents the term loan and revolving credit facility. As at December 31, 2014, the outstanding principal of the term loan was $126.8 million (2013 $70.0 million, 2012 $70.0 million) with no amounts being drawn against the revolving credit facility (2013 $nil, 2012 $nil). Finance leases are mainly comprised of leases on delivery trucks. As at December 31, 2014, the outstanding principal of the finance leases was $2.3 million (2013 $2.7 million, 2012 $3.1 million). Subordinated debts represent the Series A and B promissory notes. As at December 31, 2014, the total face value of these notes with outstanding interest was $195.1 million (2013 $247.8 million, 2012 $233.3 million). As at December 31, 2014, the total face value of Class A convertible shares and Class B common shares and their outstanding dividends amounted to $37.5 million (2013 $41.9 million, 2012 $39.6 million). Management believes that SCCI s operating activities and available financing capacity will provide adequate sources of liquidity to meet its short-term and long-term needs. Capital resources Senior secured credit facility On September 23, 2011, SCCI entered into a five-year senior credit agreement with a term credit facility of $90 million, which was fully drawn upon the agreement date, and a revolving credit facility of $15 million, which was undrawn upon the agreement date. The credit agreement was amended on November 15, 2012 reducing the term credit facility to $70 million, which was fully drawn upon the amendment date. The revolving credit facility of $15 million remained unchanged. These facilities were extinguished on June 30, On June 30, 2014, SCCI entered into a five-year senior credit agreement with a term credit facility of $130 million, which was fully drawn upon the agreement date, a revolving credit facility of $15 million, which was undrawn upon the agreement date, and an accordion feature of $15 million. The terms of the credit facility included quarterly principal repayments payable in arrears commencing September 30, On February 25, 2015, SCCI increased its revolving credit facility by $15.0 million to $30.0 million. As at March 31, 2015, the balance outstanding on the term credit facility was $125.1 million (December 31, 2014 $126.8 million, December 31, 2013 $70.0 million; December 31, 2012 $70 million) and $25.0 million was drawn against the revolving credit facility (December 31, 2014 $nil, December 31, 2013 $nil, December 31, 2012 $nil). Interest on the term facility is based on the prime rate or bankers acceptance rate, at SCCI s option, plus applicable margins based on the achievement of certain targets, as defined by the senior secured credit agreement. Interest on the bankers acceptance is payable in advance, whereas interest on the prime rate is payable in arrears. Interest on the revolving facilities is payable monthly in advance at the bankers acceptance rate or in arrears at the prime rate plus the applicable margin based on the achievement of certain targets, as defined by the senior secured credit agreement. Under the terms of the term credit facility and the revolving credit facility, certain financial and non-financial covenants must be maintained. As at March 31, 2015, SCCI and its subsidiaries were in compliance with all covenants. The term credit facility and revolving credit facility described above are secured by a first fixed floating charge on the assets of SCCI and SCC LP, except for specified permitted encumbrances. The provisions under these facilities provide for restrictions on the operations and activities of SCCI. Generally, the most significant restrictions relate to permitted investments as well as the incurrence and maintenance of certain financial ratios primarily linked to operating earnings before interest, taxes, depreciation and amortization. 69

72 Series A and Series B promissory notes The Series A promissory notes bear interest at a fixed rate of 12% per annum and interest is due on December 31 of each year. The Series A promissory notes, including all accrued but unpaid interest, is due and payable on September 23, The Series A promissory noteholders are subordinated to the credit facility. Each Series A promissory note ranks pari passu with all other Series A promissory notes. SCCI has the option to pay the annual interest payment in cash or to issue to the noteholder a Series B promissory note for the amount of interest due. The Series B promissory notes are non-interest bearing. In 2014, $70.3 million of Series A and B promissory notes were repaid. In Q1 2015, a further $61.9 million of Series A and Series B promissory notes were repaid. As a result of these transactions, the cash flow assumptions related to the Series A and B promissory notes have been revised in both 2014 and Q resulted in accelerated interest expense being recognized in these periods (see Finance Related Expenses in the Review of these respective periods). An amount of $17.7 million net of withholding tax in non-interest bearing Series B promissory notes in lieu of the cash interest payment due on December 31, 2014 was issued in 2015 (2014 $20.8 million). As at March 31, 2015 and December 31, 2014, certain Series A and B promissory notes are held by related parties. Class A convertible shares The holders of the Class A convertible shares are not entitled to receive notice of nor to attend all meetings of the shareholders of SCCI and are not entitled to vote, but they are entitled to receive, equally on a per share basis with the common shareholders, dividends as and when declared by the board of directors. The holders of the Class A convertible shares shall be entitled, at their option, each time there is a payment of principal on the Series A and B promissory notes, to have a pro rata portion of the Class A convertible shares converted into Class D common shares. Each Class A convertible share shall be converted into the number of Class D common shares equal to the notional value of the Class A convertible share divided by the fair value of the Class D common share, which includes accrued dividends at 12%. If a holder does not elect to convert their Class A convertible shares into Class D common shares, they will receive a payment equal to the notional amount of the Class A convertible shares. The notional amount is determined as the subscription price paid for each Class A convertible share plus an amount equal to 12% per annum (not compounded) of the subscription price paid for the Class A convertible shares outstanding from time to time less the amount of any dividends paid by SCCI to the holder less any capital previously returned. Upon the voluntary or involuntary liquidation, dissolution or windup of SCCI, the holders of the Class A convertible shares are entitled to receive, concurrent with any distribution of any amount of any part of the assets of SCCI among any of the other classes of shares, for each Class A convertible share, an amount determined by the board of directors. The Class A convertible shares are mandatorily redeemable, pay a fixed rate of return of 12% and may not share equally in liquidation or dissolution of SCCI, and as such are disclosed as debt in the consolidated financial statements. The Class A convertible shares cannot be repaid either in full or in part without there being made concurrently a pro rata payment on the Series A and B promissory notes. There can also be no payment in respect of the interest on any of the Series A promissory notes unless there is a concurrent pro rata dividend payment in cash in respect of the Class A convertible shares. Legal waivers were obtained from each of the Class A convertible shareholders in respect of the non-payment of dividends that would otherwise be required during the year. In 2014, there was a repayment of $7.0 million on the Class A convertible shares. In Q1, 2015, there was a further repayment of $4.0 million on the Class A convertible shares. As a result of these transactions, the cash flow assumptions related to the Class A convertible shares have been revised in both 2014 and Q resulted in accelerated interest expense being recognized in these periods (see Finance Related Expenses in the Review of these respective periods). 70

73 Class B common shares As at December 31, 2014, the majority of the Class B common shares were held by management. Under the terms of the investor agreements, management employees have the ability, upon death or disability, to put these shares back to SCCI for cash equal to the then fair market value of the shares. Due to this put option, Class B common shares have been accounted for as a liability under the accounting standards. Off Balance Sheet Arrangements SCCI did not have any material off-balance sheet arrangements as at March 31, 2015, the year-end of Fiscal 2014 and Fiscal 2013, nor does it have any subsequent to Q Related Parties SCCI is controlled by funds managed by Birch Hill Equity Partners Management Inc., which owns 80.4% of SCCI s common shares, 81.6% of the Series A and B promissory notes and 71.2% of the Class A convertible shares. The following transactions were carried out with related parties during Q1 2015, Q and each of Fiscal 2014, Fiscal 2013 and Fiscal 2012: (C$ thousands unless otherwise stated) Q Q $ $ $ $ $ Short-term advances to related parties Amounts due from related parties as at the end of Q were $257, representing amounts advanced to SC Management and SC US Holdco in respect of tax instalments and withholding tax paid on behalf of these entities. 28.8% of SCCI s Class A convertible shares and 97.6% of SCCI s Class B common shares are held by management. Transactions with key management personnel Key management personnel of SCCI includes SCCI s directors and senior officers and employees with authority and responsibility for planning, directing and controlling the activities of SCCI, and are considered related parties to SCCI. SCCI incurred the following compensation expenses in relation with key management personnel: (C$ thousands unless otherwise stated) Q Q $ $ $ $ $ Salaries and short-term employee benefits... 2,428 1,638 3,620 3,581 3,178 Share-based compensation ,430 1,642 3,634 3,598 3,239 Share-based compensation On November 1, 2008, SCCI established a stock option plan (the SOP ) to provide long-term incentives to certain key officers and employees of SCCI and its subsidiaries. A maximum of 1,000,000 options are authorized for issuance under the SOP. The stock options are granted with an exercise price equal to the fair market value of the Class E special shares at the date of grant, as determined by the board of directors. On November 1, 2008, options were granted to purchase 920,000 Class E special shares at a strike price of $2.80 per share. No options were granted in 2009 and Options vest 20% per year on the anniversary date of the grant. In December 2010, 60,000 options granted were cancelled. On November 15, 2011, additional options were granted to purchase 140,000 Class E special shares at a strike price of $3.04 per share. As at 71

74 December 31, 2014, 1,000,000 of the options are outstanding (2013 1,000,000) and 947,500 of the options granted have vested ( ,500). These options are not exercisable until there has been a liquidity event. Any options not exercised upon a liquidity event will expire. Subsequent Events On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of SCCI, SC US Holdco and SC Management. Outlook Since its inception, Sleep Country has developed a leading regional market strategy, a strong brand with top-of-mind unaided brand awareness, a reputation for excellence in customer service and strong supplier relationships. Now that this platform has been established, SCCI believes it has a low-risk path to growth and expansion within its existing markets. Management believes that Sleep Country is well-positioned to continue to grow revenue, profitability and cash flows by driving SSSG, continuing to add stores in both existing, satellite and new markets and expanding its merchandising opportunities in accessories. Management believes that, through the strategies and initiatives described below, over the next five to seven years, an opportunity exists to open 50 to 70 new stores, drive annual SSSG between 3% and 6%, grow total revenue from $406 million for the 12-month period ended March 31, 2015 to between $575 million and $640 million annually, and to increase Operating EBITDA from $56 million for the 12-month period ended March 31, 2015 to between $80 million and $90 million annually, through the following strategies and initiatives: Continued increases in expenditure on radio, television, print and digital advertising and new advertising creative. Drive SSSG of mattresses and accessories. SCCI expects to increase its mattress sales by focusing on increasing traffic through marketing and advertising, increasing customer conversion rates and increasing AUSP. SCCI plans to increase accessory revenue by continuing to focus on the accessory product offering, its procurement, sales training and dedicated advertising, which is expected to result in increased customer traffic, conversion and AUSP. Open an average of 10 new stores per year starting in 2015, with each new store having an average annual revenue of $1.2 million in its first full year of operations. Maintain consistent gross profit margins in line with the Fiscal 2014 reported results, by leveraging its supplier network. Renovate an average of 10 to 15 stores each year starting in In 2014, management developed and implemented an enhanced design for SCCI s stores with a contemporary design and bright, welcoming atmosphere. In addition to the improved aesthetics, the new layout and design places a greater emphasis on products in the growing accessories category. Over time, Sleep Country intends to strategically select stores to renovate to this design, which will also be featured by all new stores that it opens. Early results have reported that the four stores renovated in 2014 have achieved better SSSG than the previous formats, showing an 18% increase in revenues since re-opening above Sleep Country s other stores in the same region. The foregoing description of Sleep Country s potential growth opportunity is based on management s current strategies, its assumptions concerning its growth outlook, and its assessment of the outlook for the business and the Canadian mattress and foundation industry as a whole and may be considered to be forwardlooking information for purposes of applicable Canadian securities legislation. Readers are cautioned that actual results may vary. See Forward-Looking Information and Risk Factors for a description of the risks and uncertainties that impact Sleep Country s business and that could cause actual results to vary. Management considers these assumptions to be reasonable in the circumstances, given the time period for such outlook. However, there can be no assurance that Sleep Country will be able to open 10 stores per year or that SCCI will be able to achieve SSSG between 3% and 6%. Actual annual sales of new stores may vary from $1.2 million per store. 72

75 Risk Factors SCCI s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair value interest risk), credit risk and liquidity risk. SCCI s overall risk management program and business practices seek to minimize any potential adverse effects on SCCI s consolidated financial performance. Risk management is carried out by the senior management team under policies approved by the board of directors. Market risk Market risk is the loss that may arise from changes in factors such as interest rate, foreign exchange and the impact these factors may have on other counter parties. Foreign exchange risk SCCI operates in Canada and is exposed to foreign exchange risk arising from exposure to fluctuations in the United States dollar exchange rate. Foreign exchange risk arises primarily from the purchase of accessory inventory invoiced in United States dollars. Cash flow and fair value interest risk SCCI has no significant interest-bearing assets. SCCI s income and operating cash flows are substantially independent of changes in market interest rates. SCCI s primary interest rate risk arises from long-term debt. SCCI manages its exposure to changes in interest rates by using a combination of fixed and variable rate debt and utilizing interest rate swaps as necessary to achieve the desired proportion of variable and fixed rate debt. An increase or decrease in interest rates by 1% would result in a $1.5 million increase (or decrease) in annual interest expense on the credit facility. SCCI 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 SCCI s customers or other counterparties to meet their payment obligations. Credit risk arises from deposits with banks, as well as credit exposures from mattress suppliers for the payment of volume and co-operative advertising rebate amounts and balances owed from third party financing companies under the various financing plans Sleep Country offers its customers. In accordance with SCCI 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. SCCI transfers the credit risk for financing plans to third-party financing companies. The third-party financing companies that SCCI deals with carry a minimum credit rating of A or better. There are no significant impaired receivables that have not been provided for in the allowance. There are no amounts considered past due. Liquidity risk Liquidity risk is the risk that SCCI cannot meet a demand for cash or fund its obligations as they come due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities. 73

76 Capital risk SCCI s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for its Common and Class A convertible shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital structure to minimize the cost of capital. SCCI s dividends are limited by long-term debt covenants which require that accumulated dividends to shareholders do not exceed accumulated distributable cash, as defined by the credit agreement. In order to maintain or adjust the capital structure, SCCI may issue new shares or sell assets to reduce long-term debt. For an understanding of other potential risks, including non-financial risks, see the Risk Factors section of the Prospectus. Accounting Standards Implemented in 2014 Financial instruments The amendments to International Accounting Standards (IAS) 32, Financial Instruments Presentation (IAS 32), clarify the criteria that should be considered in determining whether an entity has a legally enforceable right of set-off in respect of its consolidated financial statements. Amendments to IAS 32 are applicable to annual periods beginning on or after January 1, 2014, with retrospective application required. SCCI has adopted the amendment to IAS 32 on January 1, 2014 and included the required disclosures in the audited consolidated financial statements. Levies The International Financial Reporting Interpretation Committee issues IFRIC 21, Levies. IFRIC 21 addresses accounting for liability to pay a levy within the scope of IAS 37, Provisions, contingent liabilities and contingent assets. A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes and fines or other penalties imposed for breaches of the legislation. SCCI adopted IFRIC 21 on January 1, 2014 and it did not result in any measurement adjustment as at January 1, Accounting Standards and Amendments Issued but Not Yet Adopted The following standards and amendments to existing standards were released by the IASB. SCCI is evaluating the impact of these standards and whether to early adopt these standards. Revenue In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. IFRS 15 replaces all previous revenue recognition standards, including IAS 18 Revenue. The new standard is effective for annual periods beginning on or after January 1, 2017 with early adoption permitted. Financial instruments In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments 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. IFRS 7 Financial Instruments: Disclosures was also amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments to IFRS 7 are effective upon adoption of IFRS 9. Presentation of financial statements IAS 1 Presentation of financial statements has been amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements, and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1,

77 Critical Accounting Estimates and Judgments The preparation of financial statements requires management to make estimates and assumptions using judgment that affects the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates. The following discusses the most significant accounting judgments and estimates that SCCI has made in the preparation of the consolidated financial statements. Impairment of goodwill and brands Management is required to use judgment in determining the grouping of assets to identify their cash generating units ( CGUs ) for the purposes of testing fixed assets for impairment. Judgment is further required to determine appropriate groupings of CGUs, for the level at which goodwill and intangible assets are tested for impairment. In addition, judgment is used to determine whether a triggering event has occurred requiring an impairment test to be completed. In determining the recoverable amount of a CGU, various estimates are employed. SCCI 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 SCCI s board of directors. Discount rates are based on an estimate of SCCI 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, 2014, 2013 and 2012, impairment reviews were performed by comparing the carrying value of goodwill and brands with the recoverable amount of the CGU to which goodwill and brands have been allocated. Management determined that there has been no impairment. Long-term debt Series A and B Promissory Notes, Class B Common shares and Class A Convertible shares The calculation of amortized cost associated with the Series A and Series B Promissory Notes, Class B common shares and the Class A Convertible shares requires 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 impact amounts recognized as interest expense. For example, if the promissory notes are 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 may be material. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SC US HOLDCO Please refer to Management s Discussion and Analysis of Financial Condition and Results of Operations of SC US Holdco beginning on page M-1. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SC MANAGEMENT Please refer to Management s Discussion and Analysis of Financial Condition and Results of Operations of SC Management beginning on page M

78 USE OF PROCEEDS The estimated proceeds from the Offering of approximately $281.2 million (assuming no exercise of the Over-Allotment Option), after deducting the Underwriters Fee and the expenses of the Offering, which are estimated to be $2.4 million, will be used by the Company as follows: (i) $193,512,214 to partially satisfy the purchase price for the acquisition of the Purchased Shares from the Existing Shareholders; (ii) $77,621,360 to redeem the Class A Common Shares held by BH Feather US (one of the Birch Hill Entities) which will be issued as part of the Pre-Closing Transactions; and (iii) $10,060,098 to subscribe for additional common shares of SCCI. SCCI will use the funds it receives from the Company, after deducting its share of the expenses of the Offering and the other transactions described in this Prospectus, to pay bonuses and other deferred compensation payments owed to members of management. If the Over-Allotment Option is exercised in full, the Company will use the proceeds received, after deducting the Underwriters Fee, to repay the principal amount of the Acquisition Notes. If the Over-Allotment Option is exercised only in part, the Company will repay the principal amount of such Acquisition Notes on a pro rata basis, to the extent of the proceeds received after deducting the Underwriters Fee, and the balance of the outstanding principal amount of the Acquisition Notes will be automatically converted into Common Shares on closing of the Over-Allotment Option at a price per share equal to the Offering Price. If the Over-Allotment Option is not exercised, the principal amount of the Acquisition Notes will be automatically converted into Common Shares on the 45 th day following the Closing Date at a price per share equal to the Offering Price. See The Acquisition and Related Transactions. THE ACQUISITION AND RELATED TRANSACTIONS Pre-Closing Transactions Immediately prior to Closing, SCCI, certain of its subsidiaries, certain of the Existing Shareholders, SC US Holdco, SC Management and their respective affiliates will undertake steps to simplify the share structure of the Acquired Entities (the Pre-Closing Transactions ). The chart below sets out the current ownership structure of SCCI: Current Ownership of SCCI (1) Class A Class B Class A Common Common Convertible Series A Series B Shares Shares Shares Notes Notes Birch Hill Entities 84.6% 2.4% 71.2% 81.4% 82.6% Co-Investors 15.4% 18.6% 17.4% Management (2) 97.6% 28.8% Notes: (1) Please see Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI and footnotes 12, 15 and 19 of the audited consolidated financial statements of SCCI for a more detailed description of the outstanding securities of SCCI. (2) Current and former members of management hold options to acquire Class E special shares of SCCI. In connection with the Pre-Closing Transactions, the Class A convertible shares and promissory notes of SCCI will be exchanged for common shares of SCCI and all stock options of SCCI, which are held by current and former members of management, will be settled in cash or exercised for Class E special shares of SCCI, with loans in the aggregate amount of approximately $2.36 million from SCCI to satisfy the exercise price of such options. These loans will be advanced immediately prior to the closing of the Offering and the Acquisition and will be repaid as part of the Acquisition. 76

79 The chart below sets out the current ownership structure of SC US Holdco: Current Ownership of SC US Holdco Common Shares Subordinated Promissory Notes Birch Hill Entities 68.5% 50% Co-Investors 31.5% 50% The subordinated promissory notes of SC US Holdco will be exchanged for common shares of SC US Holdco in connection with the Pre-Closing Transactions. In addition, in connection with the Pre-Closing Transactions, the Company will acquire, directly or indirectly, certain shares of SCCI and SC US Holdco held by BH Feather US in exchange for the issuance of Common Shares and Class A redeemable common shares of the Company (the Class A Common Shares ). See Description of Share Capital. The current beneficial holders of common shares of SC Management are Stephen Gunn, Christine Magee, Dave Friesema, Stewart Schaefer, Sieg Will, SCCI, BH Feather US, Birch Hill Feather LP and Robert Masson. The shares held by the shareholders of SC Management, other than the shares held by SCCI, will be purchased by the Company pursuant to the Acquisition. The Acquisition At Closing, immediately following completion of this Offering, the Company will complete the Acquisition of all of the issued and outstanding shares (the Purchased Shares ) of SCCI, SC US Holdco and SC Management (together with SCCI and SC US Holdco, the Acquired Entities ) not already owned by it pursuant to the terms and conditions of a share purchase agreement dated July 10, 2015 (the Purchase Agreement ) entered into between the Company, the Acquired Entities and the Existing Shareholders. The Existing Shareholders include the Birch Hill Entities, the Co-Investors, the Executive Group and certain current and former employees of SCCI. The Acquired Entities will be all of the partners of SCC LP, the entity that currently carries on the business of Sleep Country. In addition, immediately following the completion of the Offering, the Company will redeem the Class A Common Shares held by BH Feather US. Immediately following the completion of the Offering and the Acquisition, the Company will own all of the issued and outstanding securities of the Acquired Entities. SCCI will transfer its general partner interest in SCC LP to a newly formed general partner and SCCI will acquire each of SC Management and SC US Holdco. SC Management and SC US Holdco will subsequently be dissolved into SCCI. See Description of the Business Corporate Structure for a chart that illustrates the structure of the Company and its material subsidiaries following completion of this Offering and the Acquisition. The Purchase Agreement The following is a summary of the material attributes and characteristics of the Purchase Agreement. This summary is qualified in its entirety by reference to the provisions of that agreement, which contains a complete statement of those attributes and characteristics. A copy of the Purchase Agreement will be available on SEDAR at Investors are advised to review the Purchase Agreement for a complete description of the Existing Shareholders representations, warranties and indemnities and related limitations. Pursuant to the Purchase Agreement, the purchase price payable by the Company to the Existing Shareholders for the Purchased Shares is equal to $461,673,036 which is to be satisfied by (a) an aggregate cash payment of $193,512,214, (b) the issuance to the Existing Shareholders of an aggregate of 13,126,666 Common Shares, and (c) the issuance to the Birch Hill Entities and the Co-Investors of an aggregate of $45,007,500 principal amount of non-interest bearing, unsecured subordinated convertible notes (the Acquisition Notes ). Immediately following the closing of the Acquisition, the Existing Shareholders will own approximately 53% of the Common Shares outstanding, assuming conversion of the Acquisition Notes, and after giving effect to the Offering. 77

80 If the Over-Allotment Option is exercised in full, the Company will use the proceeds received, after deducting the Underwriters Fee, to repay the principal amount of the Acquisition Notes. If the Over-Allotment Option is exercised only in part, the Company will repay the principal amount of such Acquisition Notes on a pro rata basis, to the extent of the proceeds received after deducting the Underwriters Fee, and the balance of the outstanding principal amount of the Acquisition Notes will be automatically converted into Common Shares on closing of the Over-Allotment Option at a price per share equal to the Offering Price. If the Over-Allotment Option is not exercised, the principal amount of the Acquisition Notes will be automatically converted into Common Shares on the 45 th day following the Closing Date at a price per share equal to the Offering Price. The completion of the Acquisition is conditional on, among other things, this Offering having been completed, the Pre-Closing Transactions having been completed and other usual and customary conditions for transactions of this nature. The Purchase Agreement will contain representations and warranties and related indemnities from the Existing Shareholders on a several, and not joint and several, basis (except with respect to the Birch Hill Entities which will jointly and severally represent, warrant and provide the related indemnities with each other but no other Existing Shareholders). The Existing Shareholders will provide representations and warranties regarding title to the Purchased Shares and the business carried on by Sleep Country. It will be a condition of Closing under the Purchase Agreement that the Purchased Shares be acquired by the Company with good title thereto, free and clear of any encumbrances. The Existing Shareholders have also represented that this Prospectus contains full, true and plain disclosure of all material facts relating to Sleep Country and does not contain any misrepresentation (as defined under applicable securities laws). Generally, these representations and warranties will survive for a period of 18 months following the Closing Date, except for certain limited representations and warranties which will survive without limitation of time, the no misrepresentation representation, which will survive for a period of three years following the Closing Date, and tax-related representations and warranties which will survive until the expiry of the applicable assessment period. The maximum liability of each Existing Shareholder (or in the case of the Birch Hill Entities, the Birch Hill Entities collectively) under all representations, warranties and indemnities under the Purchase Agreement will be limited to the cash portion of the proceeds received by such Existing Shareholder from the sale of the Purchased Shares, including any cash proceeds received from the redemption of the Class A Common Shares or the repayment of the Acquisition Notes. Certain qualifications and limitations apply and there can be no assurance of recovery by the Company from the Existing Shareholders for breaches of such representations and warranties. See Risk Factors Risks relating to the Acquisition. The representations and warranties, the indemnities and the contractual limits on the liability of the Existing Shareholders contained in the Purchase Agreement were negotiated by the Company, SCCI, the Underwriters and the Existing Shareholders. Purchasers under this Prospectus will not have a direct statutory right of action against any of the Existing Shareholders, unless an Existing Shareholder is also a director of the Company. A purchaser s sole remedy against the Existing Shareholders will be the Company exercising its rights, if any, under the Purchase Agreement to claim indemnification in respect of a breach of the representations and warranties in such agreement by such party or, in certain circumstances, pursuant to an indemnity regarding taxes, subject to the limitations discussed in the preceding paragraphs. Any recourse against the Existing Shareholders must be pursued individually, other than with respect to the Birch Hill Entities. As a result, there can be no assurance of recovery by the Company from any or all of the Existing Shareholders for any breach of their respective representations and warranties under the Purchase Agreement. 78

81 Investor Rights Agreement In connection with the ongoing investment of the Birch Hill Entities, the Company and the Birch Hill Entities will, on Closing, enter into an investor rights agreement (the Investor Rights Agreement ). Pursuant to the Investor Rights Agreement, the Birch Hill Entities will, as a group, have the right to nominate (i) two individuals for election to the Board of Directors so long as they own or control, in the aggregate, at least 25% of the issued and outstanding Common Shares, and (ii) one individual for election to the Board of Directors so long as they own or control, in the aggregate, at least 12.5%, but less than 25% of the issued and outstanding Common Shares. In addition, pursuant to the Investor Rights Agreement, the Company has agreed to grant the Birch Hill Entities registration rights whereby the Birch Hill Entities will, no earlier than six months following the completion of the Offering, have the right from time to time to demand that the Common Shares then held by the Birch Hill Entities and the Co-Investors be qualified for distribution under a prospectus in accordance with applicable Canadian securities laws, which right is exercisable by the Birch Hill Entities up to two times in any 12-month period. The Company has also granted to the Birch Hill Entities piggy-back rights, subject to customary exceptions, in the event that the Company proposes to complete an offering of Common Shares. These demand and piggy-back registration rights are available to the Birch Hill Entities so long as they hold or control, in the aggregate, at least 10% of the issued and outstanding Common Shares. DESCRIPTION OF SHARE CAPITAL The Company is currently authorized to issue an unlimited number of Common Shares and an unlimited number of Class A Common Shares, of which one Common Share and no Class A Common Shares were issued and outstanding as at July 9, After giving effect to the Offering and the Acquisition, assuming the conversion of the Acquisition Notes, there will be 37,539,133 Common Shares (37,539,133 Common Shares if the Over-Allotment Option is exercised in full) and no Class A Common Shares issued and outstanding. Common Shares Holders of Common Shares are entitled to receive notice of any meetings of shareholders, to attend and to cast one vote per Common Share at all such meetings. Holders of Common Shares do not have cumulative voting rights with respect to the election of directors and, accordingly, holders of a majority of the Common Shares entitled to vote in any election of directors may elect all directors standing for election. Holders of Common Shares are entitled to receive on a pro rata basis such dividends, if any, as and when declared by the Board of Directors at its discretion from funds legally available therefor and upon the liquidation, dissolution or winding-up of the Company are entitled to receive on a pro rata basis the net assets of the Company after payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attaching to any other series or class of shares ranking senior in priority to or on a pro rata basis with the Common Shares with respect to dividends or liquidation. The Common Shares do not carry any pre-emptive, subscription, redemption or conversion rights, nor do they contain any sinking or purchase fund provisions. Class A Common Shares Holders of Class A Common Shares will be entitled to the same rights and privileges as holders of the Common Shares described above under Common Shares and will rank equally with the holders of Common Shares upon the liquidation, dissolution or winding-up of the Company. The Class A Common Shares will not carry any pre-emptive or subscription rights, nor will they contain any sinking or purchase fund provisions. In the event the Company completes an initial public offering of Common Shares, the Class A Common Shares will be redeemable at the option of the Company upon written notice to the holders of the Class A Common Shares, with the redemption price being equal to the price per Common Share in the initial public offering. In the event that the Company does not redeem the Class A Common Shares within 45 days of the completion of an initial public offering of the Common Shares, the Class A Common Shares will automatically convert, on a one-for-one basis, into Common Shares. As described above under The Acquisition and Related Transactions, 4,565,962 Class A Common Shares will be issued in connection with the Pre-Closing Transactions, all of which will be redeemed with the net proceeds of the Offering. See The Acquisition and Related Transactions and Use of Proceeds. 79

82 DESCRIPTION OF MATERIAL INDEBTEDNESS Existing Credit Facilities As of March 31, 2015, SCCI had a $125.1 million senior term loan and a $30 million revolving credit facility with certain Canadian chartered banks, as lenders (the Existing Credit Facilities ). As at the date hereof, the Existing Credit Facilities are fully drawn. SCCI is in compliance with all material terms and conditions of the Existing Credit Facilities. The Existing Credit Facilities are guaranteed by, and secured by a first ranking charge over the present and future undertaking and property of, SCCI and its subsidiaries located in Canada, a first ranking pledge of all securities in all present and future subsidiaries of SCCI and an assignment of all material contracts, licenses and trade-marks of SCCI and its subsidiaries located in Canada. Certain shareholders of SCCI have also provided limited recourse guarantees and pledged their equity interests in SCCI as security for SCCI s obligations under the Existing Credit Facilities. The Existing Credit Facilities contain restrictive covenants customary for credit facilities of this nature, including restrictions on SCCI s and its subsidiaries ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, sell or otherwise transfer assets, enter into transactions with affiliates or change its line of business, subject to certain exceptions. The Existing Credit Facilities contain customary representations and warranties and events of default. New Credit Facility On the Closing Date, SCCI intends to replace the Existing Credit Facilities with a revolving credit facility in the maximum amount of $175 million (the New Credit Facility ). SCCI has entered into an arrangement agreement with a Canadian chartered bank to arrange the New Credit Facility. The New Credit Facility will mature five years from the Closing Date, with full repayment due at maturity of all amounts outstanding thereunder. On the Closing Date, the Company expects that approximately $155 million will be drawn under the New Credit Facility. It is expected that the terms and conditions of the New Credit Facility will remain generally consistent with the Existing Credit Facilities, except for changes necessitated by the change in the ownership structure of SCCI, the elimination of the existing term loan and certain changes to the financial covenants. Financial covenants will include total leverage and interest coverage ratios. In addition to the security granted under the New Credit Facility and additional security usual and customary for transactions of the same type, SCCI s obligations under the New Credit Facility will be guaranteed by the Company. Reporting requirements will also be amended to reflect the new ownership structure and the public company structure. The New Credit Facility will include a cross default to other indebtedness of the Company and its subsidiaries. The Company will be permitted to make distributions so long as no default or event of default has occurred and is continuing or would result from the payment. Prime rate advances under the New Credit Facility will bear interest at a rate per annum equal to the Canadian prime rate or U.S. base rate, as applicable, plus, in each case, an applicable margin determined by the total leverage ratio. 80

83 CAPITALIZATION The following table sets out the consolidated capitalization of the Company as at March 31, 2015 after giving effect to the Offering and the use of proceeds therefrom described under Use of Proceeds, including the transactions described under The Acquisition and Related Transactions. The table should be read in conjunction with the unaudited pro forma consolidated financial statements of the Company contained in this Prospectus. As at March 31, 2015 (1) Pro Forma (in thousands) Long-term debt (including current portion) (2)... $156,707 Shareholders equity (deficiency): Capital stock ,247 Deficit... (1,424) Total ,822 Total Capitalization ,529 (1) On May 27, 2015, the Company issued one Common Share. See Prior Sales of Common Shares. (2) At Closing, the Company is expected to have gross outstanding long term debt of approximately $157.1 million, consisting of $155 million drawn under the New Credit Facility and finance leases of approximately $2.1 million. Long term debt net of transaction costs is expected to be approximately $156.7 million. DIVIDEND POLICY Subject to financial results, capital requirements, available cash flow and any other factors that the Board of Directors may consider relevant, it is the intention of the Board of Directors following Closing to declare quarterly cash dividends. It is expected that future cash dividend payments will be made to shareholders of record as of the close of business on the last business day of each fiscal quarter. All dividends expected to be paid by the Company, unless otherwise indicated, are designated as eligible dividends in accordance with subsection 89(14) of the Tax Act and any applicable corresponding provincial or territorial provisions. See Risk Factors Payment of dividends. Initially, the Company anticipates paying quarterly cash dividends, with annualized aggregate dividend payments of approximately $17 million. The first dividend that would be payable to investors in the Offering would be the dividend for the period beginning on the Closing Date and ending on September 30, The Company expects the first dividend would be equal to an aggregate amount of approximately $4 million (or approximately $0.11 per Common Share). Dividends will be declared and paid in arrears. Accordingly, the Company expects the first dividend payment on the Common Shares would be declared following the announcement of the Company s results for the third quarter of fiscal 2015 in November 2015 and would be paid in December The amount and timing of the payment of any dividends are not guaranteed and are subject to the discretion of the Board of Directors. See Risk Factors Payment of dividends. Dividend Reinvestment Plan Following Closing and subject to the receipt of any required regulatory approvals, the Company intends to adopt a dividend reinvestment plan ( DRIP ), pursuant to which resident Canadian holders of Common Shares will be entitled to elect to have all of the cash dividends of the Company payable to such person automatically reinvested in additional Common Shares. Pursuant to the DRIP, cash dividends will be reinvested at a price per Common Share calculated by reference to the volume weighted average of the trading price for the Common Shares on the relevant stock exchange or marketplace for the five trading days immediately preceding the relevant dividend date, less a discount, if any, of up to 5%, at the Company s election. The Company has set the initial discount at 3%. The Company may, subject to the terms of the DRIP, alter or eliminate this discount at any time. 81

84 No brokerage commission will be payable in connection with the purchase of Common Shares under the DRIP and all administrative costs will be borne by the Company. Cash undistributed by the Company upon the issuance of additional Common Shares under the DRIP will be invested in the Company to be used for general corporate purposes. Shareholders who are non-residents of Canada will not be entitled to participate in the DRIP. Upon becoming a non-resident of Canada, a shareholder must terminate the shareholder s participation in the DRIP. Further administrative details, including the date of the first dividend for which shareholders will be entitled to elect to have dividends reinvested under the DRIP, and enrolment documents regarding the DRIP, will be made available to shareholders following Closing. PRIOR SALES OF COMMON SHARES The following table summarizes the issuances by the Company of Common Shares or securities convertible into Common Shares in the 12-month period prior to the date of this Prospectus: Description of Number of Securities Date of Issuance Transaction Issued Issue Price Per Share May 27, 2015 Issued on incorporation 1 Common Share $1.00 PRINCIPAL SHAREHOLDERS Upon completion of the Offering and the Acquisition, it is expected that (i) the Existing Shareholders, either directly or indirectly, will own 19,889,133 Common Shares, assuming the conversion of the Acquisition Notes, representing a 53.0% interest in the Company (or 17,241,633 Common Shares, representing a 45.9% interest in the Company if the Over-Allotment Option is exercised in full) and (ii) of the Existing Shareholders, the Birch Hill Entities together with the Co-Investors, either directly or indirectly, will have direction and control over 17,104,996 Common Shares, assuming the conversion of the Acquisition Notes, representing a 45.6% interest in the Company (or 14,457,496 Common Shares, representing a 38.5% interest in the Company if the Over-Allotment Option is exercised in full). As a result, the Birch Hill Entities will have a significant influence on the Company. See Risk Factors. To the best of the knowledge of the directors and executive officers of the Company, the following table sets forth the shareholdings of those persons who, after giving effect to the Offering and the Acquisition, will be the direct or indirect beneficial owners of, or exercised control or direction over, 10% or more of the outstanding Offered Shares: Offered Shares Beneficially Owned or Controlled Immediately Name of Shareholder After the Offering Number % Birch Hill Entities (1)... 14,459,062 (2) 38.5% (3) (1) The Birch Hill Entities are Birch Hill Feather LP and Birch Hill Feather (US) Holdings LP. The general partner of these limited partnerships is Birch Hill Feather GP Inc. and Birch Hill Equity Partners Management Inc., respectively, each of which is owned by Birch Hill Equity Partners Inc., which in turn is owned by the employees of Birch Hill Equity Partners Management Inc. Voting and dispositive powers with respect to the Common Shares which will be held by the Birch Hill Entities upon completion of the Offering and the Acquisition will be exercised by Birch Hill Equity Partners Management Inc. The board of directors of Birch Hill Equity Partners Management Inc. is comprised of Stephen Dent, John MacIntyre, Michael Salamon and David Samuel each of whom disclaims any beneficial ownership of the Common Shares which will be held by the Birch Hill Entities upon completion of the Offering and the Acquisition. (2) Excludes the Common Shares held by the Co-Investors and assumes the conversion of the Acquisition Notes. Dispositive powers with respect to the Common Shares which will be held by the Co-Investors upon completion of the Offering and the Acquisition will be exercised by Birch Hill Equity Partners Management Inc., but voting direction and control with respect to such Common Shares will remain with the applicable Co-Investor. (3) Assumes no exercise of the Over-Allotment Option (12,221,098 Common Shares, representing 32.6%, if the Over-Allotment Option is exercised in full). 82

85 DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, province and country of residence, position held with the Company, independence, principal occupation and number of Common Shares held by each person who will be a director and/or an executive officer of the Company as at the Closing Date. Name, Province and Common Shares Country of Residence Position / Title Principal Occupation (1) Held Stephen K. Gunn... Executive Co-Chair Executive Co-Chair of the 821,275 Ontario, Canada Company Christine Magee... Executive Co-Chair Executive Co-Chair of the 648,198 Ontario, Canada Company J. Douglas Bradley (2)... Director Corporate director Nil Ontario, Canada John Cassaday (2)... Director Corporate director Nil Ontario, Canada Andrew Moor (3)... Director President and Chief Executive Nil Ontario, Canada Officer of Equitable Bank David Shaw (4)... Director Founder and Chief Executive Nil Ontario, Canada Officer of Knightsbridge Human Capital Management Inc. Stephen Dent (5)... Director Co-Founder of Birch Hill Equity Nil Ontario, Canada Partners Thecla Sweeney (5)... Director Partner of Birch Hill Equity Nil Ontario, Canada Partners David Friesema... Director and Chief Executive Chief Executive Officer of the 391,081 Ontario, Canada Officer Company Stewart Schaefer... President of Dormez-vous? President of Dormez-vous? and 456,134 Québec, Canada and Chief Business Chief Business Development Development Officer Officer of the Company Robert Masson... Chief Financial Officer and Chief Financial Officer and 35,566 Ontario, Canada Corporate Secretary Corporate Secretary of the Company David Howcroft... Senior Vice-President, Sales Senior Vice-President, Sales of 34,707 Ontario, Canada the Company Sieg Will... Senior Vice-President, Senior Vice-President, 91,819 Ontario, Canada Operations Operations of the Company Eric Solomon... Senior Vice-President, Senior Vice-President, 29,412 Ontario, Canada Merchandising and Merchandising and Marketing of Marketing the Company (1) See Biographical Information Regarding the Directors and Executive Officers of the Company for the five-year history of each director and executive officer. (2) Independent Director. Member of the Audit Committee and the Compensation, Nominating and Corporate Governance Committee. (3) Independent Director. Chair of the Audit Committee. Member of the Compensation, Nominating and Corporate Governance Committee. (4) Independent Director. Chair of the Compensation, Nominating and Corporate Governance Committee. Member of the Audit Committee. (5) Independent Director. Nominee of the Birch Hill Entities. Although Mr. Dent and Ms. Sweeney are independent for purposes of NI , they may not be considered independent for purposes of NI As a result, they will not serve on the Audit Committee, which is comprised entirely of independent directors. See Audit Committee. 83

86 Immediately after the closing of the Offering and the Acquisition, the directors and executive officers of the Company, as a group, will beneficially own, directly or indirectly, or exercise control or direction over, 2,508,192 Common Shares, representing 6.7% of the Common Shares, whether or not the Over-Allotment Option is exercised. Biographical Information Regarding the Directors and Executive Officers of the Company The following is biographical information relating to each person who is expected to be a director or executive officer of the Company upon completion of the Offering and the Acquisition. The directors of the Company shall be elected at each annual general meeting of the shareholders of the Company held to elect directors. Stephen K. Gunn (60) Mr. Gunn is an Executive Co-Chair of Sleep Country. He co-founded Sleep Country in 1994 and served as its Chief Executive Officer from 1997 to Mr. Gunn was a management consultant with McKinsey & Company from 1981 to 1987 and then co-founded and was President of Kenrick Capital, a private equity firm. Mr. Gunn is also a member of the Board of Directors of Dollarama Inc., Golfsmith International Holdings GP Inc., Cara Operations Limited and Mastermind Toys. He holds a Master of Business Administration from the University of Western Ontario and a B.Sc. degree in Electrical Engineering from Queen s University. Christine Magee (55) Ms. Magee is an Executive Co-Chair of Sleep Country. She co-founded Sleep Country in 1994 and served as its President until November Ms. Magee was employed as the Commercial Accounts Manager of Continental Bank from 1982 to 1985 and as a Senior Manager of Corporate and Commercial Lending with National Bank from 1985 to She serves on the Board of Directors of SiriusXM Canada and Trillium Health Partners. She is a member of the Mentoring Council of the Province of Ontario Innovation Fund, the Advisory Board of the Ivey School of Business and the Women s President Organization. Ms. Magee previously served on the Board of Directors of Cott Corporation from 2004 to 2008 and McDonald s Restaurants from 1999 to She holds an HBA (Honours) from the University of Western Ontario. J. Douglas Bradley (63) Mr. Bradley is a member of the Board of Directors of Sleep Country. He is currently a corporate director. From 2005 to 2012, he was Managing Director of Westerkirk Capital Inc., a private equity firm. Prior to that, he was Managing Director, Corporate Development of TrizecHahn Corporation from 1995 to From 1982 to 1994, Mr. Bradley was a partner of Coopers & Lybrand Chartered Accountants, a predecessor firm of PricewaterhouseCoopers LLP. Mr. Bradley has served on numerous boards during his 40-year career, including, most recently, Viking Air Limited and Cosmetica Laboratories. He holds a Bachelor of Mathematics degree from the University of Waterloo and is a Chartered Professional Accountant. John Cassaday (61) Mr. Cassaday is a member of the Board of Directors of Sleep Country. He is currently a corporate director. Prior to April 2015, Mr. Cassaday served as President and Chief Executive Officer and as a director of Corus Entertainment Inc., a position he held since its inception in Corus is a Canadian leader in pay and specialty television and in Canadian radio and a global leader in children s programming and licensing. Prior to Corus, Mr. Cassaday was Executive Vice President of Shaw Communications, President and Chief Executive Officer of CTV Television Network and President of Campbell Soup Company in Canada and the United Kingdom. Mr. Cassaday is currently a director of Manulife Financial Corporation and Sysco Corporation. He is also active in community affairs, principally with St. Michael s Hospital. Mr. Cassaday has an MBA (Dean s List) from the Rotman School of Management at the University of Toronto. Andrew Moor (55) Mr. Moor is a member of the Board of Directors of Sleep Country. Since 2007, he has served as the President and Chief Executive Officer of Equitable Bank and Equitable Group and is also a member of both boards of directors. Mr. Moor was employed by CIBC Wood Gundy from 1987 to 1996 in various positions from Associate in investment banking to Managing Director in the private equity division. From 1996 to 2001, Mr. Moor was employed as Chief Financial Officer and President SMED International Inc. Mr. Moor was President and Chief Executive Officer of Invis Inc. from 2002 to From 2003 to 2008, he served as a trustee of Sleep Country Canada Income Fund and was also a member of its Audit and Compensation and Corporate Governance Committees. Mr. Moor is a director of the Trust Companies Association, Borrowell Inc. and a Trustee of The Havergal College Foundation. He holds a Master of Business Administration from the University of British Columbia and a B.Sc. in Mechanical Engineering from University College London. 84

87 David Shaw (61) Mr. Shaw is a member of the Board of Directors of Sleep Country. He is the Founder and Chief Executive Officer of Knightsbridge Human Capital Management Inc., a national human capital firm founded in Prior to founding Knightsbridge, Mr. Shaw was President and Chief Executive Officer of Pepsi Cola Canada Beverages from 1996 to Mr. Shaw s career with PepsiCo spanned 22 years within Canada and abroad gaining extensive international experience in Australia, Singapore and Turkey. Mr. Shaw is the former Chairman of the North York General Hospital Foundation. He currently sits on the Queen s School of Business Advisory Board, the Mother Parkers Tea & Coffee Inc. Board of Advisors, the Princess Margaret Cancer Foundation Board and the boards of directors of two publicly traded companies Fiera Capital Corporation and Brick Brewing Co. Limited. Stephen Dent (54) Mr. Dent is a member of the Board of Directors of Sleep Country. He co-founded Birch Hill Equity Partners, a leading mid-market private equity fund, in 2005 and prior to that ran its predecessor organization, the Canadian mid-market Private Equity Group within TD Capital. Mr. Dent joined TD Capital in 1989 as an associate. He also serves on the Board of Directors for Bio Agri Mix, Hi-Pro Feeds, Mastermind Toys and Motion Specialties. He has served on the Boards of Algonquin Group, Carmanah Design and Manufacturing, Constellation Software, Lift Technologies, Locator Group, and PageMart Wireless. Mr. Dent has also played a lead role in Birch Hill s investments in A-Channel, AltaGas Services, Celestica International Holdings and COM DEV International. He received his Master of Business Administration from the University of Western Ontario and his BBA (Honours) from Wilfrid Laurier University. Thecla Sweeney (43) Ms. Sweeney is a member of the Board of Directors of Sleep Country. She joined Birch Hill Equity Partners, a leading mid-market private equity fund, in 2004 when the group was still part of TD Capital. She is currently the Chair of Mastermind Toys and of Motion Specialties and has previously served on the Board of Directors of ACE Bakery, Atria Networks, Secunda Canada and TSC Stores. Prior to joining Birch Hill, Ms. Sweeney worked as a consultant to the predecessor of Porter Airlines in Business Development, she was a consultant at Bain & Company and also spent three years in the Chairman s Office of George Weston Limited. Outside of Birch Hill, Ms. Sweeney serves on the Board as Co-Chair of the Canadian Women in Private Equity. She received her Master of Business Administration at the University of Western Ontario where she graduated as an Ivey Scholar and also received her BA (Honours) from the University of Western Ontario. David Friesema (48) Mr. Friesema is the Chief Executive Officer of Sleep Country, a position he has held since November He has been with Sleep Country since 1995 holding numerous senior positions, including Head of Sales, General Manager and Chief Operating Officer. During his tenure, Mr. Friesema has been involved in developing many of the sales training programs, creative marketing advertisements and influencing the advance positioning that Sleep Country enjoys in the mattress industry today. Prior to joining Sleep Country, Mr. Friesema helped establish and manage mattress retail organizations in the United States. He is currently the Chairman of the Better Sleep Council of Canada and is a past board member of Shelternet for Abused Women. He attended the University of Detroit Business School and the University of Missouri-St. Louis School of Psychology. Stewart Schaefer (50) Mr. Schaefer is the President of Dormez-vous? and the Chief Business Development Officer for Sleep Country. Mr. Schaefer founded Dormez-vous? in 1994 and grew the business to five stores before being acquired by Sleep Country in In 1992, Mr. Schaefer co-founded Heritage Classic Beds, a manufacturer and distributor of iron and brass beds. From 1986 to 1992, he trained and worked as a commodity broker in Chicago, later returning to Montreal to work at Dean Witter Reynolds and Refco Futures. Mr. Schaefer studied Finance and Marketing at Concordia University in Montreal. Robert Masson (43) Mr. Masson joined Sleep Country in July 2013 and serves as its Chief Financial Officer and Corporate Secretary. Prior to joining Sleep Country, he was the Chief Financial Officer of Second Cup from February 2009 to June Mr. Masson also has extensive management experience with several other public and private companies, including IBM Canada, Manchuwok, Ernst & Young, Deloitte & Touche and Sappi. In addition to his finance responsibility, Mr. Masson has overall responsibility for Information Technology at Sleep Country. He holds a Bachelor of Commerce degree and a Post Graduate Diploma of Accounting, both from the University of Kwa-Zulu Natal in South Africa. He also holds a Chartered Accountant designation and is a member of the Chartered Professional Accountants of Ontario. 85

88 David Howcroft (44) Mr. Howcroft is the Senior Vice President of Sales for Sleep Country, a position he has held since He has been with Sleep Country since 1996 and during his tenure has created numerous programs to consistently build, develop and motivate a first-class sales team. He is also instrumental in developing and implementing various sales workshops, training programs and sales processes. Mr. Howcroft brings with him over 20 years of retail sales experience, his ability to conceive of new sales strategies and a well-recognized ability to mentor and motivate. Sieg Will (49) Mr. Will is the Senior Vice President of Operations for Sleep Country, a position he has held since He has been with Sleep Country since 2001 and during his tenure he has been promoted into positions of greater responsibility within the organization. He played an instrumental role in the development and implementation of standard operating policies and procedures across the organization while adopting a continuous improvement approach to conducting business. Prior to joining Sleep Country, he held senior positions with Canadian Tire and PepsiCo in the sales, operations and account management areas. Mr. Will sits on the Humber College Supply Chain Advisory Board, is a Team Leader for Sleeping Children Around the World and an Ambassador for the Pinehurst Club Breakfast. He graduated from the University of Guelph with a B.A. (Honours), studied at Wilfrid Laurier for a business diploma and attended the Schulich School of Business for his Master s Certificate in Supply Chain Management. He has a Professional Logistics Designation from the Logistics Institute. Eric Solomon (57) Mr. Solomon joined Sleep Country in 1996 and is the Senior Vice President of Merchandising and Marketing, a position he has held since Mr. Solomon provides oversight to the marketing department and has been instrumental in growing the business by increasing top-of-mind brand awareness and diversifying the product portfolio with exclusive offerings. During his tenure at Sleep Country, Mr. Solomon has also headed both the sales and operations functions. Prior to joining Sleep Country, Mr. Solomon held management positions in the services and retail sectors. Mr. Solomon attended McMaster University. Corporate Cease Trade Orders and Bankruptcies To the Company s knowledge, none of the directors or executive officers of the Company is, or has been, within the ten years before the date of this Prospectus, a director, chief executive officer or chief financial officer of any company (including the Company) that was the subject of a cease trade or similar order, or an order that denied such company access to any statutory exemptions under Canadian securities legislation, which order was: (i) in effect for a period of more than 30 consecutive days, and (ii) issued either (a) when the director or executive officer was acting in the capacity as a director, chief executive officer or chief financial officer, or (b) after such person ceased to be in such capacity, but which resulted from an event that occurred while they were acting in such capacity. To the Company s knowledge, none of the directors or executive officers of the Company is, or has been, within the ten years before the date of this Prospectus, a director or executive officer of any company (including the Company) that, while that person was acting in such capacity or within one year of that person ceasing to act in such capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that company. Penalties and Sanctions To the Company s knowledge, none of the directors or executive officers of the Company has been subject to any penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered into a settlement agreement with a Canadian securities regulatory authority or been subject to any other penalties or sanctions imposed by a court, or regulatory body that would likely be considered important to a reasonable investor in making an investment decision. 86

89 Personal Bankruptcies To the Company s knowledge, none of the directors or executive officers of the Company holding a sufficient number of securities of the Company to affect materially the control of the Company, or a personal holding company of any such persons has, within the ten years before the date of this Prospectus, been bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director or officer. Conflicts of Interest To the best of the Company s knowledge, there are no existing or potential conflicts of interest among the Company or its subsidiaries and the directors or executive officers of the Company or its subsidiaries as a result of their outside business interests as at the date of this Prospectus. Certain of the directors and executive officers serve as directors and executive officers of other public companies. Accordingly, conflicts of interest may arise which could influence these persons in evaluating possible acquisitions or in generally acting on behalf of the Company. The Company s directors and executive officers are required by law to act honestly and in good faith with a view to the best interests of the Company. Subject to any limitations in the Company s constating documents, no agreement or transaction would be void or voidable only because it was made between the Company and one or more of its directors or by reason that such director was present at the meeting of directors that approved such agreement or transaction or that the vote or consent of the director is counted for the approval of such agreement or transaction. Subject to any limitations or provisions to the contrary in the Company s constating documents, in order for an agreement or transaction between the Company and one or more of its directors to be valid, the relevant director or directors must disclose in good faith his or their interests in such agreement or transaction to the other directors not having a conflict of interest (or a sufficient number of directors to carry the resolution without counting the votes of the interested director(s)) and such other directors must vote in favour of the agreement or transaction. If all of the directors have a conflict of interest, the agreement or transaction must be authorized, approved or ratified by a resolution of shareholders in order to achieve statutory validity. An agreement or transaction between a director and the Company will be valid unless it can be shown that, at the time the agreement or transaction was authorized, it was unfairly prejudicial to one or more shareholders or the creditors of the Company. In appropriate cases, the Company will establish a special committee of independent directors to review a matter in which several directors, or management, may have a conflict. The directors and executive officers of the Company have been advised of their obligations to act at all times in good faith in the interest of the Company and to disclose any conflicts to the Company if and when they arise. Persons considering the purchase of Offered Shares pursuant to the Offering under this Prospectus must appreciate that they will be required to rely on the judgment and good faith of these persons in resolving any such conflicts of interest that may arise. AUDIT COMMITTEE Overview The Audit Committee oversees the accounting and financial reporting practices and procedures of the Company and the audits of the Company s financial statements. The Audit Committee s purpose and responsibilities include oversight of: (i) the integrity of Sleep Country s accounting and financial reporting systems, including those used in connection with the preparation of its financial statements, budgets and forecasts; (ii) the adequacy of Sleep Country s internal controls over financial reporting and disclosure controls and procedures; (iii) Sleep Country s compliance with legal and regulatory requirements; (iv) the appointment of the external auditor and the external auditor s qualifications and independence; and (v) the performance of Sleep Country s internal audit function and the external auditor; (vi) Sleep Country s risk management procedures; (vii) all related party transactions in which Sleep Country is involved or proposes to be involved; and (viii) improprieties or suspected improprieties with respect to accounting and other matters that affect financial reporting. The Board of Directors intends to delegate to the Audit Committee the approval of the Company s quarterly results, as permitted by applicable securities legislation. The Audit Committee has the authority to communicate directly with the external auditor of the Company. 87

90 Audit Committee Charter The Board of Directors will adopt a written charter for the Audit Committee which will set out its responsibilities and duties, qualifications for membership, procedures for committee member appointments and removal and reporting to the Board of Directors. Composition of the Audit Committee The Audit Committee will be structured to comply with National Instrument Audit Committees ( Nl ). The Audit Committee will be comprised of Andrew Moor (Chair), Douglas Bradley, John Cassaday and David Shaw. Each member of the Audit Committee is financially literate within the meaning of NI In addition, each member of the Audit Committee is independent within the meaning of NI Relevant Education and Experience For the relevant education and experience of each of the members of the Audit Committee, please see Directors and Executive Officers Biographical Information Regarding the Directors and Officers of the Company. Pre-Approval Policies and Procedures The Audit Committee Charter will set out procedures regarding the provision of non-audit services by the Company s independent registered chartered accountants. This policy encourages consideration of whether the provision of services other than audit services is compatible with maintaining the auditor s independence and requires Audit Committee pre-approval of permitted non-audit and non-audit-related services. External Auditor Service Fees (By Category) The following chart summarizes the aggregate fees billed by PricewaterhouseCoopers LLP, the external auditor of the Company, for professional services rendered to SCCI for the fiscal years ended December 31, 2014 and December 31, 2013 for audit and non-audit related services: Audit Fees Audit-Related Fees Tax Fees Other Fees $144,500 $11,900 Nil Nil $127,000 $16,200 Nil Nil CORPORATE GOVERNANCE Overview Corporate governance refers to the way the business and affairs of a reporting issuer are managed and relates to the activities of the Board of Directors of the Company, the members of whom are elected by and are accountable to the shareholders. Corporate governance takes into account the role of the individual members of management who are appointed by the Board of Directors and who are charged with the day to day management of the Company. The Board of Directors is committed to sound corporate governance practices that are both in the interest of its shareholders and contribute to effective and efficient decision-making. In June 2005, National Policy Corporate Governance Guidelines ( NP ) and National Instrument Disclosure of Corporate Governance Practices ( NI ) were adopted by the securities regulatory authorities in Canada. NP establishes corporate governance guidelines which apply to all public companies and Sleep Country expects to implement its own corporate governance practices prior to the completion of the Offering in light of these guidelines. NI mandates the disclosure of corporate governance practices in accordance with Form F1, which disclosure is set out below. 88

91 Board of Directors The Board of Directors consists of nine directors, six of whom are considered independent for purposes of NI An independent director is one who is free from any direct or indirect relationship which could, in the view of the Board of Directors, be reasonably expected to interfere with a director s independent judgment. The independent members of the Board are Douglas Bradley, John Cassaday, Stephen Dent, Andrew Moor, David Shaw and Thecla Sweeney. Stephen K. Gunn, Christine Magee and David Friesema are not independent for purposes of NI Stephen K. Gunn and Christine Magee are each Executive Co-Chairs of Sleep Country, and David Friesema is the Chief Executive Officer of Sleep Country. Although Mr. Dent and Ms. Sweeney are independent for purposes of NI , they may not be considered independent for purposes of NI As a result, they will not serve on the Audit Committee, which is comprised entirely of independent directors. See Audit Committee. The Company will hold regularly scheduled Board of Directors meetings at least four times per year. Each meeting will include an in-camera session comprised solely of independent directors, without the presence of non-independent directors and management of the Company, to facilitate an open and candid discussion among the independent directors. Stephen K. Gunn and Christine Magee, as Executive Co-Chairs, are responsible for chairing all meetings of the Board of Directors, providing leadership to the Board of Directors, managing the Board of Directors, acting as liaisons between the Board of Directors and management as well as the independent directors and the non-independent directors, and representing the Company to external groups. The following table provides details regarding directorships held by Sleep Country s directors in other reporting issuers or the equivalent thereof in foreign jurisdictions. J. Douglas Bradley, Stephen Dent, David Friesema and Thecla Sweeney are not currently directors of any other reporting issuer. Name of Director Name of Other Reporting Issuer Stock Exchange John Cassaday... Manulife Financial Corporation TSX / NYSE Sysco Corporation NYSE Stephen K. Gunn... Dollarama Inc. TSX Cara Operations Limited TSX Christine Magee... Sirius XM Canada Holdings Inc. TSX Andrew Moor... Equitable Group Inc. TSX David Shaw... Fiera Capital Corporation TSX Brick Brewing Co. Limited TSX The Company does not impose term limits on its directors as it takes the view that term limits are an arbitrary mechanism for removing directors which can result in valuable, experienced directors being forced to leave the Board of Directors solely because of length of service. Instead, the Company believes that directors should be assessed based on their ability to continue to make a meaningful contribution. The Company s annual performance review of directors assesses the strengths and weaknesses of directors and, in its view, is a more meaningful way to evaluate the performance of directors and to make determinations about whether a director should be removed due to under-performance. The Mandate of the Board of Directors The Board of Directors is responsible for the general supervision of the management of the business as well as for the oversight and review of the strategic planning process of the Company. The Board of Directors will discharge its responsibilities directly and through its committees, which consist of the Audit Committee and the Compensation, Nominating and Corporate Governance Committee. The Compensation, Nominating and Corporate Governance Committee is responsible for corporate governance issues. The Board of Directors meets regularly to review the business operations, corporate governance and financial results of the Company. The Board of Directors will adopt a formal Board of Directors mandate. 89

92 Position Descriptions Executive Co-Chairs of the Board of Directors The Executive Co-Chairs of the Board of Directors are Stephen K. Gunn and Christine Magee. The Board of Directors will adopt a written position description for the Executive Co-Chairs of the Board of Directors, indicating that the Executive Co-Chairs are responsible for, among other things, chairing all meetings of the Board of Directors, promoting cohesiveness among the directors, promoting a thorough understanding of the duties and responsibilities of the directors, promoting the proper flow of information to the directors, acting as liaisons between the Board of Directors and management to promote open and constructive discussions between directors and management and presiding over meetings of the Company s shareholders. The Executive Co-Chairs of the Board of Directors will also schedule meetings of directors where non-independent directors and management are not in attendance. Chair of the Audit Committee The Chair of the Audit Committee will be Andrew Moor. The Board of Directors will adopt a written position description for the Chair of the Audit Committee, indicating that the Chair of the Audit Committee is responsible for, among other things, chairing all meetings of the committee, promoting cohesiveness among members of the committee, promoting a thorough understanding of the duties and responsibilities of the committee, promoting the proper flow of information to the committee, acting as the liaison between the committee and each of the Company s management, the internal auditor and external auditor, promoting open and constructive discussions between members of the committee, management, the internal auditor and the external auditor and reporting to the Board of Directors on the activities of the committee. Chair of the Compensation, Nominating and Corporate Governance Committee The Chair of the Compensation, Nominating and Corporate Governance Committee will be David Shaw. The Board of Directors will adopt a written position description for the Chair of this committee, indicating that the Chair of the Compensation, Nominating and Corporate Governance Committee is responsible for, among other things, chairing all committee meetings, promoting cohesiveness among members of the committee, promoting a thorough understanding of the duties and responsibilities of the committee, promoting the proper flow of information to the committee, acting as the liaison between the committee and each of the Company s management, compensation and governance consultants and other outside advisors, promoting open and constructive discussions between members of the committee, management, compensation and governance consultants and other outside advisors and reporting to the Board of Directors on the activities of the committee. Chief Executive Officer The Board of Directors will adopt a position description for the Chief Executive Officer whose primary role is to take overall supervisory and managerial responsibility for the day-to-day operations of the Company s business and manage the Company in order to achieve the goals and objectives determined by the Board of Directors in the context of the Company s strategic plan. The Chief Executive Officer s position description will set forth responsibilities including, but not limited to: (i) fostering a corporate culture that promotes ethical practices and encourages individual integrity; (ii) maintaining a positive and ethical work climate that is conducive to attracting, retaining and motivating top-quality employees at all levels; (iii) developing a long-term strategy and vision for the Company that leads to the creation of shareholder value; (iv) developing an annual operating plan and financial budget that support the Company s long-term strategy; (v) strategy and implementation for major mergers, acquisitions and divestitures; (vi) designing or supervising the design and implementation of effective disclosure and internal controls; (vii) formulating and overseeing the implementation of major corporate policies; (viii) serving as the chief spokesperson for the Company and establishing the Company s communications framework and strategy; and (ix) ensuring that the Company has an effective management team and has an active plan for its development and succession. 90

93 Orientation and Continuing Education The Company will adopt a director education and training policy and has established a formal orientation process for new directors and continuing education program for all directors. Before their first Board of Directors meeting, new directors will be provided with a tour of the Company s facilities. They will also be provided with a Board of Directors member manual that includes the articles of incorporation, by-laws, minutes of meetings, significant corporate policies, list of Board of Directors committees and mandates, a project overview and strategic plan, a list of Board of Directors members and their contact information, the latest financial statements and the current budget/forecast of the Company. This material will be supplemented by a meeting between the new director and management to discuss the nature and operations of the Company. The new director will also be introduced to all of the then-current members of Board of Directors. The Executive Co-Chairs will be responsible for ensuring that the new director understands his or her responsibilities as a member of the Board of Directors and any committees that they may join and ensuring that directors maintain the skill and knowledge necessary to meet their obligations as directors. There will also be continuing education opportunities for all directors that will be provided internally and externally. Ethical Business Conduct The Company will adopt a code of ethics and business practices (the Code of Conduct ). A copy of the Code will be obtainable from the Company s website at and will also be available on SEDAR at under the Company s profile. The Board of Directors intends that it will review compliance with the Code of Conduct at least on an annual basis. Compensation, Nominating and Corporate Governance Committee The Compensation, Nominating and Corporate Governance Committee s purpose and responsibilities include: (i) reviewing and approving corporate goals and objectives relevant to CEO compensation, evaluating the CEO s performance in light of these goals and objectives and approving the CEO s compensation level based on this evaluation; (ii) overseeing the evaluation of the CEO and the officers of Sleep Country; (iii) recommending to the Board of Directors CEO, officer and director compensation, incentive-compensation and equity-based plans; (iv) approving and monitoring insider trading and share ownership policies; (v) reviewing the Sleep Country s executive compensation disclosure; (vi) identifying individuals qualified to become directors, consistent with the criteria established by the Board of Directors; (vii) recommending to the Board of Directors the director nominees for the next annual meeting of shareholders; (viii) developing and recommending to the Board of Directors a set of corporate governance principles applicable to Sleep Country; (ix) overseeing the evaluation of the directors; (x) reviewing the Board of Directors committee structure and recommend to the Board of Directors any changes it considers necessary or desirable; (xi) make recommendations with respect to management succession; and (xii) development and recommendation of an orientation program and a continuing education program for the directors. The Compensation, Nominating and Corporate Governance Committee will be comprised of David Shaw (Chair), John Cassaday, Douglas Bradley and Andrew Moor. Each member is independent within the meaning of NI Accordingly, the committee will be able to ensure an objective process in determining compensation. Initial management is being compensated based on current competitive rates. On a going forward basis, the Compensation, Nominating and Corporate Governance Committee will review peer group practices when determining compensation for senior management. Compensation The Board of Directors, with the assistance of the Compensation, Nominating and Corporate Governance Committee, is responsible for reviewing the compensation of members of the Board of Directors to ensure that compensation realistically reflects the responsibilities and risks involved in being a director and for reviewing the compensation of members of senior management to ensure that compensation is competitive within the industry and aligns the interests of such individual with those of the Company. 91

94 Nomination of Directors The Board of Directors, with the assistance of the Compensation, Nominating and Corporate Governance Committee, is responsible for the nomination of directors. The Compensation, Nominating and Corporate Governance Committee identifies the individuals qualified to become new directors and recommends to the Board of Directors new nominees for election by shareholders or for appointment by the Board of Directors to fill any vacancy on the Board of Directors. In making its recommendations to the Board of Directors, the committee considers: (i) the competencies and skills that the Board of Directors considers to be necessary for the Board of Directors, as a whole, to possess; (ii) the competencies and skills that the Board of Directors considers each existing director to possess; (iii) the competencies and skills each new nominee would bring to the boardroom; and (iv) the representation of women on the Board of Directors. Board of Directors Assessments The Board of Directors will be responsible for reviewing, on an annual basis, the requisite competencies, skills and diversity of prospective members of the Board of Directors as well as the composition of the Board of Directors as a whole. It is anticipated that the Compensation, Nominating and Corporate Governance Committee will be responsible for implementing an assessment process which assessment will include each member s contribution, qualification as an independent director, as well as skills and experience in the context of the needs of the Board of Directors. Diversity The Compensation, Nominating and Corporate Governance Committee believes that having a diverse Board of Directors and senior management offers a depth of perspective and enhances Board of Directors and management operations. The Compensation, Nominating and Corporate Governance Committee identifies candidates to the Board of Directors and management of the Company that possess skills with the greatest ability to strengthen the Board of Directors and management and the Company is focused on continually increasing diversity within the Company. The Compensation, Nominating and Corporate Governance Committee will not specifically define diversity, but will consider diversity of experience, perspective, education, race, gender and national origin as part of its overall annual evaluation of director nominees for election or re-election as well as candidates for management positions. Gender and geography are of particular importance to the Company in ensuring diversity within the Board of Directors and management. Recommendations concerning director nominees will be, foremost, based on merit and performance, but diversity will be taken into consideration, as it is beneficial that a diversity of backgrounds, views and experiences be present at the Board of Directors and management levels. The Company expects to recruit and select board and management candidates that represent both gender diversity and business understanding and experience. However, the Board of Directors will not support fixed percentages for any selection criteria, as the composition of the Board of Directors and management will be based on the numerous factors established by the selection criteria and it is ultimately the skills, experience, character and behavioral qualities that are most important to determining the value which an individual could bring to the Board of Directors or management of the Company. One of the eight members of the senior management of the Company and two of the nine members of the Board of Directors are female. The Company does not have a formal policy on the representation of women on the Board of Directors or senior management of the Company. The Company takes gender into consideration as part of its overall recruitment and selection process in respect of its Board of Directors and senior management and the Compensation, Nominating and Corporate Governance Committee will continue to do so following Closing. However, the Board of Directors does not believe that quotas or strict rules set forth in a formal policy necessarily result in the identification or selection of the best candidates. As such, the Company does not see any meaningful value in adopting a formal policy in this respect at this time as it does not believe that it would further enhance gender diversity beyond the current recruitment and selection process carried out by the Compensation, Nominating and Corporate Governance Committee. 92

95 The Board of Directors is mindful of the benefit of diversity on the Board of Directors and management of the Company and the need to maximize the effectiveness of the Board of Directors and management and their respective decision-making abilities. Accordingly, in searches for new directors, the Compensation, Nominating and Corporate Governance Committee will consider the level of female representation and diversity on the Board of Directors and management and this will be one of several factors used in its search process. This will be achieved through continuously monitoring the level of female representation on the Board of Directors and in senior management positions and, where appropriate, recruiting qualified female candidates as part of the Company s overall recruitment and selection process to fill Board of Directors or senior management positions, as the need arises, through vacancies, growth or otherwise. Where the Compensation, Nominating and Corporate Governance Committee believes that a male candidate and a female candidate each offer the Company substantially the same skill set and perspective, the Company anticipates that the committee will consider numerous other factors beyond gender and the overall level of female representation in deciding the candidate to whom to the offer will be made. EXECUTIVE COMPENSATION Overview The following discussion describes the significant elements of the compensation of the Company s Chief Executive Officer, President, Dormez-vous? and Chief Business Development Officer, Chief Financial Officer, Senior Vice-President, Sales and Senior Vice-President, Operations (collectively, the named executive officers or NEOs ), namely: David Friesema, Chief Executive Officer; Stewart Schaefer, President, Dormez-vous? and Chief Business Development Officer; Robert Masson, Chief Financial Officer and Corporate Secretary; David Howcroft, Senior Vice-President, Sales; and Sieg Will, Senior Vice-President, Operations. Compensation Discussion and Analysis Overview The Governance, Compensation and Nominating Committee, in consultation with the Chief Executive Officer, will be responsible for establishing, reviewing and overseeing the compensation policies of the Company and compensation of the named executive officers. The Company s executive compensation program is designed to attract, retain and motivate highly qualified executives while also aligning the interests of the executives with the Company s shareholders. It is anticipated that the Chief Executive Officer will make recommendations to the Governance, Compensation and Nominating Committee each year with respect to the compensation for NEOs in consideration of the executive s performance during the year as well as the performance of the Company. The Governance, Compensation and Nominating Committee will review the recommendations of the Chief Executive Officer in determining whether to make a recommendation to the Board of Directors or recommend any further changes to compensation for the executives. In addition, the Governance, Compensation and Nominating Committee will annually review and make recommendations to the Board of Directors regarding the compensation for the Chief Executive Officer. Compensation Risk In reviewing the compensation policies and practices of the Company each year, the Governance, Compensation and Nominating Committee will seek to ensure the executive compensation program provides an appropriate balance of risk and reward consistent with the risk profile of the Company. The Governance, Compensation and Nominating Committee will also seek to ensure the Company s compensation practices do not encourage excessive risk-taking behaviour by the executive team. The Company s long-term incentive plan has been designed to focus on the long-term performance of the Company, which discourages executives from taking excessive risks in order to achieve short-term, unsustainable performance. 93

96 All of the Company s executives, including the NEOs, directors and employees will be subject to the Company s insider trading and blackout period policy, which will prohibit trading in the securities of the Company while in possession of material undisclosed information about the Company. Under this policy, such individuals will also be prohibited from entering into certain types of hedging transactions involving the securities of the Company, such as short sales, puts and calls. Furthermore, the Company will permit executives, including the NEOs, to trade in the Company s securities, including the exercise of options, only during prescribed trading windows. Principal Elements of Compensation The compensation of the named executive officers will include three major elements: (i) base salary, (ii) an annual bonus, and (iii) long-term equity incentives, consisting of options granted from time to time under the Company s stock option plan (the Stock Option Plan ) and performance share units ( PSUs ) granted from time to time under the Company s performance share unit plan (the PSU Plan ). Perquisites and personal benefits are not a significant element of compensation of the named executive officers. Base salaries A primary element of the Company s compensation program is base salary. The Company s view is that a competitive base salary is a necessary element for attracting and retaining qualified executive officers. The amount payable to a NEO is determined based on the scope of their responsibilities and prior experience, while taking into account competitive market compensation and overall market demand for such executives at the time of hire. Base salaries are reviewed annually and increased for merit reasons based on the executive s success in meeting or exceeding Company and individual objectives, including performance metrics such as an evaluation of the executive s leadership and team development, as well as financial metrics such as achieving revenue targets. Additionally, base salaries can be adjusted as warranted throughout the year to reflect promotions or other changes in the scope or breadth of an executive s role or responsibilities, as well as for market competitiveness. Annual bonuses Annual bonuses are designed to motivate executive officers to meet the Company s business objectives generally and the Company s annual financial performance targets in particular. Annual bonuses are earned and measured with reference to the Company s EBITDA for the year in comparison to the Company s EBITDA target set by the Board of Directors at the beginning of each year. The annual bonus target is set based on a range of 35% to 50% of the relevant NEO s base salary and can increase up to 68% to 100% if maximum financial performance targets are met. For example, in the case of the Chief Executive Officer, the annual bonus target is set at 50% of base salary and can increase up to 100% of base salary if maximum financial performance targets are achieved. The Company sets EBITDA targets in connection with the annual budget process to ensure that bonus targets will only be achieved if EBITDA results are at or above budget. The Company currently makes these bonus payments in cash and anticipates continuing to do so following closing. Long-term incentives Overview Prior to Closing, the Company will adopt the Stock Option Plan and the PSU Plan, under which new grants of equity-based awards may be made. In connection with the completion of the Offering, the Company intends to award grants to the named executive officers of options under the Stock Option Plan and PSUs under the PSU Plan. These grants are described below under Outstanding Option-Based Awards and Share-Based Awards. The key features of the Stock Option Plan are described below under Stock Option Plan, and the PSU Plan is described under Performance Share Unit Plan. An executive or employee of the Company who also serves as a director is not entitled to receive board fees or other compensation for their service as a director. Stock Option Plan Pursuant to the Company s Stock Option Plan, the Company may grant options ( Options ) for the purchase of Common Shares to any employee, executive officer, director or consultant of the Company or its subsidiaries. The purpose of the Stock Option Plan is to attract, retain and motivate directors, officers, employees and other services providers by providing them with the opportunity, through stock options, to acquire a proprietary interest in the Company and to benefit from its growth. The maximum number of Common Shares that may be issued under the Stock Option Plan is 10% of the total number of Common Shares issued and outstanding from time to time, less the amount of Common Shares issuable under all other securitybased compensation arrangements implemented by the Company, including the PSU Plan. 94

97 The exercise price of the Options is fixed by the Board of Directors at the date of grant and may not be less than the market price on the date of the grant as determined in accordance with the Stock Option Plan and applicable stock exchange rules (generally being the volume-weighted average trading price of the Common Shares on the TSX (or such other exchange on which the Common Shares are trading) during the five trading days immediately preceding the date of grant). Options vest at the discretion of the Board of Directors, which vesting schedule is generally fixed at the time of grant by the Board of Directors. Options granted under the Stock Option Plan may have a term of up to 10 years (subject to an extension of the scheduled expiry date in the event the option would otherwise expire during a blackout period). Options granted under the Stock Option Plan are not transferable or assignable. The administration and operation of the Stock Option Plan may be delegated by the Board of Directors to a committee thereof. Unless otherwise permitted by the Board of Directors, upon termination of a participant s employment for any reason other than for cause (including voluntary resignation, retirement or death), any unvested Options held by the participant as at the termination date immediately expire, and all vested Options held by the participant as at the termination date may be exercised until the earlier of (i) the expiry date of the Options or (ii) 90 days after the termination date, after which time all Options will expire. Unless otherwise permitted by the Board of Directors, upon termination of a participant s employment for cause, all Options (whether vested or unvested) held by the participant as at the termination date immediately expire. Unless otherwise permitted by the Board of Directors, if the participant is a non-employee director of the Company who ceases to hold office as a result of (i) his or her removal by shareholders or (ii) voluntary resignation, any vested Options held by the participant as at the termination date may be exercised until the earlier of (i) the expiry date of the Options or (ii) 90 days after the termination date (provided the termination is not due to a criminal act, in which case all vested Options will immediately expire), after which time all Options will expire. Any unvested Options held by the participant as at the termination date immediately expire. In the event of a change of control of the Company, the Board of Directors may, in its discretion, accelerate the vesting of all unvested Options such that they become immediately exercisable and, if requested by the participant, the Company will pay each participant an amount in cash equal to the whole number of Common Shares covered by the participant s Options multiplied by the amount by which the price paid for a Common Share pursuant to the change of control transaction exceeds the exercise price of the Options, net of any withholding taxes and source deductions. The Company will pay the foregoing amounts contemporaneously with completion of the transaction resulting in the change of control. Performance Share Unit Plan The named executive officers, along with other employees, will be eligible to participate in the PSU Plan. The purpose of the PSU Plan is to promote greater alignment of interests between employees and shareholders and to support the achievement of the Company s performance objectives. The PSU Plan is administered by the Board of Directors, which has the authority to determine the eligible full time employees to whom PSUs may be granted and the number of PSUs to be granted to plan participants. PSUs may be awarded annually and additional PSUs are credited to reflect dividends paid on the Common Shares based on the number of PSUs in a participant s PSU account and the fair market value (the Market Value ) of the Common Shares on the dividend payment date. Under the PSU Plan, the Market Value of a Common Share on a particular date is the volume-weighted average trading price of a Common Share during the five trading days immediately preceding that date. The maximum number of Common Shares that may be issued under the PSU Plan is 4% of the total number of Common Shares issued and outstanding from time to time, and the maximum number of Common Shares that may be issued under all security-based compensation arrangements implemented by the Company, including the Stock Option Plan and the PSU Plan, may not exceed 10% of the total number of Common Shares issued and outstanding from time to time. 95

98 PSUs will generally vest on the third anniversary of their grant, following which a participant is entitled to receive an amount equal to the product achieved by multiplying: (i) the number of vested PSUs in the participant s PSU account; (ii) the Market Value of a Common Share on the third anniversary of the date of grant; and (iii) a performance adjustment factor (the Adjustment Factor ) of between 0.5 and 1.5 which is determined based on the Company s EBITDA over the three-year performance period between the grant date and the vesting date of the PSUs (the Performance Period ). This amount may, at the discretion of the Board of Directors, be settled in cash, by the issuance of Common Shares from treasury or in Common Shares acquired on the market for such purpose. The EBITDA thresholds set for any Performance Period will be established by the Board of Directors at the time the PSUs are granted. The administration and operation of the PSU Plan may be delegated by the Board of Directors to a committee thereof. Unless otherwise permitted by the Board of Directors, upon termination of a participant s employment for any reason (including termination with or without cause, voluntary resignation, retirement or death) other than following a change of control, all unvested PSUs held by the participant as at the termination date will be forfeited. If a participant s employment is terminated or if a participant resigns for good reason, in either case, within 12 months following a change of control of the Company, all PSUs credited to such participant s account automatically vest and are paid out based on the Market Value determined by the Board of Directors acting in good faith and an Adjustment Factor that is the greater of 1.0 and such other Adjustment Factor as may be determined by the Board of Directors acting in good faith. The Board of Directors may, in its discretion, following a grant date but prior to the vesting date, designate an earlier vesting date for the vesting of all or any portion of the PSUs then outstanding and granted to a participant. 96

99 Summary Compensation Table The following table sets out information concerning the expected fiscal 2015 compensation to be earned by, paid to, or awarded to the NEOs. Share- Optionbased Non-equity incentive plan compensation (Bonus) (4) ($) based Annual Total Salary awards awards incentive compensation Name and Principal Position Year ($) (1) ($) (2) ($) (3) plans ($) David Friesema $500,000 $150,000 $150,000 $250,000 $1,050,000 Chief Executive Officer Stewart Schaefer $400,000 $125,000 $125,000 $200,000 $850,000 President, Dormez-vous? & Chief Business Development Officer Robert Masson $275,000 $60,000 $60,000 $130,000 $525,000 Chief Financial Officer & Corporate Secretary David Howcroft $275,000 $60,000 $60,000 $105,000 $500,000 Senior Vice-President, Sales Sieg Will $270,000 $60,000 $60,000 $105,000 $495,000 Senior Vice-President, Operations Notes: (1) Amounts reflect the current annualized base salary for each NEO. The actual base salary paid to each NEO in respect of fiscal 2015 will be a pro-rated portion of such amount from the Closing Date until December 31, (2) On Closing, the Company expects to grant the following PSUs to the NEOs: (i) David Friesema 8,823 PSUs, (ii) Robert Masson 3,529 PSUs, (iii) Stewart Schaefer 7,352 PSUs, (iv) David Howcroft 3,529 PSUs and (v) Sieg Will 3,529 PSUs. The Company does not plan to grant any additional PSUs in The dollar values presented in the table represent the grant date fair value of the PSUs awarded to the NEOs on the Closing Date. Grant date fair value is determined using the market value of the Common Shares on the grant date. The PSUs vest on the third anniversary of the grant date. This value has not been, and may never be, realized by the NEOs. The actual amount payable, if any, in respect of the PSUs will depend on, among other things, the Market Value of the Common Shares on the vesting date and the Company s performance during the Performance Period. See Principal Elements of Compensation Performance Share Unit Plan. (3) On Closing, the Company expects to grant the following Options to the NEOs: (i) David Friesema 27,322 Options, (ii) Robert Masson 10,928 Options, (iii) Stewart Schaefer 22,768 Options, (iv) David Howcroft 10,928 Options and (v) Sieg Will 10,928 Options. All Options granted to the NEOs will have an exercise price of $ The Company does not plan to grant any additional Options in The dollar values presented in the table represent the grant date fair value of the Options awarded to the NEOs on the Closing Date. Grant date fair value is determined using the Black-Scholes Option Pricing Model, which is consistent with the valuation for accounting purposes in accordance with IFRS 2, Share-Based Payment. The Black-Scholes Option Pricing Model requires the use of subjective assumptions, including with respect to the expected stock price volatility, and therefore it does not necessarily provide a reliable single measure of the fair value of the Options granted. Key assumptions include a risk free interest rate of 1.39%, which is based on a Government of Canada 5 to 10-year benchmark bond yield at the date of grant, expected volatility of 43%, estimated dividend yield of 3% and a 7-year expected life of the Options. The Options expire 10 years from the date of grant and vest on the fourth anniversary of the grant date. This value has not been, and may never be, realized by the NEOs. The actual gains, if any, on the exercise of the Options will depend on the value of the Common Shares on the TSX on the exercise date. (4) Amounts reflect the target annual bonuses of each NEO in The actual amount of the bonuses paid in respect of fiscal 2015 may be higher or lower than these amounts depending on the Company s performance in fiscal See Principal Elements of Compensation Annual Bonuses. 97

100 Employment Agreements and Termination Benefits The Company has written employment agreements with each of its NEOs and each executive is entitled to receive compensation established by the Company as well as other benefits in accordance with plans available to the most senior employees (including health, dental, life insurance, accidental death and dismemberment, sick days and short-term disability). The Company s NEO employment contracts do not contain any provisions relating to a change of control. For a summary of the change of control benefit provisions provided under each of the Company s long-term incentive plans, see Principal Elements of Compensation Long-Term Incentives. Mr. Friesema Mr. Friesema s executive employment agreement provides that the Company may terminate his employment at any time, without cause, by providing notice of termination. If Mr. Friesema s employment is terminated without cause, he shall be entitled to receive his base salary in effect as of the termination date for two years following the termination date, a pro-rated target annual bonus based on the number of days worked prior to the termination date, entitlements under any Company incentive plans, the reimbursement of expenses properly incurred in the course of employment up to the termination date, accrued but unpaid vacation pay up to the termination date and the continuation of life, health and dental insurance coverage for two years following the termination date. If Mr. Friesema s employment is terminated for cause or due to his resignation, death or incapacity, he or his estate, as applicable, will be entitled to accrued but unpaid base salary and vacation pay up to the termination date, the reimbursement of expenses properly incurred in the course of his employment up to the termination date and entitlements under any Company incentive plans. Mr. Friesema s employment agreement also contains customary confidentiality covenants and certain restrictive covenants that will continue to apply following the termination of his employment, including non-solicitation and non-competition provisions which are both in effect during his employment and for the 24 months following the termination of his employment. Mr. Schaefer Mr. Schaefer s executive employment agreement provides that the Company may terminate his employment at any time, without cause, by providing notice of termination. If Mr. Schaefer s employment is terminated without cause, he shall be entitled to receive his base salary in effect as of the termination date for two years following the termination date, a pro-rated target annual bonus based on the number of days worked prior to the termination date, entitlements under any Company incentive plans, the reimbursement of expenses properly incurred in the course of employment up to the termination date, accrued but unpaid vacation pay up to the termination date and the continuation of life, health and dental insurance coverage for two years following the termination date. If Mr. Schaefer s employment is terminated for cause or due to his resignation, death or incapacity, he or his estate, as applicable, will be entitled to accrued but unpaid base salary and vacation pay up to the termination date, the reimbursement of expenses properly incurred in the course of his employment up to the termination date and entitlements under any Company incentive plans. Mr. Schaefer s employment agreement also contains customary confidentiality covenants and certain restrictive covenants that will continue to apply following the termination of his employment, including non-solicitation and non-competition provisions which are both in effect during his employment and for the 24 months following the termination of his employment. 98

101 Mr. Masson Mr. Masson s executive employment agreement provides that the Company may terminate his employment at any time, without cause, by providing notice of termination. If Mr. Masson s employment is terminated without cause, he shall be entitled to receive his base salary in effect as of the termination date for up to one year following the termination date (depending on his length of service at the time of termination), a pro-rated target annual bonus based on the number of days worked prior to the termination date, entitlements under any Company incentive plans, the reimbursement of expenses properly incurred in the course of employment up to the termination date, accrued but unpaid vacation pay up to the termination date and the continuation of life, health and dental insurance coverage for one year following the termination date. Mr. Masson s employment agreement also contains customary confidentiality covenants and certain restrictive covenants that will continue to apply following the termination of his employment, including non-solicitation and non-competition provisions which are both in effect during his employment and for the 12 months following the termination of his employment. Mr. Howcroft Mr. Howcroft s executive employment agreement provides that the Company may terminate his employment at any time, without cause, by providing notice of termination. If Mr. Howcroft s employment is terminated without cause, he shall be entitled to receive his base salary in effect as of the termination date for one year following the termination date, a pro-rated target annual bonus based on the number of days worked prior to the termination date, entitlements under any Company incentive plans, the reimbursement of expenses properly incurred in the course of employment up to the termination date, accrued but unpaid vacation pay up to the termination date and the continuation of life, health and dental insurance coverage for one year following the termination date. If Mr. Howcroft s employment is terminated for cause or due to his resignation, death or incapacity, he or his estate, as applicable, will be entitled to accrued but unpaid base salary and vacation pay up to the termination date, the reimbursement of expenses properly incurred in the course of his employment up to the termination date and entitlements under any Company incentive plans. Mr. Howcroft s employment agreement also contains customary confidentiality covenants and certain restrictive covenants that will continue to apply following the termination of his employment, including non-solicitation and non-competition provisions which are both in effect during his employment and for the 12 months following the termination of his employment. Mr. Will Mr. Will s executive employment agreement provides that the Company may terminate his employment at any time, without cause, by providing notice of termination. If Mr. Will s employment is terminated without cause, he shall be entitled to receive his base salary in effect as of the termination date for one year following the termination date, a pro-rated target annual bonus based on the number of days worked prior to the termination date, entitlements under any Company incentive plans, the reimbursement of expenses properly incurred in the course of employment up to the termination date, accrued but unpaid vacation pay up to the termination date and the continuation of life, health and dental insurance coverage for one year following the termination date. If Mr. Will s employment is terminated for cause or due to his resignation, death or incapacity, he or his estate, as applicable, will be entitled to accrued but unpaid base salary and vacation pay up to the termination date, the reimbursement of expenses properly incurred in the course of his employment up to the termination date and entitlements under any Company incentive plans. Mr. Will s employment agreement also contains customary confidentiality covenants and certain restrictive covenants that will continue to apply following the termination of his employment, including non-solicitation and non-competition provisions which are both in effect during his employment and for the 12 months following the termination of his employment. 99

102 Outstanding Option-Based Awards and Share-Based Awards The following table sets forth details of all awards that the Company expects will be outstanding for each Named Executive Officer following the completion of the Offering. Option-based Awards Share-based Awards Market or Number of Market or payout value of securities Value of payout value of vested shareunderlying Option unexercised Number of PSUs share-based based awards not unexercised exercise Option in-the-money that have not awards that have paid out or options price expiration options vested not vested distributed Name and principal position (#) ($) date ($) (#) ($) (1) ($) David Friesema... 27,322 $17.00 July 16, 2025 Nil 8,823 $150,000 Nil Chief Executive Officer Stewart Schaefer... 22,768 $17.00 July 16, 2025 Nil 7,352 $125,000 Nil President, Dormez-vous? & Chief Business Development Officer Robert Masson... 10,928 $17.00 July 16, 2025 Nil 3,529 $60,000 Nil Chief Financial Officer & Corporate Secretary David Howcroft... 10,928 $17.00 July 16, 2025 Nil 3,529 $60,000 Nil Senior Vice-President, Sales Sieg Will... 10,928 $17.00 July 16, 2025 Nil 3,529 $60,000 Nil Senior Vice-President, Operations Note: (1) The dollar values presented in the table represent the grant date fair value of the PSUs awarded to the NEOs on the Closing Date. Grant date fair value is determined using the market value of the Common Shares on the grant date. The PSUs vest on the third anniversary of the grant date. This value has not been, and may never be, realized by the NEOs. The actual amount payable, if any, in respect of the PSUs will depend on, among other things, the Market Value of the Common Shares on the vesting date and the Company s performance during the Performance Period. See Principal Elements of Compensation Performance Share Unit Plan. DIRECTOR COMPENSATION The Board of Directors, through the Compensation, Nominating and Corporate Governance Committee, will be responsible for reviewing and approving the directors compensation arrangements and any changes to those arrangements. Following Closing, the Compensation, Nominating and Corporate Governance Committee will establish the compensation arrangements for each director that is not an employee of the Company or one of its affiliates. The directors compensation program will be designed to attract and retain the most qualified individuals to serve on the Board of Directors. It is expected that non-employee directors will be paid an annual retainer of $75,000 (which may, at the Board s discretion, be paid in cash or in some combination of cash and Options) and that they will be reimbursed for their reasonable out-of-pocket expenses incurred in serving as directors. Directors who are employees of, and who receive a salary from, the Company or one of its affiliates or subsidiaries will not be entitled to receive any remuneration for serving as directors, but will be entitled to reimbursement of their reasonable out-of-pocket expenses incurred in serving as directors. The Company does not expect to pay meeting fees or any additional retainer to directors for service on a committee of the Board of Directors. INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS Except in connection with the Pre-Closing Transactions, none of the Company s directors or executive officers nor any of their respective associates is indebted to the Company or has been the subject of a guarantee, support agreement, letter of credit or similar arrangement or understanding provided by the Company or any of its subsidiaries. See The Acquisition and Related Transactions. 100

103 PLAN OF DISTRIBUTION The Underwriting Agreement This Prospectus qualifies the distribution of the Offered Shares issued by the Company to purchasers upon completion of the Offering and any Offered Shares issued pursuant to the exercise of the Over-Allotment Option. Pursuant to the underwriting agreement dated July 10, 2015, entered into among the Company, the Acquired Entities and the Underwriters (the Underwriting Agreement ), the Company has agreed to sell and the Underwriters have agreed to purchase 17,650,000 Offered Shares, at a price of $17.00 per Offered Share for aggregate gross proceeds of $300,050,000, payable in cash to the Company against delivery of the Offered Shares, on July 16, 2015 or such later date as the Company, the Acquired Entities and the Underwriters agree, but no later than July 30, The Offering Price was determined by negotiation between the Company and the Underwriters. The Underwriters are entitled under the Underwriting Agreement to customary indemnification by the Company and the Acquired Entities against certain liabilities and expenses, including certain liabilities and related expenses under applicable securities legislation in connection with the Offering. In connection with the Offering, certain of the Underwriters or securities dealers may distribute this Prospectus electronically. The obligations of the Underwriters under the Underwriting Agreement are several and not joint (or joint and several), are subject to certain closing conditions, and may be terminated at their discretion on the basis of their assessment of the state of the financial markets and upon the occurrence of certain stated events such as the Offering not having been completed prior to July 30, The Underwriters are, however, obligated to take up and pay for all of the Offered Shares if any Offered Shares are purchased under the Underwriting Agreement. In consideration for their services in connection with the Offering, the Company has agreed to pay the Underwriters a fee equal to 5.5% of the aggregate gross proceeds of the Offering, inclusive of any proceeds received by the Company in respect of Offered Shares issued hereunder pursuant to the exercise of the Over-Allotment Option. Other than Offered Shares sold in the United States, which will be represented by individual certificates, registration of interests in and transfers of Offered Shares held through CDS or its nominee will be made electronically through the NCI system of CDS. Offered Shares registered to CDS or its nominee will be deposited electronically with CDS on an NCI basis on the closing of the Offering. Canadian resident purchasers of Offered Shares will receive only a customer confirmation from the registered dealer from or through whom a beneficial interest in the Offered Shares is purchased. The TSX has conditionally approved the listing of the Offered Shares under the symbol ZZZ. Listing is subject to the Company fulfilling all of the requirements of the TSX on or before October 1, There is currently no market through which the Offered Shares may be sold and purchasers may not be able to resell Offered Shares purchased under this Prospectus. Closing of the Offering is conditional upon the Offered Shares being approved for listing on the TSX. All of the Offered Shares sold in the Offering will be freely tradable without restriction or further registration under applicable Canadian securities laws. There are no payments in cash, securities or other consideration being made, or to be made, to a promoter, finder or any other person or company in connection with the Offering other than the payments to be made to the Underwriters in accordance with the terms of the Underwriting Agreement. Over-Allotment Option Pursuant to the Underwriting Agreement, the Company has granted the Underwriters an Over-Allotment Option to cover over-allotments, if any, and for market stabilization purposes. The Over-Allotment Option may be exercised by the Underwriters, in whole or in part, up to 30 days following the Closing Date and entitles the Underwriters to purchase from the Company up to 2,647,500 Offered Shares at the Offering Price (being approximately 15% of the aggregate number of Offered Shares offered hereunder). If the Over-Allotment 101

104 Option is exercised in full, the Company will use the proceeds received, after deducting the Underwrites Fee, to repay the principal amount of the Acquisition Notes. If the Over-Allotment Option is exercised only in part, the Company will repay the principal amount of such Acquisition Notes on a pro rata basis, to the extent of the proceeds received after deducting the Underwriters Fee, and the balance of the outstanding principal amount of the Acquisition Notes will be automatically converted into Common Shares on closing of the Over-Allotment Option at a price per share equal to the Offering Price. If the Over-Allotment Option is not exercised, the principal amount of the Acquisition Notes will be automatically converted into Common Shares on the 45 th day following the Closing Date at a price per share equal to the Offering Price. See Use of Proceeds and The Acquisition and Related Transactions. If the Over-Allotment Option is exercised in full, the total price to the public will be $345,057,500, the Underwriters Fee will be $18,978, and the net proceeds to the Company will be $326,079, The sale of the Offered Shares in connection with the Over-Allotment Option is qualified for distribution under this Prospectus. A purchaser who acquires Offered Shares forming part of the Over-Allotment Option acquires those shares under this Prospectus, regardless of whether the position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases. Price Stabilization, Short Positions and Passive Market Making In connection with this Offering, the Underwriters may effect transactions that stabilize or maintain the market price of the Common Shares at levels other than those which might otherwise prevail in the open market, including: stabilizing transactions; short sales; purchases to cover positions created by short sales; imposition of penalty bids; and syndicate covering transactions. Those transactions, if commenced, may be interrupted or discontinued at any time. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the Common Shares while the Offering is in progress. These transactions may also include making short sales of the Common Shares, which involve the sale by the Underwriters of a greater number of the Common Shares than they are required to purchase in the Offering. Short sales may be covered short sales, which are short positions in an amount not greater than the Over-Allotment Option, or may be naked short sales, which are short positions in excess of that amount. The Underwriters may close out any covered short position either by exercising the Over-Allotment Option, in whole or in part, or by purchasing the Common Shares in the open market. In making this determination, the Underwriters will consider, among other things, the price of the Common Shares available for purchase in the open market compared with the price at which they may purchase the Common Shares through the Over-Allotment Option. The Underwriters must close out any naked short position by purchasing the Common Shares in the open market. A naked short position is more likely to be created if the Underwriters are concerned that there may be downward pressure on the price of the Common Shares in the open market that could adversely affect investors who purchase in the Offering. As a result of these activities, the price of the Common Shares may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the Underwriters at any time. The Underwriters may carry out these transactions on any stock exchange on which the Common Shares are listed, in the over-the-counter market, or otherwise. Pursuant to rules and regulations of certain Canadian securities regulators, the Underwriters may not, throughout the period of distribution, bid for or purchase Common Shares. The foregoing restriction is subject 102

105 to exceptions, on the condition that the bid or purchase is not engaged in for the purpose of creating actual or apparent active trading in, or raising the price of, the Common Shares. These exceptions include bids or purchases permitted under the Universal Market Integrity Rules for Canadian Marketplaces relating to market stabilization and passive market making activities and bids or purchases made for and on behalf of a customer where the order was not solicited during the period of distribution. U.S. Matters The Offering is being made in each of the provinces and territories of Canada and in the U.S. to qualified institutional buyers pursuant to Rule 144A under the U.S. Securities Act. The Offered Shares will be offered in each of the provinces and territories of Canada through those Underwriters or their affiliates who are registered to offer the Offered Shares for sale in such provinces and territories and such other registered dealers as may be designated by the Underwriters. The Offered Shares offered hereby have not been, and will not be, registered under the U.S. Securities Act or any U.S. state securities laws, and may not be offered or sold within the U.S., or to, or for the account of, U.S. persons (as defined in Regulation S under the U.S. Securities Act) absent registration or pursuant to an applicable exemption from the registration requirements of the U.S. Securities Act, and applicable U.S. state securities laws. Accordingly, except to the extent permitted by the Underwriting Agreement, the Offered Shares may not be offered or sold within the U.S., or to, or for the account or benefit of, U.S. persons. Each Underwriter has agreed that it will not offer or sell Offered Shares within the U.S., except in transactions exempt from the registration requirements of the U.S. Securities Act and applicable U.S. state securities laws. The Underwriting Agreement provides that the Underwriters may re-offer and re-sell the Offered Shares that they have acquired pursuant to the Underwriting Agreement within the U.S. to qualified institutional buyers (as defined in Rule 144A under the U.S. Securities Act) in accordance with Rule 144A under the U.S. Securities Act. The Underwriting Agreement also provides that the Underwriters will offer and sell the Offered Shares outside the U.S. to persons other than U.S. persons as that term is defined in Regulation S under the U.S. Securities Act and in accordance with Regulation S under the U.S. Securities Act. In addition, until 40 days after the commencement of the Offering, an offer or sale of the Offered Shares within the U.S. by any dealer (whether or not participating in the Offering) may violate the registration requirements of the U.S. Securities Act, unless such offer is made pursuant to an exemption from registration under the U.S. Securities Act. Lock-Up Arrangements In connection with completion of the Offering and the Acquisition, the Company, the Existing Shareholders and each of the Company s directors have agreed not to, directly or indirectly, without the prior written consent of TD and BMO, on behalf of the Underwriters, issue, sell, grant any option, right or warrant for the sale of, lend, secure, pledge or otherwise dispose or monetize, or make any short sale, engage in any hedging transaction, or enter into any form of arrangement the consequence of which is to directly or indirectly transfer to someone else, in whole or in part, any of the economic consequences of ownership of, or offer or announce any intention to do so, in a public offering or by way of private placement or otherwise, any Common Shares or any securities convertible or exchangeable into Common Shares or any other securities of the Company, for a period of 180 days after the Closing Date, subject to certain limited exceptions, including the sale of securities of the Company pursuant to the exercise of the Over-Allotment Option or in connection with the Acquisition, or the issuance of securities by the Company pursuant to or in connection with the Stock Option Plan and the PSU Plan (the Lock-Up Agreements ). See Executive Compensation. 103

106 The holders of 19,889,133 Common Shares, representing 53.0% of the Company s issued and outstanding Common Shares after the completion of the Offering and the Acquisition, and assuming the conversion of the Acquisition Notes and that the Over-Allotment Option is not exercised (45.9% if the Over-Allotment Option is exercised in full) will enter into Lock-Up Agreements. Commissions and Expenses The following table shows the per share and total Underwriters Fee the Company will pay to the Underwriters, assuming both no exercise and full exercise of the Underwriters Over-Allotment Option: Over-Allotment Option Not Exercised Over-Allotment Option Fully Exercised Per Offered Share... $0.935 $0.935 Total... $16,502,750 $18,978, The Underwriters propose to offer the Offered Shares initially at the Offering Price stated on the cover page of this Prospectus. After the Underwriters have made a reasonable effort to sell all of the Offered Shares offered by this Prospectus at the Offering Price, the initially stated Offering Price may be decreased, and further changed from time to time, by the Underwriters to an amount not greater than the initially stated Offering Price and, in such case, the compensation realized by the Underwriters will be decreased by the amount that the aggregate price paid by the purchasers for the Offered Shares is less than the gross proceeds paid by the Underwriters to the Company. Relationship between the Company and the Underwriters Affiliates of TD, BMO, National Bank and Raymond James are lenders to SCCI under the Existing Credit Facilities. Furthermore, affiliates of TD, BMO, CIBC, Scotia, National Bank and Raymond James are expected to be lenders to SCCI under the New Credit Facility to be provided on Closing. See Description of Material Indebtedness. Accordingly, the Company may be considered to be a connected issuer of each of TD, BMO, CIBC, Scotia, National Bank and Raymond James for the purposes of applicable Canadian securities legislation. None of TD, BMO, CIBC, Scotia, National Bank and Raymond James will receive any direct benefit from the Offering, other than their respective portion of the Underwriters Fee payable by the Company pursuant to the Underwriting Agreement. SCCI is currently in compliance with the terms of the Existing Credit Facilities and no breaches thereof have been waived by any of the lenders thereunder. Neither the financial position of SCCI nor the value of any of the security granted by SCCI has changed since the indebtedness under the Existing Credit Facilities was incurred, except as otherwise disclosed in this Prospectus. The decision to issue the Offered Shares and the determination of the terms of the Offering were made through negotiation between the Company, SCCI and the Underwriters. The Canadian chartered banks of which such Underwriters are affiliates did not have any involvement in such decision or determination although such Canadian chartered banks may be advised of the Offering and the terms thereof. As a consequence of the Offering, each of such Underwriters will receive its proportionate share of the Underwriters Fee. 104

107 RISK FACTORS An investment in the Offered Shares involves risk. Prospective investors should consider carefully the risks and uncertainties set forth below and the other information contained in this Prospectus. These are not the only risks and uncertainties that the Company faces. Additional risks and uncertainties not presently known to us, or that the Company currently considers immaterial, may also materially and adversely affect us. The occurrence of any of the events identified in these risks and uncertainties could materially adversely affect the business, prospects, financial condition, results of operations or cash flow of the Company. The Offered Shares are only suitable for investors who understand the potential risk of capital loss, for whom an investment in the Offered Shares is part of a diversified investment program and who fully understand and are willing to assume the risks involved in such an investment program. Risks Relating to the Company s Business Industry risk and economic sensitivity The Company s revenues depend, in part, on discretionary spending by its customers. Pressure on discretionary income brought on by economic downturns and slow recoveries, including housing market declines, changing energy prices, fiscal uncertainty and weak labour markets, may cause consumers to reduce the amount they spend on discretionary items. If recovery from any economic downturn is slow or prolonged, the Company s growth, prospects, results of operations, cash flows and financial condition could be adversely impacted. In addition, a significant percentage of the Company s stores are located in the Provinces of Ontario and Québec. Any economic downturns in these provinces would have a disproportionately greater negative impact on the Company than other retailers with a lower concentration of stores in the Provinces of Ontario and Québec. General economic conditions and discretionary spending are beyond its control and are affected by, among other things: consumer confidence in the economy; federal, provincial and local political climates; unemployment trends; consumer debt levels; consumer credit availability; the housing market; gasoline and fuel prices; interest rates and inflation; price deflation, which may result from the introduction of low-cost imports; slower rates of growth in real disposable personal income; natural disasters; national security concerns; tax rates and tax policy; currency fluctuations and other matters that influence consumer confidence and spending. Increasing volatility in financial markets may cause some of the above factors to change with an even greater degree of frequency and magnitude. Effectiveness and efficiency of advertising expenditures The Company s advertising expenditures, which are the largest component of its marketing expenses, are expected to continue to increase for the foreseeable future. A significant portion of the Company s advertising expenditures are made in the radio, television and digital formats. The Company s future growth and profitability will depend, in part, on the effectiveness and efficiency of advertising expenditures, including the ability to: (i) create greater brand awareness of each of the Company s Banners; (ii) determine the appropriate creative message and media mix for future advertising expenditures; and (iii) effectively manage advertising costs to maintain acceptable operating margins. The Company cannot assure that the advertising message that it selects will result in increased customer traffic, sales, levels of brand name awareness or market share. Should the Company fail to realize the anticipated benefits of its advertising program, or should the Company fail to effectively manage advertising costs, this could have a material adverse effect on its growth strategy and profitability. Ability to maintain profitability and implement growth strategy There can be no assurance that the Company s businesses and growth strategy will enable it to sustain profitability in future periods. The Company s future operating results will depend on a number of factors, including: (i) the Company s ability to continue to successfully execute its growth strategy; (ii) the efficiency and effectiveness of each of the Banner s advertising expenditures in building product and brand awareness, driving traffic to stores and increasing sales; (iii) the ability to realize increased sales and greater levels of profitability; (iv) the ability of the Company to effectively grow and promote the sleep related products and accessories 105

108 category of its business; (v) the ability to hire, train, manage and retain qualified management and sales associates; (vi) the ability to continuously improve its service to achieve new and enhanced customer satisfaction; (vii) the ability to maintain cost-effective delivery of its products, (viii) the ability to successfully identify and respond to emerging trends in the mattress industry; (ix) the level of competition in the mattress industry; and (x) general economic conditions and consumer confidence. While the Company believes that the methodology it employs for identifying new store locations in existing, satellite and new markets has been successful in the past, there can be no assurance that it will continue to be successful in the future. Although cannibalization of sales from existing stores has historically been minimal, as the Company executes on its planned growth strategy, increasing saturation of existing markets may occur which may increase cannibalization of sales at existing stores or make in-fill stores less profitable, which can have a material adverse effect on the Company s business, financial condition, liquidity and results of operations. New stores typically experience an adjustment period before sales levels and operating margins normalize, and even sales at successful newly-opened stores generally do not make a significant contribution to profitability in their initial months of operation. The success of any expansion strategy will be dependent upon many factors, including the ability of the Company to: (i) successfully open additional retail stores in existing and satellite markets; (ii) successfully enter new markets in which the Company has no previous retail experience; (iii) negotiate acceptable lease terms for additional store locations; and (iv) effectively hire, train, manage and retain qualified management and other personnel. There can be no assurance that the Company will be able to grow at the rate contemplated by its growth strategy, that new stores will be effectively integrated into the Company s existing operations and that such stores will be profitable. There can be no assurance that the Company will be successful in implementing its growth strategy or, even if implemented, that it will have the intended results. Failure to successfully execute any material part of the Company s growth strategy could have a material adverse effect on the Company s business, financial condition, liquidity and results of operations. Fluctuations in same store sales The Company s same store sales have fluctuated in the past for both of its Banners. There can be no assurance that the Company s same store sales results will not decline in the future. A variety of factors affect the same store sales, including: (i) levels of consumer awareness of products, brand name and store locations; (ii) same store sales performance in prior periods; (iii) the timing of new and relocated store openings, the relative proportion of new and relocated stores to mature stores and cannibalization resulting from the opening of new stores in existing markets; (iv) the amount, timing and relative success of promotional events, advertising expenditures, new product introductions and product line extensions; (v) the quality and tenure of regional and store-level managers and sales associates; (vi) the amount of competitive activity; (vii) the evolution of store operations; and (viii) general economic conditions and consumer confidence. Decreases in same store sales could have a material adverse effect on the Company s business, financial condition, liquidity and results of operations. Damage to the Company s reputation Consumers associate the Company with a high level of customer service and quality. Failure to maintain merchandise quality and integrity, or ethical and socially responsible operations could adversely affect the brand image and reputation of the Company and its Banners. Any negative publicity about, or significant damage to the Company s brand or reputation could negatively impact revenues, reduce employee morale and productivity and diminish customer trust, any of which could harm the Company s business, financial condition and results of operations. In those circumstances, it may be difficult and costly for the Company to regain customer confidence. Furthermore, damage to the reputation of any supplier or manufacturer of the Company s products, could negatively impact consumer opinion of the Company and its Banners, which could have a material adverse effect on our business and results of operations. 106

109 There has been a marked increase in the use of social media platforms and similar channels, including web logs (blogs), social media websites and other forms of Internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability and impact of information on social media platforms is virtually immediate and many social media platforms publish user-generated content without filters or independent verification as to the accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning the Company or its Banners may be posted on such platforms at any time. Information posted may be adverse to the Company s interests or may be inaccurate, each of which may harm the Company s performance, prospects, reputation or business. The harm may be immediate without affording the Company an opportunity for redress or correction. Ultimately, the risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm the Company s reputation, business, financial condition and results of operations. Competition The retail mattress and complementary sleep related products and accessories industry in Canada is highly competitive. Participants in the bedding industry compete primarily based on store location, service, price, product selection, brand name recognition and advertising. There can be no assurance that the Company will be able to continue to compete favourably with its competitors in these areas. The top seven retailers in the industry in Canada include Sleep Country / Dormez-vous?, Sears Canada, Leon s / The Brick, Hudson s Bay, BMTC, IKEA and Costco. The remaining industry sales are highly fragmented amongst a number of smaller mattress specialty stores, other furniture stores and small independent retailers. Additionally, retail furniture stores may open retail locations specifically targeted for specialty bedding as a way to directly compete with the Company and other specialty retailers. Certain of the Company s competitors may have substantially greater financial, marketing and other resources. Accordingly, the Company may face periods of intense competition in the future that could have a material adverse effect on its planned growth and future results of operations. Competition in existing and new markets may also prevent or delay the Company s ability to gain relative market share. Any of the developments described above could have a material adverse effect on the Company s planned growth and future results of operations. Although management currently believes that, compared to other retail categories, the mattress industry is not as vulnerable to show-rooming or online shopping, there can be no assurance that this will continue in the future. The Company does not currently sell any of its products online. Existing competitors may start offering mattresses, boxsprings and complementary sleep related products and accessories online or may expand their existing internet-based businesses. New competitors that offer online sales may also enter the market. An increase in internet-based competition for mattresses, boxsprings and complementary sleep related products and accessories could have a material adverse effect on the Company s business, financial condition, liquidity and results of operations. In addition, U.S. and international retailers are increasingly entering the Canadian retail market, which has created additional competitive challenges for Canadian-based retailers like Sleep Country that are principally dependent upon the Canadian market. If new competitors enter the Canadian retail mattress and complementary sleep related products and accessories market, it may adversely affect the Company s sales and reduce the Company s market share, which could in turn have a material adverse effect on the Company s business, financial condition, liquidity and results of operations. Seasonality and weather Retail mattress sales are subject to seasonal fluctuations in demand with the highest levels of sales occurring in the third and fourth quarters. Variable costs, including certain selling costs and expenses, and to some extent, employee wages, can be managed to match seasonal patterns. However, a significant portion of retail costs, including rent, are fixed and cannot be adjusted for seasonality. Unusual weather patterns may also affect sales. 107

110 Real estate The Company faces competition for retail locations from other retail market participants. All of the Company s store locations and distribution centres are leased. The Company s ability to re-negotiate favourable terms on an expiring lease or to negotiate favourable terms for a suitable alternate location and the Company s ability to negotiate favourable lease terms for additional store locations could depend on conditions in the real estate market, competition for desirable properties, the Company s relationships with current and prospective landlords or on other factors that are not within the Company s control. Any or all of these factors and conditions could negatively impact the Company s growth and profitability. Dependence on key personnel The Company s success depends in part on its ability to attract and retain key executive, merchandising, marketing and sales personnel. The Company s executive officers include David Friesema, the Chief Executive Officer, and Stewart Schaefer, President of Dormez-vous? and Chief Business Development Officer, each of whom has entered into an employment agreement with the Company. If these executive officers or other members of senior management cease to be employed by the Company, the Company would have to hire additional qualified professionals. The Company s ability to successfully hire other experienced and qualified professionals cannot be assured and may be difficult because the Company faces competition for these professionals from its competitors, its suppliers and other companies operating in its industry. As a result, the loss or unavailability of any of the Company s executive officers could have a material adverse effect on the Company. Labour relations With the exception of unionized distribution centers in Richmond, Langley, Victoria and Toronto representing 99 individuals in the aggregate, the remainder of the Company s employees are not unionized. The current agreement with Retail Wholesale Union Local 580 covering the Richmond, Langley and Victoria sites was renewed on January 1, 2014 for a four year term. The current agreement with the Workers United Canada Council, on its own behalf and on behalf of its Local 2757, in respect of the Toronto site was signed on January 14, 2013 for a three year term. Currently, labour relations are good. However, the maintenance of a productive and efficient labour environment or the successful renegotiation of the collective agreements cannot be assured. If protracted and extensive work stoppages occur, labour disruptions such as strikes or lockouts could have a material adverse effect on the Company s business and financial results. Relationship with suppliers The Company s principal suppliers are Tempur-Sealy, Serta, Simmons and Kingsdown, among others. The Company s current suppliers may not continue to sell products to it on acceptable terms or at all, and the Company may not be able to establish relationships with new suppliers to ensure delivery of products in a timely manner or on terms acceptable to it. The Company may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to it in the future. The Company is also dependent on suppliers for assuring the quality of merchandise supplied to it. The Company s inability to acquire suitable merchandise in the future or the loss of one or more of the Company s suppliers and the Company s failure to replace them may harm the Company s relationship with its customers and the Company s ability to attract new customers, resulting in a decrease in revenue. Furthermore, the Company s ability to continue to attract and retain popular brands that are favoured by consumers is important to the Company s ability to respond to consumer preferences. If suppliers of popular brands cease doing business with the Company, or the terms and conditions with such suppliers (including supplier allowances and product cost) change materially, including the Company s ability to be an exclusive seller of certain brands, the Company s results could be adversely affected. The Company does not have long term contracts with suppliers and therefore the Company s ability to continue to sell brands that are popular with consumers and, if applicable, to have exclusivity of certain brands, are dependent on ongoing positive relationships with its suppliers. 108

111 As a result of the large volume of the Company s business with a limited number of suppliers and the Company s use of their branding in its marketing initiatives, the Company s success depends on the continued popularity and reputation of these suppliers. Any (i) deterioration of their brand image, (ii) reduction in supplier incentives, (iii) an adverse change in their financial condition, production efficiency, product development or marketing capabilities, or (iv) deterioration in the Company s relationship with any of them could adversely affect the Company s own brand and the level of the Company s customers satisfaction, among other things, which could have a material adverse effect on the Company s business, financial condition, liquidity and results of operations. Intellectual property The Company continually develops and improves its brand recognition, which has been an important factor in maintaining its competitive position. No assurance can be given that others will not independently develop substantially similar branding. The Company relies on one or more of the following to protect its proprietary rights, trademarks, copyrights, trade secrets, confidentiality procedures, and contractual provisions. Despite the Company s efforts to protect its proprietary rights, unauthorized parties may attempt to obtain and use information that the Company regards as proprietary. Stopping unauthorized use of the Company s proprietary rights may be difficult, time-consuming and costly. There can be no assurance that the Company will be successful in protecting its proprietary rights and, if it is not, its business, financial condition, liquidity and results of operations could be materially adversely affected. Dependence on distribution centres and timely delivery to customers An important part of the Company s success is due to its ability to deliver mattresses and complementary sleep related products and accessories quickly to the Company s customers. This in turn is a result of the Company s successful planning and distribution infrastructure, including merchandise ordering, transportation and receipt processing, the ability of the Company s suppliers to meet its distribution requirements and the ability of the Company s employees to meet the its delivery requirements. The Company s ability to maintain this success depends on the continued identification and implementation of improvements to its planning process, distribution infrastructure and supply chain. The Company also needs to ensure that its distribution infrastructure and supply chain keep pace with its anticipated growth and increased number of stores. The cost of these enhanced processes could be significant and any failure to maintain, grow or improve them could adversely affect the Company s operating results. The Company s business could also be adversely affected if there are delays in product shipments due to freight difficulties, difficulties of the Company s suppliers or contractors involving strikes or other difficulties at their principal transport providers or otherwise, including unforeseen disruptions in operations due to fire, severe weather conditions, natural disasters, or other catastrophic events. Additionally, freight cost is impacted by changes in fuel prices. Fuel prices affect freight cost both on inbound freight from suppliers to the distribution centres and outbound freight from the distribution centres to the Company s stores and customers. Dependence on management information systems The Company depends on its management information systems in each stage of the sale of its products, including entering the customer s order, determining availability of product, arranging the optimal delivery times, inventory management, and providing after-sales service. In addition, the management information systems form the basis of the Company s financial reporting. If irreparable damage were caused to the information systems and databases or the information contained in the management information systems were lost, the business, financial condition, liquidity and results of operations could be adversely affected. Insurance The Company maintains insurance coverage in respect of its potential liabilities and the accidental loss of value of its assets from risks, in amounts, with such insurers, and on such terms as it considers appropriate, taking into account all relevant factors. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods that may be uninsurable or not economically insurable. The Company will use its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a 109

112 view to maintaining appropriate insurance coverage on the Company s assets and the business at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of the Company s lost investment. Certain factors also might make it unattractive to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to such property. There are no assurances that the Company s insurance coverage will continue to be available to it on reasonable terms, including reasonable premium, deductible and co-insurance requirements or that the Company s insurer will not disclaim coverage of any future claim. The Company s business, financial condition, liquidity and results of operations could be materially adversely affected if any of the foregoing developments were to occur. Comfort and price guarantees Generally, the Company provides its customers with a 60-day comfort guarantee whereby, within 60 days from the date of original purchase, if the customer is not satisfied with the new mattress, the Company will exchange it one time for a mattress of equal or similar quality with an exchange fee, subject to standard transportation charges. Additionally, the Company provides its customers with a low price guarantee whereby if a customer finds the same or comparable sleep set advertised for less than the Company s displayed or advertised price within 60 days of purchase, the Company will beat its competitor s advertised price on such comparable sleep set by 5% and refund the customer the difference. The Company establishes reserves relating to its customer satisfaction programs based on historical experience. An increase in comfort exchange return rates or refunds could have a material adverse effect on the Company s business, financial condition and results of operations. Debt covenants in New Credit Facility The New Credit Facility may contain negative covenants that will limit the Company s and SCCI s ability to engage in specified types of transactions. These covenants may limit the Company s and SCCI s ability and the ability of subsidiaries to, among other things, incur indebtedness; create liens; engage in mergers or consolidations; sell assets (including pursuant to sale and leaseback transactions); pay dividends or repurchase securities; make investments, acquisitions, loans or advances; repay, prepay or redeem certain indebtedness; engage in certain transactions with affiliates; amend material agreements governing certain indebtedness; and change the Company s lines of business. A breach of any of these covenants could result in an event of default under the New Credit Facility. Upon the occurrence of an event of default under the New Credit Facility, the lenders may have the ability to elect to declare all amounts outstanding under such facility to be immediately due and payable and terminate all commitments to extend further credit, or seek amendments to the debt agreements that would provide for terms more favourable to such lenders. If the Company or SCCI is unable to repay those amounts, the lenders under the New Credit Facility may be entitled to proceed against the collateral granted to them to secure that indebtedness. Dependence on operating subsidiaries The Company is a holding company with no business operations of its own or material assets other than the shares of SCCI. Accordingly, all of the Company s operations are conducted by the Company s direct and indirect subsidiaries SCCI and SCC LP. As a holding company, the Company requires dividends and other payments from its subsidiaries to meet cash requirements. While the Company presently intends to pay dividends to holders of Common Shares and anticipates that its subsidiaries will have sufficient cash flow to enable such subsidiaries to pay dividends or otherwise distribute cash to the Company, the terms of the New Credit Facility will contain restrictions on the ability of the subsidiaries from paying dividends and otherwise transferring to the Company cash or other assets in certain circumstances. As such, a decline in the Company s business, financial condition, cash flows or results of operation may result in, pursuant to the terms of the New Credit Facility, restrictions on the subsidiaries ability to pay dividends or otherwise distribute cash to the Company. In such event, the Company may be unable to pay a dividend to holders of Common Shares. The Company currently has no obligations that require cash funding from its subsidiaries. If there is an insolvency, 110

113 liquidation or other reorganization of any of the Company s subsidiaries, shareholders likely will have no right to proceed against the assets of those subsidiaries. Creditors of those subsidiaries will be entitled to payment in full from the sale or other disposal of the assets of those subsidiaries before the Company, as an equity holder, would be entitled to receive any distribution from that sale or disposal. If the Company s subsidiaries are unable to pay dividends or distributions or make other payments to us when needed, the Company will be unable to pay dividends or satisfy the Company s obligations. Fluctuations in product cost, inflation and foreign currency The Company s results may be affected by the prices of the components used in the manufacture of the mattress and complementary sleep related products and accessories it sells. These prices may fluctuate based on a number of factors beyond the Company s control, including: oil prices and other energy related costs, changes in supply and demand, general economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates and government regulation. These fluctuations may result in an increase in the Company s transportation costs for distribution, utility costs for retail stores and overall costs to purchase products from suppliers. The Company may not be able to adjust the prices of its products, especially in the short-term, to recover these cost increases. A continual rise in product costs could adversely affect consumer spending and demand for the Company s products and increase its operating costs, both of which could have a material adverse effect on the Company s financial condition and results of operations. The Company s operating results are reported in Canadian dollars. A portion of the Company s merchandise purchases are denominated in U.S. dollars which results in foreign currency exposure related to fluctuations between the Canadian and U.S. dollars. The Company does not currently use foreign exchange option or forward contracts to hedge its foreign currency risk. A sudden increase in the U.S. dollar relative to the Canadian dollar could result in higher costs to the Company which could in turn result in increased prices and reduced sales, decreased profit margins and could negatively impact the Company s business and financial results. Legal proceedings The Company and its subsidiaries may become, in the ordinary course of its business, a party to litigation. The existence of such claims against the Company or its affiliates, directors or executive officers could have various adverse effects, including the incurrence of significant legal expenses defending such claims, even those claims without merit. In general, litigation claims can be expensive and time consuming to bring and to defend against and could result in settlements for damages that could significantly impact the Company s business, results of operations or financial conditions. The Company s insurance coverage may not be sufficient to absorb the fees and costs related to a litigation and the Company may be exposed to lawsuits which could harm its reputation and keep management from growing the business. Government regulation The Company s products and its marketing and advertising programs are and will continue to be subject to regulation by various Canadian federal, provincial and local regulatory authorities. Compliance with these regulations may have an adverse effect on the Company s business. In addition, the Company s operations are subject to Canadian federal, provincial and local consumer protection regulations, environmental laws and other laws relating specifically to the bedding industry. The Company and/or the Company s suppliers may be required to incur significant expense to the extent that these regulations change and require new and different compliance measures. For example, legislation may be enacted relating to the disposal of used mattresses which may have the effect of increasing the Company s cost of providing that service to its customers or may result in the Company being forced to discontinue that service. This may result in reduced sales and could negatively impact the Company s business and financial results. In addition, failure to comply with these various regulations may result in penalties, the inability to conduct business as previously conducted or at all, and/or adverse publicity, among other things. 111

114 The Company s ability to control its labour costs is subject to numerous external factors, including provincial legislation governing minimum wages, hours of work and termination and severance entitlements. If labour costs increase, the Company may not be able to hire or retain qualified sales associates or it may result in an increase in its operating expenses, which could negatively affect the Company s profitability. Third-party consumer financing arrangements The Company offers financing to consumers through third-party consumer finance companies. Although the Company is not exposed to any customer credit risk, its business is affected by the availability and terms of financing to customers. A significant reduction of credit availability to the Company s customers could have a material impact on its business, financial condition, liquidity and results of operations. Risks Related to this Offering There is no existing market for the Offered Shares and one may not develop to provide you with adequate liquidity Prior to this Offering, there has been no public market for the Offered Shares. The TSX has conditionally approved the listing of the Offered Shares under the symbol ZZZ. Listing is subject to the Company fulfilling all of the requirements of the TSX on or before October 1, However, investor interest in the Company may not lead to the development of trading markets on the TSX or otherwise, and such markets may not become liquid. If an active trading market does not develop, it may be difficult to sell Offered Shares at a profitable price, if at all. The Offering Price will be determined by negotiation between the Company, SCCI and the Underwriters based upon a number of factors and may not be indicative of prices that will prevail following the completion of the Offering. The market price could decline below the Offering Price, and investors may not be able to resell the Offered Shares at or above the Offering Price. The price of the Offered Shares may fluctuate significantly after the Offering The trading price of the Offered Shares may be volatile and subject to wide price fluctuations in response to various factors, many of which are beyond the Company s control, including, but not limited to: (i) market conditions in the stock market generally or in any of its sub-sectors; (ii) actual or anticipated fluctuations in the Company s quarterly financial and operating results; (iii) developments or disputes concerning the Company s intellectual property or proprietary rights; (iv) introduction of new technologies, products or services by the Company or its competitors; (v) issuance of new or changed securities analysts reports or recommendations; (vi) additions or departures of key personnel; (vii) regulatory developments; (viii) litigation and governmental investigations; and (ix) economic and political conditions or events. These and other factors may cause the market price and demand for the Offered Shares to fluctuate substantially, which may limit or prevent you from readily selling your Offered Shares and may otherwise negatively affect the liquidity of the Offered Shares. The trading price of the Offered Shares may also decline in reaction to events that affect other companies in the retail mattress and complementary sleep related products and accessories industry or related industries, even if these events do not affect the Company. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of the Company s shareholders brought a lawsuit against it, the Company could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of management from the Company s business. Forward-looking information The forward-looking information relating to, among other things, future results, performance, achievements, prospects or opportunities of the Company or the Canadian market included in this Prospectus (including, in particular, the information contained in Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI Outlook, Industry Overview Canadian Mattress and Foundation Market, Description of the Business Clear Growth Strategy, including the Company s assessment of potential SSSG, potential growth in revenue and Operating EBITDA, the anticipated number of new store openings over the next five to seven years and the assumption that growth in the Canadian market will 112

115 return to historical norms) is based on opinions, assumptions and estimates made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors the Company believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct, or that growth in the Canadian market will return to historical long-term growth rates and continue to grow consistently with historical norms. Actual results of the Company in the future may vary significantly from the historical and estimated results and those variations may be material. There is no representation by the Company that actual results achieved by the Company in the future will be the same, in whole or in part, as those included in this prospectus. See Forward- Looking Information. Risks relating to the Acquisition The Company intends to use the proceeds of the Offering to acquire the Purchased Shares pursuant to the Purchase Agreement. The Purchase Agreement contains representations and warranties and related indemnities from the Existing Shareholders on a several, and not joint and several, basis. The Existing Shareholders have represented, among other things, that this Prospectus contains full, true and plain disclosure of all material facts relating to Sleep Country and does not contain any misrepresentation (as defined under applicable securities laws). The maximum liability of each Existing Shareholder under all representations, warranties and indemnities under the Purchase Agreement will be limited to the cash portion of the proceeds received by such Existing Shareholder from the sale of the Purchased Shares, including any cash proceeds received from the redemption of the Class A Common Shares or the repayment of the Acquisition Notes. However, the representations and warranties are subject to certain qualifications and limitations, including those described under The Acquisition and Related Transactions, and there can be no assurance of recovery by the Company from the Existing Shareholders for breaches of such representations and warranties. Purchasers under this Prospectus will not have a direct statutory right of action against any of the Existing Shareholders, unless an Existing Shareholder is also a director of the Company or is otherwise required to sign this Prospectus. A purchaser s sole remedy against the Existing Shareholders will be the Company exercising its rights, if any, under the Purchase Agreement to claim indemnification in respect of a breach of the representations and warranties in such agreement by such party or, in certain circumstances, pursuant to an indemnity regarding taxes, subject to the limitations discussed in the preceding paragraphs. Any recourse against the Existing Shareholders must be pursued individually. As a result, there can be no assurance of recovery by the Company from any or all of the Existing Shareholders for any breach of their respective representations and warranties under the Purchase Agreement. Significant ownership by the Birch Hill Entities Upon completion of the Offering and the Acquisition, it is expected that the Birch Hill Entities together with the Co-Investors, either directly or indirectly, will have direction and control over 17,104,996 Common Shares, assuming the conversion of the Acquisition Notes, representing a 45.6% interest in the Company (or 14,457,496 Common Shares, representing a 38.5% interest in the Company if the Over-Allotment Option is exercised in full). As a result, the Birch Hill Entities will have a significant influence with respect to all matters submitted to shareholders for approval, including without limitation the election and removal of directors, amendments to the Company s articles and by-laws and the approval of certain business combinations. This concentration of voting power may cause the market price of the Common Shares to decline, delay or prevent any acquisition or delay or discourage take-over attempts that shareholders may consider to be favourable, or make it more difficult or impossible for a third party to acquire control of the Company or effect a change in the Board of Directors and in the management. Any delay or prevention of a change of control transaction could deter potential acquirors or prevent the completion of a transaction in which shareholders could receive a substantial premium over the then current market price for their Common Shares. In addition, the Birch Hill Entities interests may not in all cases be aligned with interests of the other shareholders of the Company. The Birch Hill Entities may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to other shareholders and may ultimately affect the market price of the Common Shares. See Principal Shareholders and The Acquisition and Related Transactions. 113

116 Future sales of Common Shares by the Birch Hill Entities and directors and officers of the Company Upon completion of the Offering and the Acquisition, it is expected that the Birch Hill Entities together with the Co-Investors, either directly or indirectly, will have direction and control over 17,104,996 Common Shares, assuming the conversion of the Acquisition Notes, representing a 45.6% interest in the Company (or 14,457,496 Common Shares, representing a 38.5% interest in the Company if the Over-Allotment Option is exercised in full). Subject to compliance with applicable securities laws, sales of a substantial number of Common Shares in the public market could occur at any time before or after the expiration of the Lock-up Agreements described under Plan of Distribution. These sales, or the market perception that the holders of a large number of Common Shares intend to sell Common Shares, could reduce the market price of Common Shares. In addition, the Underwriters might waive the provisions of some or all of these Lock-up Agreements and allow the subject shareholders to sell their Common Shares at any time. There are no pre-established conditions for the grant of such a waiver by the Underwriters, and any decision by them to waive those conditions may depend on a number of factors, which might include market conditions, the performance of Common Shares in the market and the Company s financial condition at that time. If the restrictions in such Lock-up Agreements are waived, additional Common Shares will be available for sale into the public market, subject to applicable securities laws, which could reduce the market price for the Common Shares. In addition, pursuant to the Investor Rights Agreement, the Birch Hill Entities will have certain demand registration rights which can be exercised any time after 180 days following completion of the Offering. See The Acquisition and Related Transactions. Payment of dividends Payment of dividends is dependent on cash flows of the business and is subject to change. The declaration and payment of future dividends will be at the discretion of the Board of Directors, are subject to restrictions under the New Credit Facility and may be affected by various other factors, including the Company s earnings, financial condition, acquisitions and legal or contractual restrictions. There can be no assurance that the Company will be in a position to pay dividends at the same rate (or at all) in the future. Moreover, there are or may be statutory, contractual, tax or other limitations on the ability of the Company s subsidiaries to make distributions to the Company. If the cash the Company receives from its subsidiaries pursuant to such distributions is insufficient, or if the subsidiaries are unable to make such distributions, the Company may be required to raise cash through the incurrence of debt, the issuance of additional equity or the sale of assets to fund its obligations. However, there can be no assurance that the Company would be able to raise cash by any of these means in a timely manner or on terms that are favourable to the Company. Pro forma financial information In preparing the pro forma financial information in this Prospectus, the Company has given effect to, among other items, the Offering, the Acquisition and the Pre-Closing Transactions. While management believes that the estimates and assumptions underlying the pro forma financial information are reasonable, such assumptions and estimates may be materially different to the Company s actual experience going forward. Public company status The Company will incur significant legal, accounting, insurance and other expenses as a result of being a public company, which may negatively impact the Company s performance and could cause the Company s results of operations and financial condition to suffer. Compliance with applicable securities laws and the rules of the TSX substantially increases the Company s expenses, including the Company s legal and accounting costs, and make some activities more time-consuming and costly. 114

117 Financial reporting and other public company requirements Upon receiving a final receipt for this Prospectus, the Company will become subject to reporting and other obligations under applicable Canadian securities laws and rules of any stock exchange on which the Offered Shares are then-listed, including National Instrument Certification of Disclosure in Issuers Annual and Interim Filings. These reporting and other obligations will place significant demands on the Company s management, administrative, operational and accounting resources. In order to meet such requirements, the Company will, among other things, establish systems, implement financial and management controls, reporting systems and procedures and, if necessary, hire qualified accounting and finance staff. However, if the Company is unable to accomplish any such necessary objectives in a timely and effective manner, the Company s ability to comply with its financial reporting obligations and other rules applicable to reporting issuers could be impaired. Moreover, any failure to maintain effective internal controls could cause the Company to fail to satisfy its reporting obligations or result in material misstatements in its financial statements. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results could be materially adversely effected which could also cause investors to lose confidence in the Company s reported financial information, which could result in a reduction in the trading price of the Offered Shares. The Company does not expect that its disclosure controls and procedures and internal controls over financial reporting will prevent all error or fraud. A control system, no matter how well-designed and implemented, can provide only reasonable, not absolute, assurance that the control system s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within an organization are detected. The inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of certain persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all. Dilution The issuance of additional Offered Shares may have a dilutive effect on the interests of shareholders. The number of Offered Shares that the Company is authorized to issue is unlimited. The Company may, in its sole discretion, subject to applicable law and the rules of the TSX, issue additional Offered Shares from time to time (including pursuant to any equity-based compensation plans), and the interests of shareholders may be diluted thereby. If securities or industry analysts do not publish reports about the Company, if they change their recommendations regarding the Company adversely, or if the Company s operating results do not meet their expectations, the Common Share price and trading volume could decline The trading market for the Offered Shares will rely in part and be influenced by the research and reports that industry or securities analysts publish about the Company. The Company does not currently have and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of the Company, the trading price and/or the volume of trading of the Offered Shares could decrease. Even if the Company does obtain analyst coverage, if one or more of these analysts cease coverage or fail to regularly publish reports, the Company could lose visibility in the financial markets, which in turn could cause the Common Share price or trading volume to decline. Moreover, if one or more of the analysts downgrade the Company or its Common Shares or if the Company s operating results do not meet their expectations, the Offered Share price could decline. 115

118 PROMOTERS For purposes of this Offering, the Birch Hill Entities may be considered promoters of the Company within the meaning of applicable securities legislation. None of the Birch Hill Entities are selling any Offered Shares pursuant to the Offering. At Closing, immediately following completion of this Offering, the Company will acquire from the Existing Shareholders, including the Birch Hill Entities, all of the issued and outstanding shares of SCCI, SC US Holdco and SC Management not already owned by it pursuant to the terms and conditions of the Purchase Agreement. The purchase price payable by the Company to the Existing Shareholders pursuant to the Purchase Agreement is equal to $461,673,036. The Purchase Agreement was negotiated by the Company, SCCI, the Underwriters and the Existing Shareholders. See The Acquisition and Related Transactions. Upon completion of the Offering and the Acquisition, it is expected that the Birch Hill Entities, either directly or indirectly, will have direction and voting control over 14,459,062 Common Shares, assuming conversion of the Acquisition Notes, representing a 38.5% interest in the Company (or 12,221,098 Common Shares, representing a 32.6% interest in the Company if the Over-Allotment Option is exercised in full). See Principal Shareholders and Risk Factors. BH Feather US contributed $1 to the Company in exchange for one Common Share when the Company was incorporated on May 27, See Capitalization. The Birch Hill Entities current ownership of SCCI, SC US Holdco and SC Management is described in this Prospectus under the heading The Acquisition and Related Transactions Pre-Closing Transactions. MATERIAL CONTRACTS The only material contracts, which the Company or its subsidiaries have entered into in the past two years, or will enter into prior to the Closing Date, other than in the ordinary course of business, are as follows: (i) Underwriting Agreement see Plan of Distribution ; and (ii) Purchase Agreement see The Acquisition and Related Transactions. Copies of the material contracts set out above will be made available online on SEDAR at LEGAL PROCEEDINGS The Company is not subject to any legal proceedings material to the Company to which the Company or any of its subsidiaries is a party or of which any of the Company s properties is the subject matter and no such proceedings are known to the Company to be contemplated. REGULATORY ACTIONS In the past three years, neither the Company nor its subsidiaries has had any penalties or sanctions imposed on it by, or entered into any settlement agreements with, a court or a securities regulator relating to securities laws. INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS Other than the interests of certain directors or executive officers of the Company or the Existing Shareholders as described in this Prospectus, none of the directors or executive officers of the Company or Existing Shareholders, nor any associate or affiliate of any of them, has or had a direct or indirect material interest in any transaction within the three years prior to the date of this Prospectus or proposed transaction which has materially affected or will materially affect the Company. 116

119 AUDITORS, TRANSFER AGENT AND REGISTRAR PricewaterhouseCoopers LLP, Chartered Professional Accountants, Licensed Public Accountants, is the auditor of the Company and has confirmed that it is independent of the Company in accordance with the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario. The transfer agent and registrar for the Common Shares will be Computershare Trust Company of Canada through its offices at 100 University Avenue, 8 th Floor, North Tower, Toronto, Ontario. LEGAL MATTERS Certain legal matters in connection with this Offering, will be passed upon on behalf of the Company by Davies Ward Phillips & Vineberg LLP and on behalf of the Underwriters by Stikeman Elliott LLP. As of the date of this Prospectus the respective partners and associates of each of Davies Ward Phillips & Vineberg LLP and Stikeman Elliott LLP own beneficially, directly or indirectly, less than one percent (1%) of any outstanding securities of any class of the Company or any associate of the Company. PURCHASERS STATUTORY RIGHTS Securities legislation in certain of the provinces and territories of Canada provides purchasers with the right to withdraw from an agreement to purchase securities within two business days after receipt, or deemed receipt, of a Prospectus and any amendment. In several of the provinces and territories, securities legislation further provides a purchaser with remedies of rescission or, in some jurisdictions, damages where the Prospectus and any amendment contains a misrepresentation or is not delivered to the purchaser, provided that such remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser s province or territory. Purchasers should refer to any applicable provisions of the securities legislation of their province or territory for the particulars of these rights or consult with a legal advisor. 117

120 GLOSSARY Acquired Entities means, collectively, SCCI, SC US Holdco and SC Management. Acquisition means the acquisition by the Company of all of the issued and outstanding shares of the Acquired Entities on the Closing Date, as further described under The Acquisition and Related Transactions. Acquisition Notes has the meaning ascribed thereto under The Acquisition and Related Transactions The Purchase Agreement. Adjusted Net Income has the meaning ascribed thereto under Non-IFRS Measures and Retail Industry Metrics. Audit Committee means the audit committee of the Company, as further described under Audit Committee. AUSP has the meaning ascribed thereto under Non-IFRS Measures and Retail Industry Metrics. Banners has the meaning ascribed thereto on the cover page of this Prospectus. BH Feather US means Birch Hill Feather (US) Holdings LP. Birch Hill Entities means, collectively, Birch Hill Feather LP and BH Feather US. BMO means BMO Nesbitt Burns Inc. Board of Directors means the board of directors of the Company. CAGR means compound annual growth rate. CBCA means the Canada Business Corporations Act, as amended from time to time. CDS means CDS Clearing and Depository Services Inc. CEO means the chief executive officer of the Company. CIBC means CIBC World Markets Inc. Class A Common Shares means the Class A redeemable common shares of the Company. Closing means the closing of the Offering. Closing Date means July 16, 2015, or such other date as the Company and the Underwriters may agree, but in any event not later than July 30, Code of Conduct means the code of business conduct and ethics of the Company, as further described under the heading Corporate Governance. Co-Investors means Panzer Limited and Wigmore Street Investments No. 2 Limited. Common Shares means the common shares of the Company. Company means Sleep Country Canada Holdings Inc., as interpreted in the manner described under Meaning of Certain References. conversion has the meaning ascribed thereto under Non-IFRS Measures and Retail Industry Metrics. DRIP has the meaning ascribed thereto under Dividend Policy Dividend Reinvestment Plan. EBITDA has the meaning ascribed thereto under Non-IFRS Measures and Retail Industry Metrics. Executive Group means, collectively, Stephen K. Gunn, Christine Magee, David Friesema, Stewart Schaefer, Robert Masson, Sieg Will, David Howcroft and Eric Solomon. Existing Credit Facilities has the meaning ascribed thereto under Description of Material Indebtedness Existing Credit Facilities. Existing Shareholders means, collectively, the Birch Hill Entities, the Co-Investors, the Executive Group and certain current and former employees of SCCI. 118

121 Free Cash Flow has the meaning ascribed thereto under Non-IFRS Measures and Retail Industry Metrics. Free Cash Flow Conversion has the meaning ascribed thereto under Non-IFRS Measures and Retail Industry Metrics. IFRS means International Financial Reporting Standards. Investor Rights Agreement has the meaning ascribed thereto under The Acquisition and Related Transactions Investor Rights Agreement. ISPA means the International Sleep Products Association. Lock-Up Agreements has the meaning ascribed thereto under Plan of Distribution Lock-Up Arrangements. LTM means last 12-month period ended March 31, Market Survey has the meaning ascribed thereto under Market Data and Industry Data. National Bank means National Bank Financial Inc. NCI has the meaning ascribed thereto on the cover page of this Prospectus. NEOs or named executive officers means the named executive officers of the Company and its subsidiaries, as further described under Executive Compensation. New Credit Facility has the meaning ascribed thereto under Description of Material Indebtedness New Credit Facility. NI means National Instrument Audit Committees of the Canadian Securities Administrators, as amended from time to time. NI National Instrument Disclosure of Corporate Governance Practices of the Canadian Securities Administrators, as amended from time to time. NP means National Policy Corporate Governance Guidelines of the Canadian Securities Administrators, as amended from time to time. Offered Shares has the meaning ascribed thereto on the cover page of this Prospectus. Offering has the meaning ascribed thereto on the cover page of this Prospectus. Offering Price has the meaning ascribed thereto on the cover page of this Prospectus. Operating EBITDA has the meaning ascribed thereto under Non-IFRS Measures and Retail Industry Metrics. Options has the meaning ascribed thereto under Executive Compensation Principal Elements of Compensation. Over-Allotment Option has the meaning ascribed thereto on the cover page of this Prospectus. Purchase Agreement means the share purchase agreement among the Company, the Acquired Entities and the Existing Shareholders dated July 10, 2015, as further described under The Acquisition and Related Transactions The Acquisition. Purchased Shares means all of the issued and outstanding shares of SCCI, SC US Holdco and SC Management to be purchased by the Company at Closing. Pre-Closing Transactions has the meaning ascribed thereto under The Acquisition and Related Transactions Pre-Closing Transactions. Prospectus has the meaning ascribed thereto on the cover page of this Prospectus. PSU Plan has the meaning ascribed thereto under Executive Compensation Principal Elements of Compensation. 119

122 PSUs has the meaning ascribed thereto under Executive Compensation Principal Elements of Compensation. Raymond James means Raymond James Ltd. RRIF means registered retirement income fund. RRSP means registered retirement savings plan. Same Store Sales Growth or SSSG has the meaning ascribed thereto under Non-IFRS Measures and Retail Industry Metrics. SC Management means SC Management Holding Inc. SC US Holdco means Sleep Country US Holdco Canada Inc. SCC LP means Sleep Country Canada LP. SCCI means Sleep Country Canada Inc. Scotia means Scotia Capital Inc. Sleep Country means Sleep Country Canada Holdings Inc., as interpreted in the manner described under Meaning of Certain References. Stock Option Plan has the meaning ascribed thereto under Executive Compensation Principal Elements of Compensation. Tax Act means the Income Tax Act (Canada) and the regulations thereunder. TD means TD Securities Inc. TFSA means tax-free savings account. TSX means the Toronto Stock Exchange. U.S. Securities Act means the United States Securities Act of 1933, as amended. Underwriters means, collectively, TD, BMO, CIBC, Scotia, Credit Suisse Securities (Canada), Inc., GMP Securities L.P., National Bank and Raymond James. Underwriters Fee has the meaning ascribed thereto on the cover page of this Prospectus. Underwriting Agreement means the underwriting agreement among the Company, the Acquired Entities and the Underwriters dated July 10, 2015, as further described under Plan of Distribution The Underwriting Agreement. United States has the meaning ascribed thereto in Regulation S under the U.S. Securities Act. Working Capital has the meaning ascribed thereto under Non-IFRS Measures and Retail Industry Metrics. 120

123 INDEX TO FINANCIAL STATEMENTS Audited Statements for Sleep Country Canada Holdings Inc. as at and for the one day ended May 27, 2015 Independent Auditor s Report... F-3 Statement of Financial Position as at May 27, F-4 Statement of Earnings... F-5 Statement of Comprehensive Income... F-6 Statement of Shareholder s Equity... F-7 Statement of Cash Flows... F-8 Notes to Financial Statements... F-9 Unaudited Pro Forma Condensed Consolidated Statements of Financial Position for Sleep Country Canada Holdings Inc. as at March 31, 2015 and for the three months ended March 31, 2015 and for the year ended December 31, 2014 Unaudited Pro Forma Condensed Consolidated Statement of Financial Position as at March 31, F-11 Notes to Unaudited Pro Forma Condensed Consolidated Statement of Financial Position... F-12 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the three months ended March 31, F-13 Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2014 F-14 Notes to the Unaudited Consolidated Statements of Operations... F-15 Audited Consolidated Statements for Sleep Country Canada Inc. as at December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 Independent Auditor s Report... F-16 Consolidated Statements of Financial Position as at December 31, 2014 and F-17 Consolidated Statements of Operations for the fiscal years ended December 31, 2014, 2013 and 2012 F-18 Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 31, 2014, 2013 and F-19 Consolidated Statements of Changes in Shareholders Equity for the fiscal years ended December 31, 2014, 2013 and F-20 Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2014, 2013 and F-21 Notes to Consolidated Financial Statements... F-22 Unaudited Condensed Interim Consolidated Statements for Sleep Country Canada Inc. as at March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and March 31, 2014 Condensed Interim Consolidated Statements of Financial Position as at March 31, 2015 and December 31, F-44 Condensed Interim Consolidated Statements of Operations for the three months ended March 31, 2015 and March 31, F-45 Condensed Interim Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2015 and March 31, F-46 Condensed Interim Consolidated Statements of Changes in Shareholders Equity for the three months ended March 31, 2015 and March 31, F-47 Condensed Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and March 31, F-48 Notes to Condensed Interim Consolidated Financial Statements... F-49 F-1

124 Audited Statements for Sleep Country US Holdco Canada Inc. as at December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 Independent Auditor s Report... F-57 Statements of Financial Position as at December 31, 2014 and F-58 Statements of Income and Comprehensive Income for the years ended December 31, 2014, 2013 and F-59 Statements of Changes in Shareholders Equity for the years ended December 31, 2014, 2013 and F-60 Statements of Cash Flows for the years ended December 31, 2014, 2013 and F-61 Notes to Financial Statements... F-62 Unaudited Condensed Interim Statements for Sleep Country US Holdco Canada Inc. as at March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and March 31, 2014 Condensed Interim Statements of Financial Position as at March 31, 2015 and December 31, F-70 Condensed Interim Statements of Income and Comprehensive Income for the three months ended March 31, 2015 and March 31, F-71 Condensed Interim Statements of Changes in Shareholders Equity for the three months ended March 31, 2015 and March 31, F-72 Condensed Interim Statements of Cash Flows for the three months ended March 31, 2015 and March 31, F-73 Notes to Condensed Interim Financial Statements... F-74 Audited Statements for SC Management Holding Inc. as at December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 Independent Auditor s Report... F-78 Statements of Financial Position as at December 31, 2014 and F-79 Statements of Income and Comprehensive Income for the years ended December 31, 2014, 2013 and F-80 Statements of Changes in Shareholders Equity for the years ended December 31, 2014, 2013 and F-81 Statements of Cash Flows for the years ended December 31, 2014, 2013 and F-82 Notes to Financial Statements... F-83 Unaudited Condensed Interim Statements for SC Management Holding Inc. as at March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and March 31, 2014 Condensed Interim Statements of Financial Position as at March 31, 2015 and December 31, F-89 Condensed Interim Statements of Income and Comprehensive Income for the three months ended March 31, 2015 and March 31, F-90 Condensed Interim Statements of Changes in Shareholders Equity for the three months ended March 31, 2015 and March 31, F-91 Condensed Interim Statements of Cash Flows for the three months ended March 31, 2015 and March 31, F-92 Notes to Condensed Financial Interim Statements... F-93 F-2

125 July 9, 2015 INDEPENDENT AUDITOR S REPORT To the Shareholder of Sleep Country Canada Holdings Inc. We have audited the accompanying financial statements of Sleep Country Canada Holdings Inc., which comprise the statement of financial position as at May 27, 2015 and the statements of earnings, comprehensive income, shareholder s equity and cash flows for the one-day period then ended and the related notes which comprise a summary of significant accounting policies and other explanatory information (together, the financial statements). Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements represent fairly, in all material respects, the financial position of Sleep Country Canada Holdings Inc. as at May 27, 2015 and its financial performance and its cash flow for the one-day period then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. (Signed) PricewaterhouseCoopers LLP Chartered Professional Accountants, Licensed Public Accountants Toronto, Ontario F-3

126 SLEEP COUNTRY CANADA HOLDINGS INC. STATEMENT OF FINANCIAL POSITION As at May 27, 2015 Assets Cash... 1 Total assets... 1 Shareholder s Equity Common share (note 1)... 1 Total shareholder s equity... 1 $ Approved by the Board of Directors (Signed) Stephen K. Gunn Director (Signed) Christine Magee Director The accompanying notes are an integral part of these financial statements. F-4

127 SLEEP COUNTRY CANADA HOLDINGS INC. STATEMENT OF EARNINGS One day period ended May 27, 2015 Revenue... Expenses... Income taxes... Net earnings... $ The accompanying notes are an integral part of these financial statements. F-5

128 SLEEP COUNTRY CANADA HOLDINGS INC. STATEMENT OF COMPREHENSIVE INCOME One day period ended May 27, 2015 Net earnings... Other comprehensive income, net of income taxes... Comprehensive income... $ The accompanying notes are an integral part of these financial statements. F-6

129 SLEEP COUNTRY CANADA HOLDINGS INC. STATEMENT OF SHAREHOLDER S EQUITY One day period ended May 27, 2015 Shareholder s Equity Beginning of period... Issuance of 1 common share... 1 Shareholder s Equity End of period... 1 $ The accompanying notes are an integral part of these financial statements. F-7

130 SLEEP COUNTRY CANADA HOLDINGS INC. STATEMENT OF CASH FLOWS One day period ended May 27, 2015 Financing activities Issuance of 1 common share... 1 Increase in cash during the period... 1 Cash Beginning of period... Cash End of period... 1 $ The accompanying notes are an integral part of these financial statements. F-8

131 SLEEP COUNTRY CANADA HOLDINGS INC. NOTES TO FINANCIAL STATEMENTS One day period ended May 27, GENERAL INFORMATION Sleep Country Canada Holdings Inc. (the Company) was incorporated by articles of incorporation under the Canada Business Corporations Act on May 27, The Company is authorized to issue an unlimited number of common shares at no par value. The common shares are voting and entitled to dividends if, as and when declared by the board of directors. On May 27, 2015, the Company issued one common share for cash consideration of $1. The Company s headquarters are located in Toronto, Ontario. 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICY The financial statements have been prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board. These financial statements were approved by the board of directors on July 9, The following significant accounting policy was used in the preparation of the financial statements: Share capital Incremental costs directly attributable to the issuance of common shares are recognized as a deduction from equity. Functional and presentation currency The financial statements are presented in Canadian dollars, which is the Company s functional and presentation currency. Cash Cash comprises cash on hand and is stated at fair value. 3. SHARE CAPITAL The Company s authorized share capital consists of common shares and an unlimited number of preference shares, issuable in series. As at May 27, 2015 one common share was issued and outstanding. No preference shares have been issued. 4. SUBSEQUENT EVENT On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of Sleep Country Canada Inc., Sleep Country US Holdco Canada Inc. and SC Management Holding Inc. F-9

132 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma consolidated financial statements are presented to reflect the expected impact of the Pre-Closing Transactions described under section The Acquisition and Related Transactions and the use of the net proceeds from the Offering as described under Use of Proceeds as if these transactions had occurred on the date and for the periods indicated below. The Company derived the following unaudited pro forma consolidated financial statements by applying pro forma adjustments to the historical consolidated financial statements of SCCI and historical financial statements of SC US Holdco and SC Management included elsewhere in the Prospectus. The accounting policies used in preparation of the unaudited pro forma consolidated financial statements are consistent with those applied by SCCI, SC US Holdco and SC Management, and as described in the historical consolidated financial statements of SCCI and historical financial statements of SC US Holdco and SC Management included elsewhere in the Prospectus. The unaudited pro forma condensed consolidated statement of financial position as of March 31, 2015 has been derived from the audited statement of financial position of Sleep Country as at May 27, 2015, unaudited condensed interim consolidated statement of financial position of SCCI as at March 31, 2015 and unaudited condensed interim statements of financial position of SC US Holdco and SC Management as at March 31, 2015 and gives effect to the Pre-Closing Transactions and the use of the net proceeds from the Offering as if such transactions had occurred on March 31, The unaudited pro forma condensed consolidated statement of operations for the three months ended March 31, 2015 has been derived from the unaudited condensed interim consolidated statement of operations of SCCI for the three months ended March 31, 2015 and unaudited condensed interim statements of operations of SC US Holdco and SC Management for the three months ended March 31, 2015 and gives effect to the Pre-Closing Transactions as if such transactions had occurred on January 1, The unaudited pro forma consolidated statement of operations for the year ended December 31, 2014 has been derived from audited consolidated statement of operations of SCCI for the year ended December 31, 2014 and audited statements of operations of SC US Holdco and SC Management for the year ended December 31, 2014 and gives effect to the Reorganization as if such transactions had occurred on January 1, Adjustments reflected in the unaudited pro forma consolidated statement of financial position give effect to the events that are directly attributable to the applicable transactions, for which there are firm commitments and the complete financial effects are objectively determinable. Adjustments reflected in the unaudited pro forma consolidated statements of operations include those items that are directly attributable to the applicable transactions, factually supportable and expected to have a continuing impact. For the purposes of the pro forma consolidated financial statements, it is assumed that the Over-Allotment Option is not exercised. The unaudited pro forma consolidated statement of financial position and statements of operations should be read in conjunction with the sections entitled The Acquisition and Related Transactions, Use of Proceeds, Capitalization, Selected Consolidated Financial Information, Management s Discussion and Analysis of Financial Condition and Results of Operations of SCCI, Description of Material Indebtedness and the historical audited and unaudited financial statements and accompanying notes thereto, included elsewhere in the Prospectus. The unaudited pro forma consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the Company s financial position or results of operations had the transactions to which the pro forma adjustments relate actually occurred on the dates or for the periods indicated, nor does such unaudited financial information purport to project the Company s results of operations or financial condition for any future period or as of any future date. A number of factors may affect the Company s results. See Risk Factors and Forward-looking Information. F-10

133 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at March 31, 2015 (C$ thousands) Assets Sleep Sleep SC US Equity Reorganization Country SCCI Country Holdco SC Management Offering Adjustments Pro Forma Current assets Cash and cash equivalents... 13, ,194 (a) (280,379) (b,c,e,f) 14,300 Trade and other receivables.. 6, ,418 Due from related companies non-interest bearing and due on demand 257 (257) (c,e) Inventories... 28,914 28,914 Prepaid expenses and deposits 2,394 2,394 51, ,194 (280,636) 52,026 Property and equipment... 24,938 24,938 Other assets Deferred tax assets... 4,891 (g) (4,891) (g) Investments in group companies... 22,765 2,500 (25,265) (e) Intangible assets other than goodwill , ,061 Goodwill , , ,888 22,887 2, ,085 (310,793) 423,567 Liabilities Current liabilities Trade and other payables... 32, (64) (g) 7,060 (c,d) 39,230 Customer deposits... 10,888 10,888 Due to related companies non-interest bearing and due on demand (257) (c,e) Long-term debt... 7,299 (6,526) (b) , (64) ,891 Other liabilities... 6,950 6,950 Deferred tax liabilities... 24, (19,372) (g) 5,970 Long-term debt ,597 1,331 (89,994) (b,e) 155, ,903 1, (64) (109,089) 219,745 Shareholders Equity Share capital ,605 7, ,739 (a) (214,101) (b,c,e,f) 205,247 Retained earnings (deficit)... (80,673) 13,848 1,541 (1,590) (a,g) 65,450 (c,g) (1,424) Other comprehensive loss... (e) Non-controlling interest... 53,053 (53,053) (e) 95,985 20,922 2, ,149 (201,704) 203, ,888 22,887 2, ,085 (310,793) 423,567 F-11

134 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION a) Represents the net proceeds of $281.2 million received from the Offering, excluding any proceeds from the exercise of the Over-Allotment Option, after deducting Underwriting Fees and other expenses and costs relating to the Offering of $18.9 million. b) In connection with the Pre-Closing Transactions, Series A and B promissory notes of SCCI and Series A and B promissory notes of SC US Holdco are converted into shares of SCCI and SC US Holdco respectively based on their fair values at the conversion date. All accrued interest on the Series A promissory notes of SCCI and SC US Holdco is to be converted into Series B promissory notes of SCCI and SC US Holdco, respectively, prior to the settlement of the notes. Also, the Class A convertible shares of SCCI are converted into shares of SCCI based on their carrying values as at the conversion date. Details of the promissory notes and Class A convertible shares being settled are as follows: C$ thousands SCCI SC US Holdco Total Promissory notes... 84,620 1,331 85,951 Class A convertible shares... 15,673 15,673 Net adjustment to long-term debt for promissory notes and Class A convertible shares ,293 1, ,624 In addition, SCCI will replace the Existing Credit Facilities of $150.1 million as at March 31, 2015 with the New Credit Facility and expects that $155.1 million will be drawn under the New Credit Facility. The New Credit Facility will mature five years from the Closing Date, with full repayment due at maturity of all amounts outstanding thereunder. c) In connection with the Pre-Closing Transactions, all stock options of SCCI will be either settled in cash or exercised for shares of SCCI. SCCI s shares are then sold to Sleep Country for a combination of cash, Common Shares of Sleep Country and Acquisition Notes based on the economic value of the SCCI shares as determined at the date the final prospectus in respect of the Offering is filed. For the purposes of the pro forma consolidated financial statements, it is assumed that the Over-Allotment Option is not exercised and it is assumed that the principal amount of the Acquisition Notes will be automatically converted into Common Shares on the 45 th day following the Closing Date. On or about the consummation of the Offering, SCCI expects to record incremental compensation expense relating to bonuses payable to certain members of management in connection with the Pre-Closing Transactions. In connection with the Pre-Closing Transactions, SCCI will declare and pay dividends to the Existing Shareholders, in the aggregate amount of $13 million with $0.9 million withheld to settle balances due to related companies and for withholding taxes payable. d) Represents the withholding and payroll taxes payable to the relevant government authorities in relation to the interest paid on Series A promissory notes in (b) above, dividends, share-based and other management compensation in (c) above. e) Sleep Country will use the net proceeds received from the Offering to satisfy a portion of the purchase price on the acquisition of all outstanding shares of SCCI ($157 million) and SC US Holdco ($36.5 million) not already held by it. The balance of the purchase price on this acquisition will be satisfied by the issuance of Common Shares and Acquisition Notes by Sleep Country. For the purposes of the pro forma consolidated financial statements, it is assumed that the Over-Allotment Option is not exercised and it is assumed that the principal amount of the Acquisition Notes will be automatically converted into Common Shares on the 45 th day following the Closing Date. Under the new capital structure, Sleep Country owns all of the issued and outstanding shares of SCCI, SC US Holdco and SC Management and there is no non-controlling interest to be recorded. Equity of the subsidiary and amounts due to and from the group entities are therefore eliminated. f) Represents outstanding Common Shares of Sleep Country issued in exchange for SCCI, SC US Holdco and SC Management shares and subscription from management. Sleep Country will use $77.6 million net proceeds received from the Offering to redeem the Class A common shares issued in connection with the Pre-Closing Transactions. g) Represents deferred and current taxes related to the issuance costs of the Offering in (a), settlement of Series A promissory notes in (b), and incremental compensation expense in (c) above. F-12

135 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For Three months Ended March 31, 2015 (C$ thousands except per share amounts) Sleep Sleep SC US SC Reorganization Country SCCI Country Holdco Management Adjustments Pro Forma Revenues... 91,613 91,613 Cost of sales... 69,380 69,380 Gross profit... 22,233 22,233 Share of profit of investments accounted for using equity method... 2, (3,225) (h) General and administrative expenses... 11, ,933 Depreciation and amortization.. 2,466 2,466 Income before finance, interest and other (income) expenses and income taxes... 7,838 2, (3,225) 7,834 Finance related expenses... 33, (31,903) (i) 1,514 Interest income and other (income) expenses net... (149) (149) Income (loss) before income taxes (recovery)... (25,382) 2, ,678 6,469 Income taxes (recovery) Current... (838) ,251 (i) 1,877 Deferred... (6,853) 6,725 (i) (128) (7,691) ,976 1,749 Net income (loss) from continuing operations... (17,691) 2, ,702 4,720 Total net income (loss) from continuing operations attributable to Owners of the parent... (20,784) 2, ,795 4,720 Non-controlling interest... 3,093 (3,093) (h) (17,691) 2, ,702 4,720 Earnings (loss) per share of continuing operations attributed to the common shareholders of the company Basic... (0.89) (j) 0.13 Diluted... (0.89) (j) 0.13 F-13

136 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Year Ended December 31, 2014 (C$ thousands except per share amounts) Sleep SC Reorganization Country SCCI Sleep Country SC US Holdco Management Adjustments Pro Forma Revenues , ,085 Cost of sales , ,665 Gross profit , ,420 Share of profit of investments accounted for using equity method (6,378) (697) 7,075 (h) General and administrative expenses 54, ,916 Depreciation and amortization... 9,897 9,897 Income before finance, interest and other (income) expenses and income taxes... 38,625 6, (7,075) 38,607 Finance related expenses... 61, (55,508) (i) 6,162 Interest income and other (income) expenses net Income (loss) before income taxes (recovery)... (22,898) 6, ,433 32,424 Income taxes (recovery) Current... 4,959 1, ,111 (i) 12,897 Deferred... (10,721) 6 10,024 (i) (691) (5,762) 1, ,135 12,206 Net income (loss) from continuing operations... (17,136) 4, ,298 20,218 Total net income (loss) from continuing operations attributable to Owners of the parent... (30,009) 4, ,171 20,218 Non-controlling interest... 12,873 (12,873) (h) (17,136) 4, ,298 20,218 Earnings (loss) per share of continuing operations attributed to the common shareholders of the company Basic... (1.42) (j) 0.54 Diluted... (1.42) (j) 0.54 F-14

137 NOTES TO UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS h) Represents the elimination of the share of SCC LP s profit previously attributable to non-controlling interests, including the share recorded under equity accounting by SC US Holdco and SC Management as SCC LP results are consolidated into SCCI, and under the new capital structure all subsidiary entities will be wholly owned by Sleep Country. i) Represents the reversal of interest expense and the related tax impact on Series A and B promissory notes, Class A convertible shares and Class B common shares, which will no longer be in existence under the new capital structure. In addition, finance related expenses include interest on the New Credit Facility, of which $155 million is expected to be outstanding at Closing, in place of the Existing Credit Facilities of $150.1 million as at March 31, Interest on the New Credit Facility is expected to be 3.75% per annum. (j) The unaudited pro forma consolidated basic and diluted earnings per share reflect the effect of the Offering. For purposes of the unaudited pro forma consolidated basic and diluted earnings per share, the number of Sleep Country Common Shares is as follows: Common Shares Existing Shareholders... 19,889,133 Offering... 17,650,000 Total... 37,539,133 F-15

138 July 9, 2015 INDEPENDENT AUDITOR S REPORT To the Shareholders of Sleep Country Canada Inc. We have audited the accompanying consolidated financial statements of Sleep Country Canada Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2014 and December 31, 2013 and the consolidated statements of operations, consolidated statements of comprehensive income (loss), consolidated statements of changes in shareholders equity and consolidated statements of cash flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Sleep Country Canada Inc. and its subsidiaries as at December 31, 2014 and December 31, 2013 and their financial performance and their cash flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. (Signed) PricewaterhouseCoopers LLP Chartered Professional Accountants, Licensed Public Accountants Toronto, Ontario F-16

139 SLEEP COUNTRY CANADA INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31, 2014 and 2013 (in thousands of Canadian dollars, except per share amounts) $ $ Assets Current assets Cash and cash equivalents (note 5)... 41,331 27,401 Trade and other receivables (note 6)... 6,477 5,808 Due from related companies non-interest bearing and due on demand (note 19) Inventories (note 7)... 26,369 27,046 Prepaid expenses and deposits... 2,475 1,482 Assets of disposal group held for sale (note 21)... 14,086 90,754 61,748 Property and equipment (note 8)... 24,948 30,455 Other assets Intangible assets other than goodwill (note 9) , ,006 Goodwill (note 9) , , , ,223 Liabilities Current liabilities Trade and other payables (note 10)... 33,729 30,546 Customer deposits... 12,116 10,093 Long-term debt (note 12)... 7, Liabilities of disposal group held for sale (note 21)... 5,210 58,422 41,524 Other liabilities (note 11)... 6,965 7,078 Deferred tax liabilities (note 13)... 31,820 42,541 Long-term debt (note 12) , , , ,258 Shareholders Equity Share capital (note 15) , ,994 Deficit... (63,693) (28,234) Currency translation reserve Non-controlling interest... 46,987 33, , , , ,223 Contingent liabilities and unrecognized contractual commitments (note 17) Approved by the Board of Directors (Signed) Stephen K. Gunn (Signed) Christine Magee Director Director The accompanying notes are an integral part of these consolidated financial statements. F-17

140 SLEEP COUNTRY CANADA INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) $ $ $ Revenues , , ,581 Cost of sales (notes 7 and 14) , , ,710 Gross profit ,420 88,088 80,871 General and administrative expenses (note 14)... 54,898 50,226 42,641 Depreciation and amortization... 9,897 9,342 7,872 Income before finance, interest and other (income) expenses and income taxes 38,625 28,520 30,358 Finance related expenses (note 12)... 61,502 23,215 23,126 Interest income and other (income) expenses net (145) (102) 61,523 23,070 23,024 Income (loss) before income taxes (recovery)... (22,898) 5,450 7,334 Income taxes (recovery) (note 13) Current... 4,959 (22) 27 Deferred... (10,721) 1, (5,762) 1, Net income (loss) from continuing operations... (17,136) 4,381 6,399 Net income (loss) from discontinued operations (note 21)... 2,996 (2,588) (1,311) Net income (loss) for the year... (14,140) 1,793 5,088 Total net income (loss) attributable to Owners of the parent... (28,002) (2,052) 1,667 Non-controlling interest... 13,862 3,845 3,421 (14,140) 1,793 5,088 Earnings (loss) per share attributed to the common shareholders of the company (note 16) Basic earnings per share (in dollars) Continuing operations... $ (1.52) $ 0.01 $ 0.13 Discontinued operations (0.10) (0.05) Earnings (loss) per share... $ (1.42) $ (0.09) $ 0.08 Diluted earnings per share (in dollars): Continuing operations... $ (1.52) $ 0.01 $ 0.06 Discontinued operations (0.10) (0.05) Earnings (loss) per share... $ (1.42) $ (0.09) $ 0.01 The accompanying notes are an integral part of these consolidated financial statements. F-18

141 SLEEP COUNTRY CANADA INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the years ended December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) $ $ $ Net income (loss) for the year... (14,140) 1,793 5,088 Other comprehensive income (loss) to be reclassified to consolidated statement of operations Cumulative translation differences related to discontinued operations (52) Total comprehensive income (loss) for the year... (13,792) 1,945 5,036 Total comprehensive income (loss) attributable to Owners of the parent... (27,654) (1,900) 1,615 Non-controlling interest... 13,862 3,845 3,421 (13,792) 1,945 5,036 The accompanying notes are an integral part of these consolidated financial statements. F-19

142 SLEEP COUNTRY CANADA INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY For the years ended December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) Class A Total Currency Total Noncommon Contributed share translation controlling controlling Total shares surplus capital reserve Deficit interest interest equity $ $ $ $ $ $ $ $ Balance January 1, , , ,822 (20) (27,849) 96,953 25, ,804 Net income for the year... 1,667 1,667 3,421 5,088 Other comprehensive loss... (52) (52) (52) Comprehensive income (loss) for the year. (52) 1,667 1,615 3,421 5,036 Share-based compensation and other... (689) (689) (689) (689) Balance December 31, , , ,133 (72) (26,182) 97,879 29, ,151 Balance January 1, , , ,133 (72) (26,182) 97,879 29, ,151 Net income (loss) for the year... (2,052) (2,052) 3,845 1,793 Other comprehensive income Comprehensive income (loss) for the year. 152 (2,052) (1,900) 3,845 1,945 Share-based compensation and other... (139) (139) (139) 8 (131) Balance December 31, , , , (28,234) 95,840 33, ,965 Balance January 1, , , , (28,234) 95,840 33, ,965 Net income (loss) for the year... (28,002) (28,002) 13,862 (14,140) Other comprehensive income Comprehensive income (loss) for the year. 348 (28,002) (27,654) 13,862 (13,792) Share-based compensation and other Repurchase of shares and other... (2,924) 2,519 (405) (405) (405) Dividends... (7,457) (7,457) (7,457) Balance December 31, , , , (63,693) 60,338 46, ,325 The accompanying notes are an integral part of these consolidated financial statements. F-20

143 SLEEP COUNTRY CANADA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) $ $ $ Cash provided by (used in) Operating activities Net income (loss) for the year... (14,140) 1,793 5,088 Items not affecting cash Depreciation of property and equipment (note 8)... 9,003 7,709 6,282 Amortization of intangible assets (note 9)... 1,629 2,192 1,875 Reversal of brand intangible asset impairment (note 9)... (5,981) Share-based compensation Finance related expenses... 61,502 23,215 23,126 Other non-cash expenses Deferred income taxes... (10,721) 1, ,636 36,110 37,511 Changes in non-cash items relating to operating activities (note 18)... 6,079 (1,127) ,715 34,983 38,355 Investing activities Purchase of property and equipment... (6,533) (12,797) (9,233) Purchase of intangible assets (note 9)... (752) (955) (1,536) (7,285) (13,752) (10,769) Financing activities Increase of non-controlling interest... 8 Increase of Class A convertible shares and Class B common shares Additional term loan taken on senior secured credit facility... 60,000 Repayment of senior secured credit facility... (3,250) (18,313) Financing costs on senior secured credit facility... (1,409) (272) Repayment of Series A and B promissory notes... (60,502) (6,361) (6,591) Repayment on Class A convertible shares... (7,035) (1,139) (909) Dividends paid on Class A common shares... (7,457) Interest paid... (5,971) (2,734) (4,287) Decrease in other long-term debt... (910) (785) (887) (26,534) (10,769) (31,259) Exchange rate difference on cash and cash equivalents (11) Increase (decrease) in cash and cash equivalents during the year... 13,937 10,489 (3,684) Cash and cash equivalents Beginning of year... 27,401 16,912 20,596 Cash and cash equivalents End of year... 41,338 27,401 16,912 Non-cash investing and financing activities Series B promissory notes issued interest in kind (note 12)... 20,841 20,841 22,024 Acquisition of property and equipment under finance lease ,641 Conversion of Series A and B promissory notes into convertible shares... 6,326 The accompanying notes are an integral part of these consolidated financial statements. F-21

144 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 1. ORGANIZATION Sleep Country Canada Inc. (Sleep Country or the company) (formerly Canada Inc.) is a Canadian private company amalgamated under the Canada Business Corporations Act on July 30, On September 23, 2008, the company acquired the units of the Sleep Country Canada Income Fund (the fund), which owned and operated the business. Sleep Country Canada Inc. and its subsidiaries operate in the retail market place, offering mattresses and bedding related products. The company is the general partner of its subsidiary partnership, Sleep Country Canada Limited Partnership (Sleep Country LP). The main subsidiaries of the company are: Sleep Country LP Sleep Country Holding Inc. Sleep Country US Holding, Inc. Sleep America, LLC The address of the company s head and registered office is 140 Unit 1, Wendell Avenue, Toronto, Ontario. 2. BASIS OF PRESENTATION The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and using the accounting policies described herein. The consolidated financial statements were authorized for issue by the Board of Directors (Board) on July 9, The consolidated financial statements were prepared on a historical cost basis. The company s functional currency is the Canadian dollar. 3. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. Basis of consolidation The consolidated financial statements include the accounts of the company and other entities that the company controls. Control exists when the company is exposed to or has rights to variable returns from its involvement in the entity and has the ability to direct the activities that significantly affect the entities returns through its power over the entity. All intercompany transactions and balances are eliminated on consolidation. Non-controlling interests Non-controlling interest represents equity interests in subsidiaries owned by outside parties. The share of net assets of subsidiaries attributable to non-controlling interests is presented as a component of equity. Their share of net earnings is recognized directly in equity. Changes in the parent company s ownership interest in subsidiaries that do not result in a loss of control are accounted for as transactions within equity. When the company ceases to have control or significant influence, any retained interest in the entity is re-measured to its fair value, with the change in the carrying amount recognized in net earnings (loss). The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. The company holds the general partner unit and the preferred units in Sleep Country LP, representing 98% of the partners capital as at December 31, 2014, with common units being held by third party investors. All commercial operations of the company are undertaken by Sleep Country LP and its registered address is 140 Unit 1, Wendell Avenue, Toronto, Ontario. The allocation of the profit or loss of Sleep Country LP is specified in the limited partnership agreement whereas on an annual basis specific allocations are made to the general partner and the remaining profit or loss is allocated to the third party investors on a pro-rata basis based on the percentage of common units held. For the year ended December 31, 2014, the allocation of profit or loss to the company was 67% ( %; %). F-22

145 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial assets and liabilities Financial assets and liabilities are recognized when the company becomes a party to the contractual provision of the financial instrument. Financial assets are derecognized when the contractual rights to receive cash flows from the financial asset expire and financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled. Financial instruments upon initial recognition are measured at fair value and classified as financial assets or liabilities at fair value through the consolidated statements of operations, loans and receivables or other financial liabilities. Loans and receivables and other financial liabilities are measured at amortized cost. The following classifications have been applied: Cash and cash equivalents, trade and other receivables and due from related parties are classified as loans and receivables; and trade and other payables, customer deposits and long-term debt have been classified as other financial liabilities. The Class B common shares meet the definition of a financial liability under IFRS as the redemption feature (puttable on the death of the employee or certain other circumstances) creates an unavoidable contractual obligation to pay cash. The Class B common shares are presented as a liability, measured at amortized cost based on the calculated redemption amount at each reporting period. Long-term debt is recognized initially at fair value, net of recognized transaction costs, and is subsequently measured at amortized cost, being the carrying value. Any difference between the carrying value and the redemption value is recognized in the consolidated statements of operations and comprehensive income (loss) using the effective interest rate method. Fees paid on the establishment of senior credit facilities are capitalized as a prepayment for liquidity services and amortized over the period of the facility to which it relates. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Foreign currency translation Functional and presentation currency Items included in the consolidated financial statements of each of the company s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currencies of the subsidiaries are Canadian dollars and United States dollars. The consolidated financial statements are presented in Canadian dollars, which is the company s functional currency. The company translates its foreign operations, whereby assets and liabilities are translated at the exchange rate in effect at the consolidated statements of financial position dates, while revenues and expenses are translated at an appropriate weighted average rate. Any resulting translation gains or losses are included in other comprehensive income (loss) and the currency translation reserve. Transactions and balances Transactions denominated in a foreign currency are translated into the functional currencies at the rate in effect at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currencies at the exchange rates in effect at the year-end date and revenues and expenses are translated at the average rate during the year. Foreign exchange gains and losses are included in the consolidated statements of operations. Segment information As at December 31, 2014, the company manages its business on the basis of one operating segment, which is also the company s only reportable segment, which is consistent with the internal reporting provided to the chief operating decision-maker, the Chief Executive Officer. The company operates in Canada, which is its country of domicile. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held with banks and other short-term highly liquid investments with original maturities of three months or less. F-23

146 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories Inventories are stated at the lower of their carrying value determined on a specific item basis and estimated net realizable value. Net realizable value is the estimated selling price less applicable selling expenses. Trade discounts and volume rebates earned are deducted in determining the carrying value of inventory purchases. Trade and other receivables Receivable balances are recognized initially at fair value and a provision for impairment is established when there is evidence that the company will not be able to collect all the amounts due according to the original terms of the receivable balance. Property and equipment Property and equipment are recorded at cost less accumulated depreciation, net of any impairment loss. Depreciation is computed on a straight-line basis at annual rates based on the estimated useful lives of the related assets as follows: Computer hardware Furniture, fixtures and other Leasehold improvements Assets under finance lease 36 months 48 to 60 months over the term of the lease over the term of the lease Included in furniture, fixtures and other are office equipment depreciated over 60 months and certain vehicles depreciated over 48 months. Assets under finance lease primarily represent the delivery truck fleet. The company recognizes in the carrying amount of property and equipment the full purchase price of assets acquired/constructed as well as the costs incurred that are directly incremental as a result of the construction of a specific asset, when they relate to bringing the asset into working condition. Estimates of useful lives, residual values and methods of depreciation are reviewed annually. Any changes are accounted for prospectively as a change in accounting estimate. Goodwill and intangible assets Intangible assets are assets acquired that lack physical substance and that meet the specified criteria for separate recognition from goodwill. Computer software Computer software is recorded at cost less accumulated amortization, net of any impairment loss. Amortization is computed on a straight-line basis at annual rates based on the estimated useful life of 36 months. Non-compete contracts Non-compete contracts are amortized over an estimated life of ten years. Brands Brands are recorded at cost and are not subject to amortization, having an indefinite life. They are tested for impairment annually, as of the consolidated statements of financial position dates, or more frequently if events or circumstances indicate that they may be impaired. Goodwill Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed. Goodwill is not amortized and management tests goodwill for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. F-24

147 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Impairment of non-financial assets Impairment of goodwill and indefinite life intangibles Management tests goodwill and brands for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The asset will be written down if the carrying amount of the asset exceeds the higher of its fair value less costs to sell and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Goodwill is allocated to cash generating units (CGUs) or groups of CGUs for the purpose of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the synergies of the business combination which the goodwill arose. The impairment tests are performed by comparing the carrying value of the assets (or asset groups) of these CGUs with their recoverable amount, which is the higher of their fair value less costs to sell and their value in use (which is the present value of the expected future cash flows of the relevant asset or CGU), as determined by management. Impairment of definite life intangibles and property and equipment Assets that are subject to amortization are periodically reviewed for indicators of impairment. Whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, the asset or CGU is tested for impairment. To the extent that the asset or CGU s carrying amount exceeds its recoverable amount, an impairment loss is recognized in the consolidated statement of operations. The recoverable amount of an asset or a CGU is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from an asset or CGU. The fair value is the price that could be received for an asset or CGU in an orderly transaction between market participants at the measurement date, less costs of disposal. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Impairment reversals If, in a subsequent period, the amount of recognized impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, a reversal of the previously recognized impairment, except for goodwill, is recognized in the consolidated statement of operations. Trade and other payables Trade and other payables are obligations to pay for goods or services that have been acquired or rendered in the ordinary course of business from suppliers and employees. Accounts payable and accrued liabilities are classified as current liabilities if payment is due or expected within one year or less. Otherwise, they are presented as non-current liabilities. Trade and other payables are recognized initially at fair value and subsequently measured at amortized cost. Customer deposits Customer deposits represent amounts paid by customers in advance of delivery of product (i.e. mattresses). These deposits can be for a portion or for the entire product sale. The amounts received representing the customer deposit is unencumbered and can be used for general corporate purposes. Once the product is delivered to the customer the liability is relieved and is recorded in sales. Over time, some portion of the customer deposits are not redeemed (breakage). Breakage income on customer deposits is determined based on historical patterns when it can be determined that the likelihood of usage is remote. Decommissioning provisions These provisions represent the cost of the company s obligation to rehabilitate its stores and is estimated based on the present value of expected future rehabilitation costs and is recognized in the period in which the obligation is incurred. The present value of these costs is added to the cost of the associated asset and amortized over its useful life, while the corresponding liability will accrete to its future value over the same period. Share-based compensation The company has a share-based compensation plan (the Plan), as described in note 19. F-25

148 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) The company grants stock options to certain employees of the company. Stock options vest equally over five years. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche s vesting period by increasing contributed surplus based on the number of awards expected to vest. This number is reviewed at least annually, with any change in estimate recognized immediately in compensation expense with a corresponding adjustment to contributed surplus. Revenue recognition Revenue is recognized either on the customer picking up the product or on delivery of the product to the customer s home. Provisions for refunds relating to the company s various customer satisfaction programs are accrued based on historical experience. Leases Assets, primarily delivery trucks, held under leases which result in the company receiving substantially all the risks and rewards of ownership of the asset (finance leases) are capitalized at the lower of the fair value of the property and equipment or the estimated present value of the minimum lease payments. The corresponding finance lease obligation is included within long-term debt. The interest element is amortized using the effective interest rate method. The company leases stores and distribution centres. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. The company recognizes rental expense incurred and inducements received from landlords on a straight-line basis over the term of the lease. Any difference between the calculated expense and the amounts actually paid is reflected as deferred lease inducements in other liabilities in the company s consolidated statements of financial position. Income taxes Income taxes comprise current and deferred income taxes. Income taxes are recognized in the consolidated statements of operations, except to the extent that it relates to items recognized directly in other comprehensive income (loss) or directly in equity, in which case the income tax is recognized directly in other comprehensive income (loss) or equity, respectively. Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years. Income taxes provided for by Sleep Country and its corporate subsidiaries are accounted for using the liability method. Deferred income taxes arise due to the temporary differences in the financial reporting and tax bases of assets and liabilities. Changes in these temporary differences are reflected in the provision for deferred income taxes using substantively enacted income tax rates and regulations. Deferred taxes are recognized for all temporary differences except where they arise on goodwill that is not tax deductible, on the initial recognition of an asset or liability that is not a business combination and at the time of the transaction affects neither accounting nor taxable income, and in respect of differences associated with investments in subsidiaries where the group is able to control the timing of their reversal and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized to the extent that the recoverability of deferred income tax assets is considered more likely than not. Assets held for sale and discontinued operations Assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of the carrying amount and fair value less costs to sell. There were no impairment losses recognized on the initial classification of these assets. Reversals of impairments are not recognized in excess of any cumulative impairment loss. A discontinued operation is a component of the company s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale. Classification as a discontinued operation including related impairment charges occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative consolidated statement of operations is presented as if the operation had been discontinued from the start of the comparative period. F-26

149 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) New and amended standards adopted during the year The amendments to International Accounting Standards (IAS) 32, Financial Instruments Presentation (IAS 32), clarify the criteria that should be considered in determining whether an entity has a legally enforceable right of set-off in respect of its consolidated financial statements. Amendments to IAS 32 are applicable to annual periods beginning on or after January 1, 2014, with retrospective application required. The company has adopted the amendment to IAS 32 on January 1, 2014 and included the required disclosures in the consolidated financial statements. The International Financial Reporting Interpretation Committee (IFRIC) issued IFRIC 21, Levies. IFRIC 21 addresses accounting for liability to pay a levy within the scope of IAS 37, Provisions, contingent liabilities and contingent assets. A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes and fines or other penalties imposed for breaches of the legislation. The company adopted IFRIC 21 on January 1, 2014 and it did not result in any measurement adjustment as at January 1, Accounting standards and amendments issued but not yet adopted The following standards and amendments to existing standards were released by the IASB. The company is evaluating the impact of these standards and whether to early adopt these standards. In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers. IFRS 15 replaces all previous revenue recognition standards, including IAS 18, Revenue. The new standard is effective for annual periods beginning on or after January 1, 2017 with early adoption permitted. In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments, 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. IFRS 7, Financial instruments: Disclosures, was also amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments to IFRS 7 are effective upon adoption of IFRS 9. IAS 1, Presentation of financial statements, has been amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements, and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of financial statements requires management to make estimates and assumptions using judgments that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates. The following discusses the most significant accounting judgments and estimates that the company has made in the preparation of the consolidated financial statements. Impairment of goodwill and brands Management is required to use judgment in determining the grouping of assets to identify their CGUs for the purposes of testing fixed assets for impairment. Judgment is further required to determine appropriate groupings of CGUs, 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, 2014 and 2013, impairment reviews were performed by comparing the carrying value of goodwill and brands with the recoverable amount of the CGU to which goodwill and brands have been allocated. Management determined that there has been no impairment (note 9). F-27

150 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued) Long-term debt Series A and B promissory notes, Class B common shares and Class A convertible shares The calculation of amortized cost associated with the Series A and B promissory notes, Class B common shares and the Class A convertible shares requires 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 impact amounts recognized as interest expense. For example, if the promissory notes are 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 may be material. 5. CASH AND CASH EQUIVALENTS $ $ Cash at bank... 41,331 27, TRADE AND OTHER RECEIVABLES The company s trade and other receivables consist of balances due from vendors related to volume and co-operative advertising rebates and balances due from the third party financing companies. As at December 31, 2014, no receivable balances were considered impaired (2013 $nil). The carrying amounts of the company s trade and other receivables, which approximate their fair values, are denominated in the following currencies: $ $ Canadian dollars... 6,477 5,225 United States dollars ,477 5,808 The maximum exposure to credit risk at the reporting date is the carrying value of the trade and other receivables. The company does not hold any collateral as security with the exception of the right of offset for certain supplier payables. 7. INVENTORIES $ $ Merchandise... 26,369 27,046 Inventory and directly related costs recognized as an expense , ,021 Write-downs of inventory due to net realizable value lower than cost Write-offs due to damage or shrinkage... 1,034 1,029 There have been no reversals of previously taken write-downs in 2014 and F-28

151 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 8. PROPERTY AND EQUIPMENT Furniture, Assets under Computer fixtures Leasehold finance hardware and other improvements lease Total $ $ $ $ $ At January 1, 2013 Cost... 2,700 6,003 35,278 5,457 49,438 Accumulated depreciation... (1,799) (3,177) (17,189) (2,325) (24,490) Net book value ,826 18,089 3,132 24,948 Year ended December 31, 2013 At January 1, ,826 18,089 3,132 24,948 Additions ,515 10, ,299 Depreciation... (583) (989) (5,374) (763) (7,709) Disposal... (17) (153) (170) Exchange differences At December 31, ,206 3,369 23,204 2,676 30,455 At December 31, 2013 Cost... 3,403 6,760 44,970 4,967 60,100 Accumulated depreciation... (2,197) (3,391) (21,766) (2,291) (29,645) Net book value... 1,206 3,369 23,204 2,676 30,455 Year ended December 31, 2014 At January 1, ,206 3,369 23,204 2,676 30,455 Additions , ,931 Depreciation... (697) (1,050) (6,539) (717) (9,003) Disposal... (2) (77) (95) (174) Exchange differences Transferred to disposal group classified as held for sale... (82) (539) (2,956) (3,577) At December 31, ,324 19,479 2,262 24,948 At December 31, 2014 Cost... 3,148 4,852 43,540 4,794 56,334 Accumulated depreciation... (2,265) (2,528) (24,061) (2,532) (31,386) Net book value ,324 19,479 2,262 24,948 F-29

152 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 9. INTANGIBLE ASSETS Non-compete Computer Brands contracts software Total $ $ $ $ At January 1, 2013 Cost ,540 2,804 6, ,972 Accumulated amortization... (1,191) (3,544) (4,735) Net book value ,540 1,613 3, ,237 Year ended December 31, 2013 At January 1, ,540 1,613 3, ,237 Additions Amortization for the year... (280) (1,912) (2,192) Exchange differences At December 31, ,540 1,333 2, ,006 At December 31, 2013 Cost ,540 2,804 7, ,942 Accumulated amortization and impairments... (1,471) (5,465) (6,936) Net book value ,540 1,333 2, ,006 Year ended December 31, 2014 At January 1, ,540 1,333 2, ,006 Additions Amortization for the year... (280) (1,349) (1,629) Disposal during the year... (80) (80) Exchange differences Reversal of impairment loss... 5,981 5,981 Transferred to disposal group classified as held for sale... (5,981) (11) (5,992) At December 31, ,540 1,053 1, ,042 At December 31, 2014 Cost ,540 2,804 8, ,379 Accumulated amortization and impairments... (1,751) (6,586) (8,337) Net book value ,540 1,053 1, ,042 Amortization of $1,572 (2013 $2,130; 2012 $1,817) from the Canadian operating segment is included in the consolidated statements of operations. Amortization of $57 (2013 $62; 2012 $58) from the United States operating segment is reported in the net result of discontinued operations in the consolidated statements of operations. In 2009, due to continued weakness in the business environment in which Sleep America operates, management determined that the value of the corporate brand had been impaired and a write-down of $5,981 was recorded in the same year. As a result of entering into a sale agreement for the Sleep America assets on November 5, 2014, there are indicators of a reversal of the impairment taken in 2009 (see note 21). Goodwill of $242,146 (2013 $242,146) has been allocated to the overall Canadian operating segment: mattress retailer (Canadian Goodwill CGU). Goodwill of $490 (2013 $449), updated annually for foreign exchange translation, has been allocated to the United States operating segment (US Goodwill CGU), and included as assets of disposal group held for sale as at December 31, Management has determined, using appropriate valuation methodologies, that there was no impairment of its goodwill as at December 31, 2014 or In assessing goodwill for impairment as at December 31, 2014, the company compared the aggregate recoverable amount of the assets included in the CGUs to their respective carrying amounts. The recoverable amount has been determined based on the fair value less cost of disposal of the CGUs using the 2015 budgets approved by management that made maximum use of observable markets for inputs and outputs. The fair value less cost of disposal is categorized as Level 3 in the fair value F-30

153 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 9. INTANGIBLE ASSETS (Continued) hierarchy. For periods beyond the budget period of 5 years, cash flows were extrapolated using growth rates of 2.0% to 3.9% ( % to 3.9%) and a terminal growth rate of 2.5% ( %) that do not exceed the long-term average for the mattress retailer segment. A discount rate of 12.5% ( %) was used in the model. As at December 31, 2014, the impact of a 25 basis point increase/decrease in the discount rate would result in an increase/decrease of $8,679 in the recoverable amount of the Canadian Goodwill CGU. Management has determined, using appropriate valuation methodologies, that there was no impairment of its Sleep Country or Dormez-vous corporate brands as at December 31, 2014 or In assessing the brands intangible assets of $101,540 for impairment as at December 31, 2014 and 2013, the company compared the aggregate recoverable amount included in the CGU to the carrying amount. The recoverable amount has been determined based on the fair value less cost of disposal of the CGU using the 2015 budgets approved by management that made maximum use of observable markets for inputs and outputs. For periods beyond the budget period, cash flows were extrapolated using growth rates of 2.0% to 3.9% ( % to 3.9%) and a terminal growth rate of 2.5% ( %) that do not exceed the long-term average for the mattress retailer in these segments. A discount rate of 12.5% ( %) was used in the model. In January 2015, the Sleep America business was sold in excess of its carrying amount, which led to the reversal of a previously taken impairment on the Sleep America brand intangible in the amount of $5,981. The recoverable amount was determined by the fair value less costs to sell and is categorized as Level 2 in the fair value hierarchy. The recoverable amount does not exceed the initial carrying value. The intangible asset was subsequently classified as an asset held for sale, see note TRADE AND OTHER PAYABLES $ $ Trade payables... 12,174 17,355 Accrued expenses... 21,555 13,191 33,729 30,546 Under certain agreements, the company has the right to set off financial assets with financial liabilities with respect to vendor rebates owed and purchases. At December 31, 2014, the company had gross financial assets of $1,043 offset against gross financial liabilities of $13,217. The net amount of $12,174 owing has been recorded in trade payables as at December 31, The total gross financial assets of $380 and gross financial liabilities of $17,735 were netted to $17,355 as trade payables owing at December 31, OTHER LIABILITIES $ $ Rent escalation... 2,104 2,439 Decommissioning provisions Deferred lease inducements... 3,515 3,435 Warranty liability ,965 7,078 F-31

154 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 12. LONG-TERM DEBT $ $ Senior secured credit facility (i) ,483 69,791 Series A and Series B promissory notes , ,048 1,033,229 Class B common shares (2013 1,033,229)... 2, ,509,702 Class A convertible shares ( ,509,702)... 17,530 15,755 Finance lease obligation... 2,262 2, , ,000 Less: Current portion of long-term debt... 7, , ,115 (i) Represented net of transaction costs of $1,267 as at December 31, 2014 (2013 $209). Senior secured credit facility On September 23, 2011, the company entered into a five-year senior credit agreement with a term credit facility of $90,000, which was fully drawn upon the agreement date, and a revolving credit facility of $15,000 subject to a standby fee. The terms of the credit facility included quarterly principal repayments payable in arrears commencing October 1, On November 15, 2012, the company entered into an amendment of the credit agreement to reduce the term credit facility to $70,000, which was fully drawn upon the amendment date. The revolving credit facility of $15,000 remained unchanged. These facilities were extinguished on June 30, On June 30, 2014, the company entered into a five-year senior credit agreement with a term credit facility of $130,000, which was fully drawn upon the agreement date, and a revolving credit facility of $15,000, with an accordion feature of $15,000, subject to a standby fee. The terms of the credit facility include quarterly principal repayments payable in arrears commencing September 30, As at December 31, 2014, the balance outstanding on the term credit facility was $126,750 (2013 $70,000) and no amounts were drawn against the revolving credit facility (2013 $nil). Interest on the term facility is based on the prime or bankers acceptance rates plus applicable margins based on the achievement of certain targets, as defined by the senior secured credit agreement. Interest on the bankers acceptance is payable in advance, whereas that on the prime rate is payable in arrears. Interest on the revolving facilities is payable monthly in advance at the bankers acceptance rate or in arrears at the prime rate plus the applicable margin based on the achievement of certain targets, as defined by the senior secured credit agreement. Under the terms of the term and revolving credit facilities, certain financial and non-financial covenants must be maintained. As at December 31, 2014, the company and its subsidiaries were in compliance with all covenants. The term and revolving credit facilities described above are secured by a first fixed floating charge on the assets of Sleep Country and Sleep Country LP, except for specified permitted encumbrances. The provisions under these facilities provide for restrictions on the operations and activities of Sleep Country. Generally, the most significant restrictions relate to permitted investments as well as the incurrence and maintenance of certain financial ratios primarily linked to operating earnings before interest, taxes, depreciation and amortization. Series A and Series B promissory notes In 2008, the company simultaneously issued $187,069 of Series A promissory notes (Series A notes) and $21,913 of common shares for total consideration of $208,982. The company recorded the Series A notes at their amortized cost, representing the present value of future interest and principal repayments to maturity, at a discount rate of 15%, being the estimated fair value rate of interest. The residual amount of $86,351 has been allocated to contributed surplus. Interest expense is accreting monthly such that on maturity the carrying amount will be equal to the principal of the Series A notes plus the issued Series B promissory notes (Series B notes) that are issued in lieu of cash interest payments. The Series A notes bear interest at a fixed rate of 12% per annum and interest is due on December 31 of each year. The Series A notes, including all accrued but unpaid interest, are due and payable on September 23, The Series A noteholders are subordinated to the credit facility. Each Series A note ranks pari passu with all other Series A notes. F-32

155 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 12. LONG-TERM DEBT (Continued) The company has the option to pay the annual interest payment in cash or to issue to the noteholder a Series B note for the amount of interest due. The Series B notes are non-interest bearing. An amount of $17,684, net of withholding tax in non-interest bearing Series B notes in lieu of the cash interest payment due on December 31, 2014, is to be issued in 2015 (2014 $20,841; 2013 $20,841). As at December 31, 2014, 82.36% of the Series A and Series B notes are held by related parties (note 19). During the year, $70,343 of Series A and Series B notes were settled for $60,502. As a result of these transactions, the cash flow assumptions related to the Series A and B promissory notes have been revised and resulted in accelerated interest expense being recognized. For the year ended December 31, 2014, the company incurred accelerated interest expense as noted, including accretion, of $46,051 (2013 $18,059; 2012 $17,480) on the Series A and B notes. Class B common shares As at December 31, 2014, the majority of the Class B common shares are held by management. Under the terms of the investor agreement, management employees have the ability, upon death or disability, to put these shares back to the company for cash equal to the then fair market value of the shares. Due to this put option, Class B common shares have been accounted for as a liability and are recorded at their amortized cost, determined in reference to the redemption amount. In December 31, 2013, 20,623 shares were subscribed for $0.20 per share. Class A convertible shares (convertible shares) The holders of the convertible shares are not entitled to receive notice of and to attend all meetings of the shareholders of the company and are not entitled to vote. The holders of convertible shares are entitled to receive, equally on a per share basis with the common shareholders, dividends as and when declared by the Board of Directors of the company. The holders of the convertible shares shall be entitled, at their option, each time there is a payment of principal on the Series A and Series B promissory notes, to have a pro rata portion of the convertible shares converted into Class D common shares. Each convertible share shall be converted into the number of Class D common shares equal to the notional value of the convertible share divided by the fair value of the Class D common share, which includes accrued dividends at 12%. If a holder does not elect to convert their convertible shares into Class D common shares, they will receive a payment equal to the notional amount of the Class A convertible shares. The notional amount is determined as the subscription price paid for each Class A convertible share plus an amount equal to 12% per annum (not compounded) of the subscription price paid for the Class A convertible shares outstanding from time to time less the amount of any dividends paid by the company to the holder less any capital previously returned. Upon the voluntary or involuntary liquidation, dissolution or windup of the company, the holders of the convertible shares are entitled to receive, concurrent with any distribution of any amount for any part of the assets of the company among any of the other classes of shares, for each convertible share, an amount determined by Board of Directors. The convertible shares are mandatorily redeemable, pay a fixed rate of return of 12% and may not share equally in liquidation or dissolution of the company, and as such are presented as debt in the consolidated financial statements. The convertible shares cannot be repaid either in full or in part without there being made concurrently a pro rata payment on the Series A and Series B notes. There can also be no payment in respect of the interest on any of the Series A notes unless there is a concurrent pro rata dividend payment in cash in respect of the convertible shares. Legal waivers were obtained from each of the convertible shareholders in respect of the non-payment of dividends that would otherwise be required during the year. In 2008, given that the convertible shares have similar terms, conditions, rights and privileges as the Series A notes, they were fair valued at $8,676, representing the present value of future dividends and redemption amounts, using the same term to maturity as the Series A notes, and at a discount rate of 15%, being the estimated fair value rate of interest. The residual amount of $16,366 was allocated to contributed surplus. The $8,676 is accreting monthly such that on redemption the carrying amount will be equal to the redemption amount plus the accrued, unpaid dividends. In August 2012, Series A promissory notes of $6,326 were converted into convertible shares at $1 per share. In December 2013, an additional 185,610 convertible shares were subscribed for $1.28 per share. During the year, there was a repayment of $7,035 on the Class A convertible shares, which resulted in accelerated interest expense. Due to the accelerated interest, an expense of $8,810 has been recorded for the year ended December 31, 2014 (2013 $2,187; 2012 $1,195). F-33

156 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 12. LONG-TERM DEBT (Continued) Finance related expenses included in the consolidated statements of operations include the following: $ $ $ Fair value adjustment on interest rate swap... (814) Interest on finance lease obligations Revolver commitment fees Interest on interest rate swap agreement Interest expense on senior credit facility... 4,593 2,482 4,177 Interest expense on Series A and Series B notes... 46,051 18,059 17,480 Interest expense and fair value adjustment on Class A convertible and Class B common shares... 10,584 2,370 1,195 61,502 23,215 23, INCOME TAX Components of income tax provision (recovery) Significant components of the income tax provision (recovery) are as follows: $ $ $ Current income tax expense (recovery)... 4,959 (22) 27 Deferred income tax expense (recovery) relating to Taxable income Temporary differences... (10,721) Deferred income tax rate changes (10,721) 1, Provision for (recovery of) income taxes... (5,762) 1, Reconciliation to effective tax rate The overall income tax provision differs from the amount that would be obtained by applying the combined statutory income tax rate to income (loss) due to the following: $ $ $ Income (loss) of continuing operations before income taxes (recovery)... (22,898) 5,450 7,334 Weighted average Canadian income tax rate % 26.28% 26.06% Income tax expense (recovery) based on statutory income tax rate... (6,017) 1,432 1,911 Effect of income tax allocated to non-controlling interest... (3,692) (1,203) (981) Effect of non-deductible expenses and other items... 3, (242) Deferred tax rate changes (5,762) 1, Effective income tax rate % 19.61% 12.75% F-34

157 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 13. INCOME TAX (Continued) Deferred income tax liability Significant components of the net deferred income tax liability are as follows: $ $ Excess of carrying value of intangible assets over tax values... (13,620) (13,694) Benefit of financing fees deductible in future years Loss carry-forwards net of unrecognized deferred tax assets... (13) Other temporary differences... 2,001 1,413 Deferred income tax liability on Series A and B notes... (20,420) (30,420) (31,820) (42,541) The US operations have unrecognized deferred income tax assets of US$14,903 as at December 31, 2014 (2013 US$13,520). The deferred income tax assets were not included in the sale of Sleep America s assets and liabilities as described in note 21. The US operations non-capital loss carry-forwards of US$27,200 as at December 31, 2014 (2013 US$23,894) begin expiring in As at the date of acquisition, the loss carry-forward balance was US$4,953, which is subject to certain limitations under the US tax rules. The company has a refundable tax on hand balance of $1,038 (2013 $nil) at the end of the 2014 taxation year. This balance may be recovered upon the future payment of a dividend that equals three times this balance. 14. EXPENSES BY NATURE 2014 Selling, general Cost of sales and administrative $ $ Inventory and directly related costs recognized as an expense, including write-downs and write-offs ,821 Media and advertising expenses... 18,814 Telecommunication and information technology... 2,954 Salaries, wages and benefits... 67,307 13,036 Credit card and finance charges... 8,941 Rent and other occupancy charges... 42,001 6,645 Professional fees... 1,084 Other... 2,536 3, ,665 54, Selling, general Cost of sales and administrative $ $ Inventory and directly related costs recognized as an expense, including write-downs and write-offs ,129 Media and advertising expenses... 17,017 Telecommunication and information technology... 2,683 Salaries, wages and benefits... 62,502 12,318 Credit card and finance charges... 7,988 Rent and other occupancy charges... 38,808 6,273 Professional fees Other... 2,395 3, ,834 50,226 F-35

158 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 14. EXPENSES BY NATURE (Continued) 2012 Selling, general Cost of sales and administrative $ $ Inventory and directly related costs recognized as an expense, including write-downs and write-offs ,004 Media and advertising expenses... 13,176 Telecommunication and information technology... 2,632 Salaries, wages and benefits... 59,277 10,520 Credit card and finance charges... 8,219 Rent and other occupancy charges... 36,460 5,988 Professional fees Other... 1,969 1, ,710 42, SHARE CAPITAL Authorized share capital Unlimited Class A common shares Unlimited Class B common shares Unlimited Class C common shares Unlimited Class D common shares Unlimited Class E special shares Unlimited Class A convertible shares Issued and outstanding $ $ 18,989,868 Class A common shares ( ,913,373)... 18,989 21,913 Contributed surplus , , , ,994 Class A, B, C and D common shares (common shares) The holders of the common shares are entitled to receive, equally on a per share basis with the common shareholders, dividends as and when declared by the Board of Directors of the company. However, the holders of Class B common shares shall be entitled to receive, as and when declared by the Board of Directors of the company, dividends without dividends being declared to the Class A, C and D common shareholders. The holders of Class A, B and C common shares are entitled to receive notice of and to attend all meetings of the shareholders of the company and are entitled to receive one vote per share on all matters to be voted on at all meetings of shareholders. The holders of Class D common shares are not entitled to receive notice of and to attend all meetings of the shareholders of the company and are not entitled to vote. The holders of common shares are not entitled to vote separately as a class or series or to dissent on certain proposals specified in the Articles of Incorporation. Upon the voluntary or involuntary liquidation, dissolution or windup of the company, the holders of the common shares are entitled to share in the remaining assets available for distribution after payment of liabilities. On April 1, 2014, 2,923,505 Class A common shares were repurchased for cancellation for one dollar. F-36

159 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 15. SHARE CAPITAL (Continued) Class E special shares (special shares) The holders of the special shares are not entitled to receive notice of or to attend all meetings of the shareholders of the company and are not entitled to vote. The holders of special shares are entitled to receive, equally on a per share basis with the common shareholders, dividends as and when declared by the Board of Directors of the company. The holders of the special shares shall be entitled, at their option, to have the special shares converted into Class D common shares. Each special share shall be converted into the number of Class D common shares having an aggregate value equal to the value of the special units of Sleep Country LP then held by the company less the aggregate amount of dividends paid on the special shares. Upon the voluntary or involuntary liquidation, dissolution or windup of the company, the holders of the special shares are entitled to receive, concurrent with any distribution of any amount of any part of the assets of the company among any of the other classes of shares, for each special share, an amount determined by the Board of Directors. As at December 31, 2014, there were no special shares outstanding. 16. EARNINGS (LOSS) PER SHARE (EPS) Basic earnings (loss) per share amounts are calculated by dividing the net earnings (loss) attributable to common shareholders of the company by the weighted average number of shares issued during the year. Diluted earnings (loss) per share amounts are calculated by dividing the net earnings (loss) attributable to common shareholders of the company by the weighted average number of shares issued during the year adjusted for the effects of potentially dilutive stock options. The following table sets forth the calculation of basic and diluted EPS: 2014 Attributable to common shareholders Weighted average Net earnings number of (loss) shares EPS $ (in thousands $ of shares) Basic and diluted Continuing operations... (30,009) 19,711 (1.52) Discontinued operations... 2,007 19, (28,002) 19,711 (1.42) 2013 Attributable to common shareholders Weighted average Net earnings number of (loss) shares EPS $ (in thousands $ of shares) Basic and diluted Continuing operations , Discontinued operations... (2,200) 21,913 (0.10) (2,052) 21,913 (0.09) F-37

160 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 16. EARNINGS (LOSS) PER SHARE (EPS) (Continued) 2012 Attributable to common shareholders Weighted average Net earnings number of (loss) shares EPS $ (in thousands $ of shares) Basic Continuing operations... 2,838 21, Discontinued operations... (1,171) 21,913 (0.05) 1,667 21, Diluted Continuing operations... 2,838 66, Discontinued operations... (1,171) 66,938 (0.05) 1,667 66, The weighted average number of shares used in the calculation of diluted EPS is summarized below: $ $ $ Class A common shares... 19,710,732 21,913,373 21,913,373 Effect of convertible shares issued... 35,031,760 Effect of stock options issued... 9,993,233 19,710,732 21,913,373 66,938,366 The effects of convertible shares and stock options are anti-dilutive for the years ended December 31, 2014 and December 31, CONTINGENT LIABILITIES AND UNRECOGNIZED CONTRACTUAL COMMITMENTS Operating leases The company and its subsidiaries conduct all of their operations from leased stores and distribution centres. The company has entered into operating lease arrangements for leased premises, delivery trucks, passenger vehicles and office equipment with terms varying from three to 15 years. For the year ended December 31, 2014, the total amount paid under these operating leases was $37,084 (2013 $34,016; 2012 $32,055). These leases terminate at various dates to Non-cancellable operating lease rentals are payable as follows: $ $ Less than 1 year... 32,260 35,743 Between 1 and 5 years... 85,179 96,976 More than 5 years... 34,175 32, , ,992 F-38

161 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 18. CHANGES IN NON-CASH ITEMS RELATING TO OPERATING ACTIVITIES $ $ $ Trade and other receivables... (951) (711) 214 Due from related companies... (5) (3) 777 Inventories... (2,608) (4,975) 1,000 Prepaid expenses and deposits... (60) 36 (77) Trade and other payables... 6,730 3,055 (955) Customer deposits... 2, (1,108) Other ,079 (1,127) RELATED PARTY TRANSACTIONS AND BALANCES The company is controlled by Birch Hill Equity Partners Management Inc. (incorporated in Canada), which owns 80.36% of the company s common shares, 82.36% of Class A and B promissory notes and 71.18% of Class A convertible shares and is the company s ultimate parent company. The following balances are due from related parties: $ $ Short-term advances to related parties % of the company s Class A convertible shares and 97.64% of the Class B common shares are held by management. Compensation awarded to key management included: $ $ $ Salaries and short-term employee benefits... 3,620 3,581 3,178 Share-based compensation ,634 3,598 3,239 Key management includes the company s directors and members of the Executive Committee. On November 1, 2008, the company established the Plan to provide long-term incentives to certain key officers and employees of the company and its subsidiaries. A maximum of 1,000,000 options are authorized for issuance under the Plan. The stock options are granted with an exercise price equal to the fair market value of the Class E special shares at the date of grant, as determined by the Board of Directors. On November 1, 2008, options were granted to purchase 920,000 Class E special shares at a strike price of $2.80 per share. No options were granted in 2009 and Options vest 20% per year on the anniversary date of the grant. In December 2010, 60,000 options granted were cancelled. On November 15, 2011, additional options were granted to purchase 140,000 Class E special shares at a strike price of $3.04 per share. As at December 31, 2014, 1,000,000 of the options are outstanding (2013 1,000,000) and 947,500 of the options granted have vested ( ,500). These options are not exercisable until there has been a liquidity event. Any options not exercised upon a liquidity event will expire. 20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The company s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair value interest risk), credit risk and liquidity risk. The company s overall risk management program and business practices seek to minimize any potential adverse effects on the company s consolidated financial performance. F-39

162 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued) Risk management is carried out by the senior management team under policies approved by the Board of Directors. Market risk Market risk is the loss that may arise from changes in factors such as interest rate, foreign exchange and the impact these factors may have on other counterparties. Foreign exchange risk The company operates in Canada and the United States and is exposed to foreign exchange risk arising from exposure to fluctuations in the United States dollar exchange rate. Foreign exchange risk arises primarily from its net investment in its self-sustaining United States operations. The exposure related to United States dollar payments to suppliers is not significant. This risk is managed primarily through local cash flow funding of the United States operations. Cash flow and fair value interest risk The company has no significant interest bearing assets. The company s income and operating cash flows are substantially independent of changes in market interest rates. The company s primary interest rate risk arises from long-term debt. The company manages its exposure to changes in interest rates by using a combination of fixed and variable rate debt and utilizing interest rate swaps as necessary to achieve the desired proportion of variable and fixed rate debt. An increase or decrease in interest rates by 1% would result in an increase/decrease of $1,268 on interest expense on the credit facility. There are also a small number of finance leases at variable interest 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. For banks, in accordance with the company s Investment Policy, 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 the company deals with carry a minimum rating of A 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 that the company cannot meet a demand for cash or fund its obligations as they come due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities. F-40

163 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued) The table below analyzes the company s financial liabilities into relevant maturity groupings based on the remaining period from the consolidated statement of financial position date to the contractual maturity date. The amounts discussed in the table are contractual undiscounted cash flows. Within Between Over 1 year 1 and 5 years 5 years $ $ $ At December 31, 2014 Trade and other payables... 33,729 Long-term debt... 12, , ,789 Class A convertible and Class B common shares... 58,643 45, , ,432 At December 31, 2013 Trade and other payables... 30,546 Long-term debt... 3,593 78, ,920 Class A convertible and Class B common shares... 71,696 34,139 78, ,616 Fair value of financial instruments The different levels used to determine fair values have been defined as follows: Level 1 inputs use quoted prices (unadjusted) in active markets for identical financial assets or financial liabilities that the company has the ability to access. Level 2 inputs other than quoted prices included in Level 1 that are observable for the financial asset or financial liability, either directly or indirectly. Level 2 inputs include quoted prices for similar financial assets and financial liabilities in active markets, and inputs other than quoted prices that are observable for the financial liabilities. Level 3 inputs are unobservable inputs for the financial asset or financial liability and include situations where there is little, if any, market activity for the financial asset or financial liabilities. The following describes the fair value determinations of financial instruments: The carrying values of cash and cash equivalents, trade and other receivables, due from related companies, trade and other payables, other assets and liabilities and customer deposits approximate their fair values due to the relatively short periods to maturity of these financial instruments. The carrying values of the revolving and term facilities approximate their fair values as the terms and conditions of the borrowing arrangements are comparable to market terms and conditions as at December 31, 2014 and December 31, The finance leases and Class B common shares approximate their fair values as the implicit interest rates used in determining their fair value approximate interest rates as at December 31, 2014 and December 31, The fair value of the Series A and Series B promissory notes is estimated to be $200,483 (2013 $221,831) and is within Level 3 of the fair value hierarchy. The fair value of the Class A convertible shares is estimated to be $37,310 (2013 $36,534) and is within Level 3 of the fair value hierarchy. The valuation techniques used to estimate the fair value of the Series A and Series B promissory notes and Class A convertible shares incorporates discounted contractual obligations using assumptions such as interest rate curves and an estimated credit spread. Capital risk management The company s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for its common and Class A convertible shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital structure to minimize the cost of capital. The company s dividends are limited by long-term debt covenants which require that accumulated dividends to shareholders do not exceed accumulated distributable cash, as defined by the credit agreement. F-41

164 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued) In order to maintain or adjust the capital structure, the company may issue new shares or sell assets to reduce long-term debt. 21. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS The assets and liabilities for the Sleep America business have been presented as held for sale following the approval of the sale on November 5, 2014 for US$12,500. The completion of this transaction occurred subsequent to year-end on January 6, Assets of disposal group held for sale $ $ Current assets Cash Trade and other receivables Inventories... 3,621 3,704 Prepaid expenses and deposits Property and equipment... 3,577 3,832 Intangible assets other than goodwill... 5, Goodwill ,086 9,143 Liabilities of disposal group held for sale $ $ Current liabilities Trade and other payables... 3,985 3,439 Customer deposits Other liabilities ,210 4,734 Analysis of the result of discontinued operations $ $ $ Revenue... 40,710 34,308 31,932 Cost of sales... 35,809 31,312 28,543 Gross profit... 4,901 2,996 3,389 General and administrative expenses... 6,963 5,025 4,415 Depreciation and amortization Loss before interest and impairment reversal... (2,797) (2,588) (1,311) Impairment reversal on intangible asset (note 9)... (5,981) Interest income and other expenses net Net income (loss) from discontinued operations... 2,996 (2,588) (1,311) F-42

165 SLEEP COUNTRY CANADA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (in thousands of Canadian dollars, except per share amounts) 21. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (Continued) Cash flows $ $ $ Net cash flows from operating activities (2,350) (963) Net cash flows from investing activities... (128) (2,780) (1,242) Net cash flows from financing activities... 5,158 2,106 Exchange rate difference on cash (11) (110) 22. SUBSEQUENT EVENTS The sale of the Sleep America business was approved on November 5, 2014 and closed on January 6, 2015 for US$12,500. The assets and liabilities of the Sleep America business were presented as held for sale as of December 31, 2014 and its operating results as those of discontinued operations for the year ended December 31, 2014 and all comparative periods in the consolidated financial statements. On February 25, 2015, the company drew an additional $25,000 on its senior secured credit facility, which was subsequently reinvested as a capital contribution in Sleep Country LP. Sleep Country LP then made a distribution to the company and as part of the distribution, there was a $61,855 repayment of the Series A and B promissory notes, a $3,987 return of stated capital on the Class A convertible shares and a $2,342 payment of taxable dividend declared on the Class B Common Shares. On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000. The net proceeds of the offering will be used to acquire the outstanding shares of the Company, Sleep Country US Holdco Canada Inc. and SC Management Holding Inc. F-43

166 SLEEP COUNTRY CANADA INC. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited) (in thousands of Canadian dollars, except per share amounts) March 31, December 31, $ $ Assets Current assets Cash and cash equivalents... 13,486 41,331 Trade and other receivables... 6,296 6,477 Due from related companies non-interest bearing and due on demand (note 9) Inventories (note 4)... 28,914 26,369 Prepaid expenses and deposits... 2,394 2,475 Assets of disposal group held for sale (note 11)... 14,086 51,347 90,754 Property and equipment (note 5)... 24,938 24,948 Other assets Intangible assets other than goodwill (note 6) , ,042 Goodwill , , , ,370 Liabilities Current liabilities Trade and other payables... 32,202 33,729 Customer deposits... 10,888 12,116 Long-term debt (note 7)... 7,299 7,367 Liabilities of disposal group held for sale (note 11)... 5,210 50,389 58,422 Other liabilities... 6,950 6,965 Deferred tax liabilities... 24,967 31,820 Long-term debt (note 7) , , , ,045 Shareholders Equity Share capital , ,603 Deficit... (80,673) (63,693) Currency translation reserve Non-controlling interest... 53,053 46,987 95, , , ,370 Approved by the Board of Directors (Signed) Stephen K. Gunn Director (Signed) Christine Magee Director The accompanying notes are an integral part of these condensed interim consolidated financial statements. F-44

167 SLEEP COUNTRY CANADA INC. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands of Canadian dollars, except per share amounts) Three months Three months ended ended March 31, March 31, $ $ Revenues... 91,613 81,344 Cost of sales (note 4)... 69,380 63,712 Gross profit... 22,233 17,632 General and administrative expenses... 11,929 11,876 Depreciation and amortization... 2,466 2,513 Income before finance, interest and other (income) expenses and income taxes.. 7,838 3,243 Finance related expenses (note 7)... 33,369 6,946 Interest income and other (income) expenses net... (149) 3 Loss before recovery of income taxes... (25,382) (3,706) Recovery of income taxes Current... (838) (599) Deferred... (6,853) (106) (7,691) (705) Net loss for the period from continuing operations... (17,691) (3,001) Discontinued operations Net income (loss) for the period from discontinued operations (note 11)... 6,777 (561) Net loss for the period... (10,914) (3,562) Total net income (loss) attributable to Owners of the parent... (16,980) (4,457) Non-controlling interest... 6, (10,914) (3,562) Earnings (loss) per share attributed to the common shareholders of the company basic and diluted (in dollars) (note 10) Continuing operations... (1.09) (0.19) Discontinued operations (0.02) Loss per share... (0.89) (0.21) The accompanying notes are an integral part of these condensed interim consolidated financial statements. F-45

168 SLEEP COUNTRY CANADA INC. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (in thousands of Canadian dollars, except per share amounts) Three months Three months ended ended March 31, March 31, $ $ Net loss for the period... (10,914) (3,562) Other comprehensive income (loss) to be reclassified to the consolidated statement of operations Cumulative translation differences related to discontinued operations... (428) 175 Total comprehensive loss for the period... (11,342) (3,387) Total comprehensive income (loss) attributable to Owners of the parent... (17,408) (4,282) Non-controlling interest... 6, (11,342) (3,387) The accompanying notes are an integral part of these condensed interim consolidated financial statements. F-46

169 SLEEP COUNTRY CANADA INC. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited) (in thousands of Canadian dollars, except per share amounts) Class A Total Currency Total Noncommon Contributed share translation controlling controlling Total shares surplus capital reserve Deficit interest interest equity $ $ $ $ $ $ $ $ Balance January 1, , , , (28,234) 95,840 33, ,965 Net income (loss) for the period... (4,457) (4,457) 895 (3,562) Other comprehensive income Comprehensive income (loss) for the period (4,457) (4,282) 895 (3,387) Share-based compensation Balance March 31, , , , (32,691) 91,562 34, ,582 Balance January 1, , , , (63,693) 60,338 46, ,325 Net income (loss) for the period... (16,980) (16,980) 6,066 (10,914) Other comprehensive income... (428) (428) (428) Comprehensive income (loss) for the period... (428) (16,980) (17,408) 6,066 (11,342) Share-based compensation Balance March 31, , , ,605 (80,673) 42,932 53,053 95,985 The accompanying notes are an integral part of these condensed interim consolidated financial statements. F-47

170 SLEEP COUNTRY CANADA INC. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands of Canadian dollars, except per share amounts) Three months ended Three months ended March 31, 2015 March 31, 2014 $ $ Cash provided by (used in) Operating activities Net loss for the period... (10,914) (3,562) Items not affecting cash Depreciation of property and equipment... 2,115 2,251 Amortization of intangible assets Gain on sale of Sleep America... (6,326) Finance related expenses... 33,369 6,946 Share-based compensation Other non-cash expenses... (104) (63) Deferred income taxes... (6,853) (106) 11,640 5,916 Changes in non-cash items relating to operating activities (note 8)... (5,376) 734 6,264 6,650 Investing activities Purchase of property and equipment... (2,105) (2,626) Proceeds on sale of Sleep America... 14,756 Purchase of intangible assets... (370) (139) 12,281 (2,765) Financing activities Additional revolving loan taken on senior secured credit facility... 25,000 Repayment of senior secured credit facility... (1,625) Financing costs on senior secured credit facility... (75) Repayment of Series A and B promissory notes... (61,855) Repayment of Class A convertible shares... (3,987) Interest paid... (3,674) (642) Decrease in other long-term debt... (181) (185) (46,397) (827) Exchange rate difference on cash and cash equivalents Increase (decrease) in cash and cash equivalents during the period.. (27,852) 3,076 Cash and cash equivalents Beginning of period... 41,338 27,401 Cash and cash equivalents End of period... 13,486 30,477 Non-cash investing and financing activities Series B promissory notes issued interest in kind... 17,684 20,841 Acquisition of property and equipment The accompanying notes are an integral part of these condensed interim consolidated financial statements. F-48

171 SLEEP COUNTRY CANADA INC. NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (in thousands of Canadian dollars, except per share amounts) 1. ORGANIZATION Sleep Country Canada Inc. (Sleep Country or the Company) (formerly Canada Inc.) was incorporated under the Canada Business Corporations Act on July 30, On September 23, 2008, the Company acquired the units of the Sleep Country Canada Income Fund (the fund), which owned and operated the business. Sleep Country Canada Inc. and its subsidiaries operate in the retail market place, offering mattresses and bedding related products. The company is the General Partner of its subsidiary partnership, Sleep Country Canada Limited Partnership (Sleep Country LP). The main subsidiaries of the Company are: Sleep Country LP Sleep Country Holding Inc. Sleep Country US Holding, Inc. Sleep America, LLC The address of its registered office is 140 Unit 1, Wendell Avenue, Toronto, Ontario. 2. BASIS OF PRESENTATION The condensed interim consolidated financial statements of the Company are prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standard (IAS 34), Interim Financial Reporting. Accordingly, certain information and note disclosure normally included in the annual financial statements prepared in accordance with IFRS, as issued by the IASB, have been omitted or condensed. Accordingly, the condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, The condensed interim consolidated financial statements of the Company include the financial results of Sleep Country Canada Inc. and its subsidiaries. The Company s operations can be affected by seasonal fluctuations due to changes in customer buying habits throughout the year. The condensed interim consolidated financial statements were approved and authorized for issuance by the Board of Directors on July 9, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These condensed interim consolidated financial statements have been prepared using the same accounting policies and methods of computation as the annual consolidated financial statements of Sleep Country Canada Inc. for the year ended December 31, Accounting standards and amendments issued but not yet adopted The following standards and amendments to existing standards were released by the IASB. The Company is evaluating the impact of these standards and whether to early adopt these standards: Amendment to IAS 1, Presentation of financial statements This standard was amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements, and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, 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, 2017 with early adoption permitted. 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. F-49

172 SLEEP COUNTRY CANADA INC. NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (in thousands of Canadian dollars, except per share amounts) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 INVENTORIES a) The amount of inventory recognized as an expense for the three-month period ended March 31, 2015 was $41,186 (three-month period ended March 31, 2014 $37,060), which is presented within cost of sales on the condensed interim consolidated statement of operations. b) During the three-month period ended March 31, 2015, there was $180 in inventory writedowns (three-month period ended March 31, 2014 $194). As at March 31, 2015, the inventory markdown provision totalled $1,214 (December 31, 2014 $1,250). 5. PROPERTY AND EQUIPMENT Assets Furniture, under Computer fixtures Leasehold finance hardware and other improvements lease Total $ $ $ $ $ At January 1, 2014 Cost... 3,403 6,760 44,970 4,967 60,100 Accumulated depreciation... (2,197) (3,391) (21,766) (2,291) (29,645) Net book value... 1,206 3,369 23,204 2,676 30,455 Year ended December 31, 2014 At January 1, ,206 3,369 23,204 2,676 30,455 Additions , ,931 Depreciation... (697) (1,050) (6,539) (717) (9,003) Disposal... (2) (77) (95) (174) Exchange differences Transferred to disposal group classified as held for sale... (82) (539) (2,956) (3,577) At December 31, ,324 19,479 2,262 24,948 At December 31, 2014 Cost... 3,148 4,852 43,540 4,794 56,334 Accumulated depreciation... (2,265) (2,528) (24,061) (2,532) (31,386) Net book value ,324 19,479 2,262 24,948 Period ended March 31, 2015 At January 1, ,324 19,479 2,262 24,948 Additions ,654 2,105 Depreciation... (170) (221) (1,543) (181) (2,115) Disposal... At March 31, ,337 19,590 2,081 24,938 At March 31, 2015 Cost... 3,365 5,086 44,974 4,794 58,219 Accumulated depreciation... (2,435) (2,749) (25,384) (2,713) (33,281) Net book value ,337 19,590 2,081 24,938 F-50

173 SLEEP COUNTRY CANADA INC. NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (in thousands of Canadian dollars, except per share amounts) 6. INTANGIBLE ASSETS Employment Computer Brands contracts software Total $ $ $ $ At January 1, 2014 Cost ,540 2,804 7, ,942 Accumulated depreciation... (1,471) (5,465) (6,936) Net book value ,540 1,333 2, ,006 Year ended December 31, 2014 At January 1, ,540 1,333 2, ,006 Additions Amortization for the year... (280) (1,349) (1,629) Disposal during the year... (80) (80) Exchange differences Reversal of impairment loss... 5,981 5,981 Transferred to disposal group classified as held for sale... (5,981) (11) (5,992) At December 31, ,540 1,053 1, ,042 At December 31, 2014 Cost ,540 2,804 8, ,379 Accumulated amortization and impairments... (1,751) (6,586) (8,337) Net book value ,540 1,053 1, ,042 Period ended March 31, 2015 At January 1, ,540 1,053 1, ,042 Additions Amortization for the period... (70) (281) (351) Disposal during the period... Exchange differences... At March 31, , , ,061 At March 31, 2015 Cost ,540 2,804 8, ,749 Accumulated amortization and impairments... (1,821) (6,867) (8,688) Net book value , , ,061 Due to the signed sale agreement for the Sleep America assets on November 5, 2014, the impairment previously recorded in 2009 was reversed in the year ended December 31, 2014 (note 11). The recoverable amount was determined by the fair value less costs to sell and is categorized as Level 2 in the fair value hierarchy. The recoverable amount does not exceed the initial carrying value. The intangible asset was classified as an asset held for sale as at December 31, F-51

174 SLEEP COUNTRY CANADA INC. NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (in thousands of Canadian dollars, except per share amounts) 7. LONG-TERM DEBT March 31, December 31, $ $ Senior secured credit facility (i) , ,483 Series A and Series B promissory notes... 84, ,436 1,033,229 Class B common shares (2014 1,033,229) ,494 31,509,702 Class A convertible shares ( ,509,702)... 15,673 17,530 Other long-term debt... 2,081 2, , ,205 Less: Current portion of long-term debt... 7,299 7, , ,838 (i) Represented net of transaction costs of $1,274 as at March 31, 2015 (December 31, 2014 $1,267). Senior secured credit facility On February 25, 2015, the Company increased its revolving credit facility by $15,000 to $30,000. As at March 31, 2015, the balance outstanding on the term credit facility was $125,100 (December 31, 2014 $126,750) and $25,000 was drawn against the revolving credit facility (December 31, 2014 $nil). Under the terms of the term and revolving credit facilities, certain financial and non-financial covenants must be maintained. As at March 31, 2015, the Company and its subsidiaries were in compliance with all covenants. Series A and Series B promissory notes The Company has the option to pay the annual interest payment in cash or to issue to the noteholders a Series B note for the amount of interest due. The Series B notes are non-interest bearing. An amount of $17,684 in non-interest bearing Series B notes in lieu of the cash interest payment due on December 31, 2014 was issued in January As at March 31, 2015, 81.62% of the Series A and Series B notes are held by related parties (note 9). In 2015, $61,855 of Series A and Series B notes were repaid. As a result of these transactions, the cash flow assumptions related to the Series A and Series B promissory notes have been revised and resulted in accelerated interest expense being recognized. For the threemonth period ended March 31, 2015, the Company incurred accelerated interest expense as noted, including accretion, of $29,203 (three-month period ended March 31, 2014 $4,205) on Series A and B notes. Class A convertible shares On February 25, 2015, there was a repayment of $3,987 on the Class A convertible shares, which resulted in accelerated interest accretion. Due to the interest accretion, an expense of $2,130 has been recorded for the quarter ended March 31, 2015 (three-month period ended March 31, 2014 $645). F-52

175 SLEEP COUNTRY CANADA INC. NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (in thousands of Canadian dollars, except per share amounts) 7. LONG-TERM DEBT (Continued) Finance related expenses included in the consolidated statement of operations include the following: Three-month Three-month period ended period ended March 31, March 31, $ $ Interest on finance lease obligations Revolver commitment fees Interest expense on senior credit facility... 1, Interest expense on Series A and Series B notes... 29,203 4,205 Interest expense and fair value adjustment on Class A convertible and Class B common shares... 2,648 2,065 33,369 6, CHANGES IN NON-CASH ITEMS RELATING TO OPERATING ACTIVITIES Three-month Three-month period ended period ended March 31, March 31, $ $ Trade and other receivables (657) Due from related companies... (241) (138) Inventories... (2,545) 939 Prepaid expenses and deposits (160) Trade and other payables... (1,527) 1,359 Customer deposits... (1,228) (910) Other... (97) 301 (5,376) RELATED PARTY TRANSACTIONS AND BALANCES The Company is controlled by Birch Hill Equity Partners Management Inc. (incorporated in Canada), which owns 84.60% of the Company s Class A common shares, 81.62% of Series A and B promissory notes and 71.18% of Class A convertible shares and is the Company s ultimate parent company. The following balances are due from related parties: March 31, December 31, $ $ Short-term advances due from related parties Amounts of 28.82% of the Class A convertible shares and 97.64% of the Class B common shares are held by management. F-53

176 SLEEP COUNTRY CANADA INC. NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (in thousands of Canadian dollars, except per share amounts) 10. EARNINGS (LOSS) PER SHARE (EPS) Basic earnings (loss) per share amounts are calculated by dividing the net earnings (loss) attributable to common shareholders of the Company by the weighted average number of shares issued during the year. Diluted earnings (loss) per share amounts are calculated by dividing the net earnings attributable to common shareholders of the Company by the weighted average number of shares issued during the year adjusted for the effects of potentially dilutive stock options. The following table sets forth the calculation of basic and diluted EPS: March 31, 2015 Attributable to common shareholders Weighted average number Net of shares earnings (in thousands (loss) of shares) EPS $ $ Basic and diluted Continuing operations... (20,784) 18,990 (1.09) Discontinued operations... 3,804 18, (16,980) 18,990 (0.89) March 31, 2014 Attributable to common shareholders Weighted average number Net of shares earnings (in thousands (loss) of shares) EPS $ $ Basic and diluted Continuing operations... (4,081) 21,913 (0.19) Discontinued operations... (376) 21,913 (0.02) (4,457) 21,913 (0.21) The effects of stock options and convertible shares are anti-dilutive for the three-month periods ended March 31, 2015 and March 31, F-54

177 SLEEP COUNTRY CANADA INC. NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (in thousands of Canadian dollars, except per share amounts) 11. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS The assets and liabilities for the Sleep America business have been presented as held for sale as at December 31, 2014 following the approval of the sale on November 5, 2014 for US$12,500. This transaction closed on January 6, Assets of disposal group held for sale as at December 31, 2014: Current assets Cash... 7 Trade and other receivables Inventories... 3,621 Prepaid expenses and deposits Property and equipment... 3,577 Intangible assets other than goodwill... 5,992 Goodwill ,086 $ Liabilities of disposal group held for sale: Current liabilities Trade and other payables... 3,985 Customer deposits Other liabilities ,210 $ Analysis of the result of discontinued operations Three Three months months ended ended March 31, March 31, $ $ Revenue... 10,108 Cost of sales... 8,972 Gross profit... 1,136 General and administrative expenses... 1,513 Depreciation and amortization Gain on sale... 6,777 Net income (loss) from discontinued operations... 6,777 (561) F-55

178 SLEEP COUNTRY CANADA INC. NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (in thousands of Canadian dollars, except per share amounts) 11. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (Continued) Cash flows Three Three months months ended ended March 31, March 31, $ $ Net cash flows from operating activities... (6,777) 535 Net cash flows from investing activities... 14,756 (16) Net cash flows from financing activities... Exchange rate difference on cash , FINANCIAL INSTRUMENTS Fair value of financial instruments The different levels used to determine fair values have been defined as follows: a) Level 1 inputs use quoted prices (unadjusted) in active markets for identical financial assets or financial liabilities that the company has the ability to access. b) Level 2 inputs other than quoted prices included in Level 1 that are observable for the financial asset or financial liability, either directly or indirectly. Level 2 inputs include quoted prices for similar financial assets and financial liabilities in active markets, and inputs other than quoted prices that are observable for the financial liabilities. c) Level 3 inputs are unobservable inputs for the financial asset or financial liability and include situations where there is little, if any, market activity for the financial asset or financial liabilities. The following describes the fair value determinations of financial instruments: The carrying values of cash and cash equivalents, trade and other receivables, due from related companies, trade and other payables, other assets and liabilities and customer deposits approximate their fair values due to the relatively short periods to maturity of these financial instruments. The carrying values of the revolving and term facilities approximate their fair values as the terms and conditions of the borrowing arrangements are comparable to market terms and conditions as at March 31, 2015 and December 31, The finance leases and Class B common shares approximate their fair values as the implicit interest rates used in determining their fair value approximate interest rates as at March 31, 2015 and December 31, The fair value of the Series A and Series B promissory notes is estimated to be $154,405 (December 31, 2014 $200,483) and is within Level 3 of the fair value hierarchy. The fair value of the Class A convertible shares is estimated to be $34,591 (December 31, 2014 $37,310) and is within Level 3 of the fair value hierarchy. The valuation techniques used to estimate the fair value of the Series A and Series B promissory notes and Class A convertible shares incorporate discounted contractual obligations using assumptions such as interest rate curves and an estimated credit spread. 13. SUBSEQUENT EVENTS On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000. The net proceeds of the offering will be used to acquire the outstanding shares of the Company, Sleep Country US Holdco Canada Inc. and SC Management Holding Inc. F-56

179 July 9, 2015 INDEPENDENT AUDITOR S REPORT To the Shareholders of Sleep Country US Holdco Canada Inc. We have audited the accompanying financial statements of Sleep Country US Holdco Canada Inc., which comprise the statements of financial position as at December 31, 2014 and December 31, 2013 and the statements of income and comprehensive income, statements of changes in shareholders equity and statements of cash flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Sleep Country US Holdco Canada Inc. as at December 31, 2014 and December 31, 2013 and its financial performance and its cash flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. (Signed) PricewaterhouseCoopers LLP Chartered Professional Accountants, Licensed Public Accountants Toronto, Ontario F-57

180 SLEEP COUNTRY US HOLDCO CANADA INC. STATEMENTS OF FINANCIAL POSITION As at December 31, 2014 and 2013 (expressed in Canadian dollars) $ $ Assets Current assets Income taxes recoverable... 69,095 Investment in limited partnership (note 5)... 19,912,728 13,480,910 19,912,728 13,550,005 Liabilities Current liabilities Trade and other payables (note 6)... 18,425 13,824 Due to related companies non-interest bearing and due on demand (note 12).. 7,500 8,227 Income taxes payable... 1,100,270 1,126,195 22,051 Deferred income taxes (note 8) , ,002 Long-term debt (note 7)... 1,284,893 1,121,598 2,786,637 1,513,651 Shareholders Equity Share capital (note 9)... 5,664,550 5,178,977 Retained earnings... 11,406,645 6,855,852 Currency translation reserve... 54,896 1,525 17,126,091 12,036,354 19,912,728 13,550,005 Approved by the Board of Directors (Signed) Stephen K. Gunn Director (Signed) Christine Magee Director The accompanying notes are an integral part of these financial statements. F-58

181 SLEEP COUNTRY US HOLDCO CANADA INC. STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the years ended December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) $ $ $ Partnership income allocation... 6,378,447 1,632,185 1,374,004 Legal and professional expenses... 13,466 8,974 9,820 Operating income... 6,364,981 1,623,211 1,364,184 Finance related expenses (note 7) , , ,419 Interest income... (148) (847) (697) Income before income taxes... 6,196,792 1,476,769 1,236,462 Income taxes (note 8) Current... 1,640, , ,279 Deferred... 5,547 14,012 24,233 1,645, , ,512 Net income for the year... 4,550, , ,950 Other comprehensive income (loss) Currency translation adjustment... 53,371 9,476 (2,404) Comprehensive income for the year... 4,604,164 1,008, ,546 Basic and diluted earnings per share (note 10) Earnings per share The accompanying notes are an integral part of these financial statements. F-59

182 SLEEP COUNTRY US HOLDCO CANADA INC. STATEMENTS OF CHANGES IN SHAREHOLERS EQUITY For the years ended December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) Currency Common Contributed Total share translation Retained Total shares surplus capital reserve earnings equity $ $ $ $ $ $ Balance January 1, ,567, ,869 4,324,894 (5,547) 4,984,976 9,304,323 Net income for the year , ,950 Other comprehensive loss for the year... (2,404) (2,404) Capital contribution , , ,626 Balance December 31, ,399, ,869 5,157,520 (7,951) 5,856,926 11,006,495 Balance January 1, ,399, ,869 5,157,520 (7,951) 5,856,926 11,006,495 Net income for the year , ,926 Other comprehensive income for the year... 9,476 9,476 Capital contribution... 21,457 21,457 21,457 Balance December 31, ,421, ,869 5,178,977 1,525 6,855,852 12,036,354 Balance January 1, ,421, ,869 5,178,977 1,525 6,855,852 12,036,354 Net income for the year... 4,550,793 4,550,793 Other comprehensive income for the year... 53,371 53,371 Capital contribution , , ,573 Balance December 31, ,906, ,869 5,664,550 54,896 11,406,645 17,126,091 The accompanying notes are an integral part of these financial statements. F-60

183 SLEEP COUNTRY US HOLDCO CANADA INC. STATEMENTS OF CASH FLOWS For the years ended December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) $ $ $ Cash provided by (used in) Operating activities Net income for the year... 4,550, , ,950 Items not affecting cash Finance related expenses , , ,419 Income allocation from limited partnership... (6,378,447) (1,632,185) (1,374,004) Deferred income taxes... 5,547 14,012 24,233 Changes in non-cash items relating to operating activities (note 11)... 1,169, , ,353 (484,846) (30,016) (132,049) Financing activities Capital contribution ,573 21, ,626 Increase (decrease) in due to related party... (727) 8,559 (700,577) 484,846 30, ,049 Increase in cash and cash equivalents during the year... Cash and cash equivalents Beginning of year... Cash and cash equivalents End of year... Non-cash financing activities Series B promissory notes issued interest in kind (note 7) , , ,401 The accompanying notes are an integral part of these financial statements. F-61

184 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO FINANCIAL STATEMENTS December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) 1. ORGANIZATION Sleep Country US Holdco Canada Inc. (the Company) is a Canadian private company incorporated under the Canada Business Corporations Act on October 21, The Company owns 46.32% of the common units of Sleep Country Canada LP (Sleep Country LP) ( %), whose principal business is to operate retail stores that sell mattresses and bedding related products. The registered office of Sleep Country LP is 140 Unit 1, Wendell Avenue, Toronto, Ontario. The address of the Company s head and registered office is 100 Wellington Street West, CP Tower, Suite 2300, Toronto, Ontario. 2. BASIS OF PRESENTATION The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and using the accounting policies described herein. The financial statements were authorized for issue by the Board of Directors on July 9, The financial statements were prepared on a historical cost basis and the Company s functional currency is the Canadian dollar. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies set out below have been applied consistently to all periods presented in these financial statements. Financial assets and liabilities Financial assets and liabilities are recognized when the Company becomes a party to the contractual provision of the financial instrument. Financial assets are derecognized when the contractual rights to receive cash flows from the financial asset expire and financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled. Financial instruments on initial recognition are measured at fair value and classified as financial assets or liabilities at fair value through the statements of income and comprehensive income, loans and receivables or other financial liabilities. Loans and receivables and other financial liabilities are measured at amortized cost. The following classifications have been applied: trade and other payables and long-term debt have been classified as other financial liabilities Long-term debt is recognized initially at fair value, net of recognized transaction costs, and is subsequently measured at amortized cost, being the carrying value. Any difference between the carrying value and the redemption value is recognized in the statements of income and comprehensive income using the effective interest rate method. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Foreign currency translation Functional and presentation currency Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currencies of Sleep Country LP and its subsidiaries are Canadian dollars and United States dollars. The financial statements are presented in Canadian dollars, which is the Company s functional currency. Sleep Country LP translates its foreign operations, whereby assets and liabilities are translated at the exchange rate in effect at the statement of financial position dates, while revenues and expenses are translated at an appropriate weighted average rate. Any resulting translation gains or losses are included in other comprehensive income (loss) and the currency translation reserve. Investments in associates Associates are entities over which the Company has significant influence but not control. The Company accounts for its investment in associates using the equity method as the Company has determined that it exercises significant influence over Sleep Country LP. Under the equity method, the investment is initially recognized at cost and the carrying amount is adjusted for the Company s share of profits or losses of associates recognized in the statements of income and comprehensive income and its share of other comprehensive income (loss) of associates included in other comprehensive income. F-62

185 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The allocation of the profit or loss of Sleep Country LP is specified in the limited partnership agreement whereas on an annual basis specific allocations are made to the general partner and the remaining profit or loss is allocated to the common unitholders on a pro rata basis based on the percentage of common units held. For the year ended December 31, 2014, the allocation of comprehensive income to the Company was 15.34% ( %; %). The Company assesses at each year-end whether there is any objective evidence that its interests in investments in associates are impaired. If so, the carrying value of the Company s share of the underlying assets of associates is written down to its net recoverable amount (being the higher of fair value, less cost to sell and value in use) and the loss is charged to the statements of income and comprehensive income. Trade and other payables Trade and other payables are obligations to pay for goods or services that have been acquired or rendered in the ordinary course of business from suppliers and employees. Accounts payable and accrued liabilities are classified as current liabilities if payment is due or expected within one year or less. Otherwise, they are presented as non-current liabilities. Trade and other payables are recognized initially at fair value and subsequently measured at amortized cost. Income taxes Income tax comprises current and deferred tax. Income tax is recognized in the statements of income and comprehensive income except to the extent that it relates to items recognized directly in other comprehensive income or directly in equity, in which case the income tax is also recognized directly in other comprehensive income or equity, respectively. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years. In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is provided on temporary differences arising on investments in associates, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the statement of financial position dates and are expected to apply when the deferred tax asset is realized or liability is settled. Deferred income tax liabilities are presented as non-current. New and amended standards adopted during the year The amendments to International Accounting Standard (IAS) 32, Financial Instruments Presentation (IAS 32), clarify the criteria that should be considered in determining whether an entity has a legally enforceable right of set-off in respect of its financial statements. Amendments to IAS 32 are applicable to annual periods beginning on or after January 1, 2014, with retrospective application required. The Company has adopted the amendment to IAS 32 on January 1, 2014 and included the required disclosures in the financial statements. The International Financial Reporting Interpretations Committee (IFRIC) issued IFRIC 21, Levies. IFRIC 21 addresses accounting for liability to pay a levy within the scope of IAS 37, Provisions, contingent liabilities and contingent assets. A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes and fines or other penalties imposed for breaches of the legislation. The Company adopted IFRIC 21 on January 1, 2014 and it did not result in any measurement adjustment as at January 1, Accounting standards and amendments issued but not yet adopted The following standards and amendments to existing standards were released by the IASB. The Company is evaluating the impact of these standards and whether to early adopt these standards. In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments, 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. IFRS 7, Financial Instruments Disclosures F-63

186 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) was also amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments to IFRS 7 are effective on adoption of IFRS 9. IAS 1, Presentation of Financial Statements, has been amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses during the reporting period. Estimates and other judgments are continually evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. The following discusses the most significant accounting judgments and estimates that the Company has made in the preparation of the financial statements. Equity method of accounting The equity method of accounting is being applied by the Company as it relates to its investment in Sleep Country LP. The conclusion to account for an investment using the equity method is based on the assessment of the limited partnership arrangement and management applied judgment in determining a conclusion. The Company s common units contain voting rights over certain matters, there are interchangeable management personnel and material transactions between the entities. Therefore, management has concluded that the Company has the ability to exercise significant influence. Long-term debt Series A and Series B promissory notes The calculation of amortized cost associated with the Series A and Series B promissory notes requires 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 impact amounts recognized as interest expense. For example, if the promissory notes are repaid prior to the contractual maturity date, non-cash interest accretion would be accelerated resulting in additional charges in the statements of income and comprehensive income, which may be material. 5. INVESTMENT IN LIMITED PARTNERSHIP Changes in the carrying amount of the investment were as follows: $ $ Opening balance... 13,480,910 11,839,249 Share of partnership income... 6,378,447 1,632,185 Share of other comprehensive income... 53,371 9,476 Closing balance... 19,912,728 13,480,910 During the year ended December 31, 2014, Sleep Country LP repurchased for cancellation the common units held by an investor, resulting in an increase in the Company s proportionate ownership interest in Sleep Country LP. F-64

187 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) 5. INVESTMENT IN LIMITED PARTNERSHIP (Continued) The following summarizes the financial information of Sleep Country LP: $ $ $ (in thousands) Summary of operations Revenue , , ,581 Net income from continuing operations... 38,594 28,598 30,457 Net income (loss) from discontinued operations... 2,996 (2,588) (1,311) Net income for the year... 41,590 26,010 29,146 Other comprehensive income (loss) (51) 41,938 26,161 29,095 Net income attributable to the preferred unitholders... 27,820 21,973 25,750 Net income attributable to common unitholders... 13,770 4,037 3, $ $ (in thousands) Summary of financial position Current assets... 87,687 61,186 Non-current assets , ,472 Current liabilities... 46,461 41,994 Non-current liabilities... 8,480 9, TRADE AND OTHER PAYABLES $ $ Withholding taxes payable... 4,944 4,944 Accrued expenses... 13,481 8,880 18,425 13, LONG-TERM DEBT The long-term debt relates to Series A and Series B promissory notes. In 2008, the Company issued $1,577,878 of Series A promissory notes (Series A notes). The Company has recorded the Series A notes at their amortized cost, amounting to $561,559 representing the present value of future interest and principal repayments to maturity, at a discount rate of 15%, being the estimated fair value rate of interest. The residual amount of $1,016,319 has been allocated to contributed surplus, net deferred taxes of $258,450. Interest expense will be accreted monthly such that on maturity the carrying amount will be equal to the principal of the Series A notes plus the issued Series B promissory notes (Series B notes) that are issued in lieu of cash interest payments. As at December 31, 2013 and 2014, all Series A and Series B notes are held by related parties. The Series A notes bear interest at a fixed rate of 12% per annum and interest is due on December 31 of each year. The Series A notes, including all accrued but unpaid interest, are due and payable on November 3, Each Series A note ranks pari passu with all other Series A notes. No interest or principal payments can be made on any Series A note without a pro rata payment being made on all other Series A notes. The Company has the option to pay the annual interest payment in cash or to issue to the noteholder a Series B note for the amount of interest due. The Series B notes are non-interest bearing. An amount of $189,345 in non-interest bearing Series B notes in lieu of the cash interest payment due on December 31, 2014 less withholding taxes of $4,944 is to be issued in 2015 (2014 $184,401; 2013 $184,401). F-65

188 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) 7. LONG-TERM DEBT (Continued) Finance related expenses included in the statements of income and comprehensive income include the following: $ $ $ Interest expense on promissory notes , , ,419 Interest expense other , , , INCOME TAXES Reconciliation to effective tax rate The overall income tax provision differs from the amount that would be obtained by applying the combined statutory income tax rate to income due to the following: $ $ $ Income before income taxes... 6,196,792 1,476,769 1,236,462 Canadian statutory income tax rate % 26.24% 26.07% Income tax expenses based on statutory income tax rate... 1,629, , ,341 Change in basis of investment in associate... 16,315 87,503 33,821 Change in deferred tax rates... 2,868 8,350 1,645, , ,512 Effective income tax rate % 32.36% 29.48% Deferred income tax liability The deferred income tax liability of $375,549 (2013 $370,002) relates to the Series A and Series B promissory notes. 9. SHARE CAPITAL Authorized Unlimited common shares Issued and outstanding $ $ 849,626 common shares ( ,626)... 4,906,681 4,421,108 Contributed surplus , ,869 5,664,550 5,178,977 Common shares The holders of the common shares are entitled to receive, equally on a per share basis with the common shareholders, dividends as and when declared by the Board of Directors of the Company. On the voluntary or involuntary liquidation, dissolution or windup of the Company, the holders of the common shares are entitled to share in the remaining assets available for distribution after payment of liabilities. F-66

189 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) 10. EARNINGS PER SHARE (EPS) Basic earnings per share amounts are calculated by dividing the net earnings attributable to common shareholders of the Company by the weighted average number of shares issued during the year. Diluted earnings per share amounts are calculated by dividing the net earnings attributable to common shareholders of the Company by the weighted average number of shares issued during the year adjusted for the effects of potentially dilutive instruments. The Company does not currently have any potentially dilutive instruments. The following table sets forth the calculation of basic and diluted EPS: December 31, 2014 Attributable to common shareholders Weighted average number of Net income shares EPS $ $ Basic and diluted Net income attributable to the common shareholders... 4,550, , December 31, 2013 Attributable to common shareholders Weighted average number of Net income shares EPS $ $ Basic and diluted Net income attributable to the common shareholders , , December 31, 2012 Attributable to common shareholders Weighted average number of Net income shares EPS $ $ Basic and diluted Net income attributable to the common shareholders , , CHANGES IN NON-CASH ITEMS RELATING TO OPERATING ACTIVITIES $ $ $ Income taxes net... 1,169, , ,016 Trade and other payables... (343) (7,346) (6,663) 1,169, , ,353 F-67

190 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) 12. RELATED PARTY TRANSACTIONS AND BALANCES The Company has an investment in Sleep Country LP. The following balances are due to related parties: $ $ Short-term advances due to related parties... 7,500 8, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair value interest risk), credit risk and liquidity risk. The Company s overall risk management program and business practices seek to minimize any potential adverse effects on the Company s financial performance. Risk management is carried out by the senior management team under policies approved by the Board of Directors. Market risk Market risk is the loss that may arise from changes in factors such as interest rate, foreign exchange and the impact these factors may have on other counterparties. Foreign exchange risk Sleep Country LP operates in Canada and the United States and is exposed to foreign exchange risk arising from exposure to fluctuations in the United States dollar exchange rate. Foreign exchange risk for the Company arises primarily from its net investment in Sleep Country LP due to its United States operations. This risk is managed primarily through local cash flow funding of the United States operations. Cash flow and fair value interest risk The Company has no significant interest bearing assets. The Company s income and operating cash flows are substantially independent of changes in market interest rates. The Company s primary interest rate risk arises from long-term debt. The interest rate on the long-term debt is fixed at a rate of 12% and therefore the Company does not have any significant exposure to fluctuations in interest rates. Credit risk Credit risk refers to the risk of losses due to failure of the limited partnership in which the Company has invested to meet their payment obligations. Liquidity risk Liquidity risk is the risk the Company cannot meet a demand for cash or fund its obligations as they come due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities. F-68

191 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) 13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued) The table below analyzes the Company s financial liabilities into relevant maturity groupings based on the remaining period from the statement of financial position dates to the contractual maturity date. The amounts discussed in the table are contractual undiscounted cash flows. Between Within 1 and 5 1 year years Over 5 years $ $ $ At December 31, 2014 Trade and other payables... 18,425 Long-term debt... 4,343,443 18,425 4,343,443 At December 31, 2013 Trade and other payables... 13,824 Long-term debt... 4,343,443 13,824 4,343,443 Fair value of financial instruments The different levels used to determine fair values have been defined as follows: Level 1 inputs include quoted prices (unadjusted) in active markets for identical financial assets or financial liabilities that the Company has the ability to access. Level 2 inputs other than quoted prices included in Level 1 that are observable for the financial asset or financial liability, either directly or indirectly. Level 2 inputs include quoted prices for similar financial assets and financial liabilities in active markets, and inputs other than quoted prices that are observable for the financial liabilities. Level 3 inputs are unobservable inputs for the financial asset or financial liability and include situations where there is little, if any, market activity for the financial assets or financial liabilities. The following describes the fair value determinations of financial instruments: The carrying values of amounts due to related companies and trade and other payables approximate their fair values due to the relatively short periods to maturity of these financial instruments. The fair value of the Series A and Series B promissory notes is estimated to be $2,813,171 (2013 $2,284,359) and is within Level 3 of the fair value hierarchy. The valuation techniques used to estimate the fair value of the Series A and Series B promissory notes incorporate discounted contractual obligations using assumptions such as interest rate curves and an estimated credit spread. Capital risk management The Company s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for its common shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital structure to minimize the cost of capital. In order to maintain or adjust the capital structure, the Company may issue new shares or sell assets to reduce long-term debt. 14. SUBSEQUENT EVENTS On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of Sleep Country Canada Inc., the Company and SC Management Holding Inc. F-69

192 SLEEP COUNTRY US HOLDCO CANADA INC. CONDENSED INTERIM STATEMENTS OF FINANCIAL POSITION (Unaudited) (expressed in Canadian dollars) March 31, December 31, $ $ Assets Current assets Income taxes recoverable ,830 Investment in limited partnership (note 4)... 22,765,130 19,912,728 22,886,960 19,912,728 Liabilities Current liabilities Trade and other payables (note 5)... 16,950 18,425 Due to related companies non-interest bearing and due on demand (note 10).. 241,804 7,500 Income taxes payable... 1,100, ,754 1,126,195 Deferred income taxes (note 7) , ,549 Long-term debt (note 6)... 1,331,198 1,284,893 1,965,281 2,786,637 Shareholders Equity Share capital... 7,073,716 5,664,550 Retained earnings... 13,847,963 11,406,645 Currency translation reserve... 54,896 20,921,679 17,126,091 22,886,960 19,912,728 Approved by the Board of Directors (Signed) Stephen K. Gunn Director (Signed) Christine Magee Director The accompanying notes are an integral part of these condensed interim financial statements. F-70

193 SLEEP COUNTRY US HOLDCO CANADA INC. CONDENSED INTERIM STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) For the three-month periods ended March 31, 2015 and March 31, 2014 (expressed in Canadian dollars) Three months ended Three months ended March 31, 2015 March 31, 2014 $ $ Partnership income allocation... 2,907, ,785 Legal and professional expenses... 2,250 1,364 Operating income... 2,905, ,421 Finance related expenses (note 6)... 47,524 41,484 Interest income... (19) 47,524 41,465 Income before income taxes... 2,857, ,956 Income taxes (recovery) (note 7) Current , ,136 Deferred... (220) 1, , ,504 Net income for the period... 2,441, ,452 Other comprehensive income (loss) Currency translation adjustment... (54,896) 26,839 Comprehensive income for the period... 2,386, ,291 Basic and diluted earnings per share (note 8) Earnings per share The accompanying notes are an integral part of these condensed interim financial statements. F-71

194 SLEEP COUNTRY US HOLDCO CANADA INC. CONDENSED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited) For the three-month periods ended March 31, 2015 and March 31, 2014 (expressed in Canadian dollars) Total Currency Common Contributed share translation Retained Total shares surplus capital reserve earnings equity $ $ $ $ $ $ Balance January 1, ,421, ,869 5,178,977 1,525 6,855,852 12,036,354 Net income for the period , ,452 Other comprehensive income... 26,839 26,839 Balance March 31, ,421, ,869 5,178,977 28,364 7,063,304 12,270,645 Balance January 1, ,906, ,869 5,664,550 54,896 11,406,645 17,126,091 Net income for the period... 2,441,318 2,441,318 Other comprehensive loss... (54,896) (54,896) Capital contribution... 1,409,166 1,409,166 1,409,166 Balance March 31, ,315, ,869 7,073,716 13,847,963 20,921,679 The accompanying notes are an integral part of these condensed interim financial statements. F-72

195 SLEEP COUNTRY US HOLDCO CANADA INC. CONDENSED INTERIM STATEMENTS OF CASH FLOWS (Unaudited) (expressed in Canadian dollars) Three months ended Three months ended March 31, 2015 March 31, 2014 $ $ Cash provided by (used in) Operating activities Net income for the period... 2,441, ,452 Items not affecting cash Finance related expenses... 47,524 41,484 Income allocation from limited partnership... (2,907,298) (411,785) Deferred income taxes... (220) 1,368 (418,676) (161,481) Changes in non-cash items relating to operating activities (note 9)... (1,224,794) 37,834 (1,643,470) (123,647) Financing activities Capital contribution... 1,409,166 Increase in due to related party , ,647 1,643, ,647 Increase in cash and cash equivalents during the period... Cash and cash equivalents Beginning of period... Cash and cash equivalents End of period... Non-cash investing and financing activities Series B promissory notes issued interest in kind (note 6) , ,401 The accompanying notes are an integral part of these condensed interim financial statements. F-73

196 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS For the three-month periods ended March 31, 2015 and March 31, 2014 (expressed in Canadian dollars) 1. ORGANIZATION Sleep Country US Holdco Canada Inc. (the Company) is a Canadian private company incorporated under the Canada Business Corporations Act on October 21, The Company owns 46.32% of the common units of Sleep Country Canada LP (Sleep Country LP), whose principal business is to operate retail stores that sell mattresses and bedding related products. The registered office of Sleep Country LP is 140 Unit 1, Wendell Avenue, Toronto, Ontario. The address of the Company s head and registered office is 100 Wellington Street West, CP Tower, Suite 2300, Toronto, Ontario. 2. BASIS OF PRESENTATION The condensed interim financial statements of the Company are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standard 34 (IAS 34), Interim Financial Reporting. Accordingly, certain information and note disclosure normally included in the annual financial statements prepared in accordance with IFRS, as issued by the IASB, have been omitted or condensed. Accordingly, the condensed interim financial statements should be read in conjunction with the annual financial statements for the year ended December 31, The condensed interim financial statements were authorized for issue by the Board of Directors on July 9, The Company s partnership income allocation can be affected by seasonality as the income earned by Sleep Country LP fluctuates due to changes in customer buying habits throughout the year. The condensed interim financial statements were prepared on a historical cost basis and the Company s functional currency is the Canadian dollar. 3. SIGNIFICANT ACCOUNTING POLICIES These condensed interim financial statements have been prepared using the same accounting policies and methods of computation as the annual financial statements of Sleep Country US Holdco Canada Inc. for the year ended December 31, Accounting standards and amendments issued but not yet adopted The following standards and amendments to existing standards were released by the IASB. The Company is evaluating the impact of these standards and whether to early adopt these standards. In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments 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. IFRS 7 Financial Instruments: Disclosures was also amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments to IFRS 7 are effective upon adoption of IFRS 9. IAS 1 Presentation of financial statements has been amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements, and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, INVESTMENT IN LIMITED PARTNERSHIP Changes in the carrying amount of the investment were as follows: March 31, December 31, $ $ Opening balance... 19,912,728 13,480,910 Share of partnership income... 2,907,298 6,378,447 Share of other comprehensive income (loss)... (54,896) 53,371 Closing balance... 22,765,130 19,912,728 F-74

197 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS (Continued) For the three-month periods ended March 31, 2015 and March 31, 2014 (expressed in Canadian dollars) 5. TRADE AND OTHER PAYABLES March 31, December 31, $ $ Withholding taxes payable... 1,219 4,944 Accrued expenses... 15,731 13,481 16,950 18, LONG-TERM DEBT The long-term debt relates to Series A and Series B promissory notes. In 2008, the Company issued $1,577,878 of Series A promissory notes (Series A notes). The Company has recorded the Series A notes at their amortized cost and interest expense will be accreted monthly such that on maturity the carrying amount will be equal to the principal of the Series A notes plus the issued Series B promissory notes (Series B notes) that are issued in lieu of cash interest payments. The Series A notes bear interest at a fixed rate of 12% per annum and interest is due on December 31 of each year. The Series A notes, including all accrued but unpaid interest, are due and payable on November 3, Each Series A note ranks pari passu with all other Series A notes. No interest or principal payments can be made on any Series A note without a pro rata payment being made on all other Series A notes. The Company has the option to pay the annual interest payment in cash or to issue to the noteholder a Series B note for the amount of interest due. The Series B notes are non-interest bearing. An amount of $189,345 in non-interest bearing Series B notes in lieu of the cash interest payment due on December 31, 2014 less withholding taxes of $4,944 was issued in January 2015 (2014 $184,401). Finance related expenses included in the statements of income and comprehensive income is comprised of interest expense on the promissory notes of $47,524 for the three-month period ended March 31, 2015 (three-month period ended March 31, 2014 $41,484). 7. INCOME TAX Reconciliation to effective tax rate The overall income tax provision differs from the amount that would be obtained by applying the combined statutory income tax rate to income due to the following: Three month Three month period ended period ended March 31, March 31, $ $ Income before income taxes... 2,857, ,956 Canadian statutory income tax rate % 26.30% Income tax expense based on statutory income tax rate ,730 97,031 Change in basis of investment in associate... (332,524) 64, , ,504 Effective income tax rate % 43.77% Deferred income tax liability The deferred income tax liability of $375,329 (December 31, 2014 $375,549) relates to the Series A and Series B promissory notes. F-75

198 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS (Continued) For the three-month periods ended March 31, 2015 and March 31, 2014 (expressed in Canadian dollars) 8. EARNINGS PER SHARE (EPS) Basic earnings per share amounts are calculated by dividing the net earnings attributable to common shareholders of the Company by the weighted average number of shares issued during the year. Diluted earnings per share amounts are calculated by dividing the net earnings attributable to common shareholders of the Company by the weighted average number of shares issued during the year adjusted for the effects of potentially dilutive warrants and stock options. The Company does not currently have any potentially dilutive instruments. The following table sets forth the calculation of basic and diluted EPS: March 31, 2015 Weighted average number Earnings Net income of shares per share $ $ Basic and diluted Net income attributable to the common shareholders... 2,441, , March 31, 2014 Weighted average number Earnings Net income of shares per share $ $ Basic and diluted Net income attributable to the common shareholders , , CHANGES IN NON-CASH ITEMS RELATING TO OPERATING ACTIVITIES Three month Three month period ended period ended March 31, March 31, $ $ Income tax net... (1,222,100) 42,779 Trade and other payables... (2,694) (4,945) (1,224,794) 37, RELATED PARTY TRANSACTIONS AND BALANCES The company has an investment in Sleep Country Canada LP. The following balances are due to related parties: March 31, December 31, $ $ Short-term advances due to related parties ,804 7,500 F-76

199 SLEEP COUNTRY US HOLDCO CANADA INC. NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS (Continued) For the three-month periods ended March 31, 2015 and March 31, 2014 (expressed in Canadian dollars) 11. FINANCIAL INSTRUMENTS Fair value of financial instruments The different levels used to determine fair values have been defined as follows: Level 1 inputs use quoted prices (unadjusted) in active markets for identical financial assets or financial liabilities that the Company has the ability to access. Level 2 inputs other than quoted prices included in Level 1 that are observable for the financial asset or financial liability, either directly or indirectly. Level 2 inputs include quoted prices for similar financial assets and financial liabilities in active markets, and inputs other than quoted prices that are observable for the financial liabilities. Level 3 inputs are unobservable inputs for the financial asset or financial liability and include situations where there is little, if any, market activity for the financial asset or financial liabilities. The following describes the fair value determinations of financial instruments: The carrying values of amounts due to related companies and trade and other payables approximate their fair values due to the relatively short periods to maturity of these financial instruments. The fair value of the Series A and Series B promissory notes is estimated to be $2,928,696 (December 31, 2014 $2,813,171) and is within Level 3 of the fair value hierarchy. The valuation techniques used to estimate the fair value of the Series A and Series B promissory notes incorporate discounted contractual obligations using assumptions such as interest rate curves and an estimated credit spread. 12. SUBSEQUENT EVENTS On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of Sleep Country Canada Inc., the Company and SC Management Holding Inc. F-77

200 July 9, 2015 INDEPENDENT AUDITOR S REPORT To the Shareholders of SC Management Holding Inc. We have audited the accompanying financial statements of SC Management Holding Inc., which comprise the statements of financial position as at December 31, 2014 and December 31, 2013 and the statements of income and comprehensive income, statements of changes in shareholders equity and statements of cash flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of SC Management Holding Inc. as at December 31, 2014 and December 31, 2013 and its financial performance and its cash flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. (Signed) PricewaterhouseCoopers LLP Chartered Professional Accountants, Licensed Public Accountants Toronto, Ontario F-78

201 SC MANAGEMENT HOLDING INC. STATEMENTS OF FINANCIAL POSITION As at December 31, 2014 and 2013 (expressed in Canadian dollars) $ $ Assets Current assets Cash and cash equivalents Income taxes recoverable... 6, ,426 Investment in limited partnership (note 5)... 2,188,377 1,485,576 2,188,379 1,492,002 Liabilities Current liabilities Trade and other payables (note 6)... 11,201 15,196 Due to related companies non-interest bearing and due on demand (note 11)... 5,903 2,166 Income taxes payable , ,970 17,362 Shareholders Equity Share capital (note 8) , ,104 Retained earnings... 1,272, ,373 Currency translation reserve... 5, ,045,409 1,474,640 2,188,379 1,492,002 Approved by the Board of Directors (Signed) Stephen K. Gunn Director (Signed) Christine Magee Director The accompanying notes are an integral part of these financial statements. F-79

202 SC MANAGEMENT HOLDING INC. STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the years ended December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) $ $ $ Partnership income allocation , , ,690 Legal and professional expenses... 4,600 15,969 6,351 Operating income , , ,339 Interest (income) expense... (11) 213 (82) Income before income taxes , , ,421 Current income taxes (note 7) ,435 55,324 40,230 Net income for the year , , ,191 Other comprehensive income (loss) Currency translation adjustment... 5,832 1,035 (264) Comprehensive income for the year , , ,927 Basic and diluted earnings per share (note 9) Earnings per share The accompanying notes are an integral part of these financial statements. F-80

203 SC MANAGEMENT HOLDING INC. STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY For the years ended December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) Currency Share translation Retained Total capital reserve earnings equity $ $ $ $ Balance January 1, ,101 (608) 556,340 1,143,833 Net income for the year , ,191 Other comprehensive loss... (264) (264) Capital contribution , ,923 Balance December 31, ,024 (872) 660,531 1,350,683 Balance January 1, ,024 (872) 660,531 1,350,683 Net income for the year , ,842 Other comprehensive income... 1,035 1,035 Capital contribution... 16,080 16,080 Balance December 31, , ,373 1,474,640 Balance January 1, , ,373 1,474,640 Net income for the year , ,945 Other comprehensive income... 5,832 5,832 Capital contribution... 59,992 59,992 Balance December 31, ,096 5,995 1,272,318 2,045,409 The accompanying notes are an integral part of these financial statements. F-81

204 SC MANAGEMENT HOLDING INC. STATEMENTS OF CASH FLOWS For the years ended December 31, 2014, 2013 and 2012 (expressed in Canadian dollars) Cash provided by (used in) $ $ $ Operating activities Net income for the year , , ,191 Items not affecting cash Income allocation from limited partnership... (696,969) (178,348) (150,690) (192,024) (71,506) (46,499) Changes in non-cash items relating to operating activities (note 10) ,295 62,034 27,380 (63,729) (9,472) (19,119) Investing activities Additional investment in limited partnership... (7,756) Financing activities Capital contribution... 59,992 16, ,923 Increase (decrease) in due to related party... 3,737 1,148 (83,804) 63,729 17,228 19,119 Increase in cash and cash equivalents during the year... Cash and cash equivalents Beginning of year Cash and cash equivalents End of year The accompanying notes are an integral part of these financial statements. F-82

205 SC MANAGEMENT HOLDING INC. NOTES TO FINANCIAL STATEMENTS December 31, 2014, 2013 and 2012 (expressed in Canadian dollars, unless otherwise noted) 1. ORGANIZATION SC Management Holding Inc. (the company) is a Canadian private company incorporated under the Canada Business Corporations Act on October 28, The company owns 5.06% of the common units of Sleep Country Canada LP (Sleep Country LP) ( %), whose principal business is to operate retail stores that sell mattresses and bedding related products. The registered office of Sleep Country LP is 140 Unit 1, Wendell Avenue, Toronto, Ontario. The address of the company s head and registered office is 1 140, Wendell Avenue, Toronto, Ontario. 2. BASIS OF PRESENTATION The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) and using the accounting policies described herein. The financial statements were authorized for issue by the Board of Directors on July 9, The financial statements were prepared on a historical cost basis and the company s functional currency is the Canadian dollar. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies set out below have been applied consistently to all periods presented in these financial statements. Financial assets and financial liabilities Financial assets and financial liabilities are recognized when the company becomes a party to the contractual provision of the financial instrument. Financial assets are derecognized when the contractual rights to receive cash flows from the financial asset expire and financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled. Financial instruments on initial recognition are measured at fair value and classified as financial assets or liabilities at fair value through the statements of income and comprehensive income, loans and receivables or other financial liabilities. Loans and receivables and other financial liabilities are measured at amortized cost. The following classifications have been applied: trade and other payables have been classified as other financial liabilities. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Foreign currency translation Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currencies of Sleep Country LP and its subsidiaries are Canadian dollars and United States dollars. The financial statements are presented in Canadian dollars, which is the company s functional currency. Sleep Country LP translates its foreign operations, whereby assets and liabilities are translated at the exchange rate in effect at the statement of financial position dates, while revenues and expenses are translated at an appropriate weighted average rate. Any resulting translation gains or losses are included in other comprehensive income (loss) and the currency translation reserve. Investments in associates Associates are entities over which the company has significant influence but not control. The company accounts for its investments in associates using the equity method as the company has determined that it exercises significant influence over Sleep Country LP. Under the equity method, the investments are initially recognized at cost and the carrying amount is adjusted for the company s share of profits or losses of associates recognized in the statements of income and comprehensive income and its share of other comprehensive income (loss) of associates included in other comprehensive income. The allocation of the profit or loss of Sleep Country LP is specified in the limited partnership agreement whereas on an annual basis specific allocations are made to the general partner and the remaining profit or loss is allocated to the common unitholders on a pro rata basis based on the percentage of common units held. For the year ended December 31, 2014, the allocation of comprehensive income to the company was 1.68% ( %; %). F-83

206 SC MANAGEMENT HOLDING INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars, unless otherwise noted) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The company assesses at each year-end whether there is any objective evidence that its interests in investments in associates are impaired. If so, the carrying value of the company s share of the underlying assets of associates is written down to its net recoverable amount (being the higher of fair value, less cost to sell and value in use) and the loss is charged to the statements of income and comprehensive income. Trade and other payables Trade and other payables are obligations to pay for goods or services that have been acquired or rendered in the ordinary course of business from suppliers and employees. Accounts payable and accrued liabilities are classified as current liabilities if payment is due or expected within one year or less. Otherwise, they are presented as non-current liabilities. Trade and other payables are recognized initially at fair value and subsequently measured at amortized cost. Income taxes Income tax comprises current and deferred tax. Income tax is recognized in the statements of income and comprehensive income except to the extent that it relates to items recognized directly in other comprehensive income or directly in equity, in which case the income tax is also recognized directly in other comprehensive income or equity, respectively. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years. In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is provided on temporary differences arising on investments in associates, except where the timing of the reversal of the temporary differences is controlled by the company and it is probable that the temporary differences will not reverse in the foreseeable future. New and amended standards adopted during the year The amendments to International Accounting Standard (IAS) 32, Financial Instruments Presentation (IAS 32), clarify the criteria that should be considered in determining whether an entity has a legally enforceable right of set-off in respect of its financial statements. Amendments to IAS 32 are applicable to annual periods beginning on or after January 1, 2014, with retrospective application required. The company has adopted the amendment to IAS 32 on January 1, 2014 and included the required disclosures in the financial statements. The International Financial Reporting Interpretations Committee (IFRIC) issued IFRIC 21, Levies. IFRIC 21 addresses accounting for liability to pay a levy within the scope of IAS 37, Provisions, contingent liabilities and contingent assets. A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes and fines or other penalties imposed for breaches of the legislation. The company adopted IFRIC 21 on January 1, 2014 and it did not result in any measurement adjustment as at January 1, Accounting standards and amendments issued but not yet adopted The following standards and amendments to existing standards were released by the IASB during The company is evaluating the impact of these standards and whether to early adopt them. In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments, 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. IFRS 7, Financial Instruments Disclosures, was also amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments to IFRS 7 are effective on adoption of IFRS 9. IAS 1, Presentation of Financial Statements, has been amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of financial statements requires management to make estimates and assumptions using judgments that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses during the reporting period. F-84

207 SC MANAGEMENT HOLDING INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars, unless otherwise noted) 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued) Estimates and other judgments are continually evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. The following discusses the most significant accounting judgments and estimates the company has made in the preparation of the financial statements: Equity method of accounting The equity method of accounting is applied by the company as it relates to its investment in Sleep Country LP. The conclusion to account for an investment using the equity method is based on the assessment of the limited partnership arrangement and management applied judgment in determining a conclusion. The company s common units contain voting rights over certain matters, there are interchangeable management personnel and material transactions between the entities. Therefore, management has concluded that the company has the ability to exercise significant influence. 5. INVESTMENT IN LIMITED PARTNERSHIP Changes in the carrying amount of the investment were as follows: $ $ Opening balance... 1,485,576 1,298,437 Additional investment in limited partnership... 7,756 Share of partnership income , ,348 Share of other comprehensive income... 5,832 1,035 Closing balance... 2,188,377 1,485,576 During the year ended December 31, 2014, Sleep Country LP repurchased for cancellation the common units held by an investor, resulting in an increase in the company s proportionate ownership interest in Sleep Country LP. The following summarizes the financial information of Sleep Country LP: $ $ $ (in thousands of Canadian dollars) Summary of operations Revenue , , ,581 Net income from continuing operations... 38,594 28,598 30,457 Net income (loss) from discontinued operations... 2,996 (2,588) (1,311) Net income for the year... 41,590 26,010 29,146 Other comprehensive income (loss) (51) 41,938 26,161 29,095 Net income attributable to the preferred unitholders... 27,820 21,973 25,750 Net income attributable to common unitholders... 13,770 4,037 3,396 F-85

208 SC MANAGEMENT HOLDING INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars, unless otherwise noted) 5. INVESTMENT IN LIMITED PARTNERSHIP (Continued) $ $ (in thousands of Canadian dollars) Summary of financial position Current assets... 87,687 61,186 Non-current assets , ,472 Current liabilities... 46,461 41,994 Non-current liabilities... 8,480 9, TRADE AND OTHER PAYABLES $ $ Accrued expenses... 11,201 15, INCOME TAXES Reconciliation to effective tax rate The overall income tax provision differs from the amount that would be obtained by applying the combined statutory income tax rate to income due to the following: $ $ $ Income before income taxes , , ,421 Canadian statutory income tax rate % 26.09% 25.94% Income tax expense based on statutory income tax rate ,234 42,309 37,464 Change in basis of investment in associate... 6,201 13,015 2, ,435 55,324 40,230 Effective income tax rate % 34.12% 27.86% 8. SHARE CAPITAL Authorized Unlimited common shares Issued and outstanding $ $ 271,627 ( ,627) common shares , ,104 Common shares The holders of the common shares are entitled to receive, equally on a per share basis with the common shareholders, dividends as and when declared by the Board of Directors of the company. On the voluntary or involuntary liquidation, dissolution or windup of the company, the holders of the common shares are entitled to share in the remaining assets available for distribution after payment of liabilities. 9. EARNINGS PER SHARE (EPS) Basic earnings per share amounts are calculated by dividing the net earnings attributable to common shareholders of the company by the weighted average number of shares issued during the year. F-86

209 SC MANAGEMENT HOLDING INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars, unless otherwise noted) 9. EARNINGS PER SHARE (EPS) (Continued) Diluted EPS amounts are calculated by dividing the net earnings attributable to common shareholders of the company by the weighted average number of shares issued during the year adjusted for the effects of potentially dilutive instruments. The company does not currently have any potentially dilutive instruments. The following table sets forth the calculation of basic and diluted EPS: December 31, 2014 Attributable to common shareholders Weighted average number of Net income shares EPS $ $ Basic and diluted Net income attributable to the common shareholders , , December 31, 2013 Attributable to common shareholders Weighted average number of Net income shares EPS $ $ Basic and diluted Net income attributable to the common shareholders , , December 31, 2012 Attributable to common shareholders Weighted average number of Net income shares EPS $ $ Basic and diluted Net income attributable to the common shareholders , , CHANGES IN NON-CASH ITEMS RELATING TO OPERATING ACTIVITIES $ $ $ Income taxes net ,290 53,536 27,183 Trade and other payables... (3,995) 8, ,295 62,034 27, RELATED PARTY TRANSACTIONS AND BALANCES The company has an investment in Sleep Country LP. F-87

210 SC MANAGEMENT HOLDING INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2014, 2013 and 2012 (expressed in Canadian dollars, unless otherwise noted) 11. RELATED PARTY TRANSACTIONS AND BALANCES (Continued) The following balances are due to related parties: $ $ Short-term advances due to related parties... 5,903 2, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The company s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair value interest risk), credit risk and liquidity risk. The company s overall risk management program and business practices seek to minimize any potential adverse effects on the company s financial performance. Risk management is carried out by the senior management team under policies approved by the Board of Directors. Market risk Market risk is the loss that may arise from changes in factors such as interest rate, foreign exchange and the impact these factors may have on other counterparties. Foreign exchange risk Sleep Country LP operates in Canada and the United States and is exposed to foreign exchange risk arising from exposure to fluctuations in the United States dollar exchange rate. Foreign exchange risk for the company arises primarily from its net investment in Sleep Country LP due to its United States operations. This risk is managed primarily through local cash flow funding of the United States operations. Cash flow and fair value interest risk The company has no significant interest bearing assets or liabilities. The company s income and operating cash flows are substantially independent of changes in market interest rates. Credit risk Credit risk refers to the risk of losses due to the failure of Sleep Country LP to meet its payment obligations. Liquidity risk Liquidity risk is the risk the company cannot meet a demand for cash or fund its obligations as they come due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities. The company s financial liabilities are all due within one year of the statement of financial position dates. Capital risk management The company s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for its common shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital structure to minimize the cost of capital. In order to maintain or adjust the capital structure, the company may issue new shares or sell assets to reduce long-term debt. 13. SUBSEQUENT EVENTS On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of Sleep Country Canada Inc., Sleep Country US Holdco Canada Inc. and the Company. F-88

211 SC MANAGEMENT HOLDING INC. CONDENSED INTERIM STATEMENTS OF FINANCIAL POSITION (Unaudited) (expressed in Canadian dollars) March 31, December 31, $ $ Assets Current assets Cash Investment in limited partnership (note 4)... 2,500,061 2,188,377 2,500,063 2,188,379 Liabilities Current liabilities Trade and other payables (note 5)... 12,951 11,201 Due to related parties non-interest bearing and due on demand (note 9)... 15,820 5,903 Income taxes payable... 1, ,866 30, ,970 Shareholders Equity Share capital , ,096 Retained earnings... 1,540,814 1,272,318 Currency translation reserve... 5,995 2,469,740 2,045,409 2,500,063 2,188,379 Approved by the Board of Directors (Signed) Stephen K. Gunn Director (Signed) Christine Magee Director The accompanying notes are an integral part of these condensed interim financial statements. F-89

212 SC MANAGEMENT HOLDING INC. CONDENSED INTERIM STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) (expressed in Canadian dollars) Three months ended Three months ended March 31, 2015 March 31, 2014 $ $ Partnership income allocation ,679 44,995 Legal and professional expenses... 1,750 2,364 Income before income taxes ,929 42,631 Current income taxes (note 6)... 47,433 18,623 Net income for the period ,496 24,008 Other comprehensive income (loss) Currency translation adjustment... (5,995) 2,932 Comprehensive income for the period ,501 26,940 Basic and diluted earnings per share (note 7) Earnings per share The accompanying notes are an integral part of these condensed interim financial statements. F-90

213 SC MANAGEMENT HOLDING INC. CONDENSED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited) (expressed in Canadian dollars) Currency Share translation Retained Total capital reserve earnings equity $ $ $ $ Balance January 1, , ,373 1,474,640 Net income for the period... 24,008 24,008 Other comprehensive income... 2,932 2,932 Balance March 31, ,104 3, ,381 1,501,580 Balance January 1, ,096 5,995 1,272,318 2,045,409 Net income for the period , ,496 Other comprehensive loss... (5,995) (5,995) Capital contribution , ,830 Balance March 31, ,926 1,540,814 2,469,740 The accompanying notes are an integral part of these condensed interim financial statements. F-91

214 SC MANAGEMENT HOLDING INC. CONDENSED INTERIM STATEMENTS OF CASH FLOWS (Unaudited) (expressed in Canadian dollars) Three months ended Three months ended March 31, 2015 March 31, 2014 $ $ Cash provided by (used in) Operating activities Net income for the period ,496 24,008 Items not affecting cash Income allocation from limited partnership... (317,679) (44,995) (49,183) (20,987) Changes in non-cash items relating to operating activities (note 8)... (122,564) 6,525 (171,747) (14,462) Financing activities Capital contribution ,830 Increase in due to related companies... 9,917 14, ,747 14,462 Increase in cash and cash equivalents during the period... Cash and cash equivalents Beginning of period Cash and cash equivalents End of period The accompanying notes are an integral part of these condensed interim financial statements. F-92

215 SC MANAGEMENT HOLDING INC. NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (expressed in Canadian dollars) 1. ORGANIZATION SC Management Holding Inc. (the company) is a Canadian private company incorporated under the Canada Business Corporations Act on October 28, The company owns 5.06% of the common units of Sleep Country Canada LP (Sleep Country LP), whose principal business is to operate retail stores that sell mattresses and bedding related products. The registered office of Sleep Country LP is 140 Unit 1, Wendell Avenue, Toronto, Ontario. The address of the company s head and registered office is 140 Unit 1, Wendell Avenue, Toronto, Ontario. 2. BASIS OF PRESENTATION The condensed interim financial statements of the company are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standard 34 (IAS 34), Interim Financial Reporting. Accordingly, certain information and note disclosure normally included in the annual financial statements prepared in accordance with IFRS, as issued by the IASB, have been omitted or condensed. Accordingly, the condensed interim financial statements should be read in conjunction with the annual financial statements for the year ended December 31, The condensed interim financial statements were authorized for issue by the Board of Directors on July 9, The company s partnership income allocation can be affected by seasonality as the income earned by Sleep Country LP fluctuates due to changes in customer buying habits throughout the year. The condensed interim financial statements were prepared on a historical cost basis and the company s functional currency is the Canadian dollar. 3. SIGNIFICANT ACCOUNTING POLICIES These condensed interim financial statements have been prepared using the same accounting policies and methods of computation as the annual financial statements of SC Management Holding Inc. for the year ended December 31, Accounting standards and amendments issued but not yet adopted The following standards and amendments to existing standards were released by IASB. The company is evaluating the impact of these standards and whether to early adopt these standards. In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments, 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. IFRS 7, Financial Instrument Disclosures, was also amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments to IFRS 7 are effective upon adoption of IFRS 9. IAS 1, Presentation of Financial Statements, has been amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements, and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, INVESTMENT IN LIMITED PARTNERSHIP Changes in the carrying amount of the investment were as follows: March 31, December 31, $ $ Opening balance... 2,188,377 1,485,576 Share of partnership income , ,969 Share of other comprehensive income (loss)... (5,995) 5,832 Closing balance... 2,500,061 2,188,377 F-93

216 SC MANAGEMENT HOLDING INC. NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS (Continued) (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (expressed in Canadian dollars) 5. TRADE AND OTHER PAYABLES March 31, December 31, $ $ Accrued expenses... 12,951 11, INCOME TAXES Reconciliation to effective tax rate The overall income tax provision differs from the amount that would be obtained by applying the combined statutory income tax rate to income due to the following: Three-month Three-month period ended period ended March 31, March 31, $ $ Income before income taxes ,929 42,631 Canadian statutory income tax rate % 26.18% Income tax expense based on statutory income tax rate... 82,363 11,159 Change in basis of investment in associate... (34,930) 7,464 47,433 18,623 Effective income tax rate % 43.68% 7. EARNINGS PER SHARE (EPS) Basic EPS amounts are calculated by dividing the net earnings attributable to common shareholders of the company by the weighted average number of shares issued during the year. Diluted EPS amounts are calculated by dividing the net earnings attributable to common shareholders of the company by the weighted average number of shares issued during the year adjusted for the effects of potentially dilutive warrants and stock options. The company does not currently have any potentially dilutive instruments. The following table sets forth the calculation of basic and diluted EPS: March 31, 2015 Attributable to common shareholders Weighted average number of Net income shares EPS $ $ Basic and diluted Net income attributable to the common shareholders , , F-94

217 SC MANAGEMENT HOLDING INC. NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS (Continued) (Unaudited) For the three-month periods ended March 31, 2015 and 2014 (expressed in Canadian dollars) 7. EARNINGS PER SHARE (EPS) (Continued) March 31, 2014 Attributable to common shareholders Weighted average number of Net income shares EPS $ $ Basic and diluted Net income attributable to the common shareholders... 24, , CHANGES IN NON-CASH ITEMS RELATING TO OPERATING ACTIVITIES Three-month Three-month period ended period ended March 31, March 31, $ $ Income taxes net... (124,314) 5,788 Trade and other payables... 1, (122,564) 6, RELATED PARTY TRANSACTIONS AND BALANCES The company has an investment in Sleep Country LP. The following balances are due to related parties: March 31, December 31, $ $ Short-term advances due to related parties... 15,820 5, SUBSEQUENT EVENTS On June 23, 2015, Sleep Country Canada Holdings Inc. filed an ameded and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of Sleep Country Canada Inc., Sleep Country US Holdco Canada Inc. and the Company. F-95

218 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SC US HOLDCO The following Management s Discussion and Analysis ( MD&A ) is prepared as of the date of this Prospectus and is intended to assist readers in understanding the financial performance and financial condition of SC US Holdco for the first quarter ended March 31, 2015 and should be read in conjunction with the unaudited condensed interim financial statements of SC US Holdco for the first quarter ended March 31, 2015 and the accompanying notes, the audited financial statements and the accompanying notes for the year ended December 31, 2014 and the related MD&A included in this Prospectus. Basis of Presentation SC US Holdco s Q unaudited condensed interim financial statements and accompanying notes have been prepared in accordance with IFRS. All amounts are presented in Canadian dollars, except number of stores, per share amounts or unless otherwise indicated. All references in this MD&A to Q are to SC US Holdco s fiscal quarter ended March 31, 2015 and to Q are to SC US Holdco s fiscal quarter ended March 31, Forward-Looking Statements Some of the information contained in this MD&A contains forward-looking statements. These statements are based on management s reasonable assumptions and beliefs in light of the information currently available to them and are made as of the date of this MD&A. SC US Holdco does not undertake to update any such forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Actual results may differ materially from those indicated or underlying forward-looking statements as a result of various factors, including those described in Risk Factors and elsewhere in this Prospectus. SC US Holdco cautions that the list of risk factors and uncertainties is not exhaustive and other factors could also adversely affect its results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. See Forward-looking Information and Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these statements. Overview SC US Holdco is a Canadian private company incorporated under the Canadian Business Corporations Act on October 21, As at March 31, 2015 SC US Holdco held a 46.3% (December 31, %) interest in SCC LP. SCC LP is Canada s leading mattress retailer and the only specialty mattress retailer with a national footprint. SCC LP operates under two mattress retail banners (the Banners ): Dormez-vous?, the largest retailer of mattresses in Québec; and Sleep Country Canada the largest mattress retailer in the rest of Canada. SCC LP continues to expand its presence coast to coast. Since the beginning of 2007, SCC LP has opened 78 new stores and, as at March 31, 2015, it had 215 stores and 16 distribution centres across Canada. SCC LP s stores average approximately 5,000 square feet and offer a large selection of mattresses and a wide assortment of complementary sleep related products and accessories. Between 2006 and 2014, SCC LP more than doubled its sales of complementary sleep products and accessories which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. SCC LP 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, SCC LP was also operating in Arizona, U.S.A. under the Sleep America banner. The Sleep America business was sold on January 6, The address of SC US Holdco s head and registered office is 100 Wellington Street West, CP Tower, Suite 2300, Toronto, Ontario. M-1

219 Factors Affecting our Results of Operations Partnership income allocation On September 23, 2008, SC US Holdco acquired an interest in SCC LP. The results of operations of SC US Holdco depend on the allocation of income from SCC LP. The income from SCC LP is affected by the performance of its principal business which is to operate retail stores that sell mattresses and bedding related products. Legal and professional expenses Legal and professional expenses include legal and other professional fees associated with corporate management. Finance related expenses Finance related expenses are interest incurred primarily on long-term debt. Income taxes SC US Holdco is subject to federal and provincial income taxes in jurisdictions in which it conducts business. SC US Holdco records deferred tax expense (recovery) in respect of realizable temporary differences. SC US Holdco does not recognize a deferred tax asset for temporary differences or loss carry forwards where management does not believe that it is probable these will reverse in the foreseeable future. Selected Interim Financial Information The following table summarizes the results of SC US Holdco s operations for Q and Q1 2014: (C$ unless otherwise stated) Q Q (unaudited) (unaudited) Net Income Data Share of income in SCC LP... 2,907, ,785 Legal and professional expenses... 2,250 1,364 Operating income... 2,905, ,421 Finance related expenses... 47,524 41,484 Interest income... (19) Income before income taxes... 2,857, ,956 Income taxes , ,504 Net income... 2,441, ,452 Basic and diluted earnings per share:... $ 2.87 $ 0.24 March 31, December 31, Total assets... 22,886,960 19,912,728 Long-term debt... 1,331,198 1,284,893 Analysis of results Partnership income allocation The allocation of income from SCC LP increased from $411,785 in Q to $2,907,298 in Q This was mainly driven by an increase in the net income of SCC LP from $2.7 million to $15.4 million. The net income of SCC LP in Q was mainly driven by a 12.6% increase in revenues and the profit on sale of the Sleep America business which was sold in January M-2

220 The income allocation from SCC LP in Q was based on a share of 18.9% and net income of SCC LP of $15.4 million. The income allocation from SCC LP in Q was based on a share of 15.3% and net income of SCC LP of $2.7 million. Legal and professional expenses Total legal and professional expenses increased from $1,364 in Q to $2,250 in Q mainly due to increased professional fees related to corporate tax compliance. Finance related expenses Finance related expenses are comprised of interest on SC US Holdco s Series A and Series B promissory notes. Finance related expenses were $47,524 for Q1 2015, compared to $41,484 for Q1 2014, which represents interest accrued at the rate of 15% based on the discount rate applied on the amortized cost of the Series A and Series B promissory notes. Income taxes Q had an income tax expense of $416,206 compared to an income tax expense of $161,504 in Q The income tax expense for Q was comprised of a $416,426 current income tax expense mainly due the higher allocation of income from SCC LP and a deferred tax recovery of $220. The income tax expense for Q was comprised of a $160,136 current income tax expense mainly due the allocation of income from SCC LP offset by a deferred tax expense of $1,368. Net income Net income for Q was $2,441,318 compared to a net income of $207,452 for Q The increase in net income was mainly due to the increased allocation of partnership income from SCC LP, offset by an increase in income taxes and finance related expenses. Liquidity SC US Holdco s primary sources of cash consist of advances from related parties and capital contributions from shareholders. SC US Holdco s primary use of cash is to fund operating expenses, finance costs and debt services. SC US Holdco s ability to fund future cash requirements will depend on capital contributions from its shareholders, advances from related parties and its future allocation of income from SCC LP, which will be affected by general economic, financial and other factors including factors beyond its control despite the risk management strategies that management puts in place. See Risk Factors. Fluctuations in liquidity are primarily driven by payment of taxation during the year, which are funded by additional capital contributions. A summary of net cash flows by activities is presented below for Q and Q1 2014: (C$) Q Q $ $ (unaudited) (unaudited) Cash flows used in operating activities... (1,643,470) (123,647) Cash flows from financing activities... 1,643, ,647 Increase in cash and cash equivalents during the period... Cash and cash equivalents Beginning of period... Cash and cash equivalents End of period... M-3

221 Net cash flows used in operating activities Net cash flows used in operating activities were $1,643,470 for Q compared to $123,647 for Q1 2014, representing an increase of $1,519,823. The increase in cash used was primarily due to the payment of income taxes. Net cash flows generated by financing activities Net cash flows generated by financing activities were $1,643,470 for Q1 2015, consisting of a capital contributions of $1,409,166 and an increase in amounts due to related parties of $234,304. Net cash flows generated by financing activities were $123,647 for Q1 2014, consisting of an increase in amounts due from related parties. Management believes that SC US Holdco s operating activities and available financing capacity will provide adequate sources of liquidity to meet its short-term and long-term needs. Subsequent Events On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of SCCI, SC US Holdco and SC Management. Risk Factors For an understanding of other potential risks, including non-financial risks, see the Risk Factors section of the Prospectus. M-4

222 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SC US HOLDCO The following Management s Discussion and Analysis ( MD&A ) is prepared as of the date of this Prospectus and is intended to assist readers in understanding the financial performance and financial condition of SC US Holdco. This MD&A provides information concerning SC US Holdco s financial condition as at December 31, 2014 and December 31, 2013 and results of operations for the fiscal years ended December 31, 2014, December 31, 2013 and December 31, This MD&A should be read in conjunction with SC US Holdco s audited financial statements and unaudited financial statements included elsewhere in this Prospectus. Basis of Presentation The audited financial statements of SC US Holdco have been prepared in accordance with IFRS and are presented in Canadian dollars unless otherwise indicated. SC US Holdco s fiscal year is the twelve-month period ending December 31. All references in this MD&A to Fiscal 2014 are to SC US Holdco s fiscal year ended December 31, 2014, to Fiscal 2013 are to SC US Holdco s fiscal year ended December 31, 2013 and to Fiscal 2012 are to SC US Holdco s fiscal year ended December 31, Forward-Looking Statements Some of the information contained in this MD&A contains forward-looking statements. These statements are based on management s reasonable assumptions and beliefs in light of the information currently available to them and are made as of the date of this MD&A. SC US Holdco does not undertake to update any such forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Actual results may differ materially from those indicated or underlying forward-looking statements as a result of various factors, including those described in Risk Factors and elsewhere in this Prospectus. SC US Holdco cautions that the list of risk factors and uncertainties is not exhaustive and other factors could also adversely affect its results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. See Forward-looking Information and Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these statements. Overview SC US Holdco is a Canadian private company incorporated under the Canadian Business Corporations Act on October 21, As at December 31, 2014 SC US Holdco held a 46.3% (December 31, %) interest in SCC LP. SCC LP is Canada s leading mattress retailer and the only specialty mattress retailer with a national footprint. SCC LP operates under two mattress retail banners (the Banners ): Dormez-vous?, the largest retailer of mattresses in Québec; and Sleep Country Canada the largest mattress retailer in the rest of Canada. SCC LP continues to expand its presence coast to coast. Since the beginning of 2007, SCC LP has opened 78 new stores and, as at March 31, 2015, it had 215 stores and 16 distribution centres across Canada. SCC LP s stores average approximately 5,000 square feet and offer a large selection of mattresses and a wide assortment of complementary sleep related products and accessories. Between 2006 and 2014, SCC LP more than doubled its sales of complementary sleep products and accessories which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. SCC LP 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, SCC LP was also operating in Arizona, U.S.A. under the Sleep America banner. The Sleep America business was sold on January 6, The address of SC US Holdco s head and registered office is 100 Wellington Street West, CP Tower, Suite 2300, Toronto, Ontario. M-5

223 Factors Affecting our Results of Operations Partnership income allocation On September 23, 2008, SC US Holdco acquired an interest in SCC LP. The results of operations of SC US Holdco depend on the allocation of income from SCC LP. The income from SCC LP is affected by the performance of its principal business which is to operate retail stores that sell mattresses and bedding related products. Legal and professional expenses Legal and professional expenses include legal and other professional fees associated with corporate management. Finance related expenses Finance related expenses are interest incurred primarily on long-term debt. Income taxes SC US Holdco is subject to federal and provincial income taxes in jurisdictions in which it conducts business. SC US Holdco records deferred tax expense (recovery) in respect of realizable temporary differences. SC US Holdco does not recognize a deferred tax asset for temporary differences or loss carry forwards where management does not believe that it is probable these will reverse in the foreseeable future. Selected Annual Financial Information The following table summarizes the results of SC US Holdco s operations for Fiscal 2014, Fiscal 2013 and Fiscal 2012: (C$ unless otherwise stated) Fiscal 2014 Fiscal 2013 Fiscal 2012 Net Income Data Share of income in limited partnership... 6,378,447 1,632,185 1,374,004 Legal and professional fees... 13,466 8,974 9,820 Operating income... 6,364,981 1,623,211 1,364,184 Finance related expenses , , ,419 Interest income... (148) (847) (697) Income before income taxes... 6,196,792 1,476,769 1,236,462 Income taxes... 1,645, , ,512 Net income... 4,550, , ,950 Basic and diluted earnings per share (in dollars):... $ 5.36 $ 1.18 $ 1.03 Total assets... 19,912,728 13,550,005 Long-term debt... 1,284,893 1,121,598 Fiscal 2014 Compared to Fiscal 2013 Partnership income allocation The allocation of income from SCC LP increased from $1,632,185 in Fiscal 2013 to $6,378,447 in Fiscal This was mainly driven by an increase in the net income of SCC LP from $26.0 million to $41.6 million. The net income of SCC LP in Fiscal 2014 was mainly driven by an 11.9% increase in revenues, a 17.4% increase in gross profit and the reversal of an impairment charge on an intangible asset of the Sleep America business which was sold in January M-6

224 The allocation of the profit or loss of SCC LP is specified in the limited partnership agreement governing SCC LP whereas on an annual basis specific allocations are made to the general partner and the remaining profit or loss is allocated to the common unitholders on a pro rata basis based on the percentage of common units held. The income allocation from SCC LP in Fiscal 2014 was based on a share of 15.3% and net income of SCC LP of $41.6 million. The income allocation from SCC LP in Fiscal 2013 was based on a share of 6.3% and net income of SCC LP of $26.0 million. Legal and professional expenses Total legal and professional expenses increased by $4,492 mainly due to increased legal fees and professional fees related to corporate tax compliance. Finance related expenses Finance related expenses are comprised of interest on SC US Holdco s Series A and Series B promissory notes. Finance related expenses were $168,337 for Fiscal 2014, compared to $147,289 for Fiscal 2013, which represents interest accrued at the rate of 15% based on the discount rate applied on the amortized cost of the Series A and Series B promissory notes. Income taxes Fiscal 2014 had an income tax expense of $1,645,999 compared to an income tax expense of $477,843 in Fiscal The income tax expense for Fiscal 2014 was comprised of a $1,640,452 current income tax expense mainly due to a higher allocation of taxable income from Sleep Country LP and a deferred tax expense of $5,547. Net income (loss) Net income for Fiscal 2014 was $4,550,793 compared to a net income of $998,926 for Fiscal The increase in net income was mainly due to the increased allocation of partnership income from SCC LP, partially offset by an increase in income taxes and finance related expenses. Fiscal 2013 Compared to Fiscal 2012 Partnership income allocation The allocation of income from the SCC LP increased from $1,374,004 in Fiscal 2012 to $1,632,185 in Fiscal The income allocation from SCC LP in Fiscal 2012 was based on a share of 4.7% and net income of SCC LP of $29.1 million. The income allocation from SCC LP in Fiscal 2013 was based on a share of 6.3% and net income of SCC LP of $26.0 million. Legal and professional expenses Total legal and professional expenses were $8,974 in Fiscal 2013, compared to $9,820 in Fiscal 2012, reflecting a decrease in legal fees, offset by an increase in professional fees related to corporate tax compliance. Finance related expenses Finance related expenses are comprised of interest on SC US Holdco s Series A and Series B promissory notes. Finance related expenses were $147,289 for Fiscal 2013, compared to $128,419 for Fiscal 2012, which represents interest accrued at the rate of 15% based on the discount rate applied on the amortized cost of the Series A and Series B promissory notes. M-7

225 Income taxes (recovery) Fiscal 2013 had an income tax expense of $477,843 compared to an income tax expense of $364,512 in Fiscal The income tax expense for Fiscal 2013 was comprised of a $463,831 current income tax expense mainly due to a higher allocation of income from Sleep Country LP and deferred tax expense of $14,012. Net income Net income for Fiscal 2013 was $998,926 compared to a net income of $871,950 for Fiscal The increase in net income was mainly due to the increased allocation of partnership income from SCC LP, partially offset by an increase in income taxes and finance related expenses. Liquidity and Capital Resources Liquidity SC US Holdco s primary sources of cash consist of advances from related parties and capital contributions from shareholders. SC US Holdco s primary use of cash is to fund operating expenses, finance costs and debt services. SC US Holdco s ability to fund future cash requirements will depend on capital contributions from its shareholders, advances from related parties and its future allocation of income from SCC LP, which will be affected by general economic, financial and other factors including factors beyond its control despite the risk management strategies that Management puts in place. See Risk Factors. Fluctuations in liquidity are primarily driven by payment of taxation during the year, which are funded by additional capital contributions. A summary of net cash flows by activities is presented below for the last three fiscal years: (C$) Fiscal 2014 Fiscal 2013 Fiscal 2012 $ $ $ Cash flows used in operating activities... (484,846) (30,016) (132,049) Cash flows from financing activities ,846 30, ,049 Increase in cash and cash equivalents during the year... Cash and cash equivalents Beginning of year... Cash and cash equivalents End of year... Net cash flows used in operating activities Net cash flows used in operating activities were $484,846 for Fiscal 2014 compared to $30,016 for Fiscal 2013, representing an increase of $454,830. The increase in cash used was primarily due to the payment of income taxes due to the increase in income allocation from SCC LP in Fiscal Net cash flows used in operating activities were $30,016 for Fiscal 2013 compared to $132,049 for Fiscal 2012, representing a decrease of $102,033. The decrease in cash utilized was primarily due to lower payment of income taxes. Net cash flows generated by financing activities Net cash flows generated by financing activities were $484,846 for Fiscal 2014, consisting of a capital contribution of $485,573 offset by a decrease in amounts due to related parties of $727. Net cash flows generated by financing activities were $30,016 for Fiscal 2013, consisting of a capital contribution of $21,457 and an increase in amounts due to related parties of $8,559. Net cash flows generated by financing activities were $132,049 for Fiscal 2012, consisting of a capital contribution of $832,626 offset by a decrease in amounts due to related parties of $700,577. M-8

226 Contractual obligations The following table summarizes SC US Holdco s significant contractual obligations as at December 31, 2014 based on undiscounted cash flow including estimated interest payable: (Canadian dollars) Thereafter Total Financial Obligations Trade and other payables... 18,425 18,425 Due to related parties... 7,500 7,500 Income taxes payable... 1,100,270 1,100,270 Long-term debt: Promissory notes... 4,343,443 4,343,443 Total... $1,126,195 $ $ $ $ $4,343,443 $5,469,638 Long term debt represents SC US Holdco s Series A and Series B promissory notes. As at December 31, 2014, the total face value of the Series A and Series B promissory notes with outstanding interest was $2,713,922 (2013 $2,529,521, 2012 $2,345,120). Management believes that SC US Holdco s operating activities and available financing capacity will provide adequate sources of liquidity to meet its short-term and long-term needs. SC US Holdco s primary source of funds are capital contributions from shareholders. Capital Resources Series A and Series B promissory notes In 2008, SC US Holdco issued $1,577,878 of Series A promissory notes ( Series A Notes ). SC US Holdco has recorded the Series A Notes at their amortized cost, amounting to $561,559 representing the present value of future interest and principal repayments to maturity, at a discount rate of 15%, being the estimated fair value rate of interest. The residual amount of $1,016,319 has been allocated to contributed surplus, net of the deferred taxation effect of $258,450. Interest expense will be accreted monthly such that on maturity the carrying amount will be equal to the principal of the Series A Notes plus the issued Series B promissory Notes ( Series B Notes ) that are issued in lieu of cash interest payments. The Series A Notes bear interest at a fixed rate of 12% per annum and interest is due on December 31 of each year. The Series A Notes, including all accrued but unpaid interest, are due and payable on November 3, Each Series A Note ranks pari passu with all other Series A Notes. No interest or principal payments can be made on any Series A Note without a pro rata payment being made on all other Series A Notes. SC US Holdco has the option to pay the annual interest payment due on the Series A Notes in cash or to issue to the Series A noteholder a Series B Note for the amount of interest due. The Series B Notes are non-interest bearing. An amount of $189,345 in non-interest bearing Series B Notes in lieu of the cash interest payment due on December 31, 2014 less withholding taxes of $4,944 is to be issued in 2015 (2014 $184,401; 2013 $184,401). Off Balance Sheet Arrangements SC US Holdco did not have any material off-balance sheet arrangements as at the year-end of Fiscal 2014 and Fiscal 2013, nor does it have any subsequent to Fiscal 2014 year-end. Related Parties SC US Holdco has an investment in SCC LP. M-9

227 The following balances are due to related parties: $ $ Short-term advances due to related parties... 7,500 8,227 Amounts due to related parties as at the end of 2014 were $7,500 due to SCC LP on account of professional fees and income taxes paid on behalf of SC US Holdco. Subsequent Events On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of SCCI, SC US Holdco and SC Management. Risk Factors SC US Holdco s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair value interest risk), credit risk and liquidity risk. SC US Holdco s overall risk management program and business practices seek to minimize any potential adverse effects on SC US Holdco s financial performance. Risk management is carried out by the senior management team under policies approved by SC US Holdco s board of directors. Market risk Market risk is the loss that may arise from changes in factors such as interest rate, foreign exchange and the impact these factors may have on other counter parties. Foreign exchange risk SCC LP operates in Canada and the United States and is exposed to foreign exchange risk arising from exposure to fluctuations in the United States dollar exchange rate. Foreign exchange risk for SC US Holdco arises primarily from its net investment in SCC LP due to its United States operations. This risk is managed primarily through local cash flow funding of the United States operations. Cash flow and fair value interest risk SC US Holdco has no significant interest bearing assets. SC US Holdco s income and operating cash flows are substantially independent of changes in market interest rates. SC US Holdco s primary interest rate risk arises from long-term debt. The interest rate on the long term debt is fixed at a rate of 12% and therefore SC US Holdco does not have any significant exposure to fluctuations in interest rates. Credit risk Credit risk refers to the risk of losses due to failure of the limited partnership in which SC US Holdco has invested to meet their payment obligations. Liquidity risk Liquidity risk is the risk that SC US Holdco cannot meet a demand for cash or fund its obligations as they come due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a M-10

228 reasonable price. Prudent liquidity management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities. Capital risk SC US Holdco s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for its common shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital structure to minimize the cost of capital. In order to maintain or adjust the capital structure, SC US Holdco may issue new shares or sell assets to reduce long-term debt. For an understanding of other potential risks, including non-financial risks, see Risk Factors section of this Prospectus. Accounting Standards Implemented in 2014 Financial instruments The amendments to International Accounting Standards (IAS) 32, Financial Instruments Presentation (IAS 32), clarify the criteria that should be considered in determining whether an entity has a legally enforceable right of set-off in respect of its financial statements. Amendments to IAS 32 are applicable to annual periods beginning on or after January 1, 2014, with retrospective application required. SC US Holdco has adopted the amendment to IAS 32 on January 1, 2014 and included the required disclosures in the audited financial statements. Levies The International Financial Reporting Interpretation Committee issued IFRIC 21, Levies. IFRIC 21 addresses accounting for liability to pay a levy within the scope of IAS 37, Provisions, contingent liabilities and contingent assets. A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes and fines or other penalties imposed for breaches of the legislation. SC US Holdco adopted IFRIC 21 on January 1, 2014 and it did not result in any measurement adjustment as at January 1, Accounting Standards and Amendments Issued but Not Yet Adopted The following standards and amendments to existing standards were released by the IASB. SC US Holdco is evaluating the impact of these standards and whether to early adopt these standards. Financial instruments In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments 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. IFRS 7 Financial instruments: Disclosures was also amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments to IFRS 7 are effective upon adoption of IFRS 9. Presentation of financial statements IAS 1 Presentation of financial statements has been amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements, and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, Critical Accounting Estimates and Judgments The preparation of financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, M-11

229 income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates. The following discusses the most significant accounting judgments and estimates that SC US Holdco has made in the preparation of the financial statements. Equity method of accounting The equity method of accounting is being applied by SC US Holdco as it relates to its investment in SCC LP. The conclusion to account for an investment using the equity method is based on the assessment of the limited partnership arrangement and management applied judgment in determining a conclusion. SC US Holdco s common units contain voting rights over certain matters, there are interchangeable management personnel and material transactions between the entities. Therefore, management has concluded that SC US Holdco has the ability to exercise significant influence. The equity method of accounting could have a significant impact on the investment in Sleep Country LP and the share of partnership income. Long-term debt Series A and Series B promissory notes The calculation of amortized cost associated with the Series A Notes and Series B Notes requires 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 impact amounts recognized as interest expense. For example, if the promissory notes are repaid prior to the contractual maturity date, non-cash interest accretion would be accelerated resulting in additional charges in the statement of income and comprehensive income, which may be material. M-12

230 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SC MANAGEMENT The following Management s Discussion and Analysis ( MD&A ) is prepared as of the date of this Prospectus and is intended to assist readers in understanding the financial performance and financial condition of SC Management for the first quarter ended March 31, 2015 and should be read in conjunction with the unaudited condensed interim financial statements of SC Management for the first quarter ended March 31, 2015 and the accompanying notes, the audited financial statements and the accompanying notes for the year ended December 31, 2014 and the related MD&A included in this Prospectus. Basis of Presentation SC Management s Q unaudited condensed interim financial statements and accompanying notes have been prepared in accordance with IFRS. All amounts are presented in Canadian dollars, except number of stores, per share amounts or unless otherwise indicated. All references in this MD&A to Q are to SC Management s fiscal quarter ended March 31, 2015 and to Q are to SC Management s fiscal quarter ended March 31, Forward-Looking Statements Some of the information contained in this MD&A contains forward-looking statements. These statements are based on management s reasonable assumptions and beliefs in light of the information currently available to them and are made as of the date of this MD&A. SC Management does not undertake to update any such forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Actual results may differ materially from those indicated or underlying forward-looking statements as a result of various factors, including those described in Risk Factors and elsewhere in this Prospectus. SC Management cautions that the list of risk factors and uncertainties is not exhaustive and other factors could also adversely affect its results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. See Forward-looking Information and Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these statements. Overview SC Management is a Canadian private company incorporated under the Canadian Business Corporations Act on October 28, As at March 31, 2015 SC Management held a 5.06% (December 31, %) interest in SCC LP. SCC LP is Canada s leading mattress retailer and the only specialty mattress retailer with a national footprint. SCC LP operates under two mattress retail banners (the Banners ): Dormez-vous?, the largest retailer of mattresses in Québec; and Sleep Country Canada the largest mattress retailer in the rest of Canada. SCC LP continues to expand its presence coast to coast. Since the beginning of 2007, SCC LP has opened 78 new stores and, as at March 31, 2015, it had 215 stores and 16 distribution centres across Canada. SCC LP s stores average approximately 5,000 square feet and offer a large selection of mattresses and a wide assortment of complementary sleep related products and accessories. Between 2006 and 2014, SCC LP more than doubled its sales of complementary sleep products and accessories which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. SCC LP 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, SCC LP was also operating in Arizona, U.S.A. under the Sleep America banner. The Sleep America business was sold on January 6, The address of SC Management s head and registered office is 140 Wendell Avenue, Unit# 1, Toronto, Ontario. M-13

231 Factors Affecting our Results of Operations Partnership income allocation In 2008, SC Management acquired an interest in SCC LP. The results of operations of SC Management depend on the allocation of income from SCC LP. The income from SCC LP is affected by the performance of its principal business which is to operate retail stores that sell mattresses and bedding related products. Legal and professional expenses Legal and professional expenses include legal and other professional fees associated with corporate management. Income taxes SC Management is subject to federal and provincial income taxes in jurisdictions in which it conducts business. Selected Interim Financial Information The following table summarizes the results of SC Management s operations for Q and Q1 2014: (C$ unless otherwise stated) Q Q (unaudited) (unaudited) Net Income Data Share of income in SCC LP ,679 44,995 Legal and professional expenses... 1,750 2,364 Operating income ,929 42,631 Income before income taxes ,929 42,631 Income taxes... 47,433 18,623 Net income ,496 24,008 Basic and diluted earnings per share (in dollars):... $ 0.99 $ 0.09 March 31, December 31, Total assets... 2,500,063 2,188,379 Analysis of results Partnership income allocation The allocation of income from SCC LP increased from $44,995 in Q to $317,679 million in Q This was mainly driven by an increase in the net income of SCC LP from $2.7 million to $15.4 million. The net income of SCC LP in Q was mainly driven by a 12.6% increase in revenues and the profit on sale of the Sleep America business which was sold in January The allocation of the profit or loss of SCC LP is specified in the limited partnership agreement governing SCC LP whereas on an annual basis specific allocations are made to the general partner of SCC LP and the remaining profit or loss is allocated to the common unitholders on a pro rata basis based on the percentage of common units held. The income allocation from SCC LP in Q was based on a share of 2.1% and net income of SCC LP of $15.4 million. The income allocation from SCC LP in Q was based on a share of 1.7% and net income of SCC LP of $2.7 million. M-14

232 Legal and professional expenses Total legal and professional expenses decreased from $2,364 in Q to $1,750 in Q mainly due to increased professional fees related to corporate tax and legal compliance. Income taxes (recovery) The income tax expense for Q was comprised of a $47,433 current income tax expense as compared to $18,623 in Q mainly due higher allocation of income from SCC LP. Net income Net income for Q was $268,496 compared to a net income of $24,008 for Q The increase in net income was mainly due to the increased allocation of partnership income from SCC LP, partially offset by an increase in income taxes. Liquidity SC Management s primary sources of cash consist of advances from related parties and capital contributions from shareholders. SC Management s primary use of cash is to fund operating expenses. SC Management s ability to fund future cash requirements will depend on capital contributions from its shareholders, advances from related parties and its future allocation of income from the limited partner, which will be affected by general economic, financial and other factors including factors beyond its control despite the risk management strategies that management puts in place. See Risk Factors. Fluctuations in liquidity are primarily driven by payments of taxation during the year, which are funded by additional capital contributions. A summary of net cash flows by activities is presented below for Q and Q1 2014: (C$) Q Q $ $ Cash flows used in operating activities... (171,747) (14,462) Cash flows from financing activities ,747 14,462 Increase in cash and cash equivalents during the period... Net cash flows used in operating activities Net cash flows used in operating activities were $171,747 for Q compared to $14,462 for Q1 2014, representing an increase of $157,285. The increase in cash used was primarily due an increase in the payment of income taxes due to a higher income allocation from SCC LP. Net cash flows generated by financing activities Net cash flows generated by financing activities were $171,747 for Q and $14,462 for Q1 2014, consisting of capital contributions for the respective period. Management believes that SC Management s operating activities will provide adequate sources of liquidity to meet its short-term and long-term needs. SC Management s primary sources of funds are capital contributions from shareholders. Subsequent Events On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of SCCI, SC US Holdco and SC Management. Risk Factors For an understanding of other potential risks, including non-financial risks, see the Risk Factors section of the Prospectus. M-15

233 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SC MANAGEMENT The following Management s Discussion and Analysis ( MD&A ) is prepared as of the date of this Prospectus and is intended to assist readers in understanding the financial performance and financial condition of SC Management. This MD&A provides information concerning SC Management s financial condition as at December 31, 2014 and December 31, 2013 and results of operations for the fiscal years ended December 31, 2014, December 31, 2013 and December 31, This MD&A should be read in conjunction with SC Management s audited financial statements and unaudited financial statements included elsewhere in this Prospectus. Basis of Presentation The audited financial statements of SC Management have been prepared in accordance with IFRS and are presented in Canadian dollars unless otherwise indicated. SC Management s fiscal year is the twelve-month period ending December 31. All references in this MD&A to Fiscal 2014 are to SC Management s fiscal year ended December 31, 2014, to Fiscal 2013 are to SC Management s fiscal year ended December 31, 2013 and to Fiscal 2012 are to SC Management s fiscal year ended December 31, Forward-Looking Statements Some of the information contained in this MD&A contains forward-looking statements. These statements are based on management s reasonable assumptions and beliefs in light of the information currently available to them and are made as of the date of this MD&A. SC Management does not undertake to update any such forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Actual results may differ materially from those indicated or underlying forward-looking statements as a result of various factors, including those described in Risk Factors and elsewhere in this Prospectus. SC Management cautions that the list of risk factors and uncertainties is not exhaustive and other factors could also adversely affect its results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. See Forward-looking Information and Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these statements. Overview SC Management is a Canadian private company incorporated under the Canadian Business Corporations Act on October 28, As at December 31, 2014, SC Management held a 5.06% (December 31, %) interest in SCC LP. SCC LP is Canada s leading mattress retailer and the only specialty mattress retailer with a national footprint. SCC LP operates under two mattress retail banners (the Banners ): Dormez-vous?, the largest retailer of mattresses in Québec; and Sleep Country Canada the largest mattress retailer in the rest of Canada. SCC LP continues to expand its presence coast to coast. Since the beginning of 2007, SCC LP has opened 78 new stores and, as at March 31, 2015, it had 215 stores and 16 distribution centres across Canada. SCC LP s stores average approximately 5,000 square feet and offer a large selection of mattresses and a wide assortment of complementary sleep related products and accessories. Between 2006 and 2014, SCC LP more than doubled its sales of complementary sleep products and accessories which include bed frames, pillows, mattress pads, sheets, duvets, headboards and footboards. SCC LP 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, SCC LP was also operating in Arizona, U.S.A. under the Sleep America banner. The Sleep America business was sold on January 6, The address of SC Management s head and registered office is 140 Wendell Avenue, Unit# 1, Toronto, Ontario. M-16

234 Factors Affecting our Results of Operations Partnership income allocation In 2008, SC Management acquired an interest in SCC LP. The results of operations of SC Management depend on the allocation of income from SCC LP. The income from SCC LP is affected by the performance of its principal business which is to operate retail stores that sell mattresses and bedding related products. Legal and professional expenses Legal and professional expenses include legal and other professional fees associated with corporate management. Income Taxes SC Management is subject to federal and provincial income taxes in jurisdictions in which it conducts business. Selected Annual Financial Information The following table summarizes the results of SC Management s operations for Fiscal 2014, Fiscal 2013 and Fiscal 2012: Fiscal Fiscal Fiscal (C$ unless otherwise stated) $ $ $ Partnership income allocation , , ,690 Legal and professional fees... 4,600 15,969 6,351 Operating income , , ,339 Interest (income) expense... (11) 213 (82) Income before income taxes , , ,421 Income taxes Current ,435 55,324 40,230 Net income , , ,191 Basic and diluted earnings per share (in dollars): Earnings per share... $ 1.86 $ 0.39 $ 0.39 December 31, December 31, Total assets... 2,188,379 1,492,002 Fiscal 2014 Compared to Fiscal 2013 Partnership income allocation The allocation of income from SCC LP increased from $178,348 in Fiscal 2013 to $696,969 in Fiscal This was mainly driven by an increase in the net income of SCC LP from $26.0 million to $41.6 million. The net income of SCC LP in Fiscal 2014 was mainly driven by a 11.9% increase in revenues, a 17.4% increase in gross profit and the reversal of an impairment charge on an intangible asset of the Sleep America business which was sold in January The allocation of the profit or loss of SCC LP is specified in the limited partnership agreement governing SCC LP whereas on an annual basis specific allocations are made to the general partner of SCC LP and the remaining profit or loss is allocated to the common unitholders on a pro rata basis based on the percentage of common units held. The income allocation from SCC LP the partnership in Fiscal 2014 was based on a share of M-17

235 1.7% and net income of SCC LP of $41.6 million. The income allocation from SCC LP in Fiscal 2013 was based on a share of 0.7% and net income of SCC LP of $26.0 million. Legal and professional expenses Total legal and professional expenses decreased by $11,369 mainly due to decreased legal fees and professional fees related to corporate tax compliance. Income taxes The income tax expense for Fiscal 2014 was comprised of a $187,435 current income tax expense as compared to $55,324 in Fiscal 2013 mainly due to a higher allocation of income from SCC LP. Net income Net income for Fiscal 2014 was $504,945 compared to a net income of $106,842 for Fiscal The increase in net income was mainly due to the increased allocation of partnership income from SCC LP, partially offset by an increase in income taxes. Review of the Fourth Quarter of 2014 Compared to the Fourth Quarter of 2013 The allocation of income from SCC LP increased from $49,630 for Q to $256,566 for Q This was mainly driven by increase in net income of SCC LP from $7.2 million to $15.4 million. The net income of SCC LP in Q was mainly driven by a 13.07% increase in revenues and gain of $5.9 million recognized on reversal of brand impairment of Sleep America. The legal and professional fees decreased from $3,993 in Q to $1,150 in Q The income tax expense increased from $15,395 in Q to $68,998 in Q mainly due to higher allocation of income from SCC LP. The net income for Q was $186,418 compared to $30,243 for Q mainly due to higher allocation of income from SCC LP, partially offset by an increase in income taxes. Fiscal 2013 Compared to Fiscal 2012 Partnership income allocation The allocation of income from SCC LP increased from $150,690 in Fiscal 2012 to $178,348 in Fiscal The income allocation from SCC LP in Fiscal 2012 was based on a share of 0.5% and net income of SCC LP of $29.0 million. The income allocation from SCC LP in Fiscal 2013 was based on a share of 0.7% and net income of SCC LP of $26.0 million. Legal and professional expenses Total legal and professional expenses were $15,969 in Fiscal 2013, compared to $6,351 in Fiscal 2012, reflecting a net increase in legal and tax fees related to corporate legal and tax compliance. Income taxes (recovery) The income tax expense for Fiscal 2013 was comprised of a $55,324 current income tax expense as compared to $40,230 in Fiscal 2012 mainly due to a higher allocation of income from SCC LP. Net income Net income for Fiscal 2013 was $106,842 compared to a net income of $104,191 for Fiscal The increase in net income was mainly due to the increased allocation of partnership income from SCC LP, partially offset by an increase in income taxes. M-18

236 Liquidity and Capital Resources Liquidity SC Management s primary sources of cash consist of advances from related parties and capital contributions from shareholders. SC Management s primary use of cash is to fund operating expenses. SC Management s ability to fund future cash requirements will depend on capital contributions from its shareholders, advances from related parties and its future allocation of income from SCC LP, which will 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 Risk Factors. Fluctuations in liquidity are primarily driven by payment of taxation during the year, which are funded by additional capital contributions. A summary of net cash flows by activities is presented below for the last three fiscal years: Statements of Cash Flows Data (C$) Fiscal 2014 Fiscal 2013 Fiscal 2012 $ $ $ Cash flows used in operating activities... (63,729) (9,472) (19,119) Cash flows from investing activities... (7,756) Cash flows from financing activities... 63,729 17,228 19,119 Increase in cash and cash equivalents during the year... Net cash flows used in operating activities Net cash flows used in operating activities were $63,729 for Fiscal 2014 compared to $9,472 for Fiscal 2013, representing an increase of $54,257. The increase in cash used was primarily due to the payment of income taxes due to the increase in income allocation from SCC LP in Fiscal Net cash flows used in operating activities were $9,472 for Fiscal 2013 compared to $19,119 for Fiscal 2012, representing a decrease of $9,647. The decrease in cash utilized was primarily due to lower payment of income taxes. Net cash flows generated by financing activities Net cash flows generated by financing activities were $63,729 for Fiscal 2014, $17,228 for Fiscal 2013, and $19,119 for Fiscal 2012, consisting of capital contributions from the investors of SC Management. Contractual Obligations The following table summarizes SC Management s significant contractual obligations as at December 31, 2014 based on undiscounted cash flow: (Canadian dollars) 2015 Thereafter Total Financial Obligations Trade and other payables... 11,201 11,201 Due to related parties... 5,903 5,903 Income taxes payable , ,866 Total... $142,970 $142,970 Management believes that SC Management s operating activities will provide adequate sources of liquidity to meet its short-term and long-term needs. SC Management s primary source of funds is capital contributions from shareholders. M-19

237 Off Balance Sheet Arrangements SC Management did not have any material off-balance sheet arrangements as at the year-end of Fiscal 2014 and Fiscal 2013, nor does it have any subsequent to Fiscal 2014 year-end. Related Parties SC Management has an investment in SCC LP. The following balances are due to related parties: $ $ Short-term advances to related parties... 5,903 2,166 Amounts due to related parties as at the end of 2014 were $5,903 due to SCC LP on account of professional fees and income taxes paid on behalf of SC Management. Subsequent Events On June 23, 2015, Sleep Country Canada Holdings Inc. filed an amended and restated preliminary base PREP prospectus in connection with an initial public offering of common shares for gross proceeds of $200,000,000. The net proceeds of the offering will be used to acquire the outstanding shares of SCCI, SC US Holdco and SC Management. Risk Factors SC Management s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair value interest risk), credit risk and liquidity risk. SC Management s overall risk management program and business practices seek to minimize any potential adverse effects on SC Management s financial performance. Risk management is carried out by the senior management team under policies approved by SC Management s board of directors. Market risk Market risk is the loss that may arise from changes in factors such as interest rate, foreign exchange and the impact these factors may have on other counter parties. Foreign exchange risk SCC LP operates in Canada and the United States and is exposed to foreign exchange risk arising from exposure to fluctuations in the United States dollar exchange rate. Foreign exchange risk for SC Management arises primarily from its net investment in SCC LP due to its United States operations. This risk is managed primarily through local cash flow funding of the United States operations. Cash flow and fair value interest risk SC Management has no significant interest bearing assets. SC Management s income and operating cash flows are substantially independent of changes in market interest rates. Credit risk Credit risk refers to the risk of losses due to failure of the limited partnership in which SC Management has invested to meet their payment obligations. M-20

238 Liquidity risk Liquidity risk is the risk that SC Management cannot meet a demand for cash or fund its obligations as they come due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities. Capital risk SC Management s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for its common shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital structure to minimize the cost of capital. In order to maintain or adjust the capital structure, SC Management may issue new shares. For an understanding of other potential risks, including non-financial risks, see Risk Factors section of this Prospectus. Accounting Standards Implemented in 2014 Financial instruments The amendments to International Accounting Standards (IAS) 32, Financial Instruments Presentation (IAS 32), clarify the criteria that should be considered in determining whether an entity has a legally enforceable right of set-off in respect of its financial statements. Amendments to IAS 32 are applicable to annual periods beginning on or after January 1, 2014, with retrospective application required. SC Management has adopted the amendment to IAS 32 on January 1, 2014 and included the required disclosures in the audited financial statements. Levies The International Financial Reporting Interpretation Committee issued IFRIC 21, Levies. IFRIC 21 addresses accounting for liability to pay a levy within the scope of IAS 37, Provisions, contingent liabilities and contingent assets. A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes and fines or other penalties imposed for breaches of the legislation. SC Management adopted IFRIC 21 on January 1, 2014 and it did not result in any measurement adjustment as at January 1, Accounting Standards and Amendments Issued but Not Yet Adopted The following standards and amendments to existing standards were released by the IASB. SC Management is evaluating the impact of these standards and whether to early adopt these standards. Financial instruments In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments 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. IFRS 7 Financial instruments: Disclosures was also amended to provide guidance on additional disclosures on transition from IAS 39 to IFRS 9. The amendments to IFRS 7 are effective upon adoption of IFRS 9. Presentation of financial statements IAS 1 Presentation of financial statements has been amended to clarify guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements, and the disclosure of accounting policies. The amendment is required for years beginning on or after January 1, M-21

239 Critical Accounting Estimates and Judgments The preparation of financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates. The following discusses the most significant accounting judgments and estimates that SC Management has made in the preparation of the financial statements. Equity method of accounting The equity method of accounting is being applied by SC Management as it relates to its investment in SCC LP. The conclusion to account for an investment using the equity method is based on the assessment of the limited partnership arrangement and management applied judgment in determining a conclusion. SC Management s common units contain voting rights over certain matters, there are interchangeable management personnel and material transactions between the entities. Therefore, management has concluded that SC Management has the ability to exercise significant influence. The equity method of accounting could have a significant impact on the investment in Sleep Country LP and the share of partnership income. M-22

240 CERTIFICATE OF ISSUER Date: July 10, 2015 This prospectus constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required under the securities legislation of each of the provinces and territories of Canada. By: (Signed) DAVID FRIESEMA Chief Executive Officer By: (Signed) ROBERT MASSON Chief Financial Officer On behalf of the Board of Directors By: (Signed) STEPHEN K. GUNN Director By: (Signed) CHRISTINE MAGEE Director C-1

241 Date: July 10, 2015 CERTIFICATE OF THE UNDERWRITERS To the best of our knowledge, information and belief, this prospectus constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required under the securities legislation of each of the provinces and territories of Canada. TD SECURITIES INC. BMO NESBITT BURNS INC. By: (Signed) SANJAY NAKRA By: (Signed) BRAD P. FRASER CIBC WORLD MARKETS INC. SCOTIA CAPITAL INC. By: (Signed) RYAN VOEGELI By: (Signed) DANY BEAUCHEMIN CREDIT SUISSE SECURITIES GMP SECURITIES L.P. NATIONAL BANK FINANCIAL INC. (CANADA), INC. By: COLIN RYAN By: (Signed) ALFRED AVANESSY By: (Signed) ANDREW WALLACE RAYMOND JAMES LTD. By: (Signed) SEAN MARTIN C-2

242 Date: July 10, 2015 CERTIFICATE OF PROMOTERS This prospectus constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required under the securities legislation of each of the provinces and territories of Canada. BIRCH HILL FEATHER LP By: Birch Hill Feather GP Inc., in its capacity as general partner BIRCH HILL FEATHER (US) HOLDINGS LP By: Birch Hill Equity Partners Management Inc., in its capacity as general partner By: (Signed) By: STEPHEN J. DENT By: (Signed) THECLA SWEENEY President Senior Vice-President C-3

243 Targeting Significant Growth Over the Next 5 7 Years At Sleep Country, we really care about helping you sleep better. Christine Magee Executive Co-Chair

244 ? Sleep Country/Dormez-vous? 140 Wendell Avenue, Unit 1 North York, ON M9N 3R2 T: sleepcountry.ca dormezvous.com