Sleep Country Reports Solid Year and Fourth Quarter



    TSX: Z.UN

    TORONTO, March 6 /CNW/ - Sleep Country Canada Income Fund today reported
a 44.9% increase in sales to $324.1 million in 2006 compared to the same
period in the previous year. For the fourth quarter of 2006, sales increased
42.2% to $87.1 million from $61.2 million in the fourth quarter of 2005.
    In 2006, EBITDA(*) for the Fund increased 11.5% to $37.8 million,
reflecting solid contributions from the Sleep Country and Sleep America
banners, offset by lower than expected losses associated with expansion
spending at Dormez-vous. In the fourth quarter of 2006, EBITDA for the Fund
decreased by $0.1 million as a result of consistent EBITDA performance under
the Sleep Country banner and the positive contribution by Sleep America offset
by the expected loss from Dormez-vous.
    For 2006, sales growth in the Sleep Country base business (operations
under the Sleep Country Canada banner excluding those of Dormez-vous and Sleep
America) increased 21.5% over the same period in 2005, with comparable store
sales growth of 10.6%. Sales under the Dormez-vous banner in Quebec and the
Sleep America banner in Arizona acquired in the first quarter of 2006
contributed the balance of the total sales increase. In the fourth quarter of
2006, sales growth in the Sleep Country base business increased 14.2% over the
fourth quarter of 2005 with comparable store sales growth of 5.3%.
    "The past year was an exceptionally busy one for the Fund," said
Christine Magee, President. "We were able to complete two significant
acquisitions early in the year which set the stage for future growth into the
Quebec and US markets. Throughout the balance of 2006, we worked on
successfully integrating these acquisitions while undertaking a major
expansion in Montreal lead by the Dormez-vous management team. At the same
time, the Sleep Country banner continued to achieve record levels of sales
while executing its infill strategy and store refurbishment program."
    "We expect 2007 to be another good year for the Sleep Country Income
Fund," said Stephen Gunn. "We anticipate continued performance of our existing
Sleep Country stores, a positive contribution from Sleep America and achieving
break even from Dormez-vous by the end of 2007." "We believe Dormez-vous will
achieve break even EBITDA within 24 months of our acquisition which is well
within our experience with past regional expansions in other parts of the
country," said Christine Magee.
    "For the year 2007 as a whole, we expect to at least maintain the Fund's
current levels of EBITDA(*), cash generation and unit holder distributions,"
said Stephen Gunn. "With break even performance in Dormez-vous coupled with
steady performance under the Sleep Country and Sleep America banner, we expect
to maintain our conservative payout ratio for the year. We continue to
maintain a strong cash balance, despite significant investments made in 2006,
which ensures that our growth plans are well funded while being able to
comfortably fund all unitholder distributions," said Stephen Gunn.
    The Board of Trustees has approved a regular cash distribution of
$0.1167 per unit for the month of February, to be paid on March 20, 2007 to
unitholders of record at the close of business on February 28, 2007.

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

    Sleep Country Canada Income Fund is the largest retailer of mattresses in
Canada with 121 corporate owned stores in eight regional markets under the
Sleep Country banner, and 17 stores in Quebec under the Dormez-vous banner.
The Fund also owns Sleep America, the largest mattress retailer in Arizona
with 38 stores. Sleep Country was again recognized as one of Canada's 50 Best
Employers in 2006 and Sleep America was recognized as a top employer in
Arizona in 2005. Sleep Country Canada Income Fund is an open-ended limited
purpose trust that owns 100% of the voting securities of Sleep Country Canada
Inc. The Fund's units are listed on the Toronto Stock Exchange under the
symbol Z.UN.


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

                                                    December 31, December 31,
                                                        2006         2005
                                                          $            $
                                                  ---------------------------
                                                     (unaudited)   (audited)
    Assets

    Current assets
    Cash and cash equivalents                            14,488       28,690
    Accounts receivable                                   7,350        4,499
    Inventories                                          18,866       11,751
    Prepaid expenses and deposits                         1,307        1,524
                                                  ---------------------------
                                                         42,011       46,464

    Property and equipment                               21,150       12,456
    Other assets                                          1,849        1,139
    Intangible assets                                    74,898       57,447
    Goodwill                                            131,488      117,968
                                                  ---------------------------
                                                        271,396      235,474
                                                  ---------------------------
                                                  ---------------------------

    Liabilities and Unitholders' Equity

    Current liabilities
    Accounts payable and accrued liabilities             32,868       26,193
    Customer deposits                                     8,110        6,477
    Distribution payable to unitholders                   1,587        1,526
    Current portion of long-term debt                     4,650          129
                                                  ---------------------------
                                                         47,215       34,325

    Long-term debt                                       56,322       40,122
    Other liabilities                                     6,115        4,546
    Future income taxes                                  15,007       16,922
                                                  ---------------------------
                                                        124,659       95,915
                                                  ---------------------------

    Unitholders' Equity

    Capital contributions                               132,526      132,767
    Cumulative translation adjustment                        98            -
    Cumulative earnings                                  78,436       52,038
    Cumulative distributions                            (62,044)     (43,586)
    Cumulative dividends on Class A shares               (2,279)      (1,660)
                                                  ---------------------------
                                                        146,737      139,559
                                                  ---------------------------
                                                        271,396      235,474
                                                  ---------------------------
                                                  ---------------------------



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

                             Three months ended        Twelve months ended
                             ------------------        -------------------
                          December 31, December 31, December 31, December 31,
                              2006         2005         2006         2005
                                $            $            $            $
                         ----------------------------------------------------
                           (unaudited)  (unaudited)  (unaudited)   (audited)

    Sales                      87,053       61,204      324,089      223,717

    Cost of sales              64,962       44,105      239,649      159,674
                         ----------------------------------------------------

    Contribution margin        22,091       17,099       84,440       64,043
                         ----------------------------------------------------

    General and
     administrative
     expenses                  13,279        8,169       46,650       30,146
                         ----------------------------------------------------

    Earnings before
     the under-noted:           8,812        8,930       37,790       33,897
                         ----------------------------------------------------

    Interest expense              983          565        3,605        2,284

    Loss on early
     repayment of
     long-term debt                 -            -            -          706

    Depreciation and
     amortization               1,548        1,528        5,884        5,722

    Other                        (353)         (60)      (1,018)        (149)
                         ----------------------------------------------------

    Earnings before
     income taxes               6,634        6,897       29,319       25,334
                         ----------------------------------------------------

    Provision for
     (recovery of)
     income taxes
      Current                   1,172        1,065        5,752        4,300
      Future                      (19)        (715)      (2,831)      (1,409)
                         ----------------------------------------------------
                                1,153          350        2,921        2,891

    Net earnings for
     the period                 5,481        6,547       26,398       22,443

    Cumulative earnings,
     beginning of period       72,955       45,491       52,038       29,595
                         ----------------------------------------------------
                         ----------------------------------------------------
    Cumulative earnings,
     end of period             78,436       52,038       78,436       52,038
                         ----------------------------------------------------
                         ----------------------------------------------------
    Basic earnings per
     unit for the period        $0.39        $0.47        $1.88        $1.60
                         ----------------------------------------------------
                         ----------------------------------------------------



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

                             Three months ended        Twelve months ended
                             ------------------        -------------------
                          December 31, December 31, December 31, December 31,
                              2006         2005         2006         2005
                                $            $            $            $
                         ----------------------------------------------------
                           (unaudited)  (unaudited)  (unaudited)   (audited)

    Cash provided by
     (used in)

    Operating activities
    Net earnings for
     the period                 5,481        6,547       26,398       22,443
    Items not
     affecting cash
      Depreciation of
       property and
       equipment                1,474        1,144        5,192        4,188
      Amortization of
       intangible assets           74          384          692        1,534
      Amortization of
       deferred financing
       costs                       70           33          252          162
      Amortization of
       deferred lease
       inducements               (216)        (165)        (790)        (638)
      Write off deferred
       financing costs              -            -            -          168
      Other non-cash
       expenses                   203          (22)         759          551
      Future income taxes         (19)        (715)      (2,831)      (1,409)
                         ----------------------------------------------------
                                7,067        7,206       29,672       26,999

    Changes in non-cash
     items related to
     operating activities      (8,716)      (3,139)      (2,278)       3,420
                         ----------------------------------------------------

                               (1,649)       4,067       27,394       30,419
                         ----------------------------------------------------

    Investing activities
    Acquisitions, net
     of cash received               -            -      (20,356)           -
    Purchase of property
     and equipment             (3,842)      (2,823)     (12,899)      (6,615)
                         ----------------------------------------------------

                               (3,842)      (2,823)     (33,255)      (6,615)
                         ----------------------------------------------------

    Financing activities
    Issuance of
     senior notes                   -            -       11,565       40,000
    Financing costs on
     senior notes                   -            -         (763)        (660)
    Repayment of term
     bank loan                      -            -            -      (35,600)
    Decrease in capital
     lease obligations            (25)         (38)        (199)        (199)
    Dividends paid on
     class A shares              (151)        (162)        (621)        (649)
    Distributions paid
     to unitholders            (4,647)      (4,578)     (18,397)     (17,494)
                         ----------------------------------------------------
                               (4,823)      (4,778)      (8,415)     (14,602)
                         ----------------------------------------------------

    Exchange rate
     differences on
     cash and cash
     equivalents                  111            -           74            -
                         ----------------------------------------------------

    Increase (decrease)
     in cash and cash
     equivalents              (10,203)      (3,534)     (14,202)       9,202
    Cash and cash
     equivalents,
     beginning of period       24,691       32,224       28,690       19,488
                         ----------------------------------------------------
                         ----------------------------------------------------
    Cash and cash
     equivalents, end
     of period                 14,488       28,690       14,488       28,690
                         ----------------------------------------------------
                         ----------------------------------------------------



    Management's Discussion and Analysis of Results and Financial Condition

    Results for the three months and year ended December 31, 2006

                 ------------------------------------------------------------
    in thousands         Fourth Quarter                 Year to Date
                 ------------------------------------------------------------
                    2006      2005      2004      2006      2005      2004
                 ------------------------------------------------------------

    Sales         $ 87,053  $ 61,204  $ 50,401  $324,089  $223,717  $195,351
    Cost of Sales   64,962    44,105    35,745   239,649   159,674   136,998
    Contribution
     Margin         22,091    17,099    14,656    84,440    64,043    58,353
                     25.4%     27.9%     29.1%     26.1%     28.6%     29.9%

    General and
     Administrative
     Expenses       13,279     8,169     8,758    46,650    30,146    29,929

    EBITDA(1)        8,812     8,930     5,898    37,790    33,897    28,424

    Net earnings  $  5,481  $  6,547  $  4,347  $ 26,399  $ 22,443  $ 19,036
    Basic
     earnings
     per unit(2)  $   0.39  $   0.47  $   0.32  $   1.88  $   1.60  $   1.36

    Cash
     distributions
     per unit     $   0.35  $   0.34  $   0.31  $   1.36  $   1.30  $   1.16
    Payout
     ratio(3)        94.9%     87.5%     86.0%     80.1%     75.0%     74.4%

    Total assets  $271,396  $235,474  $220,729  $271,396  $235,474  $220,729
    Total long-
     term debt
     (excluding
     current
     portion)     $ 56,322  $ 40,122  $ 35,851  $ 56,322  $ 40,122  $ 35,851

    Number of
     stores at
     period end        173       110        95       173       110        95
      Sleep Country    120       110        95       120       110        95
      Dormez-vous       17         -         -        17         -         -
      Sleep America     36         -         -        36         -         -

    Total Sales
     Growth          42.2%     21.4%     14.1%     44.9%     14.5%     18.1%
      Sleep Country  14.2%     21.4%     14.1%     21.5%     14.5%     18.1%
      Dormez-vous
       and Sleep
       America(4)    28.0%         -         -     23.4%         -         -

    Same Store
     Sales Growth -
     Sleep
     Country(5)       5.3%      9.6%      8.5%     10.6%      5.6%     12.3%
                 ------------------------------------------------------------
                 ------------------------------------------------------------

    (1) EBITDA refers to earnings before interest, taxes, depreciation and
        amortization and other items. EBITDA is not a recognized measure
        under Canadian generally accepted accounting principles (GAAP) and
        may not be comparable to similar measures used by other companies.
        (See "Non-GAAP Measures")
    (2) Basic earnings per unit has been calculated using the "if-converted"
        method. Under this method, the Class A shares are treated as if
        converted into units for purposes of calculating basic earnings per
        unit.
    (3) Reflects the calculation of payout ratio before changes in working
        capital.
    (4) Represents sales growth contributed by the Dormez-vous and Sleep
        America banners which were acquired in the first quarter of 2006.
    (5) Same Store Sales Growth represents only those stores with at least
        13 months of sales under the Sleep Country banner and excludes
        relocated stores.


    Sales

    Total sales in the fourth quarter of 2006 grew 42.2% to $87.1 million from
$61.2 million in the fourth quarter of 2005. The increase in sales is
attributable to the following:

    -   Sales under the Sleep Country banner increased 14.2% over the same
        period in 2005. This growth is attributable to a 5.3% increase in
        comparable store sales coupled with sales growth of 8.9% generated by
        the 12 in-fill stores opened in the last 12 months and three stores
        relocated during the previous 12 months. Volume (the number of
        mattress sets delivered) under the Sleep Country banner increased
        5.3% compared with the same period in 2005. Price (representing
        average transaction value of a mattress set) increased 7.8% with the
        balance representing increases in the sale of accessory items.
    -   Total sales increased 28.0 % due to the contribution of Dormez-vous
        in Quebec and Sleep America in Arizona in the fourth quarter.
        Dormez-vous started the quarter with 15 stores and by the end of the
        quarter added another two stores. During the quarter, Sleep America
        opened two in-fill stores.
    

    For the year ended December 31, 2005, sales grew by 44.9% to
$324.1 million from $223.7 million in 2005. Of this increase, 21.5% related to
increases under the Sleep Country banner with the balance representing the
contributions of Dormez-vous and Sleep America from the dates of their
respective acquisitions to December 31, 2006. The sales growth of 21.5% under
the Sleep Country banner is comprised of comparable store sales growth of
10.6% coupled with growth related to the 12 in-fill stores opened in the last
12 months, three stores opened in Winnipeg in August of 2005 which were added
to the comparable store base in September 2006 and three stores relocated
during the previous 12 months. Overall, volume (the number of mattress sets
delivered) under the Sleep Country banner increased by 12.6% in 2006 compared
with 2005. Price (representing average transaction value of a mattress set)
increased 7.3% with the balance representing increases in the sale of
accessory items.

    Cost of sales and contribution margin

    Cost of sales includes product-related costs and the costs of our sales
and distribution operations, net of volume rebates received from vendors. Cost
of sales for the fourth quarter of 2006 increased 47.3% to $65.0 million,
compared with $44.1 million for the fourth quarter of 2005. This increase is a
result of higher sales volumes at lower product margins and increased direct
variable costs in our distribution and sales operations partially offset by
leveraging of fixed costs on higher sales volumes. In the fourth quarter of
2006, contribution margin increased by $5.0 million to 25.4% of sales compared
to 27.9% of sales for the same period in 2005. This change in contribution
margin as a percentage of sales is due to the following factors in the fourth
quarter of 2006 compared with the same period in 2005:

    
    -   In the Sleep Country banner, contribution margin was 26.6% as a
        percentage of sales compared with 27.9% in the fourth quarter of
        2005. Factors affecting the change in contribution margin include:

        -   Lower product gross margins, which reduced contribution margin by
            1.0% due to the continuation of 2005's more aggressive pricing
            strategy, changes in vendor and product mix and the introduction
            of higher priced, lower margin products in our 2006 mattress
            line-up.
        -   During the fourth quarter, lower volume rebate levels were
            achieved with one of our vendors. The resulting adjustment to
            volume rebate amounts was made in the fourth quarter of 2006
            which decreased contribution margin by 0.5%.
        -   Sales department operations increased contribution margin by 0.9%
            due to the leveraging of store occupancy and sales management
            costs as higher sales per store were realized.
        -   Distribution department costs increased contribution margin by
            0.6% in the fourth quarter of 2006 compared with 2005. This was a
            result of higher volumes in our warehouse and delivery
            operations. Sleep Country's warehouse operations experienced
            higher compensation costs due to the opening of a distribution
            center east of Toronto and higher volumes. Sleep Country's
            delivery operations experienced both higher compensation costs,
            external delivery costs and higher truck lease costs due to
            higher volume levels.

    -   Dormez-vous and Sleep America operations increased overall cost of
        sales by 31.0% in the fourth quarter of 2006 compared with the fourth
        quarter of 2005, which did not include these operations. Sleep
        America achieved a contribution margin of 21.0% for the fourth
        quarter of 2006. Dormez-vous achieved a contribution margin of 19.2%
        for the fourth quarter of 2006, as expected.
    

    Cost of sales for the year ended December 31, 2006 increased 50.1% to
$239.6 million compared with $159.7 million for the same period in 2005. In
the Sleep Country banner, cost of sales for the year increased 24.0%. In the
Sleep Country banner, contribution margin decreased to 27.1% from 28.6% in
2006 compared with 2005. This decrease is primarily due to reductions in
product gross margins as discussed above offset by the leveraging of store
occupancy costs on higher sales. For the period from acquisition to
December 31, 2006, Sleep America achieved a contribution margin percentage of
22.0% and Dormez-vous, achieved a contribution margin percentage of 16.4%.
Dormez-vous' contribution margin has improved each quarter as the higher
losses associated with their initial expansion spending reduced as the year
progressed, as planned.

    General and Administrative Expenses

    General and administrative (G&A) expenses include advertising costs (net
of co-op advertising rebates), general management and administrative costs,
occupancy-related costs associated with distribution centers, professional
fees (including public company-related costs), information technology-related
costs and other administrative expenses. G&A expenses for the fourth quarter
of 2006 increased $5.1 million to $13.3 million from $8.2 million for the same
period in 2005. As a percentage of sales, G&A expenses were 15.3% for the
fourth quarter of 2006 compared with 13.3% for the fourth quarter of 2005.
Notable changes in G&A expenses in the fourth quarter were as follows:

    
    -   In the Sleep Country banner, G&A expenses increased by 18.8% in the
        fourth quarter of 2006 compared with the same period in 2005. This
        increase was due to the following:

        -   Management and administrative costs increased 26.2% in the fourth
            quarter of 2006 compared with the same period in 2005. This is
            due to higher compensation costs due to a combination of annual
            salary increases, increases in headcount and higher management
            incentive plan accruals.
        -   Total advertising costs (net of co-op advertising rebates)
            increased 18.4% from the same period in the prior year, however,
            on an annual basis total advertising costs were consistent with
            2005. Gross advertising spending for the quarter (before co-op
            advertising rebates) increased 14.9% during the quarter. This was
            due to planned seasonal increases in radio and television
            spending in the fourth quarter of 2006 compared with the same
            period in 2005 coupled with inflationary increases. It does not
            reflect an overall change in levels of radio and television
            spending. Advertising costs were also offset by an increase in
            co-op advertising rebates due to higher sales volumes. Sleep
            Country continues to maintain a consistent level of advertising
            expenditures on an annualized basis in existing markets,
            leveraging these costs over a larger sales base.
        -   Warehouse occupancy costs increased 12.7% from the same period in
            2005. This increase is due to the opening of a distribution
            center October 1, 2006 east of Toronto and expansion of our
            Victoria distribution center. For 2007, additional distribution
            center openings are planned in the lower mainland of Vancouver
            and west of Toronto as well as expansion of our Kelowna site.

    -   G&A expenses for the Dormez-vous and Sleep America operations
        increased total G&A expenses by 43.4% in the fourth quarter of 2006
        compared with the fourth quarter of 2005 which did not include these
        operations. As a percentage of sales, Sleep America's G&A costs were
        15.3% for the fourth quarter of 2006. As a percentage of sales,
        Dormez-vous G&A costs were 31.6% for the fourth quarter of 2006. This
        is due to expansion-related activities including leasing a new
        distribution center, full levels of TV and radio advertising
        spending, additional advertising production costs, increases in
        administrative staff levels to support higher sales levels and the
        accrual of management incentive payments.
    

    G&A costs for the year ended December 31, 2006 increased $16.6 million to
$46.7 million from $30.1 million for the same period in 2005. As a percentage
of sales, G&A expenses were 14.4% for 2006 compared with 13.5% for the same
period in 2005. Of the increase in G&A expenses, 16.0% is attributable to
increases generated by the Sleep Country banner with the balance of the
increase attributed to the acquisition of Sleep America and the acquisition
and subsequent expansion of Dormez-vous. In the Sleep Country business, G&A
costs increased due to increases in management compensation costs discussed
above coupled with increased professional fees earlier in the year due to the
acquisitions of Sleep America and Dormez-vous. Warehouse occupancy costs also
increased over the prior year due to annual increases at some facilities and
new sites added in the fourth quarter of 2006.

    
    EBITDA (see "Non-GAAP measures")

    -------------------------------------------------------------------------
    (in thousands of     Three months Three months
     dollars)                   ended        ended   Year ended   Year ended
                          December 31, December 31, December 31, December 31,
                                 2006         2005         2006         2005
    -------------------------------------------------------------------------
    Sales                     $87,053      $61,204     $324,089     $223,717
    -------------------------------------------------------------------------
    EBITDA                     $8,812       $8,930      $37,790      $33,897
    -------------------------------------------------------------------------
    EBITDA margin               10.1%        14.6%        11.7%        15.2%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    In the fourth quarter of 2006, earnings before interest, taxes,
depreciation, amortization and other expenses (EBITDA) decreased $0.1 million
to $8.8 million from $8.9 million in the fourth quarter of 2005. This is due
to EBITDA in the Sleep Country business in the fourth quarter of 2006 being
consistent with that of 2005 and a combined net loss of $0.1 million
contributed by Sleep America and Dormez-vous. EBITDA in the fourth quarter of
2006 in the Sleep Country business was impacted by decreased contribution
margin levels due to gross margin changes coupled with higher management
compensation, quarterly changes in the timing of advertising spending and
higher warehouse occupancy costs offset by leveraging of fixed costs on higher
volumes.
    For the year ended December 31, 2006, EBITDA increased $3.9 million or
11.5% to $37.8 million from $33.9 million in 2005. This was due to an increase
in EBITDA from the Sleep Country business of $4.9 million coupled with a
contribution by Sleep America of $2.5 million from the date of acquisition and
a slightly better than expected loss realized by Dormez-vous of $3.4 million.

    Interest

    Interest expense was $1.0 million for the fourth quarter of 2006 and
$3.6 million for the year. For 2005, interest expense was $0.6 million in the
fourth quarter and $2.3 million for the year. This increase is due to interest
on US $10.0 million seven year senior secured notes and US $7.8 million in
vendor promissory notes (to the former shareholders of Sleep America) issued
in connection with the acquisition of Sleep America in the first quarter of
2006.

    Depreciation and amortization

    For the fourth quarter of 2006, total depreciation and amortization
expense was $1.5 million with the majority represented by depreciation on
property and equipment. For the same period in 2005 depreciation and
amortization expense was $1.5 million with depreciation on property and
equipment accounting for $1.1 million. For the year ended December 31, 2006,
total depreciation and amortization expense was $5.9 million with depreciation
on property and equipment accounting for $5.2 million. For the same period in
2005, amortization expense was $5.7 million with depreciation on property and
equipment accounting for $4.2 million. This change is due to an increase in
depreciation expense due to higher levels of capital spending and the
acquisitions of Sleep America and Dormez-vous offset by reduced amortization
of intangible assets related to the employment contracts recorded in 2003 as
these became fully amortized early in the second quarter of 2006.

    Income taxes

    The Fund is a mutual fund trust as defined under the Income Tax Act
(Canada), and as a result, is not subject to taxation on its income to the
extent that it is distributed to unitholders.
    The income tax expense relates to Sleep Country. In the fourth quarter of
2006, income tax expense was $1.2 million compared with minimal income tax
expense in the fourth quarter of 2005. There was minimal income tax expense in
the fourth quarter of 2005 as taxable income was offset by the future income
tax effect of certain timing differences. Income tax expense of $2.9 million
was consistent between 2006 and 2005. For the year, current income tax expense
increased 33.8% due to higher taxable income realized by the Sleep Country
banner at a higher effective tax rate and including taxable income realized in
Sleep America at a lower effective tax rate. Future income tax recovery
increased $1.4 million in 2006 due the favourable effect of changes in future
income tax rates and the benefit of tax losses realized by Dormez-vous.

    Net earnings

    For the fourth quarter of 2006, net earnings were $5.5 million, or 6.3%
of sales, compared with $6.5 million or 10.7% for the fourth quarter of 2005.
In 2006, net earnings were $26.4 million or 8.1% of sales compared with
$22.4 million, or 10.0% of sales for the same period in 2005. Basic earnings
per unit was $0.39 for the fourth quarter of 2006 and $1.88 for the year
compared with $0.47 for the fourth quarter of 2005 and $1.60 for the year.

    Liquidity and Capital Resources

    At December 31, 2006, cash and cash equivalents decreased by
$14.2 million to $14.5 million from $28.7 million at December 31, 2005. This
decrease is as a result of funds used to purchase both Sleep America and
Dormez-vous in the first quarter of 2006 combined with cash used to fund the
expansion of Dormez-vous in 2006, capital spending and monthly distributions
made to unitholders. These reductions were offset by cash generated from
operations (before changes in working capital) during the year of
$29.7 million.
    Cash flow from operations, together with cash and cash equivalents on
hand is expected to be sufficient to meet operating requirements, capital
expenditures and anticipated distributions. At December 31, 2006, the Fund was
in compliance with all covenants contained in its note indenture, note
agreement and revolving credit facility. These covenants require Sleep Country
and its subsidiaries to achieve a specified senior debt to EBITDA ratio and a
specified fixed charge coverage ratio.

    Operating activities

    Cash flow used by operations was $1.6 million for the fourth quarter of
2006 as the Fund experienced strong operating performance of $7.1 offset by
seasonal decreases in working capital balances of $8.7 million. The change in
working capital for the quarter was primarily the result of decreases in
accounts payable and accrued liability balances due to payments to suppliers
in the fourth quarter of 2006 related to higher levels of sales and accounts
payable balances in the third quarter of 2006 along with higher payments
related to year-end income tax instalments. The Fund believes it has
sufficient working capital reserves to satisfy all cash requirements,
including distributions, for the next 12 months.

    Investing activities

    Capital expenditures were $3.8 million for the three months and
$12.9 million for the year. This increase was due to the initiation of the
Sleep Country banner's store refurbishment program, store openings in Quebec
and related expansion spending along with a number of IT projects started in
the fourth quarter. In the fourth quarter of 2006, about 50.0% of capital
expenditures funded the maintenance and upgrading of existing facilities and
information systems, with the remaining 50.0% funding growth (such as the
opening of new stores and distribution centres in existing or new regional
markets). In 2006, about 44.0% of capital spending was devoted to maintenance
and 56.0% to growth due to the focus on expansion spending in Quebec. The Fund
considers spending on Sleep Country's store refurbishment program to be
maintenance capital spending. On an annualized basis, it is expected that
about half of all capital spending will fund maintenance activities and half
will fund growth. The ratio of capital spending varies each quarter depending
on the timing of store openings and maintenance activities.

    Financing activities

    The Fund paid distributions to unitholders totalling $4.6 million for the
three months ending December 31, 2006 and $18.4 million for the entire year.
The December 2006 distribution of $1.6 million was accrued and paid to
unitholders on January 19, 2007. Dividends paid to the Company's Class A
shareholders for the fourth quarter of 2006 totalled $0.2 million, with
$0.6 million paid for the year.

    Foreign Exchange

    For accounting purposes, the operating results of the Fund's wholly owned
U.S. subsidiary, Sleep America, are translated at the average exchange rate
prevailing for the month while the balance sheet is translated at the period
ending exchange rate. Sleep America is considered to be a self-sustaining
foreign operation. As such, foreign exchange gains and losses arising from
such translation are recorded as a separate component of unitholders' equity
on the balance sheet, rather than impacting operating results. From an
operations perspective, US dollar funds generated by Sleep America are used to
satisfy Sleep America's US dollar liabilities, which limit the Fund's exposure
to exchange rate fluctuations

    Distributable Cash (see "Non-GAAP measures")

    Sleep Country's policy is to distribute to the Fund all available cash
from operating subsidiaries after cash required for current maintenance and
growth capital expenditures, working capital reserves, future growth capital
reserves, and other discretionary reserves considered advisable by the
Company's Board. These discretionary reserves include providing cash for
future planned maintenance capital expenditures including Sleep Country's
store renovation program. This renovation program was launched in 2006 to
renovate approximately 90 stores under the Sleep Country banner over the next
three to five years. In 2006, 17 stores were renovated under this program.
This program is discretionary and can be implemented at a faster or slower
pace depending on available cash and management resources.
    In accordance with this policy and based on the strong performance of all
the Fund's banners, on October 26, 2006, the Board approved an increase in
cash distributions to $1.40 per trust unit per year from $1.35 per trust unit
per year. This was the fifth distribution increase since May, 2004, with the
annual rate growing by a total of 30.2%, from the initial distribution level
of $1.075 per trust unit per year to the current distribution level of
$1.40 per trust unit per year.
    In August 2006, the Canadian Securities Regulators issued CSA Staff
Notice 52-306 - "Non -GAAP Financial Measures" which clarifies the
expectations of the staff of the various provincial securities commissions
about the presentation of distributable cash. It is the view of the
commissions' staff that distributable cash is, in all circumstances, a cash
flow measure and that distributable cash is only fairly presented when
reconciled to cash flows from operating activities as presented in the
issuer's financial statements. Subsequently, the Canadian Institute of
Chartered Accountants ("CICA") issued draft guidance on reporting
distributable cash in MD&A.
    The Fund had been reconciling distributable cash to cash flow from
operating activities before changes in working capital due to the seasonal
fluctuations in the Fund's working capital balances. However, in response to
this Notice and CICA draft guidance, the Fund has revised the calculation of
distributable cash to include changes in working capital balances.
    On a quarterly basis, based on seasonal changes in sales and EBITDA, the
Fund's working capital balances can vary significantly. During the fourth
quarter, the Fund typically uses a significant amount of working capital. This
is due to large reductions in accounts payable balances in the fourth quarter
due to the payment of vendor accounts generated from seasonal high sales and
EBITDA in the third quarter and year end adjustments to increase income tax
instalment payments. The year end calculation, presented below, reduces the
impact of these seasonal working capital fluctuations.
    For the fourth quarter of 2006, the revised calculation of distributable
cash and corresponding payout ratio is presented below (which includes working
capital balances) along with the payout ratio calculated without taking into
account changes in working capital balances:

    
    -------------------------------------------------------------------------
    Distributable cash per unit                       For the      For the
     (see "Non-GAAP measures")                     three months three months
                                                       ended        ended
    (in thousands of dollars except unit            December 31, December 31,
     and per unit amounts)                              2006         2005
    -------------------------------------------------------------------------
                                                              $            $
    -------------------------------------------------------------------------
    Cash flow from operating activities before
     changes in non-cash items related to
     operating activities                                 7,067        7,206
    -------------------------------------------------------------------------
    Changes in non-cash items related to operating
     activities (working capital)                        (8,716)      (3,139)
    -------------------------------------------------------------------------
    Cash flow from operating activities                  (1,649)       4,067
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Maintenance capital expenditures(1)                  (1,921)      (1,750)
    -------------------------------------------------------------------------
    Decrease in capital lease obligations                   (25)         (38)
    -------------------------------------------------------------------------
    Distributable cash from operations                   (3,595)       2,279
    -------------------------------------------------------------------------
    Number of units and Class A shares
     outstanding                                     14,045,577   14,045,577
    -------------------------------------------------------------------------
    Distributable cash per unit and Class A share      ($0.2560)     $0.1623
    -------------------------------------------------------------------------
    Distributions declared per unit and
     Class A share                                      $0.3459      $0.3375
    -------------------------------------------------------------------------
    Payout ratio                                        (135.1%)      208.0%
    -------------------------------------------------------------------------
    Payout ratio excluding the impact of
     working capital                                      94.9%        87.5%
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    Distributable cash per unit
     (see "Non-GAAP measures")                        For the      For the
                                                    year ended    year ended
    (in thousands of dollars except unit            December 31, December 31,
     and per unit amounts)                              2006         2005
    -------------------------------------------------------------------------
                                                              $            $
    -------------------------------------------------------------------------
    Cash flow from operating activities before
     changes in non-cash items related to
     operating activities                                29,672       26,999
    -------------------------------------------------------------------------
    Changes in non-cash items related to operating
     activities (working capital)                        (2,278)       3,420
    -------------------------------------------------------------------------
    Cash flow from operating activities                  27,394       30,419
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Maintenance capital expenditures(1)                  (5,653)      (3,190)
    -------------------------------------------------------------------------
    Decrease in capital lease obligations                  (199)        (199)
    -------------------------------------------------------------------------
    Distributable cash from operations                   21,542       27,030
    -------------------------------------------------------------------------
    Number of units and Class A shares
     outstanding                                     14,045,577   14,045,577
    -------------------------------------------------------------------------
    Distributable cash per unit and Class A share       $1.5337      $1.9244
    -------------------------------------------------------------------------
    Distributions declared per unit and
     Class A share                                      $1.3584      $1.3000
    -------------------------------------------------------------------------
    Payout ratio                                          88.6%        67.6%
    -------------------------------------------------------------------------
    Payout ratio excluding the impact of
     working capital                                      80.1%        77.9%
    -------------------------------------------------------------------------
    (1) Maintenance capital expenditures are defined as capital spending
        associated with the maintenance and upgrading of existing facilities
        and information systems. This also includes all leasehold
        improvements associated with the Sleep Country store refurbishment
        program and any stores relocated during the period.
    


    For the year ended December 31, 2006, the Fund used $2.3 million in
working capital when historically the Fund generates working capital on an
annual basis as sales and EBITDA increases. This was a result of increases in
inventory of $3.4 million due primarily to the opening of 12 infill stores in
Sleep Country and 17 stores in Dormez-vous along with lower accounts payable
balances at December 31, 2006 compared with 2005 due primarily to $2.5 million
of income tax payments made and larger seasonal decreases in accounts payable
balances due to high sales from the third quarter of 2006. Working capital was
also affected by the acquisition of Sleep America; due to shorter normal
vendor terms Sleep America doesn't generate working capital as they increase
sales.

    Non-GAAP measures

    Distributable cash and distributable cash per unit

    Distributable cash per unit is defined by management as cash flow from
operating activities (from the unaudited interim consolidated financial
statements) adjusted for maintenance capital expenditures, and repayment of
capital lease obligations.
    Distributable cash per unit is not a recognized measure under Canadian
GAAP and may not be comparable to similar measures used by other companies.
The Fund believes that distributable cash per unit is a useful financial
measure as it represents a starting point for investors to determine cash
available for distributions. Investors should be cautioned, however, that
distributable cash per unit should not be construed as an alternative to net
earnings as determined in accordance with GAAP. Please see the table under
"Distributable cash per unit" for a reconciliation of distributable cash to
the comparable GAAP measure which is cash flow from operating activities in
the Fund's unaudited interim consolidated financial statements for the fourth
quarter of 2006.

    EBITDA

    EBITDA is defined by management as earnings before interest, taxes,
depreciation and amortization and other items. EBITDA is not a recognized
measure under Canadian GAAP and may not be comparable to similar measures used
by other companies. The Fund believes that EBITDA is a useful financial metric
as it represents a starting point in the determination of free cash flow
available for distribution to unitholders. Investors should be cautioned
however, that EBITDA should not be construed as an alternative to net earnings
as determined in accordance with GAAP. The following table reconciles EBITDA
to net earnings in the unaudited interim consolidated financial statements for
the fourth quarter of 2006:

    
                         Three months Three months
                                ended        ended   Year ended   Year ended
    (in thousands         December 31, December 31, December 31, December 31,
     of dollars)                 2006         2005         2006         2005
                        -----------------------------------------------------
                                    $            $            $            $

    EBITDA                      8,812        8,930       37,790       33,897

    Interest expense             (983)        (565)      (3,605)      (2,284)
    Loss on early
     repayment of
     long-term debt                 -            -            -         (706)
    Depreciation and
     amortization              (1,548)      (1,528)      (5,884)      (5,722)
    Other                         353           60        1,018          149
    Provision for
     income taxes              (1,153)        (350)      (2,921)      (2,891)
                        -----------------------------------------------------
    Net earnings for
     the period                 5,481        6,547       26,398       22,443
                        -----------------------------------------------------
    


    Outstanding Unit and Share Data

    At December 31, 2006, the Fund had 13,602,997 trust units outstanding and
Sleep Country had 442,580 Class A shares outstanding.

    Forward-looking statements

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

    March 6, 2007

    %SEDAR: 00019107E




For further information:

For further information: Investor Inquiries: Stephen Gunn, Chairman and
Chief Executive Officer; Vicki Jones, Chief Financial Officer and Corporate
Secretary, Tel: (416) 242-4774, Fax: (416) 242-9644,
www.sleepcountry.ca/investor

Organization Profile

SLEEP COUNTRY CANADA INCOME FUND

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