Sleep Country Reports Solid Year and Fourth Quarter



    TSX: Z.UN

    TORONTO, March 7 /CNW/ - Sleep Country Canada Income Fund today reported
a 10.2% increase in sales to $357.2 million in 2007 compared to the same
period in the previous year. For the fourth quarter of 2007, sales increased
2.3% to $89.1 million from $87.1 million in the fourth quarter of 2006.
    In 2007, EBITDA(*) for the Fund increased 9.8% to $41.5 million, reflecting
positive contributions from the Sleep Country and Dormez-vous banners, offset
by lower EBITDA associated with the Fund's US banner Sleep America. In the
fourth quarter of 2007, EBITDA for the Fund increased by 7.6% to $9.5 million
as a result of consistent EBITDA performance by the Sleep Country banner, a
positive EBITDA contribution by Dormez-vous offset by lower EBITDA performance
at Sleep America.
    For 2007, sales growth in the Canadian business (operations under the
Sleep Country Canada and Dormez-vous banners excluding those of Sleep America)
increased 10.1% over the same period in 2006, with comparable store sales
growth of 0.9%. Sales under the Sleep America banner in Arizona acquired in
the first quarter of 2006 contributed the balance of the total sales increase.
We believe, based on our discussions with suppliers and other industry sources
that the retail mattress industry in 2007 experienced an unusually difficult
year and overall market demand was roughly flat in 2007 vs. 2006. In the
fourth quarter of 2007, sales growth in the Canadian business was 4.8% over
the fourth quarter of 2006 with comparable store sales declining by 1.3%.
Sales under the Sleep America banner continued to be negatively impacted by
both a weak retail market in Arizona and a strengthening Canadian dollar.
During the fourth quarter of 2007, sales in Canadian dollars declined by 2.5%
in the US business however US dollar sales were consistent with the fourth
quarter of 2006.
    "The past year was a successful one for the Fund on many fronts," said
Christine Magee, President. "Dormez-vous achieved significant market share
gains, successfully and profitably expanding their position both in the market
and the Montreal community. Sleep America performed reasonably well in a
tough, weakening market and took the opportunity to invest in their platform
for future expansion. They also continued to further their reach into their
local communities through a large number of community and charity events. The
Sleep Country banner achieved a record level of sales, opened seven infill
stores and initiated a new market expansion for the second quarter of 2008,
with a planned opening of 3 to 4 stores and a distribution center in
Saskatchewan."
    "We are operating in unusually tough times for the retail mattress
industry as we believe the industry has experienced almost two years of lower
than average industry growth in North America," said Stephen Gunn, Chairman
and Chief Executive Officer. "However, with the Fund's strong cash position,
strong market shares and prudent management style we believe we are well
positioned for future opportunities. We were pleased to achieve a payout ratio
of 65% for 2007."
    The Board of Trustees has approved a regular cash distribution of
$0.1208 per unit for the month of February, to be paid on March 20, 2008 to
unitholders of record at the close of business on February 29, 2008.

    
    (*) 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 or cash flow from operations as
        determined in accordance with GAAP.
    

    Sleep Country Canada Income Fund is the largest retailer of mattresses in
Canada with 127 corporate owned stores under the Sleep Country banner, and
24 stores in Quebec under the Dormez-vous banner. The Fund also owns Sleep
America, the largest mattress retailer in Arizona with 44 stores. Sleep
Country was again recognized as one of Canada's 50 Best Employers in 2007 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,
                                                      2007          2006
                                                        $             $
                                                  ---------------------------
    Assets                                          (unaudited)   (unaudited)

    Current assets
    Cash and cash equivalents                           22,139        14,488
    Accounts receivable                                  7,879         7,350
    Inventories                                         19,684        18,866
    Prepaid expenses and deposits                        1,231         1,307
                                                  ---------------------------
                                                        50,933        42,011

    Property and equipment                              22,440        21,150
    Other assets                                           773         1,849
    Intangible assets                                   72,392        74,898
    Goodwill                                           126,256       131,488
                                                  ---------------------------
                                                       272,794       271,396
                                                  ---------------------------
                                                  ---------------------------

    Liabilities and Unitholders' Equity

    Current liabilities
    Accounts payable and accrued liabilities            29,017        32,868
    Customer deposits                                    8,418         8,110
    Distribution payable to unitholders                  1,643         1,587
    Current portion of long-term debt                      808         4,650
                                                  ---------------------------
                                                        39,886        47,215

    Long-term debt                                      59,953        56,322
    Other liabilities                                    6,932         6,115
    Future income taxes                                 13,197        15,007
                                                  ---------------------------
                                                       119,968       124,659
                                                  ---------------------------
    Unitholders' Equity

    Capital contributions                              132,356       132,526
    Cumulative earnings                                106,637        78,436
    Cumulative distributions                           (81,200)      (62,044)
    Cumulative dividends on Class A shares              (2,903)       (2,279)
    Accumulated other comprehensive income (loss)       (2,064)           98
                                                  ---------------------------
                                                       152,826       146,737
                                                  ---------------------------
                                                       272,794       271,396
                                                  ---------------------------
                                                  ---------------------------



    Sleep Country Canada Income Fund
    Consolidated Statements of 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,
                              2007         2006         2007         2006
                                $            $            $            $
                          ---------------------------------------------------
                           (unaudited)  (unaudited)  (unaudited)   (audited)

    Sales                      89,096       87,053      357,182      324,089

    Cost of sales              67,470       64,962      266,008      239,649
                          ---------------------------------------------------
    Contribution margin        21,626       22,091       91,174       84,440
                          ---------------------------------------------------
    General and
     administrative expenses   12,140       13,279       49,695       46,650
                          ---------------------------------------------------

    Earnings before the
     under-noted:               9,486        8,812       41,479       37,790
                          ---------------------------------------------------

    Interest expense              697          983        3,198        3,605

    Financing expense on
     long-term debt                 -            -          136            -

    Depreciation and
     amortization               2,305        1,548        6,781        5,884

    Other                        (305)        (353)        (807)      (1,018)
                          ---------------------------------------------------
    Earnings before
     income taxes               6,789        6,634       32,171       29,319
                          ---------------------------------------------------
    Provision for (recovery
     of) income taxes
      Current                     602        1,172        4,930        5,752
      Future                   (1,480)         (19)      (1,664)      (2,831)
                          ---------------------------------------------------
                                 (878)       1,153        3,266        2,921
    Net earnings for
     the period                 7,667        5,481       28,905       26,398
                          ---------------------------------------------------
                          ---------------------------------------------------
    Basic earnings per
     unit for the period        $0.55        $0.39        $2.06        $1.88
                          ---------------------------------------------------
                          ---------------------------------------------------



    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,
                              2007         2006         2007         2006
                                $            $            $            $
                          ---------------------------------------------------
                           (unaudited)  (unaudited)  (unaudited)  (unaudited)
    Cash provided by
     (used in)

    Operating activities

    Net earnings for the
     period                     7,667        5,481       28,905       26,398
    Items not affecting
     cash
      Depreciation of
       property and equipment   2,241        1,474        6,501        5,192
      Amortization of
       intangible assets           64           74          280          692
      Amortization of
       deferred financing
       costs                        -           70            -          252
      Amortization of
       deferred lease
       inducements               (232)        (216)        (919)        (790)
      Other non-cash
       expenses                   187          203          731          759
      Future income taxes      (1,480)         (19)      (1,664)      (2,831)
                          ---------------------------------------------------

                                8,447        7,067       33,834       29,672
    Changes in non-cash
     items related to
     operating activities     (10,415)      (8,716)      (3,921)      (2,278)
                          ---------------------------------------------------

                               (1,968)      (1,649)      29,913       27,394
                          ---------------------------------------------------

    Investing activities
    Acquisitions, net of
     cash received                  -            -            -      (20,356)
    Purchase of property
     and equipment             (3,071)      (3,842)      (7,938)     (12,899)
                          ---------------------------------------------------
                               (3,071)      (3,842)      (7,938)     (33,255)
                          ---------------------------------------------------

    Financing activities
    Issuance of senior notes        -            -       10,000       11,565
    Financing costs on
     senior notes                   -            -            -         (763)
    Repayment of promissory
     notes                          -            -       (4,330)           -
    Decrease in capital
     lease obligations            (15)         (25)         (88)        (199)
    Dividends paid on
     class A shares              (158)        (151)        (623)        (621)
    Distributions paid to
     unitholders               (4,817)      (4,647)     (19,100)     (18,397)
                          ---------------------------------------------------
                               (4,990)      (4,823)     (14,141)      (8,415)
                          ---------------------------------------------------

    Exchange rate
     differences on cash
     and cash equivalents           7          111         (183)          74

    Increase (decrease)
     in cash and cash
     equivalents              (10,022)     (10,203)       7,651      (14,202)
    Cash and cash
     equivalents, beginning
     of period                 32,161       24,691       14,488       28,690
                          ---------------------------------------------------
                          ---------------------------------------------------
    Cash and cash
     equivalents, end of
     period                    22,139       14,488       22,139       14,488
                          ---------------------------------------------------
                          ---------------------------------------------------



    Management's Discussion and Analysis of Results and Financial Condition

    Results for the three months and year ended December 31, 2007

                                          -----------------------------------
    in thousands except                      Full Year  Full Year  Full Year
     per unit amounts                          Ended      Ended      Ended
                                          -----------------------------------
                                                2007       2006       2005
                                          -----------------------------------
    Sales                                    $ 357,182  $ 324,089  $ 223,717
    Cost of Sales                              266,008    239,649    159,674
    Contribution Margin                         91,174     84,440     64,043
                                                 25.5%      26.1%      28.6%
    General and Administrative Expenses      $  49,695  $  46,650  $  30,146
    EBITDA(1)                                   41,479     37,790     33,897

    Net earnings                             $  28,905  $  26,398  $  22,443
    Basic earnings per unit(2)               $    2.06  $    1.88  $    1.60

    Cash distributions per unit              $    1.41  $    1.36  $    1.30
    Payout ratio(3)                              65.0%      80.1%      77.9%

    Total assets                             $ 272,794  $ 271,396  $ 235,474
    Total long-term debt
     (excluding current portion)             $  59,953  $  56,322  $  40,122

    Number of stores at period end                 195        175        110
      Sleep Country                                127        120        110
      Dormez-vous                                   24         17          -
      Sleep America                                 44         38          -

    Total Sales Growth                           10.2%      44.9%      14.5%
      Canada                                     10.1%      28.0%      14.5%
      United States                               0.1%      16.9%        n/a

    Same Store Sales Growth(4)                   -1.4%        n/a        n/a
      Canada                                      0.9%      10.6%       5.6%
      United States                             -15.6%        n/a        n/a
                                          -----------------------------------


                                 --------------------------------------------
    in thousands except            Fourth      Third     Second       First
     per unit amounts              Quarter    Quarter    Quarter     Quarter
                                 --------------------------------------------
                                     2007       2007       2007        2007
                                 --------------------------------------------
    Sales                         $  89,096  $ 104,725  $  83,497  $  79,864
    Cost of Sales                    67,469     74,805     62,651     61,083
    Contribution Margin              21,627     29,920     20,846     18,781
                                      24.3%      28.6%      25.0%      23.5%
    General and Administrative
     Expenses                     $  12,141  $  13,901  $  12,393  $  11,260
    EBITDA(1)                         9,486     16,019      8,453      7,521

    Net earnings                  $   7,667  $  10,971  $   5,459  $   4,808
    Basic earnings per unit(2)    $    0.55  $    0.78  $    0.39  $    0.34

    Cash distributions per unit   $    0.36  $    0.35  $    0.35  $    0.35
    Payout ratio(3)                   69.4%      41.0%      87.4%      88.4%

    Total assets                  $ 272,794  $ 283,435  $ 271,050  $ 259,716
    Total long-term debt
     (excluding current portion)  $  59,953  $  59,996  $  60,770  $  51,616

    Number of stores at period
     end                                195        186        184        178
      Sleep Country                     127        123        122        121
      Dormez-vous                        24         22         22         18
      Sleep America                      44         41         40         39

    Total Sales Growth                 2.3%       7.1%      11.8%      23.6%
      Canada                           4.8%       9.7%      14.3%      12.8%
      United States                   -2.5%      -2.6%      -2.5%      10.8%

    Same Store Sales Growth(4)        -4.4%        n/a        n/a        n/a
      Canada                          -1.3%       1.7%       3.8%      -0.3%
      United States                  -24.5%     -12.1%      -10.6        n/a
                                 --------------------------------------------


                                 --------------------------------------------
    in thousands except            Fourth      Third     Second       First
     per unit amounts              Quarter    Quarter    Quarter     Quarter
                                 --------------------------------------------
                                     2006       2006       2006        2006
                                 --------------------------------------------
    Sales                         $  87,053  $  97,757  $  74,652  $  64,627
    Cost of Sales                    64,962     69,699     56,152     48,836
    Contribution Margin              22,091     28,058     18,500     15,791
                                      25.4%      28.7%      24.8%      24.4%
    General and Administrative
     Expenses                     $  13,279  $  13,186  $  11,131  $   9,054
    EBITDA(1)                         8,812     14,872      7,369      6,737

    Net earnings                  $   5,481  $   9,650  $   6,827  $   4,440
    Basic earnings per unit(2)    $    0.39  $    0.69  $    0.48  $    0.32

    Cash distributions per unit   $    0.35  $    0.34  $    0.34  $    0.34
    Payout ratio(3)                   94.9%      48.8%     121.6%      93.2%

    Total assets                  $ 271,396  $ 279,255  $ 260,818  $ 259,239
    Total long-term debt
     (excluding current portion)  $  56,322  $  55,667  $  55,671  $  56,421

    Number of stores at period
     end                                175        167        162        151
      Sleep Country                     120        116        116        112
      Dormez-vous                        17         15         11          7
      Sleep America                      38         36         35         32

    Total Sales Growth                42.2%      51.6%      42.3%      41.8%
      Canada                          23.4%      33.2%      22.2%      33.7%
      United States                   18.8%      18.4%      20.1%       8.1%

    Same Store Sales Growth(4)          n/a        n/a        n/a        n/a
      Canada                           5.3%      12.9%       6.4%      19.3%
      United States                     n/a        n/a        n/a        n/a
                                 --------------------------------------------

    (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. (See "Non-GAAP Measures")
    (4) Same Store Sales Growth represents only those stores with at least
        13 months of sales.


    Sales

    Sales overall for the Fund in the fourth quarter of 2007 grew 2.3% to
$89.1 million from $87.1 million in the fourth quarter of 2006. The increase
in sales is attributable to the following:

        -  Sales in Canada under the Sleep Country and Dormez-vous banners
           ("Canada") in the fourth quarter of 2007 increased 4.8% over the
           same period in 2006. This was comprised of a 1.3% decrease in
           comparable store sales offset by a 6.1% increase due to the
           incremental sales generated by the seven in-fill stores opened the
           previous 12 months under the Sleep Country banner and the seven
           in-fill stores opened by Dormez-vous during the previous twelve
           months. Mattress and box sales increased 3.3% compared with the
           same period in the prior year with growth in accessory sales
           accounting for the remaining increase. Volume (the number of
           mattress sets delivered) in the Canadian business increased 6.3%
           compared with the same period in 2006.

        -  Sales in the United States in Canadian dollars decreased 13.7% due
           to the sales performance of Sleep America in the fourth quarter of
           2007 compared with the same period of 2006. This was comprised of
           a flat level of US dollar sales negatively impacted by the
           strengthening of the Canadian dollar during the twelve month
           period. During the quarter, Sleep America's comparable store sales
           decreased 24.5% in Canadian dollars. Volume (the number of
           mattress sets delivered) in the United States business decreased
           16.9% compared with the same period in 2006. The markets in which
           Sleep America currently operates continue to display weak market
           conditions.

    Sales overall for the Fund grew in 2007 10.2% to $357.2 million from
$324.1 million in 2006.

        -  The sales growth of 10.1% in Canada is attributable to a 0.9%
           increase in comparable store sales under the Canadian banners with
           the balance related to in-fill stores opened during the twelve
           month period. Volume (the number of mattress sets delivered) in
           the Canadian business increased 8.9% compared with the same period
           in 2006. The remaining increase is a result of the Sleep Country
           banner's continued focus on accessory sales during 2007; sales of
           accessory items (including headboards, footboards, sheets and
           pillows) increased 17.4% over 2006.

        -  Sales in the United States increased 11.1% due to the comparison
           of a full year of sales in 2007 with ten months of sales in 2006
           due to the acquisition of Sleep America in March 2006. Using a
           full year over year comparison, Sleep America experienced a
           decline in comparable store sales of 15.6% in Canadian dollars due
           to an 11.1% decrease in US dollar sales on a comparable store
           basis and the continued strengthening of the Canadian dollar.
           Using a full year over year comparison, volume (the number of
           mattress sets delivered) in the United States business decreased
           6.3% compared with the same period in 2006. The markets in which
           Sleep America does business displayed weakening market conditions
           throughout 2007.

    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 2007 increased 3.9% to $67.5
million, compared with $65.0 million for the fourth quarter of 2006. In the
fourth quarter of 2007, contribution margin was 24.3% of sales compared to
25.4% of sales for the same period in 2006. This change in contribution margin
as a percentage of sales is due to the following factors in the fourth quarter
of 2007 compared with the same period in 2006:

        -  In the Canadian business, cost of sales increased 6.1% and
           contribution margin was 25.1% as a percentage of sales compared
           with 26.0% for 2006. Product gross margins decreased by 0.5% in
           the fourth quarter of 2007 over the same period in the prior year.
           This is due to changes in vendor and product mix and higher
           freight costs. Costs in our distribution and sales operations
           negatively impacted the fourth quarter of 2007 by 0.8% due to a
           combination of higher external delivery costs, especially in
           Western Canada where the labour market is experiencing continued
           tightness and higher store occupancy costs due to the infill
           stores opening during the 12 month period. These higher costs were
           offset by higher volume rebates received due to changes in
           vendor mix.

        -  Cost of sales in the United States decreased by 9.9% in the fourth
           quarter of 2007 compared with the fourth quarter of 2006. This
           decrease is due to higher store occupancy costs related to the
           infill stores opened offset by lower product cost of sales,
           selling, warehouse and distribution costs due to lower sales
           levels and a reduction in the number of deliveries. Sleep America
           achieved a contribution margin of 17.5% for the fourth quarter of
           2007 compared with 21.0% for the same period in 2006. This
           reduction is primarily due to lower leveraging on all fixed sales
           and distribution costs (including store occupancy and compensation
           costs) on reduced sales volumes.

    Cost of sales in 2007 increased 11.0% to $266.0 million from $239.6
million for 2006. In 2007, contribution margin increased by $6.7 million or
25.5% of sales compared to 26.1% of sales in 2006. This change as a percentage
of sales was the result of a number of factors in both the Canadian and US
businesses:

        -  In the Canadian business, cost of sales increased 10.3% and
           contribution margin was 26.5% as a percentage of sales compared
           with 26.6% for 2006. Product gross margins increased by 0.5% in
           2007 over the prior year due to changes in vendor and product mix
           while costs increased 0.6% in our sales and operations departments
           due to higher occupancy due to the infill stores opened during the
           period, higher warehouse and delivery staffing costs associated
           with three smaller regional distribution centers opened in the
           last twelve months in the Sleep Country business and salary and
           wage pressures due to labour market conditions.

        -  In the United States business, cost of sales increased by 16.3% in
           2007 compared with 2006. This decrease is partially due to 2007
           reflecting a full year of costs while 2006 reflects 10 months of
           costs due to the acquisition of Sleep America in March 2006. Sleep
           America also experienced higher store occupancy costs related to
           the infill stores opened offset by lower product cost of sales,
           selling, warehouse and distribution costs due to lower sales
           levels and a reduction in the number of deliveries. Sleep America
           achieved a contribution margin of 18.3% for 2007 compared with
           22.0% for the same period in 2006. This reduction is primarily due
           to lower leveraging on all fixed sales and distribution costs
           (including store occupancy and compensation costs) on reduced
           sales volumes.
    

    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 2007 decreased $1.1 million to
$12.1 million from $13.3 million for the same period in 2006. As a percentage
of sales, G&A expenses were 13.6% for the fourth quarter of 2007 compared with
15.3% for the fourth quarter of 2006. Notable changes in G&A expenses in the
fourth quarter were as follows:

    
     -  In the Canadian business, G&A expenses decreased 8.1% in 2007
        compared with 2006. This decrease was due to lower management
        incentive plan accruals based on to the level of performance achieved
        in 2007, a 14.5% reduction in advertising spending due to changes in
        the spending mix and increased co-op advertising rebates received at
        consistent rates on higher sales levels. These were offset by higher
        warehouse occupancy costs due to three new regional distribution
        centers opened and the expansion of our Greater Toronto Area and
        Vancouver Island distribution centers compared with the same period
        in the last twelve months and higher professional fees.

     -  In the United States business, G&A expenses decreased by 11.5% in
        2007 compared 2006. As a percentage of sales, Sleep America's G&A
        costs were 15.7% for the fourth quarter of 2007 compared with 15.3%
        for 2006. This increase in G&A expenses as a percentage of sales is
        primarily due to lower co-op advertising credits on lower sales
        volumes and changes in vendor mix.

    G&A expenses for 2007 increased $3.0 million to $49.7 million from
$46.7 million for the same period in 2006. As a percentage of sales, G&A
expenses were 13.9% for 2007 compared with 14.4% in 2006.

     -  In the Canadian business, G&A expenses increased 4.5% in 2007
        compared with 2006. This increase was due to higher warehouse
        occupancy costs due to the opening of three new sites and the
        expansion of two existing sites and higher credit card and third
        party financing charges. These were offset by lower management
        incentive plan accruals and increased co-op advertising rebates
        received at consistent rates on higher sales levels.

     -  In the United States business, G&A expenses for the Sleep America
        operations increased by 20.8% in 2007 compared with the ten months of
        2006 from the date of acquisition in March. As a percentage of sales,
        Sleep America's G&A costs were 16.7% for 2007 compared with 15.3% for
        the ten month period in 2006. This increase in G&A expenses is
        primarily due to lower co-op advertising credits on lower sales
        volumes and changes in vendor mix.


    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,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Sales                     $89,096      $87,053     $357,182     $324,089
    EBITDA                     $9,486       $8,812      $41,479      $37,790
    EBITDA margin               10.6%        10.1%        11.6%        11.7%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    In the fourth quarter of 2007, earnings before interest, taxes,
depreciation, amortization and other expenses (EBITDA) increased $0.7 million
to $9.5 million from $8.8 million in the fourth quarter of 2006. This is due
to EBITDA in the Canadian business in the fourth quarter of 2007 increasing
$1.2 million and an EBITDA decrease of $0.5 million in the United States
business. The markets in which Sleep America currently operates have
experienced weak market conditions throughout 2007.
    For the year ended December 31, 2007, earnings before interest, taxes,
depreciation, amortization and other expenses (EBITDA) rose by $3.7 million or
9.8% to $41.5 million from $37.8 million in 2006. This was due to an increase
in EBITDA from the Canadian business of $5.5 million offset by a reduction of
$1.8 million due to sales weakness in the Sleep America business.

    Interest

    Interest expense was $0.7 million for the fourth quarter of 2007 and
$3.2 million for the year. For 2006, interest expense was $1.0 million in the
fourth quarter and $3.6 million for the year. This decrease is due to lower
interest on the vendor promissory notes due to a scheduled repayment of US
$4.0 million in March 2007 and a reduction in the balance outstanding at
December 31, 2007 due to the weak EBITDA performance of Sleep America during
2007. The vendor notes were issued in connection with the acquisition of Sleep
America in the first quarter of 2006.

    Depreciation and amortization

    For the fourth quarter of 2007, total depreciation and amortization
expense was $2.3 million with the majority represented by depreciation on
property and equipment. For the same period in 2006 depreciation and
amortization expense was $1.5 million with the majority represented by
depreciation on property and equipment. For the year ended December 31, 2007,
total depreciation and amortization expense was $6.8 million with depreciation
on property and equipment accounting for $6.5 million. For the same period in
2006, amortization expense was $5.9 million with depreciation on property and
equipment accounting for $5.2 million. This change is due to an increase in
depreciation expense due to higher levels of capital spending from the 20 in
fill stores opened across all Banners during the last twelve months and the
completion of a number of IT projects during 2006 and 2007.

    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 at this
time to the extent that it is distributed to unitholders. The income tax
expense relates to Sleep Country and its subsidiaries. As a result, the
consolidated annualized tax rate for 2007 of 10.1% is lower than the combined
statutory rate for corporations.
    On June 22, 2007, amendments to the Tax Act received Royal Ascent which
modify the tax treatment of certain publicly traded trusts and partnerships
that are specified investment flow-through trusts or partnerships ("SIFTs").
Under the SIFT rules, a SIFT will generally be taxed in a manner similar to
corporations on income from a business carried on in Canada by the SIFT and
income (other than taxable dividends) or capital gains from non-portfolio
properties (as defined in the Tax Act) at a combined federal/provincial tax
rate similar to that of a corporation. Allocations or distributions of income
and capital gains that are subject to the SIFT rules will be taxed as a
dividend from a taxable Canadian corporation in the hands of the beneficiaries
or partners of the SIFT. Subject to the normal growth guidelines issued in a
press release by the Department of Finance (Canada) on December 15, 2006 (the
"Normal Growth Guidelines"), the SIFT rules will not apply until the 2011
taxation year to trusts or partnerships that would have been SIFTs on
October 31, 2006 if the "SIFT trust" and "SIFT partnership" definitions in the
Tax Act had been in force as of that date.
    The gross amount of temporary differences that are expected to reverse
before January 1, 2011 is approximately $0.3 million. As these temporary
differences are expected to reverse before the SIFT rules are expected to
apply to the Fund, no adjustment on the future income tax liability has been
recorded on these temporary differences.
    In the fourth quarter of 2007, there was an income tax recovery of
$0.9 million compared with an income tax expense of $1.2 million in the fourth
quarter of 2006 due the favourable effect of changes in future income tax
rates on future income tax balances. Income tax expense was $3.3 million in
2007 compared with $2.9 million for 2006. Future income tax recovery decreased
$1.2 million in 2007 due the favourable effect of changes in future income tax
rates offset by a small taxable position related to Dormez-vous.

    Net earnings

    For the fourth quarter of 2007, net earnings were $7.7 million, or 8.6%
of sales, compared with $5.5 million or 6.3% for the fourth quarter of 2006.
In 2007, net earnings were $28.9 million or 8.1% of sales compared with
$26.4 million or 8.2% of sales for the same period in 2006. Basic earnings per
unit was $0.55 for the fourth quarter of 2007 and $2.06 for the year compared
with $0.39 for the fourth quarter of 2006 and $1.88 for the year.

    Liquidity and Capital Resources

    At December 31, 2007, cash and cash equivalents increased by $7.6 million
to $22.1 million from $14.5 million at December 31, 2006. This increase is due
to cash generated from operations (before changes in working capital) of
$33.8 million combined with $10.0 million in senior secured notes financing.
These increases were offset by cash used to fund working capital changes of
$3.9 million primarily related to changes in accounts payable balances, fund
the continued expansion of Dormez-vous, investments in the Sleep America
business and unitholder distributions. Cash and cash equivalents represent
cash on hand and on deposit with financial institutions and does not include
any asset backed commercial paper products.
    Cash flow from operations, together with cash and cash equivalents on
hand are expected to be sufficient to meet operating requirements, capital
expenditures and anticipated distributions. The Company also has a
$10.0 million revolving credit facility which is undrawn at December 31, 2007.
At December 31, 2007, 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 $2.0 million for the fourth quarter of
2007 as the Fund experienced solid operating performance of $8.4 offset by
seasonal decreases in working capital balances of $10.4 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 lower amounts accrued
under the management bonus plan. 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 $3.1 million for the three months and
$7.9 million for the year. This decrease is due to 2006 representing an
unusually high year for capital spending as 2006 incorporated the expansion of
Dormez-vous, the store refurbishment program and the implementation of radio
frequency bar coding in a number of our distribution centers. In the fourth
quarter of 2007, about 38.0% of capital expenditures funded the maintenance
and upgrading of existing facilities and information systems, with the
remaining 62.0% funding growth (such as the opening of new stores and
distribution centers in existing or new regional markets). In 2007, about
42.0% of capital spending was devoted to maintenance and 58.0% to growth due
to the focus on expansion spending in Quebec. On an annualized basis, it is
expected that roughly 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 $4.9 million for the
three months ending December 31, 2007 and $19.2 million for the entire year.
The December 2007 distribution of $1.6 million was accrued and paid to
unitholders on January 18, 2008. Dividends paid to the Sleep Country's Class A
shareholders for the fourth quarter of 2007 totalled $158 thousand with
$623 thousand 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. The change
between 2007 and 2006 is a result of the strengthening Canadian dollar
compared with the US dollar during this period.
    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. As part of the acquisition
of Sleep America in March 2006, the Fund, through a subsidiary, borrowed
US $10.0 million seven year notes to fund a portion of the purchase price.
This long term debt further serves to offset the impact of the strengthening
Canadian dollar on the Sleep America balance sheet.

    Business Risks

    As at December 31, 2007, there had been no material change in the
Company's risks or risk management activities from those disclosed in the 2006
Annual Report.
    For more information on the Fund's risk management activities, policies
and guidelines, please see the Fund's 2006 Annual Information Form and the
business risk section in the Management's Discussion and Analysis section in
the 2006 Annual Report.

    Distributable Cash (see "Non-GAAP measures")

    In any given period, distributions declared may differ from cash provided
by operating activities primarily due to seasonal fluctuations in non-cash
operations items (such as receivables, inventory, accounts payable and accrued
liabilities and customer deposits). These seasonal or short term fluctuations
may be funded by cash on hand or the revolving credit facility. In addition,
distributions declared may exceed net income in a given period, as net income
includes amortization and distributions are determined based on non-GAAP cash
flow measures, which include the consideration of maintenance capital
expenditures.
    For the twelve months ended December 31, 2007, distributions declared did
not exceed either operating cash flow or net income as distributions were
funded by operating cash flow. For the three months ended December 31, 2007,
distributions declared did not exceed net income however did exceed operating
cash flow due to seasonal changes in working capital balances. In the fourth
quarter of 2007, distributions were funded by accumulated cash balances from
prior quarters.
    Management determines the Fund's unit distribution rate by, among other
considerations, its assessment of cash flow as determined using certain
non-GAAP measures. As such, management feels that the cash distributions are
not an economic return of capital, but a distribution of sustainable cash flow
from operations. Management does not target a specific payout ratio wand
considers unforeseen expenditures for maintenance capital expenditures when
considering changes to distribution levels.
    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. The year end calculation, presented below,
reduces the impact of these seasonal working capital fluctuations.


    
    -------------------------------------------------------------------------
    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)                              2007         2006
    -------------------------------------------------------------------------
                                                              $            $
    -------------------------------------------------------------------------

    Cash flow from operating activities
     before changes in non-cash items related to
     operating activities                                 8,447        7,067
    -------------------------------------------------------------------------
    Changes in non-cash items related to operating
     activities (working capital)                       (10,415)      (8,716)
    -------------------------------------------------------------------------
    Cash flow from operating activities                  (1,968)      (1,649)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Maintenance capital expenditures(1)                  (1,179)      (1,921)
    -------------------------------------------------------------------------
    Decrease in capital lease obligations                   (15)         (25)
    -------------------------------------------------------------------------
    Distributable cash from operations                   (3,162)      (3,595)
    -------------------------------------------------------------------------
    Number of units and Class A shares outstanding   14,045,577   14,045,577
    -------------------------------------------------------------------------
    Distributable cash per unit and Class A share      ($0.2251)    ($0.2560)
    -------------------------------------------------------------------------
    Distributions declared per unit and
     Class A share                                      $0.3583      $0.3459
    -------------------------------------------------------------------------
    Payout ratio                                        (159.2%)     (135.1%)
    -------------------------------------------------------------------------
    Payout ratio excluding the impact of
     working capital                                      69.4%        94.9%
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
    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)                              2007         2006
    -------------------------------------------------------------------------
                                                              $            $
    -------------------------------------------------------------------------
    Cash flow from operating activities before
     changes in non-cash items related to
     operating activities                                33,834       29,672
    -------------------------------------------------------------------------
    Changes in non-cash items related to operating
     activities (working capital)(2)                     (3,921)      (2,278)
    -------------------------------------------------------------------------
    Cash flow from operating activities                  29,913       27,394
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Maintenance capital expenditures(1)                  (3,303)      (5,653)
    -------------------------------------------------------------------------
    Decrease in capital lease obligations                   (88)        (199)
    -------------------------------------------------------------------------
    Distributable cash from operations                   26,522       21,542
    -------------------------------------------------------------------------
    Number of units and Class A shares
     outstanding                                     14,045,577   14,045,577
    -------------------------------------------------------------------------
    Distributable cash per unit and Class A share       $1.8883      $1.5337
    -------------------------------------------------------------------------
    Distributions declared per unit and
     Class A share                                      $1.4086      $1.3584
    -------------------------------------------------------------------------
    Payout ratio                                          74.6%        88.6%
    -------------------------------------------------------------------------
    Payout ratio excluding the impact of
     working capital(2)                                   65.0%        80.1%
    -------------------------------------------------------------------------

    (1) Maintenance capital expenditures are those expenditures related to
        maintaining and upgrading of existing facilities and information
        systems. Maintenance capital expenditures also include renovated and
        relocated stores. In 2007, 42.0% of all capital expenditures related
        to maintenance activities. In 2006, 44.0% related to maintenance
        activities.
    (2) The Fund reconciles distributable cash flow from operations
        activities before and after changes to working capital due to the
        seasonal fluctuations in the Fund's working capital balances.
    

    Non-GAAP measures

    Distributable cash and distributable cash per unit

    Distributable 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 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 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
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 2007.

    Disclosure Controls and Procedures

    Disclosure controls are procedures designed to provide reasonable
assurance that material information is gathered and reported to senior
management including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), as appropriate to permit timely decisions regarding public
disclosures. The disclosure controls are not expected to prevent and detect
all misstatements due to error or fraud.
    Management, including the CEO and CFO, has evaluated the effectiveness of
the design of the Fund's disclosure controls and procedures as of December 31,
2007. Based on this evaluation, the CEO and CFO have concluded that the Fund's
disclosure controls and procedures, as defined in Multilateral Instrument
52-109 - Certification of Disclosure in Issuer's Annual and Interim Filings,
are designed effectively to ensure that the information required to be
disclosed in reports that are filed or submitted under Canadian securities
legislation are recorded, processed, summarized and reported within the time
period specified in those rules.

    Internal Controls over Financial Reporting

    The Fund's management under the supervision of, and with the
participation of the Fund's CEO and CFO, has designed internal controls over
financial reporting, as defined under MI 52-109 of the Canadian Securities
Administrators.
    The purpose of internal controls over financial reporting is to provide
reasonable assurance regarding the reliability of financial reporting, in
accordance with GAAP, focusing in particular on controls over information
contained in the annual and interim financial statements and MD&A. The
internal controls are not expected to prevent and detect all misstatements due
to error or fraud.
    There have been no changes in the Fund's internal controls over financial
reporting during the three and twelve months ended December 31, 2007, that
have materially affected or are reasonably likely to materially affect the
Fund's internal controls over financial reporting.

    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 2007:

    
                         Three months Three months
                                ended        ended   Year ended   Year ended
    (in thousands         December 31, December 31, December 31, December 31,
     of dollars)                 2007         2006         2007         2006
                        -----------------------------------------------------
                                    $            $            $            $

    EBITDA                      9,486        8,812       41,479       37,790

    Interest expense             (697)        (983)      (3,198)      (3,605)
    Financing expense
     on long-term debt              -            -         (136)           -
    Depreciation and
     amortization              (2,305)      (1,548)      (6,781)      (5,884)
    Other                         305          353          807        1,018
    Provision for
     (recovery of)
     income taxes                 878       (1,153)      (3,266)      (2,921)
                        -----------------------------------------------------
    Net earnings for
     the period                 7,667        5,481       28,905       26,398
                        -----------------------------------------------------
    


    Outstanding Unit and Share Data

    At December 31, 2007, 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 7, 2008





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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